Sunday, October 12, 2008

Confidence Crisis

A mortgage crisis became a credit crisis and a credit crisis turned into a confidence crisis. It was panic and a sea of red everywhere on the street. I had never seen anything like this since I joined the industry in 2003 when it was the end of the last bear market.

I can see my colleagues and private banking friends in a stressful state where their panicky clients keep calling them to surrender their policies and to liquidate their investments. I'm not spared against this with several clients calling me over this weekend. One of them have an AIA endowment policy maturing in January and he is not able to wait 3 months to get his maturity proceeds. He was so scared that AIG will fall and will affect his AIA policy. I'd tried my best to allay his fears but don't seem successful.

The economic situation is a total contrast of what I saw about 15 months ago when everybody simply wants to throw money into the market. Today, it seems everybody wants to get out from the market. I really saw the emotional part of investing. I can understand their worries because there don't seems to be a solution of the problem. There are so many reports in newspaper that highlight how bad the situation is, how much the indexes dropped and how the world leaders are not able to find an answer. It simply looks like a bottomless pit to them.
When the problem hit the confidences of investor around the globe and if everyone don't trust any banks or any companies, they will simply wants to keep hard cash or gold. Where can these companies get their money from when banks refuse to lend them money. These companies need to pay their workers, suppliers, debts, etc.

Is it panic? Is it a crisis? Is it scary? I will say "Yes". I'm glad that we had adopted disciplined asset diversification since our clients invested their money from Day 1 and active reallocation and rebalancing over the past few months. This discipline had significantly reduced the losses compared to one who adopts market timing and pure equity investments. They still have considerably paper losses but fortunately to a lesser extent.

All eyes are on G7, IMF, World Bank and leaders in US and Europe to come out with a coordinated effort to regain the confidence in the people and the financial system. Its a government problem and no longer a cooperations problems. Most people will not expect the market to rebound that fast but bear in mind that nobody knows when it will rebound too. I will still say that its a good time to accumulate gradually and if you are still in it, don't jump out of the ship when we are at the center of the storm.

Good luck and hope for good news in the week ahead...


Anonymous said...

Policyholders of AIA rightfully feared for their insurance policies. Although MAS has stated that 90% of the policy is protected, the actual detail is not known. Moreover, the actual mechanism on how this is done is unknown as well. Certain practitioners think that if an insurer really collapse, MAS will not be able to protect the interest of the policyholders due to the lack of the actual procedure in place to do it.

Financial Advisers who keep on telling their AIA policyholders that MAS will protect 90% is irresponsibile in not disclosing that actually there is a risk that MAS cannot discharge its obligation.

MAS makes mistake as well. Look at the Lehman Brothers sage, it approved product with so much undisclose risk and now just push the responsibilities to "independent parties.".

Investors and policyholders must stop believing in propagada.

Another propagada is that the bank fixed deposits and cash is "safe". This is another nonsense. To get 100% guaranteed in cash, just buy SGS Bonds. Forget about fixed deposits and cash.

I am an IFA but cannot disclose my identity for obvious reasons.

Anonymous said...

hi anon,

I'm from an IFA as well. Did receive an internal circular regarding the policyholder protection fund. I can summarise the PPF details as "unknown, unknown and more unknowns". Better to diversify policies across a few companies than to count on MAS.

Should any insurer collapse, even if the policyholder really gets back some cash value, there's still the question of whether he/she can get a replacement at standard rates. Health conditions may have changed.

Anonymous said...

Hi "October 16, 2008 1:37 AM",

The circular from MAS and press release does not help. From what I understand, the policyholder's protection only applies to "guaranteed" cash value and guaraneed sum assured. Thus all ILP are not protected because an ILP cash value is not guaranteed but subjected to market risk.

In terms of legality, how the insurer's monies is ring fence against its creditors is doubtful. In Singapore context, the only way to ring fence is by placing the insurer's monies in a trust managed by a separate trustee. However, this is not so. Thus if an insurer collapse, creditors can sue and may access the insurer's monies (which consists of policyholders' assets too) since these assets are not place in a trust. MAS can say all it likes but I really wonder whether has it figure out the legality behind.

The Lehman Brothers happenings showed that MAS can walk away from the problem even if there $500m at stake.

Nevertheless we must always do the right thing to advice our client appropriately such as diversification not just in investment but insurance policies.

Anonymous said...

The best is to avoid buying whole life or endowment.No worries .Just look at the aia policies, none of the policyholders is satisfied with the cash value, either they are too low or not broken even despite more than 15 years in force.They don't make sense as a saving plan. You are better off with term and save the rest in a FD if you are paranoid about risk. You are still better off than in an endowment or whole life and in a credit crunch you have excess without having to pay high interest rate of 5.5%.

Anonymous said...


I was the IFA rep in the 2nd post. MAS did mention in a newspaper article that policyholders have higher seniority compared to unsecured creditors.

[start quote]
If an insurer ceases operations, its assets will be used to compensate policy owners. The Insurance Act accords priority to the claims of policy owners, ahead of other unsecured creditors, over the assets of the insurer and its insurance funds.
[end quote]

Section 45 of the Insurance Act mentioned that preferential debt does have seniority over policyholders. Worrying that the MAS spokesperson left this out.

The important Sections 45 & 46 only mention that the Authority may do this and may do that. Seems to suggest that the Authority can also do nothing and walk away.