Over the last four days, thousands of people have gone down to the AIA office to surrender their policies. With the news so widely publicised, many more have been influenced to surrender their AIA policies.

This is a classic case of herd mentality at work. Sometimes, it’s also referred to as the “madness of crowds“.

If you have an AIA/AIG policy or hold some unit trust by AIG, you should look at all the factors carefully before you do anything.

The parent AIG had serious liquidity problems and was in danger of failing. They have been bailed out for the time being with a loan $80 billion loan from the US government.

AIA Insurance Policy Holders

If you own an endowment plan or whole life plan that has cash values, note that:

• AIA’s insurance assets are held in a separate fund which AIA and AIG can’t touch.
• AIA and MAS has ensured the public they have sufficient assets to pay all insurance policy holders.

However, if there is a mass cancellation of policies that AIA can’t pay with its immediate cash, they will have to sell some assets (equities or bonds) from the insurance fund to pay the redemptions. Selling at current low prices might have an impact on the performance of their funds.

If you own a whole life policy, you should also consider some of these factors:

1) Whether you still need the insurance coverage.
2) The cost of surrendering and getting a new policy.
3) Whether you are still insurable at standard terms if you want to get a new policy.

If you intend to get a new policy, it is advisable to get a new one before surrendering your old policy.

If you hold an AIA term, PA or hospitalization plan or AIG general insurance plan that has no cash value, the same thing applies. You should get the replacement cover first before you surrender them.

For endowment plans, you should decide whether it makes sense to cash out the policy now. Will you be able to achieve your original savings objectives without the plan?

AIG Unit Trust Holders

The assets of the unit trust are all held in a trust account with a separate company. While falling equity prices will affect the valuation of the underlying assets, these assets are protected from creditors should AIG fail.

Change of Mind

If you have already surrendered your policy and would like to change your mind, AIA is offering a no penalty reinstatement offer. Policy holders who surrendered their policies from Sept 15 to 19 can request for reinstatement without 14 days of their surrender.

These policies will be reinstated in full as if they have never been surrendered. No interest will be charged on back premium and cash value returned to AIA.

Before you do anything, do consult your AIA advisor. And if you finally decide to surrender your policy, you don’t really have to waste one whole day of your time queuing up to do it. Contact your AIA advisor, get the required forms from him and he can surrender your policy for you.

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Our financial markets are facing a severe test as big name financial institutions experience liqudity problems. Just a couple of days ago, we had Lehman Brothers filing for Chapter 11. The next giant facing difficulties is American International Group Inc (AIG).

AIG needs to raise more than $80 billion to keep themselves afloat. According to a latest report from CNBC, The Federal Reserve is negotiating a $85-90 billion secured bridge loan for AIG.

In Singapore, thousands of anxious AIA policy holders were at their office yesterday to make enquiries or to surrender their policies. Someone even put up a video footage of the scene in youtube.

With fear in the markets now, there might be even more people flooding AIA’s office today.

The Monetary Authority of Singapore (MAS) has urged policy holders not to rush to surrender their policies. They issed a statement that “ AIA currently has sufficient assets in its insurance funds to meet its liabilities to policyholders“. Their assets are also separate from AIG.

In Singapore, insurers are required to maintain statutory insurance funds, including an investment-linked fund. This fund is segregated from its head office and other shareholders’ funds. You can read the previous AIA’s commentary of the performance of their life funds here.

AIA has ensured the public that it has sufficient capital and reserves to meet all its obligations.

I believe this is the case but a “run on AIA” with many policy holders surrendering their policies would mean AIA will have to sell off assets in their life fund in order to pay off policy holders. This is not too good given the current market conditions and is a scenario everyone wants to avoid.

My colleague and insurance expert, Pat Lim, has posted on his blog details on the Policy Protection Fund, something that has been provided for in the Insurance Act. The fund helps to protect policy holders in the unlikely event that an insurer goes under.

I think this entire episode clearly highlights the need for diversification – even for something like insurance. Like all investments, never put all your eggs into only one basket. Personally, I have insurance policies from six different insurance companies covering all my various needs.

If you have any enquiries on your AIA policies, you can talk to your AIA agent or call the AIA hotline at 62488355.

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