Deposit insurance: Malaysia plans for state guarantee of insurance-related savings
There is a head-slapping moment when the statement from Malaysia's prime minister Najib sinks in. Why are savings in insurance companies not treated in the same way as savings in banks, at least insofar as securing at least a reasonable part of them in case of failure?
There is a significant similarity between money on deposit in a bank and money in an insurance company: both are accounted for on behalf of each customer but pooled for use of the customer base (in earning interest or other growth) and shareholders.
But while governments guarantee bank deposits, up to a certain limit, funds held in insurance companies are not subject to the same protection.
There are, as we have seen in recent years, even similar risks - investing in schemes that turn potential profit into catastrophic loss. That can happen do an equity fund or REIT just as easily - and perhaps even faster - than to a bundle of underlying assets.
So the announcement by Najib that Malaysia will bring forward legislation to create an insurance scheme for policyholders with investment products makes a lot of sense.
The limit will be for MYR250,000 - far below the limit applied to banks in many countries, including the current temporary arrangements in Malaysia where the sunset provisions expire at the end of this year. But the CEO of PIDM, the government company that operates the guarantee for banks, says that this sum will be sufficient to fully insure 99% of current depositors.
The new limit will also apply to banks where, again, it will cover the vast majority of non-corporate customers.
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