Greedy doctors, overpaid agents, or kiasu patients? A few clarifications

In our previous blogpost, we looked at the situation of the Integrated Plans insurers in in Singapore, who have long complained that they have not been profitably since the introduction of Medishield Life in 2015. This has since attracted quite a bit of attention, and in the process, some questions and further data have been thrown up, which we shall examine here.

Purpose of the article

The purpose of the first article was to understand why the Integrated Plans insurers were not more profitable in the past 5 years, from the perspective of the insurer. Of course, there have been a couple of successful cases, such as Prudential, which has been profitable for 2 years in a row, and NTUC Income, which was profitable in 2019. This task is made harder because insurance is not a particularly transparent industry. The business economics differ significantly from product to product and usually involves some arcane actuarial mathematics to boot!

Looking at the Medical Claims Ratio

To simplify the problem, we can think of the healthcare insurance business model simply as premiums earned, minus claims paid, management costs, and distribution costs. This is the underwriting profit. When investment income is added on, we can the operating profit. Now, we need to adjust the gross premiums earned by the insurer to less off the reserves it sets asides for the claims which are incurred in the current year but paid in the future, so what we are working with is really the net premiums earned.

So looking at the medical claims ratio, which is the claims paid divided by net premiums earned, will give us a good idea of whether the claims are too high relative to the premiums. Here are the workings for Prudential in 2019:

Prudential Integrated Plans Analysis 2019

Category	$ Amount	% of Net Premiums
Gross Premiums	$456 Million
Net Premiums	$456 Million
Net Claims	$322 Million
% Claims Ratio		71%
Management Exp.	$21 Million
% Management Costs		5%
Distribution Exp.	$61 Million
% Distribution Costs		13%
Underwriting Result	$52 Million
Underwriting Profits		11%
Investment Income	$0.026 Million
Investment Return		0%
Operating Income	$52 Million
Operating Profits		11%

The first thing we notice is that the medical claims ratio is based off the total amount of claims. Whether the number of claims are rising, or whether the amount of each claim is rising, they are all captured in this ratio. The second thing we notice is that the claims ratio is 71%. This is higher than the claims ratio before 2016, but is it too high? Or is it too low?

If we think about this claims ratio from the policyholders’ perspective, clearly, we will all want it to be higher. A higher claims ratio means that more of every dollar a policyholder pays to the insurer can be claimed for medical expenses. In fact, Medishield Life has a claims ratio of 104% over 2016 to 2019! This is only possible because they operate as a not-for-profit insurer.

But we also observe that Medishield Life puts aside far higher reserves (57% of gross premiums) than the Integrated Plans insurers (13% of gross premiums). This is because Medishield Life covers everybody without exclusions, including any pre-existing conditions which could result in high cost in the future. In any case, Medishield Life undertakes to rebate the excess premiums in the future if they are not needed, something which you will not see with the Integrated Plan insurers, so over time, the claims ratio for Medishield Life will be around 100%.

Coming back to Prudential, we immediately see that they are obviously not as generous as Medishield Life, with a claims ratio of 71%, and making zero reserves for future claims (as they screen for pre-existing conditions during underwriting). Is 71% a good claims ratio for policyholders? Or is it too low, and helping the insurer make higher than normal profits for shareholders? This is where we turn to the international data, specifically the Affordable Care Act.

What is a sustainable medical claims ratio for a healthcare insurer?

Unless you are an American, our opinion on whether the Affordable Care Act in the US is a success or failure are of no consequence. But what is interesting to us is the medical claims ratios set in the Act, at 80% for smaller insurers and 85% for larger ones. Now, benchmarks in legislation, such as these, are never plucked from thin air. Rather, they are the result of a long process of consultation with industry experts and insurers, and are set at a level which insurers believe is sustainable for them over the long run. And it is interesting to us because it helps to shed some light on the opacity of the insurance business.

Coming back to the Integrated Plan insurers here, we see that they all have claims ratios roughly between 65% to 88%.

Underwriting Results for Integrated Plans in 2019 (% of Premiums Earned)

Insurer	Claims Ratio	Management Cost	Distribution Cost
Prudential	71%	5%	13%
NTUC Income	83%	9%	7%
AIA	69%	12%	19%
Great Eastern	88%	10%	20%
AVIVA	80%	13%	12%
AXA	65%	32%	37%

So, this is is why we conclude that the assertion made that “medical claims are too high” is not really supported. Claims may be high, but relative to the level of premiums being charged now, they are actually sustainable. Hence to use the “greedy doctors and kiasu patients” reason as an excuse for further raising premiums is not supported either. Under the Affordable Care Act, this would be branded as profiteering by the insurers. But there is nothing here in Singapore which gives the equivalent protection.

So for policyholders, if your Integrated Plan insurer is consistently having a medical claims ratio much lower than 80%, it may be a sign that you’ll find it harder to claim when it is your turn to do so. And hence, you’re getting a poorer deal for roughly the same level of premiums payable.

Delving further into the quagmire of greedy doctors and kiasu patients

But let’s look further into the issue of “greedy doctors and kiasu patients”. From what the Singapore Actuarial Society has published, we see that over the period 2016 to 2019 (when the Integrated Plan insurers were the most unprofitable), the average payout per claim made actually fell by 1% per year!

Claims Statistics from Integrated Plans 2016 to 2019

This is even more surprising considering that healthcare cost inflation between 2016 to 2019 is estimated at 1.5% per year. So are the “greedy” doctors undercharging their patients by 2.5% every year?

Healthcare cost inflation in Singapore

But the claims incidence seems to have gone up by around 9% per year from 2016 to 2019. Is this the case of “kiasu” patients, egged on by “greedy” doctors, claiming more often? Or could there be another reason for this? Could it simply be that we are growing older as a population, and hence have more aches and pains, and need more visits to doctors and hospitals?

Population Statistics for Singapore 2010 to 2020

	Total Residents	Over 65	Over 75	Over 85
2010	3,771,721	338,387	134,258	29,241
2015	3,902,690	459,715	174,659	41,663
2020	4,044,210	614,368	214,964	57,461
CAGR	0.7%	6.1%	4.8%	7.0%

Over the last ten years, the elderly population have been growing much faster than the resident population as a whole, and they are increasing, both in absolute numbers and as a proportion of the population. And this increases the incidence of claims far faster than these growth rates alone, as the elderly also have a much higher rate of hospitalization.

Hospitalization Rates for the Elderly in Singapore 2018

So, does this look like the buffet syndrome of “kiasu patients“, seeking treatment for all sorts of minor ailments to maximise their medical payouts? Or does it look like the sufferings of aged Singaporeans seeking medical attention for their increasing number of illnesses?

Hence, the claim that doctors are too greedy, and patients are too kiasu is simply a myth!

Let’s turn to Management and Distribution Costs

If the insurers’ current claims ratios look sustainable relative to current premiums charged, and the costs pressures from a rising level of claims can be controlled, then what insurers can control to be profitable are really management costs and distribution costs.

Prudential has usually been cited as a case where the management of claims has been well controlled, resulting in two years of underwriting profits so far. From the earlier table, we see that this is true to some extent. Their claims ratio is 71%, which is not the lowest amongst all the Integrated Plan insurers though. However, their combined management and distribution costs are only 18% of net premiums earned. And the runner up in underwriting profitability, NTUC Income, has a combined management and distribution cost ratio of 16%!

The best performing insurers do not have the lowest claim ratios, but have the lowest management and distribution cost ratios

A closer look at distribution costs

As somebody else posted, the commissions paid for Integrated Plans by the insurers are between 25% to 35% of premiums for the first year, and 5% to 12% of renewal premiums subsequently. Hence, an Integrated Plan insurer whose representatives do a good job in retaining policyholders over time will have distribution costs in the single digit percentages. As is the case for NTUC Income. Smaller insurers which are trying to grow their portfolios will be paying a lot more of the 25% to 35% commissions, and so will end up having distribution cost ratios in the high double digit percentages. Such as AXA.

But this distribution cost structure is self-defeating in the current market. Any fresh-faced financial adviser or insurance agent will take a look at this table of commissions and figure out that it is better for them to try to enroll new Integrated Plan policyholders than to hang on to the existing ones. But since 70% of population already have some form of Integrated Plan, to enroll a new policyholder means that it is likely that they are switching from one Integrated Plan to another.

Which means that Insurer A loses a policyholder for which the distribution cost is 5% to 12%, and has to fork out a 25% to 35% distribution cost to maintain their portfolio. While insurer B forks out 25% to 35% to grow their portfolio now, only to find out that they still need to pay the same amount a few years down the road when that new policyholder gets lured away. So NTUC Income may actually be doing the right thing in a saturated market, playing defense and trying to keep their existing policyholders rather than aggressively looking for new ones.

Integrated Plans statistics from 2018

Strangely enough, the distribution cost structure is not meant to encourage churn. Assuming that premiums rise by 5% per year, if the adviser can retain the policyholder for a 30 year period, the present value of the commissions that can be earned is 200% to 300% of the first year premium! And the only thing required to earn this is patience. Actually, they do not even need to be patient for too long. As premiums shot up by 80% to 200% over 2016 to 2018, an adviser who did nothing different would still have seen their income from their Integrated Plan clients go up by 80% to 200%. It is next to impossible to find a profession or job which gives so much return for no incremental effort!

Insurers need to put in more thought on how to retain Integrated Plan policyholders better in order to bring the distribution costs down

Investment Income

While the important factors for making profits from the Integrated Plan business are still the underwriting profitability factors of claims ratio, management and distribution costs, let’s not forget about investment income as well. Sure, the premiums need to be invested in short term, liquid financial instruments in order to meet claims, but so do the premiums from General Insurance as well, and those seem to have a much better investment record.

Another way to put this point across is to look at the investment income in 2019 for Prudential. They made an underwriting profit of $52 Million. If they earned this on day 1 and put it into a deposit at a bank at 1% interest, they would have earned $520,000. Even if they had earned this slowly over the year instead of all at once, they would make about half that, or $260,000 in investment income. Yet they only posted investment income of $26,000! It’s really anybody’s guess how this could have happened!

Are Integrated Plans loss leaders for insurers?

Finally, someone also observed that Integrated Plans could actually be loss leaders for insurers, looking to enroll these policyholders in their life and general insurance policies. Much like how banks offer attractive perks with the credit cards to lure you to take out loans from them.

But this seems unlikely.

If we look at NTUC Income, which is one of the largest insurers in terms of net Integrated Shield premiums earned, we note that this line of business is larger than their General Insurance business, and they are the biggest general insurer in Singapore! So why would anybody use their largest business line as a loss leader to attract new clients?

Furthermore, many insurers have their products distributed through independent financial advisors. As a result, there is no assurance that these advisors will always offer their other products to their clients. After all, the point of independence is not to be tied to any single insurer.

*Here’s the latest update on the Integrated Plan insurers for 2020 amidst the Covid-19 pandemic, which gives further thoughts on how to select an Integrated Plan policy!

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