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.