Is claims-based pricing for Shield riders a double-edged sword?

YOU'VE heard of "no-claim discount'' (NCD) in motor insurance, but probably not so much in the context of health insurance.

Policyholders of Integrated Shield (IP) plans, which comprise around 70 per cent of Singapore residents, will have to brace themselves. No-claim discounts - or in insurance industry parlance, "claims-based pricing" - are shaping up to be the latest lever in insurers' efforts to wrest their IP portfolios into the black.

Prudential pioneered claims-based pricing in 2017 for its private hospital insurance rider. Its results turned around dramatically in 2018 and 2019, after losses in previous years. In April this year, AIA and Great Eastern will launch claims-based pricing. Aviva says it will do so in 2022. Income says it is "closely monitoring" the model.

To be clear, claims-based pricing is applied only on co-pay riders, mostly for private hospital plans. It is not applied on the base IP policy. Prudential however is extending claims-based pricing to its public hospitalisation rider, PruExtra Plus, "to better manage claims".

In April, insurers are asking policyholders who bought their riders before 2018 to transition to riders where they will have to co-pay 5 per cent of the hospital bill, subject to a cap of S$3,000 a year.

The riders typically require policyholders to seek treatment from the insurer's panel doctors or pre-authorisation. Otherwise the S$3,000 cap, which limits policyholders' out-of-pocket expenses, may not apply. Previously it was possible to cover 100 per cent of hospital bills via riders for the deductible and co-insurance portions.

Claims-based pricing goes some way to address a bugbear among policyholders: That the majority of healthy policyholders are subsidising the minority who make large claims. In the industry, it is often said that 20 per cent of policyholders account for 80 per cent of claims. With claims-based pricing, healthy policyholders who do not make a claim will enjoy a discount on premiums - an estimated 20 to 25 per cent off the "standard" level, depending on the insurer and based on current plans. It also aims to encourage prudent behaviour - that is, healthy living and judicious use of healthcare services.

However, the scheme may well turn out to be a double-edged sword. This is because while a discount proffers a degree of equity for healthy policyholders, everyone will fall ill at some point. Eventually, riders may simply become unaffordable. Rider premiums must be paid by cash.

Based on current schemes, claims above a certain threshold - set at between S$1,000 and S$2,000 - will attract a multiplier on the premium. Depending on the number of claims and the amount, the premium could escalate by as much as two to three times. It is possible to shift downwards and reduce premiums or recover the discount if there is no claim in the review period, typically 12 months.

Older policyholders - the threshold varies between age 55 and 65 - will be subject to fewer levels of escalation and a significantly lower multiplier.

A degree of cross-subsidisation is inevitable in insurance. Policyholders buy insurance to benefit from risk pooling. Does claims-based pricing inordinately penalise the unhealthy?

Amidst Singapore's ageing population and very low birth rate, insurers' pool of risk is also set to deteriorate. Policyholders have already suffered several premium hikes on their base IP plans and riders.

Associate Professor Jeremy Lim is concerned that with claims-based pricing, policyholders may defer seeking medical advice for symptoms, and this may cause late diagnosis of serious diseases like cancer. Dr Lim is director of the Leadership Institute for Global Health Transformation at the NUS Saw Swee Hock School of Public Health.

"Prices will more and more bifurcate, with the end result being that those with premiums too high to bear will drop out. This, of course, improves the risk pool and premiums for those who don't claim, but insurers need to be clear what the objectives are.

"If the aim is to keep premiums affordable for everyone, then claims-based pricing will detract from this. If it's to improve the individual insurer's pool of lives, then this effectively pushes the highest risk or highest premium policyholders out eventually."

Great Eastern's Colin Chan, managing director of group marketing, said: "The introduction of co-payment and claims-adjusted pricing (CAP) for our Shield supplementary plans are well-considered measures to encourage responsible consumption of medical services and to reward customers who stay healthy and make informed and prudent health choices. The new CAP framework benefits the vast majority of our customers who do not make any claim as they will enjoy 20 per cent savings off the standard premium rates at their renewals.

"In the long term, this enables us to manage healthcare costs in a more sustainable way for the good of our wider policyholder base."

AIA believes it is on the right track in efforts to manage healthcare and claims costs to keep health insurance accessible and affordable for all. "While there were initial uncertainties over the effective use of claims-based pricing for IPs, market experience since then has shown that it is promising in its ability to give customers choice while also promoting responsible use of health insurance."

Aviva director of product and marketing Daniel Lum said Aviva will introduce a premium discount for MyHealthPlus customers in 2022 where they can enjoy 15 per cent off their rider premium at renewal if they have claimed S$1,000 or less in a consecutive two-year period. "Claims-based pricing still needs to be complemented with other measures, such as higher adoption of panel usage and pre-authorisation, as well as effective reduction of fraud, waste and abuse, to mitigate rising claims cost."

If your rider is affected, please do read the fine print or consult with your adviser. Generally, seeking treatment at non-panel hospitals or doctors will subject you to steeper escalation - that is, your premium may be hiked by more than one level. By choosing treatment at public or restructured hospitals, your premium may stay at Standard level, regardless of bill size.

Here are some details of insurers' claims based pricing schemes:

Great Eastern

CAP applies to private hospital supplementary plans - GREAT TotalCare Elite-P and Classic-P. For those below age 65, five premium levels starting from Preferred, Standard, and up to Level 3. Multiplier at Level 3 is 2.5x. All policy renewals from April 1 start at Standard level. Subsequent renewal premiums depend upon choice of treatment option and claim amount.

For those age 65 and above, three premium levels (Preferred, Standard and Level 1), and a maximum increase of 25 per cent of Standard premium.

Those who do not make any claims during the assessment period will enjoy Preferred status or 20 per cent discount off the standard premium. Those who have undergone treatment for critical conditions, or are in the midst of claiming for critical conditions, will also be under the special three-premium CAP structure.

Prudential

PruExtra riders: 20 per cent discount off the Standard Level premiums for those who do not make a claim. For those up to age 54, five levels of escalation above Standard Level (up to 3 times multiplier at level 5). For those 55 and above, also five levels of escalation, capped at 1.5 times at Level 5.

AIA

Claims-based pricing to be applied to AIA Max VitalCare policyholders (previously called AIA Max Essential A). This is a rider for the private hospital plan, AIA HealthShield Gold Max A. There are five premium levels, starting from Standard Level. Level 4 multiplier is 2x for those up to age 54. For age 55 and older, the Level 4 multiplier is capped at 1.4x.

The longer you stay on Standard level without claims, the higher the discount. Two consecutive years of no claims get 10 per cent discount. No claims for five consecutive years will get you 25 per cent discount.

READ MORE: More insurers to launch claims-based pricing for Integrated Shield riders