Chinese Insurers - Challenges - Investment Earnings

Chinese insurance companies is facing challenges in maintaining their investment earnings amidst falling interest rates and significant volatility within the country's stock markets. Despite these hurdles, insurance firms under its purview have not significantly increased their allocations to higher-risk assets. This conservative shift in investment strategy is attributed to a more stringent capital regulatory environment established in 2022, which has led insurers to adopt a more cautious approach to risk.

Chinese insurers' investment yields in 2023 - During the first three quarters of 2023, several of China's major insurers listed on stock exchanges witnessed their investment yields fall short of their average performances over the past three years, despite a marginal improvement from the previous year. 

The aggregate annual investment return rate for Chinese insurance companies, excluding unrealized gains, dropped by 1.53 percentage points, settling at 2.23% from the previous year.

Chinese insurers' investment yields in 2024 - the investment returns are not expected to substantially recover in 2024 due to the persistently low interest rates and difficult investment conditions. The investment strategies of insurers in the real estate sector have come under scrutiny amidst ongoing concerns about the stability of Chinese property developers. Despite these challenges, insurers will face significant losses from their property investments, highlighting their diversified and moderate exposure to this area.

Certain life insurance providers have directed a portion of their assets into the real estate market, including investments in equity, fixed-income securities, and various non-traditional assets like trust plans and asset management products.

The firm estimates that the exposure of these rated life insurers to the commercial property sector is relatively low, generally a mid-single-digit percentage of their total investment assets. In contrast, non-life insurance companies show even less investment in commercial property, reflective of their shorter insurance liability durations and smaller operational scale.

Impact of China Risk-Oriented Solvency System - The introduction of the second phase of the China Risk-Oriented Solvency System (C-ROSS) in early 2022 has prompted insurers to tread more carefully in their investment activities, particularly in long-term equity stakes related to property.

The regulatory update has increased the capital requirements for such investments and included the acquisition costs of investment properties in the calculation of available capital, which has led to a more cautious investment posture among insurers.

While there has been a slight uptick in investments in policy-driven initiatives like social housing projects, aimed at mitigating distress within the property sector, these investments represent only a small portion of the insurers' overall portfolios. While these investments may align with government efforts to stabilize the property market, their immediate return potential may be limited, potentially placing further pressure on the insurers' return on assets.

Managing India Health Insurance

Patients admitted to hospital in India experienced delay dealing with insurance claims long after the treatment is over. Indian health insurance is notorious for a poor claims ratio, and “hidden” clauses that can result in partial coverage or sometimes denial of coverage. Improving regulation is an obvious fix to the problem. In addition - deeper reform requires aligning the incentives of patients, doctors and insurance companies, so that quality health care is provided at competitive prices.

Difficulties in providing health insurance - Insurance premium are calculated based on probabilities on hospitalization, claim, cost, investment returns and profit. This calculation goes awry if more than one person falls ill or if the procedure costs more than assumed probabilities. Example, there may be an unforeseen health catastrophe such as Covid-19, where the number of people falling ill shoots up unexpectedly. People may neglect early signs of their illness, not get check-ups as frequently as they should, or may demand more expensive care than necessary. The more healthy people may drop out of the pool and stop paying premiums, reducing the collective amount. Doctors and hospitals might also be incentivized to provide relatively expensive procedures, especially when they know that the insurance firm will bear the cost. As a consequence, the firm may scrounge on paying claims, or deny coverage altogether.

This simple example shows the number of things that can break down. There are incentive issues caused by “hidden information” in all transactions. The insurance firm cannot know if the level of care provided by the hospital is proportionate to the underlying condition. It has few levers to cross-check the decisions of either the customer or the hospital. The patient does not know if the hospital has overcharged or if the insurance company is misbehaving. The hospital and insurance company do not know if the patient neglected her health and could have come in earlier. In an environment where there is, often legitimate, mistrust between all stakeholders, it is no surprise that the results are sub-optimal.

Encouraging fair play - Weak enforcement, and poor grievance redress procedures lead to a lack of fair play in the health insurance system. These are an obvious fix to improve the working of health insurance firms and need to be taken up by the Insurance Regulatory Development Authority of India (IRDAI).

The deeper solution needs mechanisms that will align the incentives of all stakeholders in the system. Some potential solutions are as follows.

First - insurance companies could incentivize regular check-ups for their customers to save expensive hospitalizations later. However, experience suggests that customers are often not willing to undergo tests, and fear the potential increase in premium if the check-up reveals an adverse condition. Mandatory check-ups before access to insurance, especially for older customers, may be difficult to operationalize but offer a possible solution to keep costs low and also provide less intrusive healthcare.

Second - the design of protocols for health procedures may establish standards of care that hospitals should follow. This will allow insurance firms to evaluate whether the hospital is charging appropriately. Improving fair play in the medical establishment is as important as fixing the problems of health insurance.

Alternative - Another model used across the world is combining health care with insurance. This is known as the Managed Care model. In this model, insurance firms and health care providers form a network through which preventive care is emphasized. An example of such a model is the Kaiser Permanente in the United States. 

Establishing institutional frameworks where potential patients are given preventive care such that fewer of them need hospitalization will not only cut costs but also provide a better quality of life. Here, the incentive of the health care provider is aligned with that of the patient. The more hospitalizations that can be prevented, the better it is for everyone. 

AIG Decline Coverage For McLaren Driven In Malaysia

In an unusual move, motor insurer AIG has decided not to insure McLaren sports cars when they cross the Causeway. The move comes after a recent accident in Johor involving three McLarens as a group of British sports cars headed south towards Kluang on October 29, 2023. No one was injured in the incident.

In a correspondence with an insurance broker, AIG said its decision was due to “an exceptional increase in the frequency of serious accidents involving McLaren vehicles in Malaysia.” From April 1, 2024, the insurer said it will not be liable for losses arising from accidents that occur outside Singapore.

Motor Fraud Claim - India

Medical College police have registered a case against a five member gang for running a large-scale insurance fraud scheme in the city of Thiruvananthapuram, India. One of the people involved is incidentally a sub-inspector with the traffic division of city police. The gang allegedly created fake medical certificates after the accidents, and the fraud has been taking place in the city unabated for so many years.

The scandal came to light after insurance companies sought information under the Right to Information Act from Medical College Hospital to verify the authenticity of medical certificates submitted along with insurance claim applications. However, the replies said that no such persons underwent treatment at the hospital for accidents and the IP numbers in the medical certificates belong to some random people who were admitted at the hospital for various illnesses

Usually, the insurance companies do not verify the medical records and FIR but by filing an RTI query, a huge scam came to light. After one of the defrauded companies filed a complaint, Medical College police registered a case under sections of IPC 465 for forgery, 468 for forgery for the purpose of cheating, 471 for fraudulent use of a forged document and 34 for crime committed by more than one person, and have started an investigation. 

The fraud allegedly took place with three major insurance companies operating the city. Police said the traffic cop’s role in the crime cannot be simply considered as negligence as it took place several times in the last couple of years. 

“A mistake might happen once or twice but here it took place several times,” said police. According to police, one ‘fake accident’ created by the gang involves a motorcycle owned by fourth accused Manesh and allegedly took place on June 9, 2018. The vehicle ridden by Vishnu on which Sajith was riding pillion hit second accused Sandhya, according to the FIR registered by Sanal Kumar. 

Fake medical certificates of the treatment taken at the Medical College hospital were forged and sent to the court. Later, they were sent to the insurance company for claim processing. But when the company sought details of the treatment from the hospital, the fraud was revealed. 

“The investigation has just started and more details and the gravity of the fraud will come to light in the coming days,” police added. Police have not yet made any arrests in connection with the case

Agent Falsifying Customer's Signature

The Hong Kong Insurance Authority (IA) has imposed a suspension of 15 months on an ex-insurance agent for unethical practices. The action was taken after the agent was found to have been involved in witnessing a client's fraudulent signature and the creation of a counterfeit beneficiary change form.

Falsifying Signature - According to the IA, the issue stemmed from a life insurance application the agent managed for a client, intended to name the client's spouse as the insured individual. With the spouse unavailable to sign the necessary paperwork due to being outside of Hong Kong, the client unlawfully signed on his behalf. The agent compounded this violation by attesting to the forgery as a witness.

A subsequent failure by the agent to honor a request to designate the client as the beneficiary led to an attempt to cover this oversight by fabricating a beneficiary form after the spouse's death, and presenting it as if the client had filled it out.

Upon discovery, during a routine claim process initiated by the client after her husband's passing, the insurance company identified the falsifications, including discrepancies in the husband's travel records and the timing of the beneficiary form's submission. As a result, the insurance policy was nullified, leaving the client unprotected.

Agent Admits Fault - Throughout the ensuing inquiry, the agent acknowledged her actions, from endorsing the initial application fraud to her subsequent efforts to mislead the insurer. These actions brought into question her professional ethics and suitability for her role, prompting the IA to take corrective action.

The IA noted the agent's admission of wrongdoing and cooperation as factors in the swift resolution of this case, viewing them as steps toward her professional redemption.

In determining the punitive measures under the Insurance Ordinance (Cap. 41), the IA considered a range of factors. These included the annulment of the policy, the agent's facilitation of the fraudulent application, her personal gain from the misconduct, her admissions of the wrongdoing, and the necessity of deterring similar misconduct in the future.

Insurer Terminates Whistle Blower

A veteran insurance agent who was an agency leader within his company's network of agents is suing his former employer, Prudential Assurance Co Singapore, for wrongful termination.
See Jen Sen worked for Prudential for 19 years before his agency agreement was terminated in March 2022.

Whistle Blower Blown Away - Mr See alleges that the termination came about because he blew the whistle on Prudential's alleged malpractice in its business to the Monetary Authority of Singapore (MAS). Mr See is suing Prudential for wrongful termination, unjust enrichment and a claim under the Unfair Contract Terms Act.

Prudential applied to strike out Mr See's claims entirely and succeeded partially - an assistant registrar on the case struck out two of the claims, leaving the wrongful termination claim.

Mr See then appealed against the striking out and succeeded in a judgment made available on Thursday (Mar 21). This means he will be allowed to pursue all three claims against Prudential at trial.

Whistle Enquiry - According to the judgment, Mr See was the subject of an inquiry by a compliance committee set up by Prudential before his termination. He was suspected of sending complaints under various pen names to MAS and the chief executive officer of Prudential, accusing Prudential of malpractice.

This refers particularly to the launching of allegedly misleading advertisements of insurance products that contravened MAS guidelines.

Mr See did not deny that he was responsible for these complaints, but his counsel referred to them as the whistleblowing acts.Mr See alleged that there was a breach of contract when his agency agreement was wrongfully terminated.

The termination was in fact grounded in his whistleblowing acts, which is not a legitimate reason to terminate his contract, Mr See alleged. He also alleged that Prudential had been "unjustly enriched" by the financial benefits it retained from terminating his agreement.

This refers to bonus payments Mr See was entitled to under an incentive scheme called the "Agency Leader Long-Term Incentive Scheme" and bonus commissions under the "Sell-Out scheme".

The conditions for receiving these bonus payments and commissions are set out in documents circulated to the agents, and form the basis of Mr See's third claim - that some conditions breach the Unfair Contract Terms Act.

State Farm Decline To Renew Policy

The California homeowners’ insurance crisis reached another critical stage this week when State Farm General Insurance announced that it would not renew policies for 72,000 property owners across the state.

The insurance giant announced Wednesday that it would not renew homeowner insurance policies for 30,000 customers, including owners of condominiums. It also plans not to offer commercial apartment policies and won’t renew the 42,000 now in place.

Although the number of people affected is large, the company said the cuts represent less than 3% of its policies in the state. News of the cancellations did not sit well with the California Department of Insurance.

State Farm’s decision not to renew policies comes as thousands of Californians are finding it extremely difficult to insure their homes and commercial properties as companies increase rates, limit coverage or stop offering policies in areas increasingly susceptible to natural disasters.

The companies have cited high inflation, catastrophe exposure, reinsurance costs and the limitation of decades-old insurance regulations as reasons for scaling back policies in the state.

State Farm reported a net loss of $6.3 billion in 2023 compared to a net loss of $6.7 billion in 2022.