AN ANALYSIS of long-term private medical insurance premiums by the Singapore Actuarial Society (SAS) has cast a spotlight on factors driving higher premiums, such as claims and distribution costs.
Integrated Shield Plans (IPs) and their accompanying riders account for 90 per cent of long-term private medical insurance.
SAS’ paper – How medical insurance premiums are spent and why they are rising – tackles each component of premium by turn. Industry data is based on returns filed by IP insurers with the Monetary Authority of Singapore (MAS).
Changes to MediShield Life (MSHL) will take effect in April 2025, with a knock-on effect on IPs and riders. “It’s an opportune time for a stocktake on how the medical insurance schemes that the population relies on have fared financially and what we can expect going forward,” said SAS.
Claims
Claims take up the largest share per dollar of premium at 78 per cent. Some drivers of higher claims are well known, such as an ageing population. From age 40 to 65, for instance, acute hospital admission rate rises by about 4 per cent per year of age. That rate per year of age rises to 6 per cent after age 65. The Ministry of Health has also reported that the average stay in public hospitals for those aged 65 and older was almost double that of those below 65.
“The impact of ageing should set the tone of the medical insurance premium increase that we should expect each year, even before medical inflation kicks in,” SAS said in the paper.
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Another driver is drug prices. SAS points out that pharmaceutical companies charge different prices in different countries for the same drugs. Income level and negotiation power are key determinants. But in this respect, Singapore is at a disadvantage because of its small population and relatively high gross domestic product per capita.
Consumers’ sensitivity to drug prices is another factor. “…insurance coverage that pays most of the drug bills lowers that sensitivity and supports higher drug price,” said the paper. In this context, the Cancer Drug List introduced in 2022 has been crucial not only to lower cancer drug prices, but also to help mitigate premium rises.
Distribution
Distribution costs are the next biggest cost component at 12 per cent. These include commissions and bonuses, agency allowances and profit commissions. In return, policyholders should receive advice on an appropriate plan and long-term affordability, as well as ongoing assistance in filing claims, among others.
Distribution costs are expressed as a percentage of premiums. They therefore rise when the other components of premiums rise, such as the cost of claims, operating expenses and cost of capital.
Commission rates are typically front-loaded – that is, they are highest in the first year of a policy. A compilation by sgbudgetbabe.com reflects this breakdown for IPs: 30 per cent in commissions is paid in the first year of a policy, 5 per cent in the second year and 2 per cent in subsequent years.
One question to ask is – how much value and support do advisers give for the commissions they earn? The highest rate is paid in the first year, but the greatest support is required in later years, when a policyholder is most likely to make a substantial claim.
An industry source said: “Does the timing of the commission match the timing of value delivered to the policyholder? Maybe a lower (upfront) and higher retainer rate is fairer, since policyholders need advisers to provide claims and administrative support.”
Operating expenses and profits
Operating expenses’ share of premium is 8 per cent, and a profit margin of 2 to 2.5 per cent may be expected.
Of operating costs, manpower accounts for around half. SAS says technology appears to be effective in keeping operating expenses in check.
According to returns filed with MAS, operating expenses per medical policy grew by 3.6 per cent a year for IP insurers between 2019 and 2023, in line with the Singapore consumer price index.
SAS estimates that between 20 and 25 cents of capital are set aside for every dollar of medical insurance premium. Insurers are subject to the risk-based capital framework. The capital set aside for a long-term medical book of business is a function of claims cost, operating expenses, “and an additional margin that provides the MAS with strong assurance that an insurer can withstand significant financial and non-financial shocks”.
The profit margin arrived at is 10 per cent of the required capital of 20 to 25 per cent, which serves as compensation for the risk taken by shareholders.
MSHL premiums carry some similar cost components such as claims costs. But there are key differences. MSHL collects more premiums than the cost of claims from younger policyholders. The excess premiums are invested to generate returns which can help mitigate premium rises at older ages. MSHL premiums rise by less than 4 per cent per year of age after age 65, slower than the rate of increase in acute hospital admission rate.
MSHL also does not incur distribution costs and requires a lower allocation to operating expenses.
