Higher Risk, Lower Return, Insurance Companies Are Under insured? What About Our Payouts?

 Higher Risk, Lower Return, Insurance Companies Are Under insured? What About Our Payouts?

The recent announcement of four ‘too big to fail’ insurance companies in Singapore seems to suggest the insurance industry may face a difficult time ahead.  Most of our insurance money is invested in the West and managed by them and the highly possible downturn of their economies will result in higher risk and lower return.

Higher capital requirements and more controls over them may prevent these insurance companies from going down.  But with reduced income and benefits distribution, less payouts from insurance products are possible.  

With an increasing number of people, especially retirees, using insurance as annuity, or monthly payouts to supplement their CPF Life, if insurance companies cut their payouts, this will affect their ‘take home’ income.  For the same reason, the CPF Board can also use the same reason (higher risk, lower return) to reduce either interest rate or payouts to CPF members.  This is, perhaps, why the CPF Board is very reluctant to increase interest rates when banks are offering higher than 2.5% per year.    

The high inflation, high interest rate in the West will likely last longer than expected.  More bankruptcies and unemployment are expected there.   If our insurance products are highly concentrated in the West, higher risk and lower return are the natural outcome.  For example, in the past, the insurance companies were happy to provide 4.5% but with the expected lower returns, they will give the minimum return or 3% as required by the authority.  

In some ways, lower returns are still better than no returns or worse, the insurance companies go bankrupt due to external factors, outside Singapore. We may be able to prevent ‘too big to fail’ in Singapore.  But we cannot stop ‘too big to fail’ in the West.  Our risk exposures in the West cannot be prevented if we park your money there.  They manage their economies, their fund managers manage our money.  When the cake becomes smaller, our share is even smaller.    

Not only do we face an uncertain future, we also face more risks in our money management.  Not to mention cheats, scams!