Seth’s Blog on Finance

Insurance firms must be made to justify higher premiums: TODAY voices

A reader of TODAY wrote in to the publication regarding his thoughts about the increase in insurance premiums:

I see two current issues regarding insurance that impact cost of living. One is the wide range of premiums for health insurance offering similar hospitalisation coverage and the ability of insurers to hike premiums by a large quantum upon renewal.

He is quite astute to note that the cost of insurance policies does impact cost of living — significantly so, I might add. I get this feeling that most Singaporeans do not seem to notice this fact at all, seemingly buying policies without much thought or research, perhaps out of a misplaced trust in the person selling them these policies. When it comes to increasing food prices or transport fares, the same people are understandably upset at the rising costs of living, but they seem oblivious to the fact that a bad insurance portfolio can cost them so much more over their lifetimes.

If a noodle stall increases prices by a dollar, one can switch to another food stall. But it is not so easy to switch insurers. Do insurers not need to justify premium hikes beyond a certain percentage?

Most policies already have clauses which allow the insurer to adjust premium rates, typically due to claims experience. Coupled with the fact that it is difficult (often impossible) to switch policies without detriment, it is pertinent that one makes a good choice when first setting up his insurance portfolio.

For things like health insurance, one should pick a plan that has a reasonable cost to coverage ratio to take into account future increases in premiums due to age, medical inflation and adverse claims experience. Some plans may not seem too costly now, but may well grow into an unaffordable financial obligation in future.

For life insurance, the same prudence in picking the right plan at the point of purchase is equally important. For example, there was a person who recently purchased a life policy from a tied agent before seeking my advice. I did some product research and got another quote from an insurance provider that seemed comparable, but had a guaranteed premium rate. Given a proper comparison, he could make a more informed choice and thus became my client.

Often, I piece together a good financial portfolio for my clients by sourcing for different parts from various providers. For a certain client profile, Company A may provide the most suitable health plan, while Company B may provide the best life policy, and Company C provides good disability income coverage etc. It still boggles my mind how tied agents can claim to do a good job for their clients when they are limited to their principal company’s limited tools which does not allow them to construct a proper portfolio for their clients.

The insurance industry’s response has always been that benefits differ. However, to ensure transparency, it should be mandated that insurers show customers, before they sign on the dotted line, a table of comparison of all the premium plans offered by insurers here. In this way, insurers have to justify higher premiums for the same class of hospital ward by highlighting the difference in benefits. And where the premium is the lowest, the insurer should highlight what is not covered, compared to other insurers.

Such a comparison table would be easily obscured by an agent interested in selling his own company’s product. In my opinion, form filling has never really worked to safeguard consumers’ interests because most people do not have the time or technical knowledge to appreciate all the forms that they sign.

Actually, we already have “comparison tables” in form of Licensed Financial Adviser (LFA) firms who can do comparisons for their clients, and yet there are still a small number of insurance companies which obstinately refuse to offer their products through LFAs, preferring instead to rely on their dedicated salesforce to sell their products so that their offerings are not put up for comparison during the point of sales. Think about this: if such companies had competitive products, why the refusal to distribute them through LFA firms in direct comparison with other products? Transparency has never been a priority.

Ultimately, the consumer himself must not take his own financial interests lightly. He does not need to know everything regarding financial planning, but he does need to know enough whom to seek advice from. While it is not easy to obtain proper advice in an financial advisory industry still dominated by tied agents, incompetent LFAs and banks, I’d like to think that at least I can make a difference to people who bother to do their research online and find themselves on my website.