Portability for Integrated Shield plans likely to raise premiums

RECENTLY I switched my sons’ Integrated Shield plans (IPs) to a different insurer. That exercise was a breeze; they were young (age 25 and 26) with no claims history nor any pre-existing illnesses. In terms of risk profile, they are highly desirable for any insurer.

But that wasn’t so for me – I am much older. Even though I am healthy with no claims history as well, I was told a switch wasn’t advisable. My annual health screen, for example, shows I have osteopenia and elevated cholesterol. Both may not be unusual at my age, but may be seen as pre-existing conditions and may trigger exclusions or premium loadings.

The issue of IP “portability”, which refers to the ability to switch between IP providers with no exclusions or restrictions on pre-existing conditions, is one that occupies both policyholders and the government.

Health Minister Ong Ye Kung has indicated that a study on IP portability could be ready this year. A paper by the Singapore Actuarial Society (SAS) published in May looks into implications of three possible scenarios or perspectives, and the preconditions that may need to be in place for IP portability to be implemented.

Risk-equalisation mechanism

The upshot of the SAS paper is this: One, the more generous the portability terms, the greater the likelihood of steep premium rises for everyone. This raises the question of “fairness”. Typically, fewer than 20 per cent of the insured in an IP risk pool makes a claim in any single year.

Two, in order for portability to become reality, the government may need to step in via the creation of a “risk-adjustment” or “risk equalisation” mechanism as currently exists in countries such as Australia and the Netherlands. Such a mechanism seeks to even out the burden on insurers for taking on risks that are seen as unprofitable, such as people already suffering chronic illnesses such as cancer and diabetes. It is hoped that this mechanism would prevent insurers from cherry-picking only healthy lives.

In the healthcare systems of these countries, health insurance is regarded as a basic right and this includes portability. In Australia, the government has regulations in place to ensure that policy switches are smooth. According to the SAS paper, risk-adjustment mechanisms in Australia help to balance the risk pool by redistributing funds from insurers with younger policyholders to insurers with older risk profiles.

In the Netherlands, portability is central to competition in health insurance. Individuals can switch insurers without losing coverage or worrying about pre-existing conditions. But the obligation under the country’s Health Insurance Act does not extend to supplementary or additional cover, where insurers can set premiums, decide on coverage, or reject applications.

IP profitability under pressure

In Singapore, the national scheme is MediShield Life under the CPF, which automatically covers all Singaporeans and permanent residents, regardless of congenital or pre-existing conditions. MediShield Life, however, provides basic cover (Class B2/C wards) for catastrophic illnesses. The scheme isn’t meant to be comprehensive; a claim limit is applied to the bill. Still, 90 per cent of subsidised hospital bills are covered by MediShield Life.

IPs sit on top of MediShield Life and cater for a wider choice of wards and “as charged” benefits, subject to a deductible and co-payment. Policyholders who wish to downgrade their plans with the same insurer need not be underwritten. But underwriting applies to those who wish to upgrade or switch to another insurer. If they have developed fresh conditions, they risk new exclusions.

All insurers are under pressure to maintain a wide risk pool with healthier and younger lives. But this gets more challenging as fewer babies are born and the population ages. Competition is keen in the rider segment as well, where insurers have more flexibility to offer additional benefits such as more generous cancer coverage.

The Life Insurance Association said: “We should consider how portability affects the customers and take a balanced view. For the new insurer to accept customers with new medical conditions, they are likely to have to buffer for the additional risk with a likelihood (of) higher risk premiums for customers.

“It will drive more standardisation (similar to a fixed standard plan) and curb innovation, such as direct purchase insurance. From an industry perspective, we should encourage free private market competition to give better value to customers.”

Concerns about the cost implications of IP portability occur at a time when IP profitability is again under threat and policyholders are braced for premium hikes. At end-August, the two-year moratorium on IP premium increases comes to an end.

In 2023, six out of seven IP insures fared worse than 2022. Four insurers including GE and Singlife incurred underwriting losses, and for two others – AIA and Prudential – underwriting profits fell sharply. The exception was Income, which chalked up an underwriting profit of S$16 million compared with S$2 million in 2022.

SAS believes a major change in IP and rider portability rules would succeed only if it is backed by strong consensus from the public on how health insurance should work, “and thorough analysis on the intended and possible unintended impacts on all stakeholders”. “There will be trade-offs between freedom and fairness,” it said.

Here are some highlights of SAS’ analysis:

• Perspective 1: “Communal” approach. All policy-specific exclusions are disallowed for IP base plans and riders, for both new policies issued and switches. All exclusions are to have a waiting period which would be standard across all insurers. Past permanent exclusions will be automatically converted by law into time-bounded ones. For those seeking to switch into a higher plan, exclusions may be added for the additional benefits, however, based on claims history.

In this scenario, insurance payouts and premiums are expected to rise sharply, and SAS believes additional measures will be needed to support this regime. It suggests:

• A “time-limited and means-tested” premium support from the government
• Because of premium rises, younger and healthier people may drop their IPs. To prevent this, the government could give a financial incentive such as a tax deduction or premium loading for late joiners. In Australia, rules are in place to encourage individuals to take up private insurance early; a premium loading may apply after a certain age.
• Set up a “high-risk pool” or claims equalisation mechanism where large claims from high-risk individuals are aggregated into a central pool administered by the government, which would spread the claims proportionally across all IP insurers. 

• Perspective 2: “Grandfathering” approach. For new business, all exclusions must have a waiting period. A switch that’s not an upgrade would not be re-underwritten, and there will be a review of existing exclusions to either remove the exclusion or convert it into a time-based exclusion. Over time, permanent exclusions are phased out. Insurers retain the right to reject applications to upgrade.

This scenario offers a relatively high degree of freedom to switch plans. SAS believes that to protect existing policyholders who are not switching from higher claims costs, some insurers may choose to close existing IP and rider plans to new business, and launch a new series where the new rules are priced in. “It should be noted that having multiple similar products co-existing will fragment the risk pools in the ecosystem, making each pool’s claims experience more volatile.”

• Perspective 3: Portability for IP base plans only. No re-underwriting and no new exclusions imposed. Existing exclusions and/or loadings remain. Insurers are not allowed to reject such applications to switch. But plan upgrades or purchase of riders are subject to re-underwriting. Riders are expected to be the platform for innovation “as insurers retain the ability to control how they take on risks”. “If both the IP and riders become highly standardised, it begs the question of the need for private insurers’ involvement in the first place.” In Singapore, it is estimated that more than three million have IP base plans, and over one million have riders.