Tan Kin Lian's Blog: Paying the right price for insurance

Tuesday, November 17, 2009

Paying the right price for insurance

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

12 comments:

Anonymous said...: why is it that when an insurance agent make a sale s/he has to disclose cost and expenses?

Why not a CEO? Why not a bag of peanut? Why not a set tv? Why not the HDB flat ? Why not the restaurant that sells the burger or curry fish?; November 17, 2009 2:12 PM
Tan Kin Lian said...: Someone posted a rude anonymous comment to asked if I had practised these three principles when I was head of NTUC Income.

I did not publish his comments as they were written in a malicious and mischievous tine.

The answer to the question is "yes". I adopted these guiding principles in my management of the business. I wanted to provide insurance as a service to the people of Singapore and to ensure that all parties, namely the customers, staff, agents and shareholders, are fairly treated.

Insurance should not be a business for people to make excessive remunerations and profits at the expense of customers.

I do not wish to comment on the practice that is currently adopted in NTUC Income, but I hope that the board and management continued to observe these principles.; November 17, 2009 5:45 PM
Anonymous said...: because insurance agents are cheats. therefore they need to disclose how much they earn from a product to see if they have sold customers the RIGHT product that is suitable for the customers.; November 17, 2009 5:47 PM
Anonymous said...: Your detractor must be an insurance agent who is feeling the heat or an agent from ntuc who is being exposed.
This shows waht you are doing is yielding result. People are getting aware of what they buy and not conned by agents.
This business is not created to make the agents qualify for mdrt or for incentive trips. This business is to provide products and best advice to consumers to attain their financial goals.
Therefore both products and advisers must be real good and not some con artists disguised as financial consultants to plunder consumers.
kudos to you , Mr. Tan. Never before so much has be revealed about insurance products and the charlatan agents.Consumers have been silent victims and some don't even know they are victims.You have done a great service to the public ans I hope your work will continue to expose the unethical practices of agents and the insurers.; November 17, 2009 6:00 PM
life insurance rbc said...: Very nicely written and useful article, thanks for it. People who don't know much about insurance sure appreciate it. I do too, even though I knew all this stuff already.

Best regards,
Lorne; November 19, 2009 1:01 AM
Tan Kin Lian said...: The person who made the malicious and anonymous posting (which was blocked by me) continued to attack me and challenged my views in a few more postings.

He was rude, disrespectful and did not give any name in his anonymous posting. But I could recognise him by his tone and content.

I do not need to read the entire comment. It was quite easy for me to blocked these malicious postings.

To this person, I have to say: if you do not like my views, you do not need to visit this blog. There are many other blogs that you can go to. You can also post your views in other forums to challenge my views. But you should not expect these malicious views to be posted here.; November 19, 2009 8:55 AM
Anonymous said...: Mr. Tan, it is an agent from ntuc. I am very sure. His cleint canceled a policy sold by him and he is not happy that you exposed him and his ruse.; November 19, 2009 9:16 AM
Vincent Sear said...: I think that disclosure of commission as per client/product is fair to the client. It's not the same as gross income confidentiality. The client still doesn't know how much is the gross income of the agent, but should be entitled to know how much is the cost of the product being paid for.; November 19, 2009 9:48 AM
Anonymous said...: I feel that if agents do proper financial planning and disclose the commission they shouldn't be afraid or shy about it. They deserve it.The problem is they don't.
If they do fact finding, gather the necessary data, identify the needs and goals and arrive at the recommendation I don't see it is wrong if the products or solutions happen to be products with high commission.
Having said that, it is unlikely to happen becuase if agents do financial planning, in ALL PROBABILITIES the products to be recommended will not be products with high commission. This is what the insurance agents don't want the clients to know and why they avoid doing fact finding and financial planning. Of course there are agents who don't know what is financail planning, the blood sucking agents who never bothered to upgrade.
So? removing commission is right. It levels the playing field.

The Watchman; November 19, 2009 2:26 PM
JRT said...: In the first posting put forth by "anonymous", it was asked why the the costs and expenses of a ceo, sale of peanuts, sale of curry etc? Why then is the cost and expenses of an insurance agent needs to be disclosed?

When an insurance agent makes a sale (of an insurance product), he/her is being paid by way of a commission from insurance company

But who is the client of the insurance agent? The policyholder!

This is clearly a conflict of interest

It is this relationship that perhaps the insurance agent may not be acting in the best interests of his/her client (being the policyholder) whom has trusted in the insurance agent

In the sale of peanut, burger, curry or the salary of ceo, there is no conflict of interest. Why should the costs and expenses be disclosed?

I think it is better that the policyholder pays for the commission or fees to the insurance agent. There are obvious benefits.

First, it eliminates the conflict of interest faced by the insurance agent

Second, it ensures that insurance companies will devise the best product and best price if they want a good market share, as gaining market share by offering a higher commission is not longer possible

Last, this mechanism will ensure the insurance agent provides the best advice in order to earn their keep

For those good insurance agents that promotes good products, their services will be highly sought after and they will be very very rich. And these are the insurance agents that i wouldn't mind paying them a fee, even if it may cost more than the current commission offered by the insurance companies!

Jerome; November 19, 2009 11:30 PM
Anonymous said...: There is a company which is going all out to be the #1. So obssessed that that it is doing anyhting to incentivise the greedy agents who only sell when the commission is big or there are incentives. These agents are NOT incentivised by their desire to put their customers' interest first but their own.
Who suffers? Obviosly their customers. Worse, their own policyholders become victims and guinea pigs for new useless products and becuase of commission.
What do you do to these greedy agents? Of course, ban THE COMMISSION.Why pay them when they do nothing except filling forms and mess up your financial future.
What do you do to this company?
Stop buying their products.; November 20, 2009 9:09 AM
Anonymous said...: If quality of business is compromised for the sake of market share it is despicable. The ceo ought to be sacked.This has become personal agenda.This is an attempt to show one upmanship.
The company suffers.
The policyholders suffer.
The insurance agents should be punished for the illgotten gain.; November 20, 2009 1:27 PM