Insurable Interest

Life insurance can provide valuable financial protection for your loved ones. But not just anyone can buy a life insurance policy on someone else. One important concept you’ll encounter when buying life insurance is “insurable interest.” 

What Is an Insurable Interest?
An insurable interest is an important and required component when someone is buying a life insurance policy. It means that a person would encounter financial hardship if the insured died. Without an insurable interest, a person cannot purchase a life insurance policy on another person. Additionally, you must have consent from someone before you purchase life insurance on them, even if you clearly have an insurable interest.

Immediate family members such as a spouse, children or even aging parents would usually automatically qualify since they may rely on you financially. However, someone outside of your family, such as a business partner, would need to show additional documentation and obtain your consent before purchasing a policy on you.

Examples of Insurable Interest
Two scenarios in which insurable interest can be established.

1. You and your spouse have young children and own a home. If either of you were to die, it could create financial hardship for the surviving spouse and children. Therefore, you both have an insurable interest in each other and can purchase life insurance for the other person.

2. You are a partner in a small business. Each business partner can purchase life insurance on the other so that they can fund the ongoing operation of the business if one partner dies.

Why Is Insurable Interest Important?
One of the main benefits of life insurance is to provide financial protection for survivors who may suffer if the insured dies. Insurance companies use insurable interest as their protection to prevent fraud and intentional illegal acts.

If this feature didn’t exist in an insurance policy, anyone could purchase a policy on someone else with ill intent. So, for example, a doctor could purchase insurance on a patient with a serious illness and be less inclined to treat them properly since they’d receive a large sum of money if they died.

How Insurers Prevent Insurable Interest from Being Abused
Insurance is designed to cover losses, not enrich beyond the actual loss itself. This is the principle behind the concept of indemnification, or compensation for harm or loss. It’s a fundamental difference between insurance and gambling.

That’s why rules dictate that a person can’t take out a life insurance policy on an acquaintance or stranger, as there is no financial impact from the insured’s death. If that were not the case, buying life insurance would be more like gambling and encourage fraud.

Life insurance companies have specific rules built into their policies that define insurable interest. Typically, the parties involved fill out a form and make an attestation that the facts are true. For large policies, there may need to be a notary or other legal representation verifying the information.

The general rule is that for certain insurable interests, the person being insured is required to provide consent and sign the insurance authorization form and provide identification. If there’s questionable insurable interest, the life insurance company will ask more questions and require additional documentation to determine the relationship. If the responses to the questions are not satisfactory to the insurance company, it will deny the policy.

Allianz Investment Collapsed

Allianz said it would set aside €3.7 billion (RM17.6 billion) to deal with investigations and lawsuits resulting from the collapse of a multi-billion-euro set of investment funds. The provision resulted in a net loss attributable to shareholders of €292 million in the fourth quarter. 

Allianz said that the outcome of various investigations and lawsuits “cannot be reliably estimated” and that it expects to incur additional expenses before these matters are finally resolved. The issue centres around Allianz funds that used complex options strategies to generate returns but racked up massive losses when the spread of Covid-19 triggered wild stock market swings in February and March 2020.

SEC & DOJ Investigation - Investors in the so-called Structured Alpha set of funds have claimed some US$6 billion (RM25 billion) in damages from the losses in a slew of cases filed in the United States. The US Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have also been investigating the case.

The matter has cast a shadow over Allianz, one of Germany's most valuable companies. It is also one of the world's biggest money managers with €2.5 trillion in assets under management through bond giant Pimco and its Allianz Global Investors, which managed the funds at the centre of the probes.

Allianz said that it expects a settlement with major investors “shortly” but discussions with other investors, the DOJ and the SEC “remain ongoing”. The quarterly loss compares with a profit of €1.8 billion a year ago. Profit for the full year at €6.6 billion was the lowest since 2013.

Conservative Investment - The US$15 billion Structured Alpha funds catered in particular to normally conservative US pension funds, from those for labourers in Alaska to teachers in Arkansas to subway workers in New York.

After the coronavirus sent markets into a tailspin early in 2020, the Allianz funds plummeted in value, in some cases by 80% or more. Investors alleged Allianz strayed from its stated strategy in their lawsuits.

Allianz said it intended to defend itself “vigorously” against the investors’ allegations - “not everything was perfect in the fund management”.

GCG Asia’s Forex Investments

Police arrested 10 individuals, including a man carrying the title “Datuk”, for their suspected involvement in fraudulent forex investment schemes in five states. Bukit Aman Commercial Crime Investigation Department director said they comprised nine men and a woman aged 29 to 64, detained in Perak, Selangor, Kuala Lumpur, Melaka and Johor.

Police seized were various items including nine luxury vehicles, 64 watches and five gold ingots weighing five kilogrammes, estimated to be worth almost RM127 million.

12% - 14% weekly rate of return - the syndicate is known as GCG Asia Forex Investments and has been active since 2018, and the suspects concerned were acting as brokers, investor searching agents, financial managers and account holders. The syndicate targets locals as victims and they promote forex-based investments with a weekly rate of return of between 12 and 14 per cent of the total capital invested. 

The syndicate promised investors that their money would be invested by GCG Asia in various mediums to generate huge profits. Investors will be given an investment website link along with a password, and they will be able to see the amount of “profits earned”, however, it cannot be transferred or cashed out.

The syndicate will then sever communication with investors after getting a substantial amount of investment and stop the operation of the investment scheme abruptly. Dissatisfied investors will feel cheated for not getting the promised returns.

To date, a total of 23 cases are being investigated related to GCG Asia’s forex investment fraud involving losses amounting to RM2.9 million. Nine of the suspects were under remand until today, while another was remanded yesterday, and an application to extend their remand order was currently underway. Four of the suspects were also found to have fraud-related criminal records.

Another Datuk - The 40-year-old mastermind holds the title of Datuk, who calls himself ‘Datuk Seri’ under their modus operandi. He also has a Master’s degree in Business Administration.

Check if the companies offering such investments were licensed by Bank Negara Malaysia to do so. Verify their accounts and phone lines through the website http://ccid.rmp.gov.my/semakmule/ to know whether they have been involved in fraud cases reported previously.

Inform CCID Scam Response Centre at 03-26101559 or 03-26101599 if you have any information regarding fraud syndicates found on social media.

Kootu Funds

A nasi lemak stall operator was fined RM50,000 in default of a year's jail by the Sessions Court here today for running a kootu fund for a group of people. Nor Jaimah Kamarudin, 38, is believed to be the first person to be charged with the offence since the amendment to the Kootu Funds (Prohibition) Act 1971 in 2011.

The amended charge carries a maximum penalty of 10 years' jail or a RM500,000 fine or both upon conviction.

During proceedings this morning, the mother-of-three pleaded guilty to organizing a kootu fund for five individuals through social media (Facebook) between January and August 2018, a charge under Section 3(1) of the Kootu Funds (Prohibition) Act 1971. 

Nor Jaimah was charged in Kuantan in 2020 and the case was then transferred to the Butterworth court here in Penang. Nor Jaimah was said to have organized a kootu fund for a group of five people where they paid money. The kootu money in this case involved more than RM100,000.

Ponzi Explained

Zachary Horwitz made headlines after he was sentenced to 20 years for bilking investors out of $650 million by peddling bogus licensing deals with HBO and Netflix. It is just the kind of juicy swindler story you might binge watch on those platforms: Horwitz, a 35-year-old actor who had bit roles in a handful of low-budget films over the past decade, pleaded guilty last fall to committing federal securities fraud and running an illegal operation known as a Ponzi scheme. For years, prosecutors say, Horwitz used his investors' money to fund a lavish Hollywood lifestyle — until his scam unraveled.

Ponzi schemes, explained - In short, a Ponzi scheme is a type of financial fraud that uses money from new investors to pay off earlier ones. The term comes from the 1920 swindler Charles Ponzi, but in recent years has become synonymous with the crimes of Bernie Madoff, the mastermind behind the largest financial fraud in history, who died in prison last year.

Although Ponzi schemes have a long history, they are far from a bygone threat, experts say. In fact, they remain a major risk to investors in an era of soaring stock markets and wild surges in newfangled assets like NFTs and cryptocurrency. They're typically perpetrated by (a) men who (b) promise steadily high returns with minimal risk and (c) often prey on friends and family to get the scam off the ground.

Early investors in a Ponzi scheme get rewarded with mindbogglingly large dividends — Horwitz allegedly promised returns between 25% and 45% — that propel them to tell others about the golden opportunity, which keeps new money flowing into the scam. Once the pool of new investment dries up, of course, the fraud falls apart.

A fraud is born - Horwitz, who goes by the stage name Zach Avery, promised his investors — many of whom were friends — that their money would be used to buy film distribution rights that he would then license to streaming platforms for a profit.

Horwitz was not a successful businessman or Hollywood insider. He just played one in real life. Horwitz's company "neither acquired film rights nor entered into any distribution agreements with HBO or Netflix" and he provided fake documents to his investors. HBO, like CNN, is part of WarnerMedia.

Horwitz instead routed the funds to his own accounts, shelling out $5.7 million on a house and splurging on trips to Vegas on private jets, according to a complaint filed by the Securities and Exchange Commission.

It's not hard to imagine how an investor might be sucked into such a scam in the era of meme stock rallies and overnight cryptocurrency millionaires. The fear of missing out is a powerful tool for grifters.

The rise of cryptos - may entice fraudsters to lure investors into Ponzi and other schemes" in part by promising investors an opportunity to "get in on the ground floor of a growing internet phenomenon.

An alleged Ponzi scheme advertised a bitcoin "investment opportunity" in an online forum. Investors were promised up to 7% interest per week, and that their funds would be used for bitcoin arbitrage. Instead, the crypto funds were used to pay existing investors and exchanged into US dollars to pay the organizer's personal expenses.

Even professional investors can fall victim to fraud. But there are several ways to avoid getting taken for a ride. Step one is simply being mindful of the potential for fraud. Beyond that, investors need to ask due diligence questions, beware of promises of guaranteed return with no risk and watch out for returns that are higher than what you're likely to find in the marketplace.

Life insurance Malaysia Todate

Life insurance is an important method of financial protection. Life insurance business in Malaysia is mostly owned by foreign entities. Only four locally-owned entities, namely, Etiqa Life Insurance Berhad, Hong Leong Assurance Berhad, Axxa Affin Life Insurance Berhad and Sunlife Malaysia Assurance Berhad.

Government offers various incentives - ie income tax charged for life insurance business has been kept relatively low, as little as 8%, as opposed to other nature of businesses, at about 24%, income from the sale of policies, i.e. premiums received by life insurance companies, is also not taxable and personal relief to life policy buyers, up to a maximum of RM3,000.

Since 2018, Bank Negara Malaysia requires all insurance companies and takaful operators in Malaysia to distinguish and keep their life insurance business and general insurance separate. 

Gross Income - for the period between 2018 and 2020, life insurer collected a total gross income of RM29 billion in 2018, of which RM25 billion was from foreign-owned companies, and RM4 billion from locally-owned companies. 

For 2019, the gross income from life insurance companies showed a sharp increase of RM44 billion, of which RM35 billion was contributions from foreign-owned companies, and RM8 billion from locally-owned life insurance companies.

Whereas for 2020, there was a slight decrease in gross income amounting to RM42 billion, of which RM8 billion was from locally-owned companies, and the rest from foreign-owned companies albeit the Covid-19 pandemic towards the end of 2019. 

From the total gross income reported, the largest contribution to life insurance companies was from the sale of policies or premiums. A total of RM29 billion was received for 2018 and 2019, while there was an increase for 2020 of RM31 billons.

Policies Sold - The percentage of sales for foreign-owned companies showed a downward trend, from 86% in 2018 to 81% in 2020, while locally-owned companies reflected an increase in policy sales, with 14% for 2018 and 19% for 2020.

Only 4% of reinsurance policies have been purchased by life insurance companies. This indicates that life insurance companies have a high ability to pay claims in the event of an insured risk.

Malaysian Financial Reporting Standards (MFRS) 17 - The insurance industry in Malaysia is constantly changing and growing. Among the challenges that they will face is the introduction of the Malaysian Financial Reporting Standards (MFRS) 17 to replace MFRS 4, which will come into effect in 2023.

All parties, especially insurance companies and enforcers, mainly Bank Negara Malaysia and Inland Revenue Board (IRB) need to play their respective roles more efficiently and effectively to ensure MFRS 17 is in line with existing laws and provisions.

Avoiding Mistake In Life Insurance Planning

Insurance planning is an act of generosity. It is done to protect our loved ones and to provide a safety net once we are gone. People take time from their busy schedules to buy from an insurer, but they may try to hurry through the fact-finding process to save time. In these days of acquiring financial documents online, some people are making mistakes when buying life insurance that could negate the benefits of having it.

1. Not listing a contingent beneficiary.
A contingent beneficiary receives the death benefit if the primary beneficiary predeceases the insured. Adding a contingent beneficiary provides a secondary receiver if something should happen to both the insured and the primary beneficiary. Typically, the spouse is listed as a primary beneficiary and children are listed as contingent.

Because insurance proceeds are paid promptly upon the death of the insured, having a contingent beneficiary means that the funds will be available even under tragic conditions where both spouses pass away in a common accident or if the primary beneficiary dies before the insured and the policy provisions have not been amended.

2. Underinsuring.
It is difficult to see far into the future. But that is what is necessary when planning your life insurance needs. We can envision our near future but going farther out is a hazy fog filled with dreams and goals. It is important that the insurance bought today is appropriate to cover current expenses and needs and it is essential to build a buffer or cushion within it so that it can keep pace with rapid changes over time. Over-insuring is an easy solution, but the premiums must be affordable.

The best course is to purchase as much insurance as you can comfortably pay for — use term insurance where appropriate to increase coverage — and then work with an agent or company representative to move some of that term insurance into permanent whole life as your job promotions and income increase. It is important that your insurance benefit provide enough value to assure that your family’s lifestyle will not be severely impacted by a sudden death.

3. Buying the wrong kind of insurance.
When buying insurance many people buy term insurance. It is low premium, and all carriers provide it. Term insurance is great for a specific purpose with a definable timeline — such as until the children are grown.

However, if the plan is to have insurance until death, which may be far into the future, whole life insurance may be a better option. It is important to consider the purpose of the insurance and buy the best policy to fit that purpose.

4. Relying too heavily on employer-provided insurance.
Employer provided life insurance is a great company benefit. However, it does have its limitations. Control over the policy and its benefit rests with the employer. In addition, if the employee resigns or retires, the insurance may not be portable. In other words, the insurance cannot go with the employee and any benefit it provides will be lost. It is quite sensible to consider your employer’s insurance package and include it in your insurance portfolio, but it must be combined with personally owned insurance that you control.

Life insurance is a valuable resource. It provides a large amount of money at a time when the family most needs it. However, a policy we think is fabulous may be ill-suited if it provides too little money or provides the money in such a way that it does not last.

Serious discussions with your insurance agent or company representative should be done on a consistent basis and your choices should be reviewed regularly. Even online carriers offer some support when questions are raised about the policy. It is a good idea to take advantage of and fully consider whatever advice you receive.

Thai Insurance Covid Backlash

The Office of the Insurance Commission (OIC) has vowed to tighten its supervision to restore public confidence in the industry, which has been hit by cash crunches during the prolonged pandemic. While all sectors faced upheaval triggered by the pandemic, the non-life insurance industry has been heavily tested by a continual surge in lump-sum claims for Covid insurance, threatening to bankrupt many local non-life insurers.

Steadying the ship - In 2021, two non-life insurance companies -- Asia Insurance and The One Insurance -- were forced to close because of liquidity crunches induced by losses from Covid claims, which spiked during the third wave of the pandemic.

The Finance Ministry decided to withdraw their business licences last year after finding the two companies were incapable of reimbursing claims for their customers. The ministry mandated the OIC oversee the transfer of active insurance policies to other insurance companies and the General Insurance Fund (GIF) supervise compensation payments to policyholders who filed for claims.

Following the closure of the two companies, Southeast Insurance, a non-life insurance giant under Thai Group Holdings (TGH) held by billionaire Charoen Sirivadhanabhakdi, also faced liquidity problems. Together with its sister company Thai Insurance, it filed a request to cancel all of their remaining Covid insurance policies offering lump-sum payment.

The OIC rejected the request, stating arbitrary cancellation of the policies is against the law and the companies must comply with the conditions stated in the policies they offered to the public. When losses occur from the sales of their products, the companies need to be responsible and pay the claims.

The OIC also said it has done everything in its power to sustain the industry by providing financial support and waivers on the calculation of capital reserves to help sustain insurance companies facing liquidity issues from the surge in Covid claims.

Backlash - The rejection sparked a legal spat between OIC and the two companies that claimed OIC's decision to reject the request caused great financial damage to the companies. They asked the court for permission to cancel their Covid insurance policies.

After the lawsuit was publicized, a spate of harsh criticism was unleashed on the companies and they backed down after the OIC, several consumer groups and the public condemned the lawsuit. The substance of the reaction was the lawsuit was unlawful and would erode public confidence in the insurance industry in the long term.

On Jan 26, TGH informed the Stock Exchange of Thailand that Southeast Insurance will voluntarily surrender its business license to the OIC, close its business, transfer existing policies to Indara Insurance, another TGH subsidiary, and transfer the business to GIF for management and supervision.

The regulator told the public Southeast Insurance could not discontinue the business without approval from the OIC. The registrar said the company must file a request with a conditional management plan that details how the company will manage its assets and liabilities, as well as take care of existing customers. Southeast Insurance must also ensure the transfer of existing policies to other insurers will not undermine the protection and rights of consumers as stated in the policies.

After the OIC has received the plan, its board of directors assesses the plan's soundness and effectiveness. If approved, the board sends the plan to the Finance Ministry for consideration of revoking the insurance business license.

Lessons learned - Public confidence in the industry is rapidly deteriorating as customers are starting to lose faith in insurance companies' ability to manage their business and products effectively in terms of risk diversification. While this concern started in the non-life industry, it is bleeding into life insurance as more people are transferring their life insurance policies to companies they consider financially stronger.

The regulator plans to conduct periodic stress tests to regularly check insurance companies' financial health and ensure they are not selling more policies than they can afford. The OIC said non-life insurance companies will be more cautious in issuing products, improve their underwriting risk management plans and be better prepared for any emerging pandemics.

The regulator also plans to revise regulations and demand more accountability from insurance company products as well as risk committees.

No risk - No risks remain in the industry in terms of Covid-19 insurance policies, although a small number of non-life insurance companies were shut down after failing to raise capital to solve liquidity crises and settle Covid-19 insurance claims for lump-sum payments.

The source said 16 insurance companies offer Covid-19 policies, while 40 insurance firms do not. Most of these 16 companies remain financially healthy. Some of them have a small number of Covid-19 policyholders as they charge a high premium. A number of these firms have turned to reinsurance to diversify their risks.

Most of the pandemic policies are expected to expire in late March or April. It will become clearer at that time if their financial status is affected by Covid-19 policies. Amid growing concern the crisis may permeate the life insurance sector, the OIC is reassuring the public lump-sum payment Covid policies are a short-term product, similar to auto accident insurance, and should not have a serious long-term effect on life insurance companies.

According to data from the Thai General Insurance Association, there were 44 million non-life insurance policies active during 2020-21, of which 10 million were Covid insurance policies with a lump-sum payment.

Of that amount, 7 million policies are still in effect until the middle of 2022.