Article by The Business Times, Singapore, 13 Apr 2013 18:03 by GENEVIEVE CUA

Market for resale endowment policies emerging article

A FLEDGLING market in Singapore second-hand endowment policies is emerging, much to the chagrin of insurance companies.

Two main factors drive the market: Original policyholders who are keen to give up or sell their policies see the opportunity to realise a value higher than the surrender values (SV) quoted by insurers.

Investors in such policies, on the other hand, are eager for a stable, higher-yielding instrument.

Second-hand endowment policies are typically referred to as traded endowments. They typically originate in the UK where the asset class is mature. UK second-hand endowments have been marketed to Singapore investors for more than a decade.

But there may be an even larger appetite here for second-hand Singapore endowment policies, given investors’ familiarity and confidence in local insurance companies and their preference for the Singapore dollar.

REPs Holdings was set up three years ago as a pioneering market maker for what managing partner Micky Neo refers to as “resale endowment policies”, to distinguish the Singapore plans from the UK variety.

Says Mr Neo, who used to be a tied insurance adviser: “We were looking at the issue of how much a customer pays in premiums (for endowments) and how much he gets back if he gives up his policy prematurely. There is a huge gap. Our aim is to fill that gap.”

A secondary market for endowments is created through the process of assignment. The original policyholder who wishes to sell his policy will have to assign the policy to a buyer or a market maker, such as REPs. The buyer or investor takes over the premium payments and eventually receives the maturity value.

There are a number of reasons why the original policyholders seek to give up their policies. The most common is that they cannot afford the premiums. Some may no longer need the policy. Others may wish to reinvest their money elsewhere.

REPs offers policyholders the chance to realise an amount that is roughly 5 to 10 per cent higher than a policy’s quoted SV. The investor benefits from a relatively attractive yield to maturity, particularly for policies that had been incepted a few years ago. REPs has a preference for policies with an effective yield to maturity of at least 4 per cent. Longer-term policies should also not have more than 15 years left to maturity.

Resale endowments are seen as attractive in Britain because of their non-correlation with traditional financial assets. In Singapore, they are seen as stable assets. But there are also risks; they are subject to insurers’ bonus cuts, for instance. And given that the secondary market is thin at the moment, investors should be prepared to hold the policy to maturity. This means they should be confident of their own cash resources to fund premiums over the medium to long term.

The value of non-linked surrenders is significant based on statistics on the Monetary Authority of Singapore website. In 2011, nearly $840 million in surrender claims were reported. This was even larger in 2008 at $1.55 billion and in 2009 at $1.18 billion.

On some policies seen by The Business Times, policyholders of 10-year endowments do not break even on their premium payments until maturity. On a 25-year policy, the surrender value based on the maximum 5.25 per cent projected return exceeds total premiums paid on the 20th year.

In response to a piece published last month on traded endowment and traded life policies, Life Insurance Association president Annette King raised some concerns. “Policyholders are at risk of selling their policy without fully comprehending the consequences and implications of such surrenders. It is unlikely that policyholders are aware that the policy they have sold is being conserved to benefit the purchasing entity rather than for them, the policyholders.”

While Singapore policies are a regulated product, the activity of market making is unregulated. REPs itself is not a financial adviser. In terms of advisory concerns, there may be a danger that policyholders, drawn to a more attractive realisation value, give up policies prematurely as they are momentarily tight on cash.

Says Mr Douglas: “Our job is not to encourage people to surrender. We suggest that they consider the implications of surrender very carefully. We come in at a point when the decision has been made and give people a significantly better option.”

In the UK, insurers are required to inform policyholders of their options should they seek to give up policies – including telling them that they can sell their policies in the secondary market.

Mr Neo argues that amid the concern about a potential fall in advisory standards should a secondary market take root, “there is currently no standard procedure” for those who surrender policies.

“I personally surrendered two policies and no disclosure of other options was highlighted to me. I’ve seen policyholders who enquire about surrendering and are told to fill up the surrender forms directly … We look forward to the regulator setting a minimum standard for the disclosure of other options so that policyholders considering a surrender can make an informed decision.”

He adds: “They should be (made aware) of all their options (including) getting 5 to 10 per cent above surrender value …”

REPs’ information document informs sellers of their options, such as policy loans, cancellation of riders or converting a policy to a paid-up status. The original policyholders are told they can surrender the policy to the insurer; assign or transfer the policy to another individual for a consideration; or sell it to REPs.

Insurers benefit from surrenders as by the time a policy is surrendered, distribution costs would have been paid out. The surrender value is a mere fraction of premiums paid, and the liability disappears from insurers’ books.

The process of assignment is legal. Insurers’ assignment forms require the name of the assignee. Some forms also ask if the assignment is for gift or sale purpose, and even ask for the consideration. This indicates that insurers are aware of the secondary market. The forms typically have to be completed at the insurer’s office. For a policy to be accepted for resale, it must be unencumbered by loans.