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 accurately to reflect that.
And consumers need to know how precious it is every time they admit themselves into a hospital.
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.
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 also followed suit.
The price hike ranges from as low as 2 percent, all the way up to 36.6 percent.
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 as to why insurers are raising premiums across the board.
And no, the reason is not greed.
Or at least it doesn’t appear to be 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.
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%, as 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.
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, rentals, 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 their 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 still 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 whereby 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 would hate to remove that security blanket of not paying a cent when hospitalized.
That is where the Prudential solution comes in.
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 being rewarded for staying healthy and not needing a claim.
This way, Prudential should be able to keep their 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 beyond just reducing the premium of its private hospital rider.
It can make the premium lower for all its clients.
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 is 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 creates 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.
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 costs balloon just because of the minority who makes more claims.
Hence, we laud Prudential for this move to make things equitable.
Lastly, we hope we have provided a much clearer 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.