I mentioned in the previous blog about ILPs and how insurers have been frequently mis-sold these products to policyholders normally through non-disclosure. The irony is that the current benefit illustration (BI) disclose all risks in an RP-ILP but nobody can understand what these BIs are saying. Just as the prospectus of Lehman Brothers’ MiniBomb fully discloses all risks, nobody can understand what it said. If a document cannot be understood, there is no disclosure. That is what is happening to RP-ILP as well. I have something to say to shareholders of these insurers:

1. Shareholders of these insurers who aggressively market these RP-ILPs should be happy if these ILPs were properly sold to their clients in an ethical manner with disclosure to their clients. If this happen, it will not have any legal liability for misrepresentations or non-disclosure. Besides having no legal liability, such insurers will also not need to take on investment risks for their policyholders. The manner which an RP-ILP is structured is such that there is no “guaranteed” cash value and bonuses to honor. With nothing for the insurer to guarantee, there is virtually no risk to the insurer. Actually the investment risk of the cash value is passed on fully to the policyholders. If the product is marketed to policyholders with full disclosure, policyholders willingly take on these risks because they would do so due to its potentially high return. One of the things that will kill an insurer instantly is when there is a “run on the insurer.” Similar to a run on a bank, a run on an insurer happens when all policyholders wish to surrender value policy at the same time.  (AIA had a close encounter with this situation a few weeks ago when a long queue of its policyholders wanted to surrender their policies due to perceive lack of confidence in the insurer. Fortunately all is well for now.) If the insurer guarantees nothing for its surrender value, than a run on an insurer has no immediate material effect on the insurer as the insurer would simply sell the underlying funds at market price. Of course the insurer would lose profits from future premium lost. As for insurance cover, since claims occur in random fashion there is no such thing as a “run on an insurer” due to claims unless it is due to catastrophic event such as war or terrorism etc.
2. If the insurer has been mis-selling its ILPs, than effectively the insurer exposes itself to legal risk through class action suit and regulatory penalties. They may also be pressured by the regulator and public to absorb the investment risks in the ILP. Effectively, this makes the ILP become a par policy in which the insurer guarantees certain cash values. In other words, the insurer could end up with huge liabilities. Therefore it is always the interest of the insurer never to mis-sell their ILPs. There is a saying: “Never say never.” As shareholders of the insurers, you just need to look at some banks in Singapore which are considering absorbing the losses of the investment products they sold. This will come from shareholders’ fund obviously.

If you are a shareholder of an insurer and if you are not satisfied with the manner which it has been marketing its ILP, it is time for you to sell your shares since your profits will be hurt by its unethical practice. If you want to a change, you must raise this issue with in the next AGM and replace existing directors if they are not forthcoming in this change. While there is not much small-time shareholders can do, existing large shareholders such as institution investors like pension funds and hedge funds should be proactive in this change.