ElderShield misconceptions cleared

02 May 2007, The Straits Times

Question

Name of the Person: Leong Sze Hian

ElderShield: Why rebate and then premiun hike?

I REFER to the article, 'Look out for add-ons to supplement ElderShield' (ST, April 23).

Why pay a rebate, and increase premiums at the same time? Why not just use the excess funding accumulated to reduce future premiums or increase benefits?

At the end of last year, there were about 750,000 policyholders, with a total of 2,366 successful claims. About 16 per cent of claims declined.

The claims payout last year was about $8.5 million (2,366 claims x $300 monthly x 12 months). Even if we assume all 750,000 policyholders paid the lowest premiums at age 40 of $169.74 (male $148.84 + female $190.63 divided by 2), premiums per year were $127.3 million ($169.74 x 750,000 policyholders).

This means the claims ratio was only about 6.7 per cent ($8.5 million in claims but $127.3 million in premiums). As the 2,366 claims were the cumulative total for the four years since the scheme started, the claims payout over premiums per year is actually much lower.

What was the claims ratio for each of the four years of the scheme? I believe this may be the most profitable insurance scheme in the history of insurance in any country. How much profit has been made since the scheme started?

Notwithstanding the proposal to increase the monthly payout by $100 and the payout period from five to six years, in view of the above, how is it possible that the proposal now is to have existing policyholders pay a one-off adjustment to make up for lower premiums paid in earlier years under the current ElderShield scheme, increase premiums of about $10 a month for the older age group, and have policyholders registered automatically for the new scheme after September pay premiums of $1 to $2 more a month?

As to the opt-out rate having gone down steadily from 38 per cent when the scheme was launched to 14 per cent last year, there are 1.26 million residents (Singaporeans and PRs) aged 40 to 64, according to the Department of Statistics' 'key statistics demography Singapore residents by age group end June 2006'. So, isn't the opt-out rate about 40 per cent (with about 750,000 policyholders among 1.26 million residents)?

Does the Ministry of Health study's opt-out rate refer to the current opt-out rate of new entrants who reach age 40, or the overall opt-out rate of those eligible?

Reply

Reply from MOH

ElderShield misconceptions cleared

In "ElderShield: Why rebate and then premium hike?" (April 30), Mr Leong Sze Hian perpetuated some misconceptions about the ElderShield scheme.  This is unfortunate as he is supposed to be a financial adviser.

First, Mr Leong took the low claim rate of ElderShield to conclude that the ElderShield must be "the most profitable insurance scheme in the history of insurance in any country".  But the current low claim rate is not unusual, and is demonstrated in other similar situations.  Disability largely strikes at old age.  As 97% of ElderShield policy holders are still below 70, it is only natural that the current claim rate is low.  However, this claim rate will increase when policyholders age with each passing year.

Second, Mr Leong was wrong to compare the claims ratio of ElderShield and that of medical insurance.  ElderShield policyholders pay the same premium rate charged at the point of entry throughout a limited premium payment period.  This is a pre-funding model so that by the time a person retires, almost all of the insurance premiums would have already been paid.  On the other hand, a medical insurance policyholder pays a rising premium as he ages and the insurance coverage has to be renewed annually.  Once the premium payment stops, the coverage stops too.

Third, Mr Leong wrongly assumed that any premiums not paid out in the form of claims would become profits for the insurers.  The fact is that the bulk of the premiums paid in the early years must be reserved by the insurers against claims arising later in life.  How else can the insurers meet their obligations to pay out claims many years in the future?   

Mr Leong asked why the need for premium increases if there are sufficient rebates to be given out. But the two are not related.  The premium rebate is meant for existing ElderShield policyholders, while any premium increase is meant to support the proposed enhancement in benefits for a new ElderShield policy.