Tan Kin Lian's Blog: Fair pricing of insurance

Tuesday, September 15, 2009

Fair pricing of insurance

Insurance serves a useful purpose in society. It only needs to be made transparent and priced fairly. I shall be writing about this matter separately.

Insurance should not be used to take money from consumers without giving fair value. It should not be over-priced or used to make excessive profit.

17 comments:

Anonymous said...: http://www.insightpress.com.au/
pls take a look at this book abt spore , intersting but i think this aussie guy is a bit bias , let the pple judge.. read the Review section; September 15, 2009 3:23 PM
Anonymous said...: Hi

I find this statement strange: "Insurance should not be used to take money from consumers without giving fair value. It should not be over-priced or used to make excessive profit."

Perhaps, someone can enlighten me if there is any product or service in the world that "should be used to take money form consumers without giving fair value. It should be over priced and used to make excessive profit?" ?; September 15, 2009 4:14 PM
Anonymous said...: Fair value is what consumers are willing to pay for. It is like selling other things. If you want to buy a $10k handbag, who is to say it is not fair value? For those who are used to buying less branded stuff, can they say $10K is not fair value?

Yes, please enlighten me too about what is fair value in the eyes of very different class of people in this world.; September 15, 2009 5:21 PM
Anonymous said...: Mission of Entity :

1. Public good
e.g. Hospital

2. Economic Profit
e.g. HDB

3. Company Profit
e.g. Local Bank

Question: What is the mission of a Life Insurance Company?; September 15, 2009 5:59 PM
Anonymous said...: Whole life products....
expensive...2.5 years of premium go to pay the agent commission, the rest to the company.
For the customers, they get an inflation eroded return of 2.5% AFTER 30 years.
Protection for the premium is peanuts and proceed if there is a death claim, enough to bury him and to tide over the family for the mourning period.; September 15, 2009 6:03 PM
Anonymous said...: Anon at 4.14 - easy, many financial products including insurance are overpriced and net the financial institutions a big fat profit while giving the consumer low returns at high risk. But monopolies can also make atypically high profits. You can think for yourself whether there is such a thing as a monopoly in Singapore.; September 15, 2009 6:41 PM
Anonymous said...: Its a trade practice and now, it seems like the industry is entitled to perpetuate and justify the high commission, maybe even increase it further. Did Case stand up? MAS? any MPs? No need to change, or think long term to pass the benefit of efficiency back to the customers. NTUC INCOME as a co-operative used to be performing a role of offering an alternative and delivering better value back to the customers, but that now has been changed and INCOME has become just as voracious, coming up with so many reasons why the change, cut bonus is necessary. Worst still it is cynically saying the change is better for the customers even if the fact show that it is self serving. Very sad for us. There is probably no hope, the establishment know that a small group will only complain but cannot take effective action. There is not one big guy, MP with a conscience or well known lawyer who can stand up for the consumers. The scholars, our leaders they are all part of our system, this gravy train. Just help themselves with high salary, high commissions, big profits and its all legal, nothing you and me can do about it. In any society, there are winners and there are losers. Accept the reality and just move on...; September 15, 2009 7:01 PM
Tan Kin Lian said...: A fair price is determined by supply and demand in the market, where information is freely available to all the parties.

When information is not freely available, especially where a transaction involve only one buyer and one seller (like insurance and structured products), then it is possible for the party with the knowledge (i.e. the seller) to take advantage of the ignorance of the buyer, even to "rip off" the buyer.

Hence, it is necessary for the regulator to step in and ensure that the consumers are fairly treated and given "fair pricing".; September 15, 2009 7:06 PM
Tan Kin Lian said...: One example of unfair pricing is land banking. The cost of one plot is $X, but it is sold for $10X with the "projection" that it will be worth $30X when approval for development is given. The buyer does not know the cost and cannot access the reliability of the projection. Those who are savvy will avoid this transaction, but there are many people around who can be easily "cheated". So, the government has to stop "crooks" from "ripping off" the public. The government, with its powers, is in a better position to determine if the terms are fair, rather than the ordinary folks.; September 15, 2009 7:10 PM
Anonymous said...: Another unfairness is the return of insurance life investemnt. The company can make 12% but it deducts half for expenses like paying the ceo and senior managers 6 figure salary and agents commission, then pay 2% on what not craps leaving 4% and from it 3% kept back for smoothing their backside next year and left 1/2 for your bonus, vested and gauranteed. WoW, this is great sharing of the gain. When it comes to loss policyholders must share too.. Bonus get cut. This is what the insurer call fairness.; September 15, 2009 7:36 PM
Anonymous said...: Insurance agents fill up the forms for you and tell the clients when it comes to claim he will be there to claim for your spouse and also to arrange funeral services for your dead body and other promises.
If you buy a $5000 policy he earns $7500 to take care of you. The doctors and the lawyers spent 6 years of brain cracking years to pass and be certified don't get what these agents get.
Is this fair?; September 15, 2009 7:41 PM
Seth said...: Firstly, I wish to know which company gives 2.5 years of premiums as commission, as well as $7,500 commission for a $5,000 policy. Looks like my company is severely underpaying me and it's time to jump ship.

Secondly, do you guys know that the commission scheme for term and whole life products are similar? In fact, I think I'll have a much easier life if I sold nothing but term, without caring about product suitability.

Lastly, for my own knowledge and curiosity, I would like to ask proponents of buy term invest the difference a question - Do you really think that every single person really suited for such a strategy?

The strategy assumes that the person is savvy and disciplined enough to invest the difference prudently and regularly such that he can self-insure when his term expires, but not everyone falls under that category.

Let me give an analogy: Anyone can easily assemble a computer with parts from Sim Lim Square, and get a much better computer in terms of specs compared to prebuilt computers from Dell, HP etc, but most mainstream consumers purchase direct from a PC manufacturer, complete with warranty and operating system install, albeit at a higher price than if they did it themselves. Why don't you guys condemn the PC manufacturers? Quite simply, not everyone has the time nor expertise to bother with choosing the different parts, assembling them together and installing the OS themselves.

In fact, a regular ILP protection plan works much like buying term and investing the rest. The mortality charges can be lower than term, depending on age, and the rest of the premiums is put into funds for investment. Of course, there is a portion that is paid as commissions to the agent, as well as profit to the company, but it's the same for term insurance!

Of course, I am not saying that term insurance is not good. In fact I usually recommend them when it's most suitable for the client. However, I do not believe that term insurance, nor any single one policy, to be a be-all-end-all solution for everyone. The suitability of the products to the client's financial portfolio is the most important.; September 16, 2009 12:01 AM
Anonymous said...: To Anon 7:41pm:

A doctor - sit there, ask a few questions, spent about 5 mins with a patient, and earn $40. Every day average 50 patients, works 3 hours in the morning, 3 hours in the afternoon - he earns $2000/day, $10,000/week, $40,000/month. Is this fair?

Best is a lawyer, write a piece of paper "a will", can charge $250.

most doctors and lawyers earn more than most of the insurance agents. Maybe that's why singapore benchmark doctors and lawyers for determining minister's pay.

In terms of job, it is not appropriate to determine fairness. If an artist has a painting that can fetch $50,000 - is it fair to other artist or people in other profession who slog long hours but paid less well? Does it make being an artist the best paid job?; September 16, 2009 1:42 AM
Anonymous said...: To SETH:12.01

I disagree strongly with your statement "a regular ILP protection plan works much like buying term and investing the rest"
Just compare the payouts. For term insurance, typically you pay $50 a month for $200,000 cover. If you want to be covered for $200,000 on endowment type ILP's, the going rate if i am not mistaken would have to be something like $1000 a month over a period of 5 years. The payment:premium ratio is highest for term insurance. Because the premium is used up and not given back. However, it is fair deal. That's what insurance is all about, it is not investment, it shall never be mixed.

Consumers should not be tempted by the thought of buying insurance hoping that they wouldnt die and then they are able plough back the money after 10 years or so. Term insurance should be purchased for as long as the plan allows. I will put it in a morbid way. It is cheap, monthly instalment to pay for one's coffin and funeral expenses, and medical costs towards the end of one's life. It helps your care giver to get back the money they paid for you in the days leading to your demise. Therefore everyone ought to be heavily insured and at a cheap price, which can only be so with Term Insurance.

However, I do agree with your ideas, that "invest the rest" may not be a fit-all idea for everyone, as per your sim lim square analogy. In general, the adage should actually read "buy term insurance. be wise with the rest of the money, whereever you deem fit." What i am saying is Term insurance is a necessity. Any remaining wealth, well, one could buy your ILP as you said, or buy shares, buy Government bonds, buy Structured deposits, buy property, set up a company, anything .... as one deems fit if one considers the investment attractive.

REX; September 16, 2009 7:47 AM
Anonymous said...: Anonymous 1.42am.
A doctor spends 6 years studying to become a doctor.
A lawyer spends 4 years studying before becoming a lawyer.
A doctor can only wait in his clinic for client ot walk in and so is a lawyer. The doctor and the lawyer cannot stand at the mrt or have roadshow to promote his service neither can they be at geylang to solicit.
Out of the $2000 a day's taking $1700 goes to cost of the day (rental , goods and staff etc) . The $30 left , maybe $10 goes to service his loan interest for his investment in the clinic. He is left with $20 to bring home to feed family. That is to assume he takes $2000 a day.What if he deoesn't take $2000 a day?
It is risky , isn't it? in term of time and money .
Do you want to become a doctor.
To be an agent????have 4 o levels , to pass some tikam tikam examns my dog can pass also.
Can solicit anywhere even at geylang. Can say and do anything from lying , cheating to conning. Passing the exam is a formality to satisfy some useless regulator. The agents can 'sell' even no exams just know the products and only 2 products and you can become mdrt..
Filling up a pages of forms amd make some empty promises nothing to do with finance and the agents gets 150% of the premium over 6 years. Does a doctor get so much?
Of course an agent can be compared with a popular prostitute charging a $150($100) a client and have 10 clients a day. The nett earning is $1000 a day, $30000 a month. Any exams required ? only HIV test maybe. No need MBBS or LLB degree same like insurance agents who are slightly better with 4 'O' levels.; September 16, 2009 8:45 AM
Tan Kin Lian said...: To anonymous 1:42 am

You said:

A doctor - sit there, ask a few questions, spent about 5 mins with a patient, and earn $40. Every day average 50 patients, works 3 hours in the morning, 3 hours in the afternoon - he earns $2000/day, $10,000/week, $40,000/month. Is this fair?

Most doctors (as GP) do not earn $40,000 a month. They do not charge $40 for 5 mins of work. They probably take in $20,000 a month and, after pay the rental, staff and other expenses, net $10,000 a month. But it is hard work and they have to study 6 years.

More importantly, they charge $20 to $30 for a consultation that can take 10 minutes.; September 16, 2009 9:07 AM
Anonymous said...: To Mr Tan's quote:

[To anonymous 1:42 am

You said:

A doctor - sit there, ask a few questions, spent about 5 mins with a patient, and earn $40. Every day average 50 patients, works 3 hours in the morning, 3 hours in the afternoon - he earns $2000/day, $10,000/week, $40,000/month. Is this fair?

Most doctors (as GP) do not earn $40,000 a month. They do not charge $40 for 5 mins of work. They probably take in $20,000 a month and, after pay the rental, staff and other expenses, net $10,000 a month. But it is hard work and they have to study 6 years.

More importantly, they charge $20 to $30 for a consultation that can take 10 minutes.]

Good one! Doctors are somewhat (I do not agree they earn that much but please, they are the one to save patient's life seriously) deserved to pay such, which is not by my agent.(Just a visit by the doctor while staying in hospital per day would be >$100 , quoted by my agent -- and tells how private shields are needed and some un-prescribed stuffs such as morphine etc etc are not clamiable by Medishield and therefore.......); November 05, 2009 3:05 PM

Tuesday, September 15, 2009

Fair pricing of insurance

17 comments:

Blog Archive