A good insurance product has the following features:
a) reimburse the insured for a loss caused to an unforeseen event
b) provides transparency in coverage
c) charges a fair price.
Medical bills, repair bills and loss of income are unforeseen events. Insurance serves a useful purpose in compensating the insured for the loss.
The coverage should be written in clear terms. It should be understood by both parties. There should not be uncertainty leading to disputes. If the coverage is written in language that is not obvious to the lay person and requires a court to interpret the meaning, it is not transparent.
A fair price is one that covers the cost of claims and provides a reasonable margin for expenses and profit. The claims should represent 70% of the premium, with the remaining 30% set aside for marketing expenses, administration expenses and profit margin. This applies to the risk portion of the premium.
For the savings portion, the margin should not take more than 10% of the premium.
Many insurance product in the market failed to meet the tests of useful purpose, transparency and fair premium. They may be written in a confusing manner (which allows the insurer to interpret differently and deny the claim) or has an excessive margin for expenses and profit (which is hidden from the customer). The product is designed to make it difficult to compare the price.
The insurance agent can over-exaggerate the claims and get the unwitting customer to pay an excessive premium. For example, If the rate of claim is 5% and the average amount of claim is $5,000, the pure premium should be $250. If the margin is 30%, the gross premium should be $357. If the insurance company is charging $500 or more, the premium is too high and the insurance should be avoided. If the agent said that the claim could be $50,000 and get the customer to pay a premium of $1,000,the cost is excessive.
I have often been asked by the public - is this insurance plan a good plan for consumers? My answer is, "it depends on the premium that is charged". If the premium rate is fair and the coverage is transparent, it is a good plan.
However, most insurance plans are designed to give excessive profit to the insurer and pays a high commission rate to make it attractive for the agent to sell the product. After allowing for the high cost, which has to be paid by the customer, most insurance product are not good for consumers.
One possible exception is term insurance as it is tranparent and the consumer can get a quote of similar products for several insurers. The competitive market is likely to drive the premuim rate down to a fair level.
Tan Kin Lian
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