Why Prudential’s premium hike is the right move for the future.
First, this is not a Prudential-sponsored blog post.
In addition, this is not written by a 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 is to reflect 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 admits themselves into hospital.
Every drop is a good drop.
We feel that it is absolutely necessary.
And should be explained better (last one, we promise).
Well, now that it has provoked strong reaction from Singaporeans, let’s get going.
News Update.
In Singapore, we do not have Obamacare.
But we have our Medishield Life.
And to improve upon Medishield Life coverage (which is inadequate), the insurers have concocted Integrated Plans (IP) to improve its scope.
There has been a spike in IP premiums after the 12-month moratorium on prices has been lifted.
AIA, Aviva and then Prudential announced that they would be increasing their premium.
Lately NTUC Income and Great Eastern did likewise.
The price hike ranges from as low as 2 percent, and up to 36.6 percent.
What particularly stand 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 shall start on 1 May 2017.
For those who does not have a clue on how (IP) plan 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 ideas of why insurers are raising premiums across the board.
And no, the reason is not greed.
At least it looks that way.
From the research paper on Healthcare Insurance by Life Insurance Association (LIA) of Singapore, we can see the reason why.
Claims have been increasing for the past few years.
Source: Heath Insurance TaskForce Report
What strikes us the most is that private hospital is way more costlier than public hospital ones.
And the scary part?
It is increasing at 8.7%, compared to 0.6% of government hospital’s one.
But you may ask.
Are the insurance companies forced to increase the price or are they profiteering from this uptick in medical cost?
Once again, the Health Insurance Taskforce report is able to address this concern.
Source: Heath Insurance TaskForce Report
It is obvious that the claim ratio is climbing with each year.
Underwriting profits have dwindled to almost zero in 2012 while distribution cost has remained pretty stable.
Noticeably, the management expenses have been on a steady decline.
Management expenses are the cost of administering IP.
It includes staff wages, rental, advertising and other operating outlays.
As you may infer from the chart, the insurance companies have been trying to stay lean in the face of increasing claim expenses.
We cannot really begrudge the insurers for elevating the prices in these circumstances.
The profits are minimal and the staffs are having the same remuneration despite processing 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 leave to unfettered medical spendings in the long run.
Each individual feels that they have the right to ask for the best (and 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 cause an endless loop whereby the medical bill increases along with the premium hike.
A very ominous future beckons..
The Prudential way
One of the recommendations that the Health Insurance Taskforce made is to get rid of the rider.
For both insurance companies and consumers, this is unpalatable.
It will be an administrative nightmare for the 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.
Source: Heath Insurance TaskForce Report
As you can see, those with IP rider tend to make more claim 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 claimed and giving discount to those who didn’t, 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 the expenses low and hence, premium 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 premium of its private hospital rider.
It can make the premium lower for all of its client.
How so?
Whenever someone with IP rider makes a claim, it is not just the rider that is utilized 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 reduce 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 may have create 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.
Not in this instance.
That is what every hospital visit feels like.
Just like most things in life, you pay more when you use it more.
Using claim experience to determine who deserve lesser 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 make more claim.
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.
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