After eight consecutive years losing subscribers, is it time to declare a state of emergency in the individual private medical insurance market? Peter Madigan investigates Click here to download pdf
It seems the individual private medical insurance (PMI) market is in a state of crisis.
For the last eight years both advisers and providers have referred to 'sluggish growth' and a 'static market', but it appears that the sector is far from stationary – it is in full blown decline.
According to recent figures from Laing & Buisson, both the number of subscribers and persons covered under individual PMI policies has been falling every year since 1996, and the market shed an astonishing 700,000 lives between 1996 and 2003.
Preliminary figures for 2004 from the Association of British Insurers (ABI), paints an even bleaker picture with the subscriber numbers for individual PMI standing at just 1,071,141 with just 1,784,480 lives covered, an incredible fall from the 2.
6 million lives insured nine years ago.
Loss of Lives Figures such as these cast doubts on whether the industry can continue to describe the sector as static when it has lost almost a quarter of all lives covered in just a seven year period.
If the market continues to lose policyholders at the current rate, the very existence of individual PMI in its current form may be under threat.
So where are all the old policyholders going, and why have the new ones failed to materialise? "I think this can be attributed to the increase in the number of players in the group private medical insurance market and the fact that more individuals are qualifying for company paid health insurance," says Jason Pettit, head of sales operations for personal business at BUPA.
This assessment is a popular one among insurers and is echoed by Claire Ginnelly, head of intermediary sales at Standard Life Healthcare.
"The individual private medical insurance market has dipped slightly with a fall in the number of subscribers. However, this has been compensated for by a slight rise in the number of corporate customers," she says.
Although this may go some way towards explaining the losses, there is still a discrepancy between the performance of the individual and group markets in the last eight years.
While individual PMI lost 701,000 lives between 1996 and 2003, the group sector was boosted by 585,000 new lives.
This leaves 115,000 lives unaccounted for.
Could all of these people have died or allowed their policies to lapse in the interim? "Undoubtedly the group sector is grabbing some business from the individual market but it would be very difficult to quantify how big this figure is," says Pettit.
It is important to note that the individual PMI market's current woes are not solely down to the loss of existing customers, but also the failure to attract new ones.
The simplest means to deter potential customers and drive existing clients to decide against renewing their policy is to raise premiums.
Looking once again at Laing & Buisson figures, in 1996 the average individual subscription income per subscriber was £683.
By 2003 that figure had almost doubled to £1,224.
Providers stress that medical inflation is placing upward pressure on premiums that they have no power to control, yet even when discussing the subject, insurers find it hard to agree precisely what costs are covered under the term medical inflation, let alone how much it is.
"Medical inflation is the result of a number of things ranging from price increases by doctors and consultants to better and more expensive drugs and diagnostic techniques becoming available and a small element of pure provider cost," says Pettit.
"We prefer claims cost inflation to the term 'medical inflation' which we believe is a misnomer as it infers paying more today than you paid yesterday for the same thing," says Nye Jones, head of intermediary development at AXA PPP healthcare.
"For some years we have been able to hold down the increases in the cost of many procedures, such as hip replacements, below the increases in the retail price index." As for the actual level of medical inflation, estimates vary from 7% – 12%, which gives some indication as to how vague a science calculating the figure really is.
Even so, if a 7% annual inflation rate is the most conservative estimate, it is hardly surprising that costs are spiralling and individuals are dumping their cover.
Rejuvenation Despite the tough conditions currently being felt in the individual PMI market, this hasn't stopped new entrants wading in.
The biggest of the new players is undoubtedly PruHealth which made headlines with its groundbreaking fitness-related premiums concept.
"PruHealth's entry has been watched with interest and if this approach takes off, I'm sure other insurers will adopt and develop the concept, although at this stage the jury is still out," says Alex Jackson, marketing communications executive at CS Healthcare.
PruHealth's approach is typical of the innovative new products that have emerged in the market in the last few years as providers have sought to streamline their propositions in difficult circumstances.
Increasingly, insurers are developing low-cost plans that work alongside the NHS by excluding cover in areas that the NHS is particularly strong in treating, such as AXA PPP healthcare's, Retirement Essentials, which excludes cancer therapy.
The first step in any attempt to rejuvenate the individual PMI market must be to bring costs under control.
While some providers have attempted to do this by restricting various aspects of cover, the biggest cost control task facing insurers is to formulate an effective response to the price increases that medical inflation inevitably brings.
A policy that sees premiums increase by 9% – 10% annually is clearly unsustainable, but some providers are exploring new ways of managing costs.
"For the last five years we have been able to keep premium increases on our core products to less than 5% because most of our members on these schemes have a co-insurance option which shares the cost of treatment between us and the member," says Jackson.
If providers are to fight back against dropping sales the first battle will have to take place on the bottom line.
Another important move is to boost transparency in the sector to increase public confidence.
It is understandable that the average policyholder may have difficulty accepting that a 10% annual price increase is due solely to medical advances.
The belief that they are being taken advantage of, however misguided, could drive several otherwise happy policyholders to dump their cover.
A feasible means of restoring faith among clients is to establish an independent medical inflation index.
Although such a move would do nothing to slow inflation it will reassure sceptical customers that they are not being taken for a ride and may even lower the current lapse rate.
In 2001, a working party set up by the Institute of Actuaries recommended the introduction of medical inflation indices after research suggested strong support from organisations as diverse as the ABI, the Financial Ombudsman Service and the Consumer's Association.
In the event however, nothing came of the proposal and the medical inflation index remains on the drawing board.
Pensions threat The immediate future looks no brighter for individual PMI than the last five years.
In fact, the coming months may be the most challenging the PMI market has faced in years due to the looming introduction of pension simplification in April 2006.
The new system may well divert general IFAs from focusing on PMI, meaning that even fewer intermediaries will be selling plans.
Perhaps an even bigger threat is to be found in the corporate sector.
As advisers visit businesses to reassess their pension provision under the new regime, there is the possibility that they will attempt to cross-sell PMI thereby further pulling people out of the individual market.
If anything, the coming 12 months may prove the toughest yet, and although the providers profess confidence, intermediaries admit they have other things on their minds than healthcare.
"We will be doing a lot of non-private medical insurance business this year, particularly pension planning pre A-day," says Ian Howell, IFA at Capital Tower.
"Private medical insurance needs to be actively marketed by companies to ensure that we continue to recommend it to our clients. More marketing material would help us in our job," adds Howell.
The immediate future for individual PMI appears to lie in streamlined niche products that target a particular section of the market.
After such a prolonged slump it is relatively safe to assume that the traditional PMI model has exhausted its possibilities and new innovative products are necessary to both control spiralling costs and take advantage of the healthcare needs of those who fall beyond the reach of corporate PMI plans.
The raft of new products that the market so desperately needs will only serve to further confuse a public already flailing in a market awash with plans of all shapes and sizes, meaning that the intermediary will have a greater role to play than ever before.
"There are plenty of opportunities for intermediaries with the market in its current state. If they have the right products, innovation and pricing, private medical insurance could become more accessible to a wider section of the population," says Berni Ryan, public relations manager at Legal and General.
This may well be true but the message coming from the intermediary community is resoundingly clear.
"There are growth opportunities but we need marketing to help us with sales," says Howell.
"We need more support." Whether they get that support is for providers to decide, but either way, developments over the coming year may well decide the fate of this already beleaguered market.
