DEPOSIT INSURANCE AND POLICY OWNERS' PROTECTION SCHEMES BILL

DEPOSIT INSURANCE AND POLICY OWNERS' PROTECTION SCHEMES BILL: Order for Second Reading read.

2.48 pm

Mr Lim Hng Kiang: Sir, I beg to move, "That the Bill be now read a Second time."

This Bill enhances existing protection schemes for depositors and insurance policy owners, and brings them together into a single piece of legislation. The Deposit Insurance Act which established the Deposit Insurance (DI) Scheme, as well as provisions under the Insurance Act relating to the Policy Owners' Protection (PPF) Scheme, will be repealed as a result.

The proposed enhancements in this Bill will strengthen the protection of depositors and owners of insurance policies. In developing the enhancements, MAS consulted the industry and the public and, where appropriate, incorporated their feedback in the key features of the Schemes. MAS also took into consideration lessons learned internationally during the recent global financial crisis.

Mr Speaker, Sir, I will first provide some background to the existing DI and PPF schemes.

The DI Scheme in Singapore was implemented in 2006. It aimed to provide a basic level of protection to small depositors. A DI Fund, built up through regular contributions levied on the full banks and finance companies who are Scheme members, would help ensure that depositors can receive quick compensation on their deposits up to the coverage limit without having to wait for the outcome of the Scheme member's liquidation process. The Scheme was also designed to keep the cost of providing deposit insurance manageable, while preserving incentives for large depositors to continue to exercise market discipline.

At present, the DI Scheme insures Singapore dollar deposits of individuals and charities in current, savings and fixed deposit accounts held with a full bank or finance company, up to S$20,000 per insured depositor per Scheme member. This was sufficient to fully cover 86% of insured depositors when the Scheme was first designed, which was within international norms of 80% to 90%.

A separate scheme – the Policy Owners' Protection (PPF) Scheme – exists to protect insurance policy owners. The PPF Scheme is provided for in the Insurance Act to compensate policy owners of life policies and compulsory insurance policies in the event that their insurer fails. The existing PPF Scheme covers 90% of the liabilities for life policies and 100% of the liabilities for compulsory insurance policies. The Scheme is currently post-funded. This means that PPF levies will be collected from PPF member insurers only when there is a payout following the failure of an insurer.

The PPF Scheme provides policy owners with certainty as to how much of their policy monies will be protected and also whether the losses they have incurred from insured events will be compensated, should their insurer fail. Besides alleviating financial distress to individual policy owners, the PPF Scheme supports public confidence in the insurance industry and helps limit possible disruption to the economy.

To ensure that the DI and PPF Schemes continue to provide adequate protection to depositors and policy owners, several enhancements are proposed. Mr Speaker, Sir, I will now go through the key provisions of this Bill.

DI Scheme-Coverage

There are two main changes to the deposit insurance coverage. First, the coverage of the Scheme will be expanded from insuring only individuals and charities to insuring all non-bank depositors. This means that deposits of sole proprietorships, partnerships, companies and unincorporated entities will be insured up to the coverage limit. This will mitigate potential cash flow problems of small business depositors in the event of a bank failure, which is in line with the Scheme's primary objective of protecting small depositors.

Second, the maximum level of coverage under the DI Scheme will be raised from S$20,000 to S$50,000 per depositor per DI Scheme member. The separate coverage of monies placed under the CPF Investment Scheme and CPF Minimum Sum Scheme will also be raised from S$20,000 to S$50,000.

With the increased S$50,000 coverage limit, the proportion of insured depositors that are fully insured will be raised to 91%.

Gross payout

In addition, under the enhanced Scheme, depositors will be paid the gross amount of their insured deposits up to the DI coverage limit, without first netting off their liabilities to the Scheme member. Gross DI payout contributes to greater confidence and stability in a distressed situation as it is easier for depositors to understand and is operationally faster. It also allows depositors to have quick access to the full amount of their insured deposits up to the coverage limit, mitigating potential cash flow difficulties they may face. If payout is on a net basis, a depositor who has a loan with the same Scheme member may receive partial payout, or no payout if his loan is larger than his deposit, thereby limiting the effectiveness of the Scheme in protecting small depositors. The depositor, however, still remains responsible for any liabilities owed to the Scheme member. The Scheme member's liquidator will be empowered to recover these liabilities from the depositor.

PPF Scheme-Coverage

Sir, let me now explain the enhancements to the PPF Scheme. First, the scope of coverage will be expanded. Currently, the PPF Scheme only covers life policies written by life insurers as well as compulsory motor third party injury and work injury compensation insurance policies. The PPF Scheme will be extended to cover all accident and health (A&H) policies written by life insurers and Singapore policies of specified personal lines written by general insurers. These specified personal lines are personal motor insurance, individual and group short-term A&H insurance, personal property insurance for structure and contents, foreign domestic maid insurance, and personal travel insurance.

In addition, the PPF Scheme will be enhanced to cover 100% (up from the current 90%) of the liabilities of life policies, subject to caps. The increase in the level of coverage will help allay the concerns of policy owners, should they become anxious that their insurer may fail and seek to cancel their policies. Where the level of coverage is 90%, some policy owners may believe that they are better off getting back 100% of their policies' surrender values, rather than waiting for compensation under the PPF Scheme. But if the insurer does not fail, policy owners who prematurely surrendered their life policies may not be able to obtain equivalent new insurance cover, for example, due to advanced age or deteriorating health.

The introduction of the aggregate caps, which did not exist previously, will mitigate the risk of moral hazard as it creates an incentive for policy owners to exercise prudence in their selection of insurers. In this way, the caps will help keep the PPF Scheme affordable. This approach is similar with the DI Scheme, which provides for 100% coverage up to a cap of S$50,000 per depositor per Scheme member. General insurance policies will be fully covered with no caps, as general insurance policies typically indemnify losses as they occur and payouts are made based on actual claims incurred. As there is no relationship between the amount of losses and the level of sophistication of the policy owner, the moral hazard risk is lesser.

Pre-funding

In addition, the revised PPF Scheme will now be pre-funded, like the DI Scheme. Life insurers and general insurers will pay levies annually into the PPF Life Fund and PPF General Fund, respectively. A pre-funded approach is more equitable compared to a post-funded approach, as the failed insurer would have contributed to the fund prior to its failure. It will also expedite payout in the event that an insurer fails.

Review and administration of the schemes

Sir, the coverage limits and scope of the DI and PPF Schemes have been carefully calibrated to meet the objectives of these Schemes. These features will be reviewed from time to time by the MAS in consultation with the Singapore Deposit Insurance Corporation (SDIC). To facilitate changes that may arise from such reviews, the Minister-in-charge of MAS will be given powers to approve an increase in coverage for these Schemes, based on MAS' recommendations. In its review, MAS will have regard to the interests of depositors and policy owners, taking into account the costs to the Schemes, or the stability of, or confidence in, the financial system. If the increase is temporary, the Minister may also decide on the duration of the increase and the period of any extension.

Sir, I will also speak briefly on the administration of the Schemes. The SDIC, which currently administers the DI Scheme, will also administer the PPF Scheme. This arrangement ensures cost efficiency and leverages on the SDIC's capabilities. Since its incorporation, the SDIC has established systems and processes to ensure that insured depositors can be compensated quickly in the event of a payout.

The SDIC will collect premium contributions and levies from DI and PPF Scheme members respectively, compensate those who have been insured in the event of a payout as well educate the public on the DI and PPF Schemes. In addition, the SDIC will manage the DI, PPF Life and PPF General Funds. These three funds will be maintained separately and no inter-fund lending will be allowed. The Bill requires the SDIC and the funds to be audited, and for a copy of the audited financial statements, auditor's report and annual report of SDIC's key activities during the year, to be provided to the Minister.

Sir, the proposed enhancements to the DI and PPF Schemes will strengthen the safety net for small depositors and policy owners. The enhancements have been carefully designed to achieve this objective, while keeping the costs of the Schemes manageable and preserving incentives for market discipline.

Sir, I beg to move.

Question proposed.

3.00 pm

Assoc. Prof. Paulin Tay Straughan (Nominated Member): Sir, I rise in support of this very important Bill which serves to alleviate Singaporeans' concerns about the security of their saving deposits in financial institutions. This Bill is particularly timely as Singaporeans are still recovering from the financial crisis triggered by the failure of Lehman Brothers in 2008.

I have one short query for the Minister. With regard to health and life insurance policies, my primary concern is with older policy owners. Should an insurer fail, one main concern for older Singaporeans is their inability to take up alternative insurance because of their advanced age and/or deteriorating health conditions. Is there provision in the Bill to ensure that they would be able to obtain equivalent new insurance cover?

Mrs Mildred Tan: Mr Speaker, Sir, thank you for allowing me to speak on this Bill.

It is an important Bill and it augurs well that MAS has been proactive in the ever changing developments in the global financial regulatory environment as well as looking after the needs of local depositors.

Since the Singapore Deposit Insurance Corporation (SDIC) was formed in 2006, we have seen an increase of the amount insured from $20,000 to $50,000. This, I believe, is in keeping with international norms as well as the growing wealth of Singaporeans. At the same time, this is an increase of 150% over the past five years. Perhaps, it is a little bit like crystal-ball gazing, but I wonder if the Minister would be able to project future increases or see the need to increase this over time, and to give regular interval updates on the need to review this.

Sir, I would like to speak on two parts: first, relating to businesses and insurance practitioners; and, second, on retail depositors.

First, on business and insurance. Sir, this Bill seems to address a gap that exists for deposit insurance when compared to intrinsically similar deposits written by banks which have been covered historically by other legislation. I understand that the Policyholder Protection Fund (PPF) will be formally established in this Bill. To me, this is significant as previously there was no formal PPF that existed, especially with the early contribution by insurers. It is also heartening to know that with the enhancements, we will see an increase of the life policyholder's coverage to 100% and the introduction of an aggregate cap that will enable PPF to be more accessible.

I would say that this Bill will provide policyholders with an additional level of comfort over and above that which already exists in the form of insurers' holding reserves and capital. However, having said that, PPF will increase the costs to the insurers which will ultimately be passed back to policyholders. It then begs the question and the consideration as to how large is large enough. Too small a fund, there is no protection or even worse, it creates a perception of protection without the means to provide the protection. Too large a fund, the capital costs will be unduly onerous.

Sir, the basis for levies paid to the Scheme needs to be clear and fair in respect of an insurer's overall risk profile. For instance, insurers that maintain a capital adequacy ratio above a certain level might reasonably pay a lower levy as their risk insolvency is higher. The levy should also be reasonably consistent over time to allow an insurer to make the right commercial decision as to what the price to set and where to deploy its capital.

Sir, next, I move on to businesses. It is clear that the DI Scheme is to protect small depositors which include small businesses. First, I must say this is an important step to protect businesses as I think that this follows the same form as the protection for retail depositors: that you may be very rich, but $50,000 is all the protection you are getting at this point and, generally, this is a sensible approach. I applaud MAS for this timely initiative and congratulate them for having gotten consensus to expand the Scheme to include businesses.

Sir, the Deposit Insurance and Policy Owners' Protection Schemes Bill increases the protection of depositors from $20,000 to $50,000. Then, I ask, for all intents and purposes, can someone with, say, $200,000 in cash be protected completely? Can they, therefore, spread their money to four banks, with each amount of $50,000, up to $200,000? The percentage of people who are covered under this Scheme would therefore mean that there is an increase of 83% to 91% protection. This places us on the high side of norms in terms of actual amounts insured, and there are countries such as Hongkong, United States and Britain which pay out such high amounts.

Sir, I note that there is no cover on investment products such as unit trusts or guaranteed capital funds. The increase of deposit over $50,000 may encourage investments in low interest deposit accounts. This is not desirable in an inflationary environment. One way is for the protection to be extended to less risky investment products to ensure higher interest savings but, at the same time, I know this risk increases the costs to banks and financial institutions. Sir, this is a delicate balancing act and one that we may need to constantly bear in mind. The balancing is not between risks and premiums alone, but it is also assurance and reality checks.

Sir, I would like to finally touch on corporate governance and audits. Here, I would like to declare that I am from Ernst and Young, a public accounting firm. The current Bill talks about audits, as the Minister had mentioned, but it does not quite indicate the audit of premium collections and the internal audit of SDIC. Perhaps, this could be considered.

Finally, I stand in support of the Bill as I believe that the changes are for the better and this is an important juncture for us to do this. I urge the agency, the Singapore Deposit Insurance Corporation, to continue its good work of educating the public on its role, and the strength of Singapore's financial system as the fundamental issue remains one of credit, and even more basic – that of trust. This is partly for the general financial literary and also to build up an important reservoir of trust, so that in the event of any financial crisis, the depth of trust would provide some form of foundation and stability.

To that end, I do hope there will be more public education and, perhaps, the Minister can share with us the outcomes he hopes to share and the key messages he will ask SDIC to send out.

Mr Lim Hng Kiang: Mr Speaker, Sir, I would like to thank the Members for their support of the Bill and for their comments raised. Let me address these comments respectively.

First, Assoc. Prof. Paulin Straughan asked whether the PPF insurance will allow the transfer of policies from a failing insurer to another insurer. This, I think, is one of the key intentions. If the insurer fails, if there is indeed a willing buyer and allows the insurance policies to be transferred to this willing buyer, then, of course, we will try to facilitate it because this is a very neat solution.

In the event that there is not a willing buyer, then, of course, SDIC has the option to establish a separate legal vehicle to continue with the coverage of the outstanding policies and let these policies, as a technical term, run off. Of course, if this is not deemed to be a good solution, then the third option is to pay off the policies. But we do recognise that for older policyholders, especially those with existing health conditions, finding a willing buyer is a better option or having a run-off is also a good option.

Mrs Mildred Tan asked about the review timeframe. I think we established the key parameters of the Deposit Insurance Scheme on the level of coverage desired and, therefore, the review will really take place when we see the coverage dropping. So, we try to achieve between 80% and 90% coverage. When the Scheme was first started in 2006, it took us five years to review it and the significant increase is because of the increases in the level of deposits and we are now able to achieve 91% coverage.

The second question is, of course, the cost considerations. I think this is a very important trade-off. The more comprehensive the coverage of the PPF, the higher the funds will need to be created and, therefore, the higher the levies. So, we need to have this balance and we have yet to establish the actual fund size and the levy structure. MAS will be consulting the industry both on the target fund size as well as the levies in due course. The aim of this Bill is to set up the structure but, in setting up the target size and the levies, we will be very mindful of this trade-off needed and also the basic principles in setting up the levies. This will be risk adjusted to be equitable to all the participants.

Mrs Mildred Tan also asked whether the DI can be extended to investment products. This is something that we have considered and consulted with the industry and felt that we should not at this moment provide cover for investment products because that will entail higher costs because the nature of investment products entails a higher risk. At this juncture, it is better for people to understand the risks especially if they invest in complicated investment products and do not expect this to be insured by the DI. So, this is the position for the time being.

On corporate governance: this is very important. There will be proper audit of the SDIC. The process will be that MAS will decide on the levies of the individual's scheme member participants depending on their deposit liability base and the SDIC will then collect the appropriate levies from them. And as MAS does its bank inspection, they will be able to check that these deposit liabilities that are declared by the banks and the finance companies are actually accurate and true. So, there will be proper processes to make sure that everybody who is participating pay up the correct levies.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. – [Mr Lim Hng Kiang].

Bill considered in Committee; reported without amendment; read a Third time and passed.