As we said, we have heard from all the major stakeholders - except the policyholders. We are not talking about the rich, who typically self-insure (they can afford to pay their medical bills if and when incurred). The people who buy insurance are primarily the middle class and possibly, some lower-income households. Their main objective - for peace of mind should the unfortunate (illness, accident, disability, death) happen.
Who speaks for the middle class who are increasingly burdened by the rising cost of living, including for education and now, healthcare? Who protects their interests? As things stand (based on our own communications with the stakeholders), we wouldn't bet against more hikes down the road. So, this week, we have taken it upon ourselves to advocate for the average man in the street, who too often has no voice and/or is not heard, suffers from information asymmetry and holds no bargaining power vis–vis the private hospitals, insurers and the government. Here, we analyse the issue from their perspective with the aim of showing why insurance premiums need not be so high.
Life + medical, one bundled package
The insurers' main argument is that medical claim payouts have far exceeded medical premiums collected. As highlighted in Life Insurance Association of Malaysia's (LIAM) 2023 annual report, the industry recorded a 26.2% increase in medical claims payout compared with 2022. According to the insurers, medical health policies have very thin margins to start. Hence, the need for corrective action - namely, increasing medical premiums to cover medical claim payouts to ensure long-term sustainability of the medical insurance business.
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Here's the thing; despite the rising payouts, insurance companies continue to report substantial profits. Basically, their argument is this – the medical insurance portfolio is only marginally profitable, and profits are primarily contributed by the life portfolio. In other words, insurers have presented medical and life as two entirely different segments of their business. Therefore, profits from life cannot be used to cross-subsidise medical. This is NOT justifiable.
Anyone who has ever bought an insurance policy can attest that life plus medical are almost always sold as one single bundled package, as part of a comprehensive financial protection plan. If medical coverage is used by life insurers as a "rider" to sell more life policies, then that is their strategic prerogative. Yes, the premiums for medical and life are often separated, primarily for accounting and tax purposes. But how premiums are calculated and split - the decision on how to allocate the premiums to the respective reserve funds - are also the prerogative of the insurers, as part of their overall strategic decision.
The point is, insurers must surely have made a thorough assessment of long-term risks on both life and medical, based on extensive analysis of big data (age, gender, health, environment and so on) using multiple actuarial models undertaken by professionals and experienced industry experts in their employ. And are confident of the sustainability of both based on their calculated premiums (however the internal allocation may be).
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Life and medical are both inherently the same business, operationally and financially, and they are marketed as a bundled package. It is the insurers' responsibility to manage risks across both segments, to ensure overall financial stability. As such, it is not justifiable that the financial viability of medical and health is now evaluated in isolation. Life and medical must be evaluated as a whole. And the data suggests that they are, by the insurers themselves.
Chart 1 is data published by Insurance Services Malaysia (ISM) for 2015, 2019 and 2023. Medical claims payouts (the green bar) have historically exceeded the annual medical premiums collected. In other words, it is not by any means a new phenomenon. While this may not be a comprehensive approach to assess the profitability (due to the amortisation of premiums and costs over time), the fact is: medical premiums have consistently fallen short of covering medical claims. This pattern suggests the presence of internal apportionment and fund pooling across different policies. Notably, life insurance is hugely profitable. Cross-subsidising medical claims with life insurance premiums has always been the norm.
Net underwriting income falls but investment income at record high
Now look at Chart 2. Yes, net underwriting income (net premium after deducting benefit payouts and operating expenses) turned negative in 2023-2024 due to increased medical claim payouts. This is another justification for the insurer to raise premiums.
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However, what was conveniently omitted from the narrative is that income as a whole did not shrink. In fact, net investment income (the blue bar) is the highest it has been in 15 years. This investment income is NOT part of insurer profits. This is the income generated from premiums collected and subsequently invested in various assets managed by the insurance companies. This investment income goes into the policyholders' pool of funds that will go towards defraying future claims (payouts) and policy sustainability.
In other words, insurers cannot selectively highlight underwriting deficits when they accumulate investment income that far exceeds underwriting losses. The insurance business - and payouts - are not solely reliant on underwriting income, and insurers should not act as though it is.
Net underwriting deficit is totally predictable
What's the fundamental concept of insurance? Risk pooling and financial protection. You pay a regular premium (whether monthly, half-yearly or annually) from the day you buy the policy (life or medical). In the case of life, the insurance company will pay a lump sum to your beneficiary upon your death, which will generally be many years in the future. In the meantime, you keep paying the premiums and these premiums are compounded (earning a return, that is, the investment income). Similarly, for medical, you pay the premiums upfront and the insurer promises to cover your medical expenses IF you fall ill, are injured and require treatment.
This is the basic mechanism behind medical insurance: the lifetime risk pooling model. The model spreads policyholders' estimated medical costs over their entire lifespan - to be sufficiently covered by the stream of regular premium payments. For most people, this means paying premiums for all the years when they are young and healthy to cover possible future medical expenses as they age and the risks of illness rise. And this risk is spread among many policyholders - some will fall sick, to varying degrees of severity, and require hospitalisation; others may never make a claim.
This is the reason why insurance companies will always get you to start a policy as young as possible, when the risks of medical payout are low. The policyholders still pay premiums that far exceed their actual medical claims. Indeed, claims are likely zero for many years, even decades. However, over time, with age, health risks will increase, leading to higher frequency and value of claims. At some point, actual medical claims will then exceed premiums.
Thus, it is completely predictable that insurance companies will see a gradual decline in underwriting profits, which eventually transitions into an underwriting loss over time as the cohort of policyholders age (visualised in Chart 3). But the premiums collected in the earlier years plus investment incomes should be capable of sustaining future claims.
Chart 4 shows the total number of active life and medical insurance policies. Sales of life and medical insurance in Malaysia gained traction in the mid-1990s to early 2000s due to the introduction of personal income tax relief (in 1996) and relaxation of regulations allowing life insurers to sell standalone medical health policies in 1997. We analysed the age distribution of policyholders in 2005. The majority (57%) of policyholders were between 25-45 years of age, and the median policyholder was 35 years old. Accordingly, this cohort of policyholders would now be 55 years old on average (range between 45 and 65 years old). This means that their medical claims are starting to rise, and the policies are now approaching the threshold of underwriting loss (as explained in Chart 3).
As we said, all this is completely predictable. It is the fundamental concept of medical insurance. How is it now justifiable for insurers to hike premium payments ostensibly to cover rising medical claims, which should already be taken into account when they calculated the original premium payments? What about the "excess" premiums already paid? As we noted in Chart 2, net underwriting income may have fallen (as expected) BUT investments and other incomes have risen, and total income net payouts and other related expenses (outgo) are at a record high! In fact, this excess of income over outgoing has been on a broad uptrend since 2009.
Why must the middle-income policyholders now pay for the mistakes of hugely profitable insurance companies?
Let's summarise what we have written so far.
- Life and medical are almost always sold as a bundled package and therefore, their sustainability must be evaluated as one.
- Medical payouts have always exceeded the premiums collected. Why? This is the marketing and pricing strategy of insurance companies. It is the insurer's strategic prerogative on all internal apportionment, fund pooling and cross-subsidies across different policies.
- The current increase in medical payouts is completely predictable and is, in fact, the fundamental basis for insurance. You pay premiums well in excess of claims when young and healthy, to enjoy the benefits of "under-paying" as you get older with higher risks of hospitalisation and medical bills.
So, why are the insurance companies now crying foul for the very rules that they themselves set? It is the insurers' sole responsibility to ensure the long-term sustainability of their policies. Insurance companies design the products, set the premium rates and benefit structures - based on extensive access to data, actuarial models and industry expertise - to reflect the broader healthcare environment after taking into account all potential risk factors. If, despite all these insurers made a mistake by incorrectly assessing all the risks and costs, why should policyholders be forced to suffer the financial consequences?
Did insurers underprice their products to compete in the market, to make sales?
Malaysians have relatively low disposable incomes (we have written extensively on how the structure of our economy, low cost, low wages, are by design, resulting from decades of public policymaking). In making policies "affordable" to the masses but still providing very high annual limits and unlimited lifetime claims, were the insurance industry overly complacent of the long-term risks? Does the historically significant gap between medical premiums collected and claims paid out (shown in Chart 1) suggest that many medical policies were underpriced from the outset? And if so, surely the insurers would have understood that certain plans will become unsustainable over time as policyholders age and health risks increase.
If policyholders must share part of the blame of rising medical claims by exhibiting the "buffet syndrome", then surely insurers are the enablers. It is unrealistic to expect policyholders to not maximise the benefits given their right to do so. Any rational patient would opt for the best - and often the most expensive - treatments available, knowing they are unlikely to hit the caps (set by their insurers, no less). Conversely, if patients were given lower coverage limits - more in line with the price (premium) of their policies - they would be more cautious, making prudent healthcare decisions to preserve their benefits for future needs.
While a higher initial premium may result in some individuals being priced out of certain high coverage plans, it represents a fairer and more transparent allocation of resources. Underpriced policies with excessive coverage create a false sense of affordability, only for policyholders to face unaffordable premium hikes later. Instead of nudging policyholders to choose a seemingly too-good-to-be-true plan with double the benefits and marginal cost differences, correctly priced policies will ensure that policyholders select plans that reflect their true financial circumstance.
Private insurance companies are profit-driven entities, and many are listed on Bursa Malaysia. Like the listed private hospitals, they too are pressured to deliver sales and profit growth to attract investors, in order to get higher valuations and share prices, and create wealth for their shareholders.
Over-recognition of earlier excess income and unsustainably high dividend payout?
Did the need to deliver growth also incentivise them, to some degree, to over-recognise the early stage excess premiums as immediate profits? And therefore, under-allocate provisions to pool funds, whether through the underestimation of future number of claims, average claims value and/or the over-projection of future investment incomes? Are insurers now driven to raise premiums to preserve their high and unsustainable profit margins, stock valuations and prices?
Remember, insurers collect premiums exceeding expenses in the early stages of a medical insurance plan. These excess funds would be carefully managed to earn investment returns to cover the anticipated rising claims that come with ageing policyholders. But did this illusion of premiums consistently exceeding claim payouts allow insurers to recognise higher-than-they-should profits, without appearing to compromise the fund's sustainability? In so doing did they under-estimate the risks and liabilities? More importantly, did it give insurance companies the misplaced confidence to maintain a high dividend payout, instead of building capital reserves for the future?
Chart 5 compares the dividend payout ratio of life insurance companies on their Malaysian portfolio versus their respective global portfolios. We also added Takaful Malaysia and a global insurer, Tokio Marine, to the comparison. The chart shows significantly higher ratios for the three largest insurers - AIA, Great Eastern and Prudential - from their Malaysian operations compared to global operations. Moreover, note that ratios in earlier years are higher relative to more recent periods, suggesting high early profit recognition.
As a result of the high dividend payouts, when medical claims began to rise in the later years (as policyholders age), insurers now risk having insufficient reserves, flagging concerns for financial unsustainability and systemic risks - therefore, justifying the premium hikes they are imposing.
Conclusion
The escalation in medical healthcare costs is an issue of critical importance to all Malaysians. This is especially so for the middle-class urbanites, who pay taxes and are struggling to cope with the rising cost of living given that they do not qualify for government assistance. As we have written previously, the government has effectively outsourced healthcare - just as they did for education and housing - for the middle class to the private sector. The problem is that three-quarters of middle-class Malaysians (the M40) do not exhibit true middle-class spending power (consumption behaviour). As a result, the savings rate is falling. And a large slice of the population is now economically vulnerable, lacks financial security and risks falling into poverty in their old age - a subject often highlighted by our own government and the Employees Provident Fund.
Medical insurance is critical for the middle class to cope with this escalation in healthcare costs. They buy insurance with the expectations of stability and protection, for the agreed price (premium). Policyholders have faithfully paid the agreed premiums to their insurers during their young and healthy years.
The majority of the young makes little to no claims, only to be now slapped with revised and sharply higher premiums.
We understand there are many factors driving this escalation in healthcare costs, including global inflation and the rise in lifestyle diseases. Also, post-Covid-19, as people became more wary of catching life-threatening diseases and sought check-ups more frequently, private hospitals may have prescribed overtreatment to drive revenue and profits. As we explained in our previous article ("High cost of private healthcare - who is (ir)responsible and how to mitigate?" in The Edge, March 3, 2025), we are not saying the insurance companies are solely responsible for the rise in healthcare costs faced by the people. But there is asymmetry of information and bargaining power between stakeholders. Insurers have near-absolute bargaining power vis–vis policyholders and significant power over hospitals. Like banks, they operate in an oligopolistic environment. Therefore, it is incumbent on the insurance companies to do more.
Life and medical policies are bundled, marketed and sold as one. They must therefore also be evaluated as one. Medical policies are designed to collect excess premiums in the early years but over time, have deficit premiums. It is the insurance companies' responsibility to manage the risks and ensure the long-term sustainability of pool funds. Did insurers miscalculate their premiums? Did they underprice medical policies - relative to the benefits - for mass market affordability? And to increase their own competitiveness in the market to drive sales and profits, and stock valuations? Did the insurance companies over-recognise profits, pay excessive dividends in the early years and now risk insufficient reserve buffers? The truth is likely a combination of all the above.
Bank Negara's responsibility as the regulator is to prevent systemic risks, NOT guarantee insurer profits. Otherwise, insurance would be a risk-free, lucrative profit-making licence! Any other business that mispriced its products - whether due to its own errors or changing market conditions beyond its control – would have zero recourse to customers. Yes, shareholders take on this risk, but they also enjoy all the upside. Hence, they must also absorb any losses.
Simply allowing insurers to pass on escalating costs to policyholders is akin to allowing them monopolistic power. It will create a future moral hazard. Where then would be the urgency for insurers to refine their actuarial models or improve cost management strategies? Instead of designing sustainable policies, insurers will simply pass on costs to policyholders as soon as their margins are squeezed. This not only weakens the incentive for insurers to operate prudently but also undermines the fundamental purpose of insurance - to provide financial security and stability for policyholders. Because, mark our words - premiums will continue to rise going forward. And this will result in increasing the burden on the middle class. The average man has no viable choice. For years, policyholders have paid the premiums, investing substantial sums into their existing policies. Do they give all that up (terminate) and risk exorbitant medical bills in the future? Or accept the increasingly unaffordable premium hikes? As we said, policyholders have no bargaining power against either private hospitals or insurance companies. It is, ultimately, the government's responsibility to ensure all Malaysians have affordable healthcare. It is time for the government to do more to protect the neglected middle-class Malaysians.
The Malaysian Portfolio gained 0.2% for the week ended April 29. Shares for United Plantations was up 2.6% while Kim Loong Resources ended 0.9% lower. Insas Bhd - Warrants C traded unchanged. Total portfolio returns now stand at 186.3% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 17.2% over the same period, by a long, long way.
The Absolute Returns Portfolio continued to recover lost ground, up 2% for the week, lifting total returns since inception to 22.4%. The top three gainers were CrowdStrike (+11.7%), US Steel Corp (+4.3%) and Goldman Sachs (+3.7%). Tencent (-0.2%) was the only losing stock last week.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor's particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
