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Posted 16 April, 2017 by Surely
in Technical Smechnical

Why Prudential’s premium hike is the right move for the future.

Firstly, this is not a Prudential-sponsored blog post.
In addition, this is not written by any Prudential advisor or staff.
In fact, we are in no way related to and remunerated by the UK-originated insurance company.

So why are you guys defending the premium increase?

Well, this increase reflects the scarcity of hospitalization plans in Singapore.
Integrated Plans must be priced rightly to reflect that.
And consumers need to know how precious it is every time they admit themselves into a hospital.

 

Every drop is a good drop.

Every drop is a good drop.

 

We feel that it is absolutely necessary.
And that it should be explained better (last one, we promise).
Well, since it has been provoking strong reactions from Singaporeans, let’s get right to it.

 

News Update.

 

In Singapore, we do not have Obamacare.
But we have Medishield Life.
And to improve upon Medishield Life coverage (which is inadequate), insurers have introduced Integrated Plans (IP) to improve its scope.

There has been a spike in IP premiums since the lifting of the 12-month moratorium on prices.
AIA, Aviva and subsequently Prudential, announced that they would be increasing their premium.
Recently, NTUC Income and Great Eastern have followed suit.
The price hike ranges from as low as 2 percent, all the way up to 36.6 percent.

 

serious

 

What particularly stands out is how Prudential chooses to load the premium of its rider.
It is a claim-experience based method of charging.
The more your hospital claim is, the higher the premium.

This is only applicable to PRUshield Extra A Premier, the rider for its private hospital plan.
It will start on 1 May 2017.

For those who do not have a clue on how IP work, you may want to read this pretty comprehensive guide right here.
Basically, this rider takes care of the deductible and co-insurance that you are liable for under the IP.

 

Unearthing the reasons behind the price hike.

 

Unlike the cost of water (sorry, we can’t help it), we have some idea of why insurers are raising premiums across the board.
And no, the reason is not greed.
Or at least it doesn’t appear so.

From the research paper on Healthcare Insurance by Life Insurance Association (LIA) of Singapore, we can see the real reasons for the hike.
Claims have been increasing the past few years.

 

Average Bill Size

Source: Heath Insurance TaskForce Report

 

What strikes us most is that private hospital claims are way costlier than public hospital ones.
And the scary part?
They are increasing at a rate of 8.7%, compared to government hospitals’ 0.6%.

But you may ask,
“Are the insurance companies forced to increase prices or are they profiteering from this uptick in medical costs?”
Again, this concern can be addressed by the Health Insurance Taskforce report.

 

Source: Heath Insurance TaskForce Report

Source: Heath Insurance TaskForce Report

 

It is obvious that the claim ratio is climbing with each passing year.
Underwriting profits have dwindled to almost zero in 2012, while distribution cost has remained pretty stable.
Noticeably, management expenses have been on a steady decline.

Management expenses are the cost of administering IP.
They include staff wages, rental, advertising and other operating outlays.
As you may infer from the chart, insurance companies have been trying to stay lean in the face of increasing claim expenses.

We really cannot begrudge the insurers for elevating prices in these circumstances.
Profits are minimal and staff receive the same remuneration despite having to process more claims.

This may lead to some negative consequences.
As IP is too important to give up, the demand for IP will remain strong.
However, it will lead to unfettered medical spendings in the long run.

Each individual feels that they have the right to ask for the best (and at times, excessive) treatment in their next hospital visit when they are paying an increased premium.
Whether they claim or not, makes no difference to the price that they are paying.

This causes an endless loop where medical bills increase along with premium hikes.
A very ominous future beckons…

 

The Prudential way

 

One of the recommendations made by the Health Insurance Taskforce is to get rid of the rider.
For both insurance companies and consumers, this is unpalatable.

It will be an administrative nightmare for insurers to redesign their riders.
As consumers, we hate to remove that security blanket of not paying a cent when hospitalized.
That is where the Prudential solution comes in.

 

Incidence

Source: Heath Insurance TaskForce Report

 

As you can see, those with an IP rider tend to make more claims than those without.
Coupled with the expensive private hospital bills in the previous chart, it is obvious where Prudential can target – those on private hospital IP with rider.

By raising the rider premium of those who claim and giving discounts to those who do not, Prudential has effectively short-circuited the medical cost loop.

Consumers are happy that they are rewarded for staying healthy and not needing a claim.
This way, Prudential should be able to keep expenses low and consequently, premiums too.

It is not a revolutionary idea as many other insurance work in the same claim-based manner.
However, it takes some foresight and courage to do this with IP as it is unprecedented.

 

Sharing is not caring

 

What Prudential has introduced goes more than reducing the premium of its private hospital rider.
It can make the premium lower for all its clients.
How so?

Whenever someone with IP rider makes a claim, it is not just the rider that is utilised to pay the bill.
The IP is also engaged to pay for the bulk of the claim.
All these add to the claim ratio of each insurer.

When Prudential implements a claim-based loading on its PRUshield Extra A Premier, it not just reducing the claims on the rider but also on the main IP.
Naturally, with lesser claims, Prudential does not have to raise the premium of its IP.

By carving out a separate risk pool for its rider, it is creating an opportunity to lower its claim ratio across the IP and the rider.
This is good news for all Prudential customers, even those who have claimed.

 

A Brighter Future

 

It is usually a bad thing when prices are raised.
But not in this instance.

 

That is what every hospital visit feels like.

That is what every hospital visit feels like.

 

Just like most things in life, you pay more when you use them more.
Using claim experience to determine who deserves a lower premium is a great way to create ownership in each and every policyholder.

After all, IP is the most basic and essential insurance that everyone needs.
It is far too important to let the cost balloon just because of a minority who makes more claims.
Hence, we laud Prudential for this move to make things equitable.

Lastly, we hope we have provided a clear explanation on the premium hike for IP and its rider.
And one day, we may just do the same for our water prices.

www.ClearlySurely.com aims to eradicate the knowledge gap between consumers and Life Insurance. Our Vision is that one day, every Man, Woman, and Child will be properly insured.

4 comments

  1. KH

    Thank you for the interesting perspective. Regardless whether the post was sponsored or written by a Pru fan, it does not matter as it’s a point of view from the content provider and I believe the site also encourages free speech. Pru has been losing tons of money in claims as the article rightly inferred. Pru has chosen to punish those who claimed and the article has lauded this move. As a Pru policyholder, I think this is against the principle of risk pooling and sharing of risk so that the cost of premiums are shared amongst healthy and unhealthy people. Certainly for me, it does not give me a peace of mind. If I do not wish to make a claim, I would not want to buy a policy, quite straightforward. If I buy a policy, it is because the laws of large numbers will help me offset the cost. Obviously the best type of clients for Pru are those who will never make a claim because in this way, they can laugh all the way to the bank. I pity those who made multiple claims from Pru then get hefty premium increases and have to be stuck with Pru and cannot change insurers because the claimed conditions are now considered as pre-existing conditions by other insurers. This “Pru” way is certainly quite selfish to me. What a fair-weather friend indeed.

    1. Surely

      While we can see your point about cost-sharing, it can be deduced from the Taskforce report that the cost for IP has increased to a point that it is no longer sustainable. More importantly, it is now an industry-wide problem faced by all IP insurers instead of just one or two.

      The idea of fairness is very subjective. We simply feel that to load the premium of those who had claimed and to give discount to those who had not, is a more equitable method than to raise the prices for everyone.

      Nevertheless, we can see your point too. I guess you will not be making friends with Prudential anymore.

  2. Sean

    I don’t think premium hike is making sense at all. Ok, i agree medical cost has increased, but it is expected. I believe this is priced in when we purchase the insurance, else, their actuary is not doing their job. Another point is that policy is like entering a contract, each party do their due diligent and agreed on price, now that one party say: wait, i realize i have to charge you more to maintain my profit, is it make sense? So, insurance company is sure make money business, and customer is always on the losing side? I would also like to point out that, look at these insurance company financial performance, year in year out making profit, growing profitability, where does all these coming from? From squeezing their customer wallet.

    1. Surely

      We are inclined to agree with you if the insurers are making excessive profit off IP plans. However that is not the case. They are taking no or minimal profit on the IP plans.

      As much as Singaporeans like to complain about the government, the public hospital cost has not risen as rapid as the private ones. Thus, private medical cost is the real cause here.

      The question in our mind is: why has private medical cost risen by 6-8% in that period? Well, you may just have provided us a subject for us to investigate into. Thank you!

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