https://www.straitstimes.com/business/simplicity-is-needed-to-cut-insurer-incomes-gordian-knot
2025-01-10
Claire Huang
Senior Business Correspondent
The Straits Times
SINGAPORE – Sometimes, less is more. This axiom can be applied to the Gordian knot that seems to bind home-grown Income Insurance.
As some observers note, its humble roots might just be a source of inspiration.
The National Trades Union Congress (NTUC) set up its first cooperatives in 1970 – the insurer NTUC Income and NTUC Comfort, a taxi cooperative.
The insurer was started by Singapore’s trade union leaders, who pledged $1.2 million from their workers’ funds.
Setting up NTUC Income was the Government’s way of helping lower-income workers get much-needed insurance cover at an affordable cost, and to encourage people to save.
A 2007 annual report stated that Income “saw a phenomenal increase in asset growth to $40 million” from 1970 to 1977.
Former NTUC Income chief Tan Kin Lian, whose tenure lasted 30 years from 1977 to 2007, said NTUC Income was “financially weak” when he took over.
He grew the insurer from an asset base of $40 million in 1977 to total assets of nearly $19 billion in 2007, with annual premiums exceeding $2 billion.
To achieve this, Mr Tan took a no-frills approach that kept sales and management expenses lower than industry norms.
His agents’ income was solely based on commissions and even those were half the market rate.
Despite this, the agents were happy as sales were brisk as premiums of Income’s products were 10 per cent cheaper than its competitors’.
Never mind that NTUC Income was not fancy, and that it did not have bancassurance – partnerships with banks – or brokers. What Mr Tan lost in having cheaper products, he made back in volume and the business hummed along.
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The tricky balance
In those early years, there was a line of thinking that cooperatives had to focus on profitability, so they were sustainable and there could be more returns to plough back to society.
Signs of this can be found in the annual report, where then NTUC secretary-general Lim Swee Say was quoted as saying: “To continue as a great movement of tomorrow, we must not keep doing more of the same, but more of the different.”
The report went on to say: “Likewise, at Income, we will change by catering increasingly to the needs of a more sophisticated and affluent generation without losing touch with our traditional heartlanders.”
In July 2024, NTUC Enterprise chair Lim Boon Heng told ST that there is a misconception that cooperatives have turned more profit-oriented.
He said: “If you do business, you must do well. You must make a profit. If you want a business to be sustainable – and sustainability is important if you want to continue to serve people and to do good – then the business must earn its cost of capital.
“I think that we have created the impression that we have gone profit-oriented, but we have pivoted to make sure that we are sustainable.”
There is merit in that, but it gets tricky.
The struggles of cooperatives, ranging from limited resources to talent, are not new, and it is why the number of cooperatives has dwindled over the years.
The challenges are compounded in a life insurance business, which demands huge upfront capital injections.
NTUC Enterprise had to pump $630 million between 2015 and 2020 into Income so the insurer could meet tougher regulatory capital requirements.
Between 2007 and 2023, Income’s market share in life and health business fell.
In 2022, it was corporatised to gain a firmer footing amid increased competition in the industry, it said. But it would continue to cater to underserved customer segments such as the elderly, people with special needs, and migrant and gig workers, said its chief executive.
By 2023, Income was in the sixth position with 5.7 per cent of market share, falling from a peak of 20.8 per cent in 2010.
At the end of 2023, it had total assets of $43 billion and 1.7 million customers.
Given the current trajectory, Income’s profit stream is expected to further narrow in future if the decline over the years under different captains and boards is not stopped.
Over time, there has also been a shift in the make-up of the board.
In the past, there were government representatives and unionists on the board, but ST was told political office holders are not allowed after Income corporatised, and it became hard to find savvy and qualified unionists.
Today, half of the 12 board members have ties to the finance sector, namely banks and asset managers. Only one is a unionist.
It is important to have financially savvy folk so that the board can watch over management, but it is equally important that they have strong union backgrounds.
It cannot be that there are no retired political office holders and actuaries who qualify.
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A pyrrhic victory?
While some may applaud the scrapping of German insurer Allianz’s proposed acquisition of Income, it is worth noting that this option killed three birds with one stone.
The marriage of convenience was aimed at giving Income financial muscle to lay the foundation for future growth and meet its social and regulatory obligations; allowing NTUC Enterprise to get funds that can be ploughed back to its causes; and helping the 16,000 or so retail shareholders make their happy exits.
The irony here is that the outcome strikes at the very heart of what some have been braying about – Income’s ability to serve society.
Logic dictates that an Income on a decline will mean it is less well-resourced to do good.
Now that there is no deal, the millions that NTUC Enterprise was to use for elderly services, among other things, are no longer available.
A key argument from the public outcry is that Allianz would have a controlling 51 per cent stake in Income after the deal, which led to questions about how Income was going to fulfil its social mission when Allianz is a for-profit entity.
These are valid concerns.
Moving forward, any deal that is proposed must ensure that Income has the ability to provide affordable insurance coverage to Singaporeans, said Ms Stefanie Yuen-Thio, joint managing partner at TSMP Law Corporation.
“This could be in the form of de facto control by having a controlling stake, or contractual protections where NTUC Enterprise has the right to make decisions on certain operational matters. These could be entrenched in the shareholders’ agreement entered into with the incoming shareholder,” she added.
One can argue that any interested party is now clear about the dos and don’ts, but some say suitors might be put off.
Former nominated member of parliament Calvin Cheng will tell you that “our international reputation as a foreign investor-friendly hub is severely damaged” – views also echoed to ST by others.
And then there were the $2 billion surplus and a $1.85 billion capital reduction plan.
For whatever reasons, there was an absence of clarity and articulation about these.
The $2 billion surplus, mentioned in Parliament on Oct 14, 2024, is money Income was allowed to keep after its corporatisation with no written conditions as ST found in the gazette.
The surplus was handed to Income so it could run its business, meet legal and capital requirements, and come up with products that help the marginalised but do not make money.
Parliament heard that Allianz had a business plan where it proposed to return $1.85 billion in cash to Income’s shareholders, within the first three years after the deal wrapped up.
The plan was for Income to run its insurance business more efficiently, without the need to hold as much capital as it now does – something that is rather common in the corporate world.
What was not spelled out clearly was that an unspecified part of the $1.85 billion would have included returns from investments that the German insurer, which is also a global fund manager, believed it could achieve.
Ultimately, whether the sum was returned in cash to shareholders would have depended on approvals, either from shareholders, the board, regulator or the court.
Like it was not confusing enough, unhappiness over healthcare costs spilled over into this saga.
But as a healthcare financing guru pointed out, to equate the Allianz-Income deal with Singapore’s rising healthcare costs is to conflate and confuse two separate issues.
Untangling the knot
Income is now in a Catch-22 situation – apparently damned if it does, and damned if it doesn’t.
NTUC Enterprise cannot continue to finance Income for the long term, but the latter cannot simply be sold to a commercial entity without the perception that its social objectives will be incompatible with the interests of a for-profit entity, said lawyer Robson Lee of Kennedys Legal Solutions.
It is not ideal for state investor Temasek and Singapore sovereign wealth fund GIC to step in – as some have suggested – nor is nationalising Income, he added.
“Even Temasek and GIC are institutions set up to invest and maximise profits for the benefit of Singapore. (And) it would be untenable for the Government to nationalise Income when civil servants are not the best people to run an insurance business,” said Mr Lee.
Also not pragmatic is the suggestion for DBS Bank to swoop in to acquire Income.
DBS sold its insurance business, Insurance Corporation of Singapore (ICS), in 2001. ICS was later acquired by CGNU, which was later rebranded to Aviva, which is now known as Singlife following a merger.
The bank now has a 15-year bancassurance deal worth $1.6 billion with Manulife Singapore that started in 2016.
It simply makes no commercial sense for DBS to fork out money for Income when it is getting paid by an insurer to sell products.
Then there are calls for the insurer to grow organically.
Organic growth is achieved by increasing sales and expanding the insurer through its own resources.
Singapore’s market is small and highly saturated, not to mention Income has no scale, so this is moot.
To have better margins, insurers here are zooming in on the high net worth segment.
Unfortunately, Income cannot do so without coming under fire because doing so creates the impression it is betraying its cooperative roots. It does not have the relevant expertise that can rival others anyway.
That said, all is not lost.
As industry players and Mr Tan told ST, Income’s unique position and customer base allow it to compete differently from other insurers in Singapore.
“The reason it is not doing so is that the existing team is unable to imagine a different path,” said an industry insider, who spoke on the condition of anonymity.
Industry players admit that products today are too complex.
What they are not saying is that the bells and whistles on products are there so they can be sold more easily, and at higher prices.
So, Income should return to its roots of providing cheap and simple products that do not require huge capital buffers, such as investment-linked plans and unit trusts, said Mr Tan.
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The industry insider went further to suggest that Income could offer products similar to competitors, but sell them at lower prices – this can be achieved if the firm’s expenses are low, like they were in the early years.
Said Mr Tan: “If you run your operations not based on your strength, but based on copying others, you’ll be weak, definitely.”
That is why Income should tap its DNA to offer products that are simple, cheap and still provide decent returns.
That leaves the question of what to do with the retail shareholders.
Can NTUC Enterprise buy them out?
Some minority shareholders are hoping for this.
Is this realistic? Probably not.
In the absence of a suitor, the easiest and most direct way is for Income to buy out the retail investors.
Another is for Income to consider issuing a new series of convertible securities that are listed on the Singapore bourse to public investors.
Mr Lee suggested that the Government may wish to allow Singaporeans to use their Central Provident Fund (CPF) monies to buy the convertible securities.
He said these securities should pay a higher interest rate than the current interest rate for the Ordinary Account in CPF.
This will incentivise Singaporeans to invest and those who hold a longer term view of Income’s prospects will have the option to covert their securities to equity.
Perhaps it is an opportune time to do some brainstorming as we start the new year and figure out if it is time to embrace simplicity and get back to basics.
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