Closing the insurance & family takaful protection gap

 

MALAYSIA is underinsured and without timely policy intervention, the odds look stacked against many who seek to protect themselves and their dependants against a rising number of risks and challenges.

While the total sum insured rose to RM1.96 billion in 2016 and the headline insurance penetration rate has hovered at about 55% for at least the past five years, the actual rate was only 35% in 2015 after eliminating multiple ownerships by the same policyholder, according to Bank Negara Malaysia. While 35% of the population have at least some form of life insurance or family takaful policy, that does not necessarily reflect adequacy of protection.

Coverage of households in the bottom 40% (B40) income group is only 4%, according to Bank Negara Malaysia’s 2015 Financial Capability and Inclusion Demand Side Survey. Affordability was the main reason for not buying a policy or allowing one to lapse. It remains a key issue for respondents, a recent online survey by The Edge and iMoney Group shows (see survey story on Page 75 and infographic on Pages 76 and 77.)

 

Even among the insured, there is an estimated average protection gap of RM553,000 to RM723,000 per family, which is the amount needed for them to maintain their existing standard of living if a primary wage earner should pass away, according to the central bank’s Financial Stability and Payments Report 2016. The report had cited a 2012 industry study on underinsurance in the country.

According to the study by the Life Insurance Association of Malaysia and Universiti Kebangsaan Malaysia, the probability of underinsurance is high at between 94% and 98%. The average protection gap is RM642,000 for families whose primary wage earner had some form of life insurance but zero medical insurance coverage, compared with RM723,000 for breadwinners without any life or medical insurance.

For each family member, the average protection gap was RM100,000 to RM150,000 — “quite far” from the per capita sum insured in Malaysia of about RM34,000, according to the 2012 study.

The RM553,000 protection gap for families whose breadwinner has some form of life and medical insurance (after taking into account savings) points to a sizeable inadequate insurance coverage, even though the real protection gap would be smaller if the family has more than one breadwinner or income provider. It could also be higher if the lost breadwinner is between 26 and 45 years old, for which the study found higher instances of underinsurance compared with other age groups.

To illustrate, the average protection gap of RM553,000 to RM723,000 is equivalent to nine to 12 years’ income, using the current median household income of RM5,228 a month or RM62,736 a year in 2016.

Chances are that the protection shortfall could be even wider today. The average premium per policy rose at an annual rate of 8% in the past five years, compared with 3% in the past decade, making insurance and takaful products even less affordable amid the rising cost of living.

 

Why costs are rising

Some pundits reckon that insurance schemes have also caused healthcare costs to escalate, relating anecdotes of private healthcare facilities ordering excessive tests that push up expenses which, in turn, drive up medical bills and the cost of insurance coverage.

Private Hospital Association Malaysia president Datuk Dr Jacob Thomas refuted this claim in a media interview last December. He pointed out that patients with a medical card from their insurers are entitled to certain discounts. Doctors may choose to “symphathise and charge less” than the maximum allowed regulated rate if a patient does not have insurance coverage, he added. He also said the higher cost of malpractice insurance borne by hospitals and doctors also increases healthcare costs, which are ultimately passed on to consumers.

Remarking on how insurance has become less affordable to the mass market in its Financial Stability and Payments Report 2016, the central bank noted that the trend “coincides with a discernible shift towards more investment-linked products”, which made up two-thirds of new businesses generated by insurance agents. Some 33% of new businesses are from investment-linked products in 2016, up from 25% in 2009, the central bank said.

These policies typically have higher premiums because of the investment element, which may appeal to consumers seeking better yields in a low-interest rate environment. For insurers, investment-linked products are relatively cheaper to underwrite due to inherently lower levels of guarantees.

On top of that, new features not only add to product complexity but also lead to higher premiums.

“The confluence of these factors, combined with a commission-based remuneration structure that incentivises the agency channel to focus on products with larger premium sizes and more affluent consumers, have further contributed to lower affordability,” Bank Negara said.

The central bank concurs that escalating healthcare costs have contributed to increased repricing of medical and health insurance products by insurers and takaful operators. It says it “took steps to promote greater discipline and transparency” from last year. Not only are insurers and takaful operators required to clearly address the frequency of repricing, level of cross-subsidisation and appropriate communication to policyholders, they must strengthen measures to conserve policies by providing options for policy holders to continue having coverage by adjusting the sum insured or reviewing incentives.

According to the report, Bank Negara is also in talks with the Ministry of Health and other stakeholders “on broader measures to address medical inflation, in particular among private healthcare providers” with further developments to be communicated by the government.

That’s good news for consumers as the need for affordable insurance and adequate healthcare coverage is real, especially among the underserved market outside urban centres, with 60% of agents serving the Klang Valley, Johor and Penang.

The central bank is encouraging greater innovation and the development of alternative distribution channels, including via mobile applications and the internet, to improve access and affordability to boost the insurance and family takaful penetration rate and close the protection gap for the underserved.

Life insurers and family takaful operators have been directed to make basic, pure protection products available, commission free, on a non-advisory direct distribution channel this year, either through physical premises or an online platform where consumers would be provided tools to make a self-assessment of which products are suitable for them. For 2018, the target is to have similar products to cover critical illness and health products.

Universal health insurance schemes

While people who buy insurance hope that they will never need it, rising medical costs, new diseases, increased longevity and higher chances of acts of terror mean a higher likelihood that one would need insurance or family takaful coverage.

Although Malaysia provides public healthcare at subsidised prices, a higher number of people seeking treatment at government hospitals and clinics risks overburdening an already stretched sector. Apart from that, the public health sector is also losing talent to private institutions. The public healthcare system will come under additional pressure as the country ages. The number of people aged 65 and above is set to hit 3.89 million by 2035, and older people need more medical care.

The government intends to continue subsidising public healthcare, Health Minister Datuk Seri Dr S Subramaniam said last year. He said the government is mulling the introduction of a government health insurance scheme to help Malaysians pay rising healthcare costs.

Whether one would agree to a mandatory monthly contribution towards a national healthcare system that would cover all medical costs is one question asked by the ongoing Transformasi Nasional 2050 (TN50) financial sector survey. A link to the survey can be found on the central bank’s website.

In a nutshell, a government-led effort towards providing universal or national healthcare insurance may already be underway — a move that could substantially close the protection gap for consumers.

Singapore’s MediShield Life basic health insurance scheme, for instance, is administered by the Central Provident Fund Board and is mandatory for all Singaporeans and permanent residents regardless of age or pre-existing health conditions, although premiums may differ, with older folks and the lower and middle-income group given subsidies and aid. The plan, which came into effect on November 2015, replaces an older non-mandatory plan, which excluded those with pre-existing medical conditions and those above 92 years old.

It remains to be seen if such a social insurance scheme will be implemented in Malaysia, whether it will be mandatory, and how much the government will subsidise it.

While Malaysia’s insurance penetration rate is far from the targeted 75%, the Thailand experience provides a ray of hope. A quarter of Thais were uninsured and about 20% of the poorest families fell into poverty due to healthcare expenses before the country introduced the Universal Coverage Scheme (UCS) in 2001, according to a report in The Guardian. By 2011, UCS covered 48 million Thais or 98% of the population and it only cost US$80 per person a year, primarily funded by general income tax, the report said.

The Thai government also paid hospitals and incentivised medical professionals to serve unpopular rural areas, according to the report commissioned by US-based think tank Center for Global Development.

As the policy makers strive to lift Malaysia’s insurance penetration rate to 75% by 2020, consumers need to be informed to fully benefit from the changes taking place. The goal is not to hit headline targets set under the Economic Transformation Plan but to ensure the insurance and family takaful protection needs of the Malaysian population are met.

For that, policy makers need to determine the basic level of insurance that will provide enough protection for all Malaysians and make that affordable to everyone.