Monday, December 07, 2009
Profit of health insurers
A senator in the US wants to cap the profit of health insurers. Read this article.
Sunday, December 06, 2009
Tour of Jiuzhaigou, China
I will be leaving for a 8 day tour of Jiuzhaigou in Sichuan, China from Wednesday.
Over-investing in mortgages
This article explains why banks over-invest in mortgages and cause the global financial crisis.
Denying insurance claims
Mortgage insurers are now following the practice of health insurers in denying claims. Read this article.
Bus owner practices risk management
I know of a private bus owner who evaluates the following options to insure his bus:
a) Third party only
b) Third party fire and theft
c) Comprehensive.
His old bus has a current market value of $40,000 and the difference in premium needed to cover fire and theft is $200. This works out to a rate of 0.5%. He decided to pay this premium, as he could not afford to take a total loss through theft or fire.
He decided not to buy the comprehensive cover as the difference in premium is too high. He decided to retain the risk and to pay for repairs to his bus on his own. In most cases, this can be funded by the savings in the premium.
This is an example of applying the principles of risk management. Insure the large losses with low frequency, and retain the small losses with high frequency.
I advise consumers to get the relevant facts and decide on the best risk management strategy, instead of relying blindly on the advice of the agent (who has a conflict of interest) or other people (e.g TKL) to decide for them.
a) Third party only
b) Third party fire and theft
c) Comprehensive.
His old bus has a current market value of $40,000 and the difference in premium needed to cover fire and theft is $200. This works out to a rate of 0.5%. He decided to pay this premium, as he could not afford to take a total loss through theft or fire.
He decided not to buy the comprehensive cover as the difference in premium is too high. He decided to retain the risk and to pay for repairs to his bus on his own. In most cases, this can be funded by the savings in the premium.
This is an example of applying the principles of risk management. Insure the large losses with low frequency, and retain the small losses with high frequency.
I advise consumers to get the relevant facts and decide on the best risk management strategy, instead of relying blindly on the advice of the agent (who has a conflict of interest) or other people (e.g TKL) to decide for them.
Saturday, December 05, 2009
Claim payable under a hospital bill
When you submit a claim under a hospital bill, the insurance company will apply the following deductions on the amount that you have spent for medical treatment:
a) Pre-existing illness. You are usually not covered for medical conditions that exist before you purchase the insurance, including congential conditions.
b) Exclusion. Certain medical conditions are specifically excluded, e.g. HIV, self-inflicted injuries.
c) Sub-limit. You are allowed to claim up to a liit for each item, such as daily room and board, hospital expenses and surgery. Any expense above the sub-limit will not be claimable
d) Pro-ration. If you are insured for a lower class of ward, and you are treated in a higher class of ward, a pro-rated formula may apply. Only this pro-rated portion of the expenses will be counted.
e) Deductible. This is the amount that you have to bear first, before you can make a claim for the excess of the eligible bill.
f) Co-insurance. You have to pay a percentage of the eligible bill in excess of the deductible.
When you submit your hospital bill, the insurance company will apply the sub-limits, exclusions and pro-ration to get the eligible amount. It will then apply the deductible and co-insurance to determine the final amount that is payable.
Before you incur a large bill, it is advisable to get an estimate of the hospital bill from your doctor and to check with your insurance company on what proportion of the bill is payable under the insurance policy.
Tan Kin Lian
a) Pre-existing illness. You are usually not covered for medical conditions that exist before you purchase the insurance, including congential conditions.
b) Exclusion. Certain medical conditions are specifically excluded, e.g. HIV, self-inflicted injuries.
c) Sub-limit. You are allowed to claim up to a liit for each item, such as daily room and board, hospital expenses and surgery. Any expense above the sub-limit will not be claimable
d) Pro-ration. If you are insured for a lower class of ward, and you are treated in a higher class of ward, a pro-rated formula may apply. Only this pro-rated portion of the expenses will be counted.
e) Deductible. This is the amount that you have to bear first, before you can make a claim for the excess of the eligible bill.
f) Co-insurance. You have to pay a percentage of the eligible bill in excess of the deductible.
When you submit your hospital bill, the insurance company will apply the sub-limits, exclusions and pro-ration to get the eligible amount. It will then apply the deductible and co-insurance to determine the final amount that is payable.
Before you incur a large bill, it is advisable to get an estimate of the hospital bill from your doctor and to check with your insurance company on what proportion of the bill is payable under the insurance policy.
Tan Kin Lian
Signs and messages
Sent to me by a friend.
Advertisement in A Long Island Shop:
Guitar for sale....... Cheap....... ....no strings attached.
Ad In Hospital Waiting Room:
Smoking Helps You Lose Weight ... One Lung At A Time!
On a bulletin board:
Success Is Relative. The more The Success, The more The Relatives.
When I Read About The Evils Of Drinking, I give Up Reading
My Grandfather Is Eighty And Still Doesn't Need Glasses. He Drinks Straight Out Of The Bottle.
You Know Your kids Have Grown Up When: Your Daughter Begins To Put On Lipstick Or when your Son starts To wipe It Off
Sign In A Bar:
'Those Of You Who Are Drinking To Forget, Please Pay In Advance.'
Sign In Driving School:
If Your Wife Wants To Learn To Drive, Don't Stand In Her Way.
Behind Every Great Man, There Is A Surprised Woman.
The Reason Men Lie Is Because Women Ask too Many Questions.
Getting Caught Is The Mother Of Invention.
Laugh And The World Laughs With You, Snore And You sleep Alone
The Surest Sign That Intelligent Life Exists Elsewhere In The Universe
Is The Fact That It Has Never Tried To Contact Us.
Sign At A Barber's Saloon In Detroit :
We Need Your Heads To Run Our Business..
A Traffic Slogan:
Don't Let Your Kids Drive If They are Not Old Enough Or Else They Will Never Be.
Sign In A Restaurant:
All Drinking Water In This Establishment Has Been Personally Passed By The Manager.
Sign On A Famous Beauty Parlor Window:
Don't Whistle At The Girls Going Out From Here. She May Be Your Grandmother !
Advertisement in A Long Island Shop:
Guitar for sale....... Cheap....... ....no strings attached.
Ad In Hospital Waiting Room:
Smoking Helps You Lose Weight ... One Lung At A Time!
On a bulletin board:
Success Is Relative. The more The Success, The more The Relatives.
When I Read About The Evils Of Drinking, I give Up Reading
My Grandfather Is Eighty And Still Doesn't Need Glasses. He Drinks Straight Out Of The Bottle.
You Know Your kids Have Grown Up When: Your Daughter Begins To Put On Lipstick Or when your Son starts To wipe It Off
Sign In A Bar:
'Those Of You Who Are Drinking To Forget, Please Pay In Advance.'
Sign In Driving School:
If Your Wife Wants To Learn To Drive, Don't Stand In Her Way.
Behind Every Great Man, There Is A Surprised Woman.
The Reason Men Lie Is Because Women Ask too Many Questions.
Getting Caught Is The Mother Of Invention.
Laugh And The World Laughs With You, Snore And You sleep Alone
The Surest Sign That Intelligent Life Exists Elsewhere In The Universe
Is The Fact That It Has Never Tried To Contact Us.
Sign At A Barber's Saloon In Detroit :
We Need Your Heads To Run Our Business..
A Traffic Slogan:
Don't Let Your Kids Drive If They are Not Old Enough Or Else They Will Never Be.
Sign In A Restaurant:
All Drinking Water In This Establishment Has Been Personally Passed By The Manager.
Sign On A Famous Beauty Parlor Window:
Don't Whistle At The Girls Going Out From Here. She May Be Your Grandmother !
Insurance company need to hold more capital
Insurance companies will be required to hold more capital. Read this article.
Friday, December 04, 2009
Creating jobs in America
Here are some suggestions from the New York Times on creating jobs in America.
Low payout for medical claim
Hi Mr Tan,
I saw this article on the forum last week but till now I have not seen any reply from Income on it (Normally companies will be quick to respond to letters in the ST forum).
Can you comment on why an expected payout of $3,600 can end up to be only $240?
Maybe you can even share this in your blog.
Puzzled by insurer's payout for medical claim
RECENTLY, my wife was hospitalised at Mount Alvernia Hospital for four days. Her medical bill came up to $7,995.15.
She is insured under Income's IncomeShield Plan MA, but the total payout by Income was a shocking $240.
I called Income to find out how it arrived at that sum and was told that technically the $7,995.15 was classified as "room and board", hence limiting the claim.
The $7,995.15 included a renal screen, bed charges, clinical consumables and supply, diagnostic imaging services, equipment use, laboratory services, outside hospital services, pharmacy cost, resident medical officer fees, treatment fee and doctor attendance fee.
Given a deductible of $4,000 per policy year and 10 per cent co-insurance, any man in the street would expect an insurance payout of $3,595.63. But this is not the case.
My wife has faithfully paid her premium for the past 15 years without a single claim and this is what she gets in return. I am writing this so the public is made aware of such pitfalls in their medical insurance.
For big insurance companies to cite a technicality as an excuse not to make a decent payout is in no way fair. I urge the Consumers Association of Singapore and leaders in the insurance industry to look into this loose definition of "room and board".
In my opinion, given my wife's good record, Income should honour the $3,595.63 payout as a goodwill gesture.
Lastly, I would like to ask the Central Provident Fund Board why only $450 a day can be used from Medisave for hospitalisation.
Ong Kok Lam
I saw this article on the forum last week but till now I have not seen any reply from Income on it (Normally companies will be quick to respond to letters in the ST forum).
Can you comment on why an expected payout of $3,600 can end up to be only $240?
Maybe you can even share this in your blog.
Puzzled by insurer's payout for medical claim
RECENTLY, my wife was hospitalised at Mount Alvernia Hospital for four days. Her medical bill came up to $7,995.15.
She is insured under Income's IncomeShield Plan MA, but the total payout by Income was a shocking $240.
I called Income to find out how it arrived at that sum and was told that technically the $7,995.15 was classified as "room and board", hence limiting the claim.
The $7,995.15 included a renal screen, bed charges, clinical consumables and supply, diagnostic imaging services, equipment use, laboratory services, outside hospital services, pharmacy cost, resident medical officer fees, treatment fee and doctor attendance fee.
Given a deductible of $4,000 per policy year and 10 per cent co-insurance, any man in the street would expect an insurance payout of $3,595.63. But this is not the case.
My wife has faithfully paid her premium for the past 15 years without a single claim and this is what she gets in return. I am writing this so the public is made aware of such pitfalls in their medical insurance.
For big insurance companies to cite a technicality as an excuse not to make a decent payout is in no way fair. I urge the Consumers Association of Singapore and leaders in the insurance industry to look into this loose definition of "room and board".
In my opinion, given my wife's good record, Income should honour the $3,595.63 payout as a goodwill gesture.
Lastly, I would like to ask the Central Provident Fund Board why only $450 a day can be used from Medisave for hospitalisation.
Ong Kok Lam
The uninsured cannot afford health care
This article explains the problem of the uninsured in America. Medical care is very costly. Those who are employed can get health insurance, paid by their employer. The employer pays a group rate which is one third of the cost of individual insurance.
In Singapore, citizens can get treated in subsidized wards and enjoy a subsidy of up to 75%. They have to pay only 25% of the full cost. The cost in restructured hospital is lower than in private hospitals. The elderly, which are likely to need health care more, will be able to benefit from the subsidized wards.
Those who are well off or have insurance can go for the non-subsidized or private care.
In Singapore, citizens can get treated in subsidized wards and enjoy a subsidy of up to 75%. They have to pay only 25% of the full cost. The cost in restructured hospital is lower than in private hospitals. The elderly, which are likely to need health care more, will be able to benefit from the subsidized wards.
Those who are well off or have insurance can go for the non-subsidized or private care.
Thursday, December 03, 2009
Urgency to create jobs
Many educated Americans, who have lost their job for nearly a year, find that their unemployment benefit is running out. They are desperate to get a job. Some are willing to work for free, to show that they can contribution and wait for a chance to get a full time job later. Many are willing to work as day labor to get paid by the day.
In the past, during boom times, the free market was able to create jobs. Most of these jobs are created by small businesses. In difficult times, these businesses are not able to get credit, as banks are more cautious. Without credit, these small entrepreneurs cannot grow their business and employ the available labor.
Many people hope that the economic situation will improve. But, it could get worse - and this is the more likely outcome. There has been so much loss of trust in our business, financial institutions and even in the free market.
Many governments reduced interest rate to reduce business cost and encourage business owners to expand this business and create more jobs. This strategy does not seem to be working. It is now time for governments start to create jobs directly. It may be necessary to reduce the length of the work week so that the available jobs can be shared by more people.
The economic system has to change. We may have to go back to some form of central planning.
Tan Kin Lian
In the past, during boom times, the free market was able to create jobs. Most of these jobs are created by small businesses. In difficult times, these businesses are not able to get credit, as banks are more cautious. Without credit, these small entrepreneurs cannot grow their business and employ the available labor.
Many people hope that the economic situation will improve. But, it could get worse - and this is the more likely outcome. There has been so much loss of trust in our business, financial institutions and even in the free market.
Many governments reduced interest rate to reduce business cost and encourage business owners to expand this business and create more jobs. This strategy does not seem to be working. It is now time for governments start to create jobs directly. It may be necessary to reduce the length of the work week so that the available jobs can be shared by more people.
The economic system has to change. We may have to go back to some form of central planning.
Tan Kin Lian
Avoid over insurance and moral hazard
There was a case of a person who bought personal accident insurance from many insurance companies, and had an accident where he lost an eye. The total amount claimed under the insurance companies amounted to more than $2 million.
The insurance companies suspected that the accident was intentional,i.e. moral hazard. But they were not able to prove their case in court. They lost the case and had to pay the claims.
To avoid moral hazard, some insurance company adopt the following approaches:
a) ask the applicant to declare the total amount that is insured under all existing policies
b) restrict the total amount that can be paid under a claim.
If the applicant declares a total insurance that is excessive, the insurance company is likely to reject the application to avoid moral hazard. If the applicant fails to disclose this material fact in the application, the insurance company has the grounds to reject the claim.
If an insurance company provides insurance for $500,000 and sets a limit of $1 million for all claims for the same event, and the insured has insured for a total of $2 million, the insurance company is required to pay only half of the insured sum, i.e. $250,000.
Tan Kin Lian
The insurance companies suspected that the accident was intentional,i.e. moral hazard. But they were not able to prove their case in court. They lost the case and had to pay the claims.
To avoid moral hazard, some insurance company adopt the following approaches:
a) ask the applicant to declare the total amount that is insured under all existing policies
b) restrict the total amount that can be paid under a claim.
If the applicant declares a total insurance that is excessive, the insurance company is likely to reject the application to avoid moral hazard. If the applicant fails to disclose this material fact in the application, the insurance company has the grounds to reject the claim.
If an insurance company provides insurance for $500,000 and sets a limit of $1 million for all claims for the same event, and the insured has insured for a total of $2 million, the insurance company is required to pay only half of the insured sum, i.e. $250,000.
Tan Kin Lian
Wednesday, December 02, 2009
Policy loan
Most life insurance policies allow you to take a loan against the cash value of your policy. You have to pay an interest rate, which is usually 6% to 8% per annum.
The savings in your policy earn a yield of around 2%. You are therefore paying an additional interest of 4% to use your own money. This is a bad deal.
To give a fair deal to its policyholders, the insurance company has to reduce the interest rate on policy loan or give a higher yield on the savings. A fair spread should be 2%. You can find out if the insurance company is treating you fairly by asking about this spread.
The savings in your policy earn a yield of around 2%. You are therefore paying an additional interest of 4% to use your own money. This is a bad deal.
To give a fair deal to its policyholders, the insurance company has to reduce the interest rate on policy loan or give a higher yield on the savings. A fair spread should be 2%. You can find out if the insurance company is treating you fairly by asking about this spread.
How much life insurance to own?
One method that can be used is called the "human life value" approach. This is calculated as the present value of the family's share of the deceased breadwinner's future earnings. It is calculated as follows:
a) Estimate the individual's average annual earnings over his or her productive lifetime
b) Deduct taxes, insurance premiums and the cost of self-maintenance; the remainder is used to support the family
c) Determine the number of years from the present age to the retirement age
d) Use a reasonable discount rate the determine the present value
For example:
present age: 30
retirement age 65
annual earnings $50,000
self maintenance: $20,000
support family: $30,000
present value for 35 years at 4% discount: 19.41
amount to insurance needed: $582,000
This is slightly more than 10 years. For such a large sum, it is necessary to buy decreasing term insurance.
If the period is taken as 25 years (i.e. the children would have grown up), the factor is 16.24. The amount of insurance needed is $487,000. This is close to my rule of thumb of 10 years.
a) Estimate the individual's average annual earnings over his or her productive lifetime
b) Deduct taxes, insurance premiums and the cost of self-maintenance; the remainder is used to support the family
c) Determine the number of years from the present age to the retirement age
d) Use a reasonable discount rate the determine the present value
For example:
present age: 30
retirement age 65
annual earnings $50,000
self maintenance: $20,000
support family: $30,000
present value for 35 years at 4% discount: 19.41
amount to insurance needed: $582,000
This is slightly more than 10 years. For such a large sum, it is necessary to buy decreasing term insurance.
If the period is taken as 25 years (i.e. the children would have grown up), the factor is 16.24. The amount of insurance needed is $487,000. This is close to my rule of thumb of 10 years.
Optimism in Banda Aceh
My friend in Aceh told me the following:
a) Banda Aceh had a population of 250,000 before tsunami. Today, the population had increased to 400,000. More people came during the reconstruction. Some are likely to stay over the longer term.
b) The city is buzzing at night. The traffic is quite busy, although not as congested as large cities around the world.
c) Aceh is now peaceful, with the end of the insurgency and independence movement. The Governor of Aceh is a local person.
a) Banda Aceh had a population of 250,000 before tsunami. Today, the population had increased to 400,000. More people came during the reconstruction. Some are likely to stay over the longer term.
b) The city is buzzing at night. The traffic is quite busy, although not as congested as large cities around the world.
c) Aceh is now peaceful, with the end of the insurgency and independence movement. The Governor of Aceh is a local person.
Tuesday, December 01, 2009
Holiday in Banda Aceh
I am travelling for a short holiday to Banda Aceh on 1 Decemeber and will return to Singapore on 5 December.
Risk Management
There are five ways to manage risk:
a) Avoidance
b) Loss control
c) Retention
d) Non-insurance transfer
e) Insurance
Insurance is just one method of risk management. It is appropriate only for the low frequency and high severity risks, such as premature death or serious disability. We only need to insure against the "premature" occurrence of these events, as everyone will have to die eventually and it cannot be prevented.
Most people use a combination of avoidance, loss control and retention to handle most risks of high frequency or low severity. There is no point in insuring against these risks as the cost of insurance is rather high and it is quite a hassle to make a claim.
Retention means that you set aside savings to pay for the losses that are likely to occur. It is better to have savings to pay for medical expenses and retirement income when one gets old, rather than depend on insurance to pay these benefits. Sometime, when you need insurance to pay your expenses, you may find that your claim is rejected due to some technical reason.
An example of "non-insurance transfer" is when your medical expenses are transferred to your employer through the contract of employment.
To summarize, having adequate savings is as important as having insurance. It is better to pay a small premium to cover the risk of premature death, accident or disability and to save the money separately for future needs.
However, if the insurance policy provides a good return on your savings, compared to other types of investments, it is all right to save through an insurance policy. For this to happen, the expense and other charges for the insurance policy must be much lower than it is now. The "effect of deduction" should not exceed 15% of the accumulated regular premiums (compared to 40% that is taken away now by most insurance policies).
a) Avoidance
b) Loss control
c) Retention
d) Non-insurance transfer
e) Insurance
Insurance is just one method of risk management. It is appropriate only for the low frequency and high severity risks, such as premature death or serious disability. We only need to insure against the "premature" occurrence of these events, as everyone will have to die eventually and it cannot be prevented.
Most people use a combination of avoidance, loss control and retention to handle most risks of high frequency or low severity. There is no point in insuring against these risks as the cost of insurance is rather high and it is quite a hassle to make a claim.
Retention means that you set aside savings to pay for the losses that are likely to occur. It is better to have savings to pay for medical expenses and retirement income when one gets old, rather than depend on insurance to pay these benefits. Sometime, when you need insurance to pay your expenses, you may find that your claim is rejected due to some technical reason.
An example of "non-insurance transfer" is when your medical expenses are transferred to your employer through the contract of employment.
To summarize, having adequate savings is as important as having insurance. It is better to pay a small premium to cover the risk of premature death, accident or disability and to save the money separately for future needs.
However, if the insurance policy provides a good return on your savings, compared to other types of investments, it is all right to save through an insurance policy. For this to happen, the expense and other charges for the insurance policy must be much lower than it is now. The "effect of deduction" should not exceed 15% of the accumulated regular premiums (compared to 40% that is taken away now by most insurance policies).
Sayings of Confucius
> The nature of man is fundamentally good inclined towards goodness.
> The princely man sticks to virtue, and the inferior man clings to material comfort.
> The princely man is just while the inferior man expects rewards and favours.
> The princely man is dignified, noble, magnanimous, and humble while the inferior man is mean, proud, crooked, and arrogant.
> The Ruler should be virtuous, just, honest and dutiful.
> The princely man sticks to virtue, and the inferior man clings to material comfort.
> The princely man is just while the inferior man expects rewards and favours.
> The princely man is dignified, noble, magnanimous, and humble while the inferior man is mean, proud, crooked, and arrogant.
> The Ruler should be virtuous, just, honest and dutiful.
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