So this article came out recently, and it was even more annoying than Investment Moat's 'The True Reason to Choose Term Life Insurance Over Whole Life'.
It was so annoying that I'm writing this at 1am, and I started at about 9pm
(okay I watched some Youtube videos)
At least Kyith's article continually attempts to show that it is his specific opinion, and he's open to being wrong about a bunch.
Now.
I'm going to shed some light on why I think this article is potentially harmful and wrong to be taken at face value.
And you don't have to take my words at face value either: but at least it'll be a proper alternative opinion - that hopefully comes from a former consultant that other consultants regard reasonably well. Incidentally, the company that lost the most money last year (GE) also had the highest claim rate (88%).
From this, I can derive a couple of things that Life Finance misses out:
a) Life Finance claims that it's much more likely that people will only claim on the base plan (Medishield Life), and more profits for the IPs!
This is due to his assumption here:
'Private hospitals account for only about 15% of all the beds in acute hospitals, and the A class and B1 class wards in public hospitals probably account for another 15% to 20%.'
Aside from 'probably' - you try seeing how many people would be satisfied buying insurance from a consultant who says 'you PROBABLY can claim', here's some additional context.
IPs don't simply account for a larger ward - they account for larger medical limits on stays and surgeries/procedures. In other words, your IP kicks in big time once your medical costs balloon even in a 'poor' ward like B2 or C.
Your Medishield Life had a paltry $100,000 claim limit in 2020 and before, which was nothing compared to the various costs that can pile up for cancer, which is one of the most common claims in Singapore.
Think about why costs may have racked up after Medishield Life came out from the insurer's point of view.
If your upgrade to a government program upgraded themselves, you would certainly have to adjust your plan to be a suitable upgrade on the government upgrade - or no one would purchase your insurance. As it stands, not every insurer can cope with this efficiently.
Keep in mind that the article being used is an actual research article and not 'anecdotal research'. You also have to account for missing parts, such as:
- the initial work required to diagnose to begin with
-multiple rounds of surgeries and treatments, not simply the cost of one
-recurrent visits across the years
-additional costs for specific foods, private transport, aid at home
b) Life Finance makes Incorrect Assumptions by using Wrong Comparisons, and CLAIMS PERCENTAGES rather than CLAIM AMOUNTS:
You can already see quite a bit of this problem from the first point, because Life Finance uses that assumption while simultaneously comparing it to the Affordable Care Act.
The comparison Life Finance makes is frankly, ridiculous because
-the Affordable Care Act is a government program while IPs are private. The US Government certainly has more money than private insurance companies in Singapore.
-the Affordable Care Act is REALLY BAD, 'probably' WORSE than IPs. Life Finance conveniently discusses the structure of it but not the costs, which have caused millions of Americans to lose their insurance due to unaffordability.
The Affordable Care Act would be more accurately compared to our Medishield Life due to coverage for pre-existing conditions and limited underwriting - which drastically increases premiums over time as healthy pools have to subsidize unhealthy pools.
In that sense, our Medishield Life is technically much more cost-efficient than the Affordable Care Act, since we don't see drastic scenarios where the worst off of us can't have some limited form of insurance.
Think about it. Medishield Life, up to last year, had a maximum coverage of $100,000 AND deductible AND co-insurance. Any ISP with a rider, even a B-ward would probably offer you $1,000,000 in coverage or more.
Aviva and AIA have $2,000,000 claim limits!
If you claimed only 3 such ISPs to it's maximum claim limit, you would need to have SIXTY FULL Medishield Life claims, not to mention all the cash out of pocket for deductibles and co-insurance.
Claim amounts matter much more than the claim percentage once you put it in context.
You might ask 'What a crazy assumption to assume a maximum claim limit' - but really, how is that a lot wilder than the other assumptions made so far?
c) Life Finance Doesn't Provide Context
I'm running out of space and I really have better things to do with my time, so let's speed this up:
Lack of Context for Prudential: I gave a talk at Prudential last year, so I have nothing but good things to say about them ok. Please don't sue me.
But basically, what makes Pru unique amongst all the IPs is that Prudential works on Claim-Based-Pricing.
Not a single other insurer in Singapore has adopted this model, though when Pru first started utilizing it and it's undoubtedly a factor in turning the profit margins for Pru around.
There are other such hidden factors for why the results were the way they were instead of the convenient suggestion that 'Hence the claim that doctors are too greedy, and patients are too kiasu is simply a myth!'
Ugh.
Lack of Context for 'Poor Investment Management'/'Net Investment Income Strangely Too Low':
Some of you might have agreed on this point.
Wait.
If you've read my article on 'How to Choose a Participating Fund (and a good savings, retirement or insurance plan)', you'll know that risk pooling still works in the same way, just with a non-par fund structure.
Claims are being paid out of premiums, so insurance companies can't afford to take high risks due to the need for liquidity. (the ability to sell quickly, and pay out claims quickly).
They have an obligation to pay you your claim quickly when its due, and so the investment needs to be 'sell-able' at any time.
You would inevitability end up with some common stock ETFs and primarily bonds, which often explain an insurer's poor market investment performance.
That's because these instruments are more liquid, but they don't allow you to take on higher performing, higher risk instruments.
This also raises costs for management because you are constantly investing and selling to pay claims, racking up a higher number of transactions and transaction costs. You cannot compare the net interest income of a bank to that of an insurer.
Again, if you're not sure - please read the article below
Between liquidity and transaction costs, it is WILDLY INACCURATE to attribute it immediately to investment mismanagement. I repeat - WILDLY INACCURATE. FALSE.
It is quite typically for someone not immersed in the industry like a financial consultant to not be aware of such basics, and the least you could do is not write an article like you're presenting facts and not your opinion.
Lack of Context for Past Policies:
Life Finances + Sources also convenient leaves out that hundreds of thousands of SIngaporeans, if not over a million - are on the older plans prior to co-payment.
Some of these old plans had to fork out cash for all sorts of reasons compared to now, which takes more than a few years to adjust.
For example, if you couldn't get warded in a Private Ward despite your private coverage, most older plans would compensate your lower-assigned ward by topping it up with a significant daily hospital cash benefit. That's just one example out of many potential rising cost issues from the past policies. (If you're reading this and you have a sample, please send me. I threw my ones away years ago)
Conclusion: Ultimately, Something That Sounds Smart Isn't Always So
I'm sure the same people who held the same views as Life Finance or who have been very peeved with insurance companies were very happy to get an 'intelligent' assessment where their favorite conclusions were drawn.
'There is some truth in the allegation that Management and Distribution Costs are too high for Integrated Plans' - Yes, an imperfect business model turns out to be imperfect while losing millions of dollars every year. Huge surprise!
'Hence the claim that doctors are too greedy, and patients are too kiasu is simply a myth!' - You're all incredibly moral and righteous, only the insurance industry is to blame, and don't you forget it.
Does it not surprise you at all in the slightest that both 'sources' are using claims % as a measurement of IP effectiveness, and not the amounts claimable?
Does it not surprise you at all that zero research was looked into the size of the average claim or the cost per item for a bill, which is standard for similar research overseas? No mention of global or local medical inflation, outside of considering it an alternative theory?
It's so sad that in my entire rebuttal, I didn't even actually even get to examine doctors or kiasu patients.
Lastly, look at this outrageous sentence:
I seriously can't tell what I'm reading.
a) It is first stated that Financial Advisers and Insurance Agents are getting paid too much in commissions.
b) It is then stated that the turnover means that Financial Advisers and Agents ultimately don't help service client policies when needed
Look, if Financial Advisers and Insurance Agents are getting paid too much and they're STILL LEAVING - how did you draw the conclusion that paying them less would get them to stay, exactly??
How can you have the audacity to state that distribution costs are too high when they can't even keep a Adviser employed?
Truly amazing. I'm really curious as to this line of thinking or whether it was simply just a backhanded way to be critical of insurance agents as a community.
This isn't even my specialty guys. And I'm presently unemployed. Come on.
Money Maverick