Integrated Plan Insurers are Profitable Again! How did they do it, and what it means for Policyholders
After 5 long years, Integrated Plan insurers are profitable again. A major reason for this is of course the lower number of claims made during the Covid-19 pandemic in 2020, which led to lower claims ratios, and hence better underwriting profitability as the insurers got to keep a larger share of the high and rising premiums as profits.
What does this mean for the policyholders? One thing is for sure, it does not mean that premiums will stop rising as fast, or even fall anytime soon, as these higher premiums are needed to meet the rising number of claims made, and also to pay for the high distribution costs for growing the number of policyholders.
But while we cannot avoid paying higher and higher premiums for Integrated Plans, we can at least look at the level and consistency of the claims ratios across different insurers to make sure we are getting our money’s worth for the premiums we will continue to pay.
This post is a few months late, but the financial results of insurance companies in Singapore for 2020 have been posted by the MAS, and surprise, surprise! The Integrated Plan insurers are all profitable again, after a long winter lasting 5 years for some of them! In some ways, this may not come as a surprise, as one of the effects of the Covid-19 pandemic has been to scare patients into delaying their treatments (for fear of getting infected at hospitals), and hence claims have been lower the the trend of the past few years. Still it has not reduced the premiums payable by any of us, which leads us to the follow-on questions. How did the insurers increase their profitability, and what does this mean for us as who are looking to get hospitalisation and surgical insurance coverage?
Back in the day, we had two posts on some of the economics behind Integrated Plans in Singapore, trying to clear the air about the source of rising premiums. Was it due to greedy doctors, overpaid agents or kiasu patients? And we found that it was more the fault of the management of the insurers for allowing unbridled competition to drive up costs and make the business unprofitable for most insurers. You can read the debate below:
- Greedy doctors, overpaid agents, or kiasu patients? What is wrong with Integrated Plans?
- Greedy doctors, overpaid agents, or kiasu patients? A few clarifications
The data for those two posts was for 2019. Now let’s take a look at the latest outcomes!
How does Integrated Plan insurance work?
While almost everyone needs hospitalisation and surgical insurance coverage, and virtually everyone is covered under MediShield Life, it is not apparent that everyone actually understands the relation between the premiums we pay and the claims we make, at least as far as the insurance company is concerned. For most of the insurers, it is quite straightforward:
- Collect premiums at the start of the year
- Pay out management fees and distribution costs like agent commissions from the premiums
- As patients make claims throughout the year, assess whether they are claimable, and how much to pay out to them out of the premiums collected
- Anything left over at the end of the year (plus investment returns) is profit! Or loss, if there is nothing left over
- Repeat for the next year
In short, nothing is really carried over to the next year, except for part of the premiums to be paid out for treatments which are carried out in one year but are only claimed in the next year. So every year we pay premiums which will either be claimed by ourselves, or someone else, paid as salaries and commissions to the insurer’s staff and agents, or end up as shareholder profits. Well, for those who make a successful claim, the premium also helps pay for their coverage of long term conditions in the future if they stick with the same insurer.
Sounds simple? Let’s take a look at the numbers!
How did the Integrated Plan insurers fare in 2020?
From the summary above of how integrated plan insurance works, there are only a few drivers for profitability. And so we have laid them out below, comparing between 2019 and 2020. Note that we have excluded one of the Big 4, AIA, because their financials are not easy to interpret, given the amount of re-insurance they take on and pass on, as well as AXA, which is really a very small player in the grand scheme of things.
Integrated Plan Insurers’ Financial results 2019 (as % of net premiums)
|2019||Prudential||AVIVA||Great Eastern||NTUC Income|
|Net Premiums||$456.1 m||$187.8 m||$321.0 m||$435.4 m|
Integrated Plan Insurers’ Financial results 2020 (as % of net premiums)
|2020||Prudential||AVIVA||Great Eastern||NTUC Income|
|Net Premiums||$467.2 m||$211.3 m||$388.6 m||$490.3 m|
At first glance, all the 4 Integrated Plan insurers here were profitable, both on an underwriting basis and on an operating basis (including investment returns). And they did it through a combination of lower claims (both based on the Claims Ratio, and the total number of claims paid), and better investment returns. At the same time, as expected, the total amount of premiums collected kept going up! So 2020 has worked out as a good deal for the Integrated Plan insurers – lower claims paid and higher premiums collected.
Three of the insurers stand out:
- Prudential, which improved profitability by relentlessly reducing their claims ratio, paying out less while taking in more in premiums
- Great Eastern, which not only reduced claims drastically, but also squeezed management costs and distribution costs to make a sharp improvement
- NTUC Income, which maintained a high claims ratio, but muscled its way to greater profitability through stellar investment returns
In fact, these three cases are interesting enough for us to do a deeper dive into their historical results.
A deep dive into the result of the largest insurers
Looking at the results for the three large insurers since 2015 can tell us a bit more about how Integrated Plan insurance works.
1. Claims Ratio
The claims ratio is a measure of how much total claims are paid out versus the net premiums earned. Obviously, this is going to be the biggest expense for the insurer, so they would prefer to lower this. But on the other hand, a high claims ratio is good for the customer, since you get back more when you need it, for the premiums you pay. This is the single biggest driver of how profitable the insurer is, we is seen in virtually every insurer’s underwriting results.
Prudential: Claims Ratio and Profitability (2015 – 2020)
Great Eastern: Claims Ratio and Profitability (2015 – 2020)
NTUC Income: Claims Ratio and Profitability (2015 – 2020)
The effect of a lower claims ratio on profitability is very prominent in the case of Prudential, having improved profitability since 2018 with the introduction of claims-based pricing. It is also key for Great Eastern, which returned to profitability in 2020 just like in 2015, thanks to the lower claims ratio due to Covid-19. But curiously enough, NTUC Income seems to have turned around its losses in 2015 to profit in the last 3 years, even as they maintained the claims ratio at a similar level, which points to their success in managing other costs.
2. Distribution Costs
Distribution costs are paid out of premiums collected, to the financial advisors and agents, and their managers. As highlighted here, the commissions paid are higher in the first few years of the Integrated Plan policies, and lower for renewals thereafter. So an insurer which is growing the number of policyholders quickly will pay out more in distribution costs than one which is growing slowly, or even shrinking the number of policyholders. And this will pass on directly into underwriting profitability.
Prudential: Distribution Costs and Profitability (2015 – 2020)
Great Eastern: Distribution Costs and Profitability (2015 – 2020)
We have not shown the data for NTUC Income because they have been paying out only single digits percentages for distribution costs throughout the whole period, as they have not been growing their number of policyholders. However, both Prudential and Great Eastern have been growing much more aggressively, and with the higher levels of distribution costs paid out, their profitability is more sensitive to the growth rate of their policyholder numbers.
3. Investment Returns
In the traditional business model of insurance, insurers tend to pay out almost all the premiums they collect in claims and distribution costs, and essentially only make profits based on the investment returns on the float of the premiums collected (as there is a period of time between when premiums are collected, and when they are paid out eventually). But this does not seem to be the model adhered to by all insurers, as shown below.
Investment Returns for Integrated Plan Business (2015 – 2020)
Both Great Eastern and NTUC Income have investment returns which follow the overall market, lower in 2015 and 2018, and higher in 2017-18 and in 2019-20. This should be comforting for their policyholders, since higher investment returns allows them to pay out more in claims, theoretically. Strangely enough, Prudential never seems to report any investment returns, regardless of the state of the markets, except for 2020. Perhaps it is their policy not to depend on investment returns for profitability? Or perhaps the returns are transfer priced away somewhere else in the organisation?
The Claims Ratio and the Distribution Costs of an Integrated Plan Insurer are the key drivers of its Profitability
So what does this mean for policyholders?
So, hurray for the Integrated Plan insurers! But what do these better financial results mean for us as policyholders? Actually, not too much. Most policyholders would wish for lower premiums, especially now that there is breathing room for the insurers, since they are profitable. But that is unlikely to come true as average premiums charged by each insurer (net premiums earned divided by lives insured) has inexorably gone up every single year, regardless of how profitable they are.
Average Premiums for Integrated Plans (2015 – 2020)
As a whole, the average premiums charged have gone up at least 50% over the past 5 years! And in the case of the two insurers which have performed the best in terms of profitability in this period, Prudential and NTUC Income, they have almost doubled!
Part of this is due to the increase in the number of claims over the years, which is to be expected as the population ages (note that the data for GreatEastern might be a bit suspect, as they report lower claims in 2019 but a much higher average claim amount!).
Number of Integrated Plan Claims (2015 – 2020)
But where the Integrated Plan insurers diverge, is in terms of the number of their policyholders. Prudential and Great Eastern have grown their policyholder numbers aggressively, and as a result incur a much higher share of premiums earned paid for distribution costs. NTUC Income, on the other hand, have seen their policyholder numbers decline, which is probably the reason why they have not incurred distribution costs of the same magnitude.
Number of lives insured (2015 – 2020)
So what we can surmise from this is that, while claims made are growing at Prudential and Great Eastern due to the growth in the number of policyholders, the increase in claims made at NTUC Income is likely to be driven by the ageing of their policyholders. This ageing of the policyholders may also help explain why the average premiums charged has been growing much faster, as the premiums automatically rise with every 5 years in age.
So what should we look out for in our insurers?
Hence, it is unlikely that premiums for Integrated Plans will fall, or even just stay the same. But the least we can look out for, is to get our money’s worth for the premiums we pay. And this is where the claims ratio comes in. As a policyholder, what we care about is how much on average we get for each dollar we pay as premiums. A higher claims ratio means that we are getting more out of our premiums. For example, if the claims ratio is 85%, the policyholders as a whole are getting back 85 cents for every dollar paid in as premiums.
Of course, we won’t be claiming against our Integrated Plan policy when we are younger and healthier. But we should get some assurance that when we need to make a claim, the claim is easily done, and the amounts we get are higher. And this is what the claims ratio tells us.
Therefore, while we can always compare the premiums for Integrated Plans, and the maximum benefits each plan across different insurers before we make our choice, we should also look for the Integrated Plan insurers which have the highest and most reliable levels of claims ratios as well.
In addition to the premiums payable and the benefits claimable on the different insurers’ Integrated Plans, we should also consider their record of claims ratio over the years to see if we are getting the most value for our premiums when buying an Integrated Plan