A run on the… insurance company?

In Singapore, insurance companies do more than just cover you when you turn up your toes.

For whatever reason, whole-life insurance policies are seen as a legitimate investment tool over here (they’re not, by the way). Instead of brokerage accounts, Singaporean investors like to use “investment-linked insurance policies” – wrap accounts for unit trusts – as a way of accessing the markets, or just as a way to “pass something on to the children”.

The insurance companies love this, of course – they can rip two enormous layers of fees out of customers (wrap account management fees, and unit trust management fees) and lock them in for ten to twenty years.

So when one of those insurance companies teeters, as AIG famously did yesterday, people rush to withdraw their investment funds. Which is, I guess, justifiable. (Unless you’re paying enormous early termination fees, as you do with insurance policies.)

But why were people still withdrawing their money todayafter the $85 billion bailout?

Here’s the BBC’s coverage.

Postscript: I was cold-called a few months ago by a guy selling these “investment-linked insurance policies”. The fee structure blew my mind – 7% upfront and 1.25% per annum, compared to 0.3% upfront brokerage and 0.3% per annum management fees if I were to buy an index fund. Clearly I’m in the wrong business.

Post-postscript: The ex-chairman of NTUC Income, one of Singapore’s larger insurance companies, has his own blog – and he addresses this very question.

Post-post-postscript: A Pravda article about the AIG run contains this gaffe-tacular graf, reproduced exactly:

‘There is alot of uncertainty in the US market and financial institutions are collapsing one by one. If AIG files for bankruptcy and AIA goes go bust, our funds may be frozen or suspended and I may lose everthing,’ he said. His annual premiums amounted to $50,000.

The big one: “alot”, not a word. This drives me nuts – you wouldn’t write “alittle”, right?

There’re at least three other errors in that excerpt. Is Pravda running short of editors – or spell-checking software?

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