Second time lucky

Private medical insurance (PMI) has a reputation among consumers as being too expensive and a reputation among IFAs as being a complicated product to advise on. This combination does not bode well for sales levels and, unsurprisingly, research analyst Laing & Buisson's latest figures suggest the market has contracted once more.

Sales are suffering simply because the market has a bad image. If consumers and advisers can dispel these myths, both parties might be able to reap real benefits.

New breed

A new breed of budget products has emerged in the last few years that is helping to push premiums down, while keeping cover simple.

According to Derry Andrews, managing director of Clinicare, the market has a clear message it needs to drive though.

'The main changes seen in the market recently are that it has become much more competitive. However, the concept the consumer has is that private medical insurance is an expensive luxury, whereas it gives exceptional value for money. For every pound paid through premiums, around 85 pence goes back in claims,' he says.

Hazel Gregory, managing director at Medical Insurance Services, says advisers should now find it a rewarding market to work in.

'Looking back over the past decade, there has been a big shake-up. There used to be one policy to fit all, whereas now we have seen some really innovative products coming forward. So it does help enormously from a broker's point of view, to be able to offer such a wide range of products ' from something all-singing and all-dancing to self-pay products. An intermediary coming into the market now is able to tailor products quite considerably,' she says.

Obvious advances in technology mean that it is easier to learn about the market and source products. There is a plethora of information available online via insurers' websites, most of which allow advisers to access online quotes and offer time-saving services such as case tracking.

There is also an industry-wide sourcing system dedicated to the PMI market ' MediQuote. Although not all providers are signed up to the system, it is still a useful tool and one that is expected to expand over the coming years. For advisers entering the market for the first time, most providers offer extensive support, from product information to access to training and support services.

One reason that may cause advisers to be deterred from entering the market is confusion over regulation issues. The PMI market, like all other general insurances, was due to come under the wing of the General Insurance Standards Council (GISC). However, it will now be regulated by the Financial Services Authority (FSA) from 2004. Until then, it is uncertain how regulation will pan out ' and more importantly, what it will cost advisers working in the market.

As Gregory says: 'It used to be relatively inexpensive for advisers to enter the market. However, now we have regulatory bodies, there are fees to be paid and there is professional indemnity insurance to be had, so there is an actual expense there that perhaps wasn't there a few years ago. Certainly, we are all waiting to see what happens with the FSA and what that may bring.'

Other rewards

However, all is not doom and gloom even if the FSA's regime makes advisers dig a little deeper in their pockets to keep compliant. Commission levels paid on PMI products have increased and according to Iain McMillan, national sales manager at Standard Life Healthcare (SLH), advisers can reap lucrative rewards.

'The commission on products is now also a lot more attractive than it was a few years ago. Advisers can now get 30% initial commission on an individual PMI policy and then renewal commission each year after that,' he says.

So what can the market offer clients in terms of cost? According to Carolyn Derrington at Norwich Union Healthcare (NUH), there is a myriad of options available to help combat premium hikes.

'We have widened the range of budget propositions available over the last two to five years. For almost every product option, customers can choose a lower cost alternative,' she says.

The market has experienced a swing towards high excess products. Policies where the client pays for outpatient treatment but is covered for inpatient treatment, or full comprehensive policies with a high excess ' which also means they pick up the bill for the outpatient treatment ' are the most popular, according to Gregory.

It seems people want to know that should they experience a major health problem, the insurance company will pay. However, most clients are prepared to pay for more minor treatments if it means premiums are cheaper.

As Gregory says: 'People still look for comprehensive cover, but what they really want is an excess. People seem to want a shared situation when it comes to claim. This helps enormously to keep premiums competitive.' Almost all providers now offer a high excess alternative to traditional PMI plans.

Growth areas

Self-pay products are the other real growth area in the market. People seem keen to save their own health fund instead of putting the same money towards traditional premiums ' that way they feel that they will be getting at least some of their money back if they never need to claim. With the cost of medical treatment continually increasing, it is the very few who can afford to save a fund that could cover every eventuality. This is where insurers have seized the opportunity to offer a safety net for self-payers and cash in on the growing market.

McMillan says: 'There will always be a market for traditional private medical insurance plans, but the statistics you see on self-pay show it is growing every year. The number of people self-paying in the UK has risen from 180,000 people two years ago to 250,000 people paying for hospital treatment without insurance this year. Although the individual market is contracting, the self-pay market is working to buck this trend. People want a safety net rather than paying for it all.'

Self-pay products can be particularly rewarding for advisers as clients will also need to set up some kind of saving vehicle for clients. Indeed, McMillain says it was with the IFA market in mind SLH launched Choices, its self-pay range which is now enjoying buoyant sales.

Another product that has received much interest from clients is Western Provident Association's (WPA) Self-Pay Protect product. Simplicity is key with this product, customers choose to cover 30%,50% or 75% of their treatment costs ' paying the rest of the bill themselves.

According to Charlie MacEwan, head of communications at WPA, this not only brings premiums down, but also helps reduce claims.

'The problem for the private medical insurance market is that premiums are increasing ahead of inflation. This is because treatment that once needed a walking stick now requires an MRI scan. We've tried to combat cost by giving clients shared responsibility for the claim with insurers. This makes customers question cost when claiming, encouraging them not to go overboard,' he says.

Age capping

Age-related premium hikes have also made PMI a hard sale for advisers in the past. However, there are a number of providers that now offer age caps to help make premiums more palatable.

Gregory says this is a benefit clients are becoming increasingly interested in.

'People are very interested in cost ' not just looking at premiums now ' but how much it is going to cost them in later life. We've found attractive products with age caps. Exeter Friendly Society, NUH and Permanent have products with an age-at-entry cap. If you do a premium projection based on current rates, it is surprising people look to their old age because that is when they think they'll need cover. People want to know how much it will cost in the future,' she says.

Despite warnings over consumer confusion surrounding moratoriums by the Office of Fair Trading (OFT) several years ago, providers are still offering moratorium products and they may still offer the best solution for clients with ailments unlikely to become chronic.

Derrington says: 'A moratorium can be the best option for some customers, particularly if they've had an injury ' such as a broken leg ' rather than an illness. This could be better than an exclusion for an ailment that could have disappeared in a couple of years. The advantage of a moratoria is that if the customer is free from treatment and advice after this period, the policy will still cover you for that condition.'

Despite NUH writing around 40% of its total PMI business with moratorium, it does not offer it through advisers due to the OFT's concerns. So a thorough product search may be needed to find providers offering moratorium products through intermediary channels.

There are other approaches to pre-existing conditions, such as extra loadings, so there are options out there.

Andrews says: 'One method of underwriting that we have adopted is applying an additional premium to cover adverse risk. If someone has asthma, for example, they can pay extra to get cover for asthma-related conditions.'

Other innovations on the PMI market include individual underwriting, which takes into account lifestyle factors when rating schemes. BUPA is currently the only provider to offer this through its product Heartbeat. PPP healthcare has been piloting a similar product, Unique, for over a year and plans to roll out the product in six months' time.

Although individual underwriting can be advantageous for the right client ' for example, the young and the healthy ' these products have not been so popular among advisers. First, there are views these products inevitably mean more paperwork and second, advisers cannot get an instant quote for comparison purposes.

One area experiencing unprecedented growth is the small group PMI market. More advisers are realising the advantages of this market ' it gives great opportunities for associated product sales and drives individual costs down. Advisers speaking to companies about pension schemes are finding group PMI an easy and valuable sale.

'After non-contributory pensions, company private medical insurance policies are the most sought-after employee benefit. It is a recruitment and a retention tool. For a small company in particular you need employees back at work as soon as possible ' they can't afford not to have protection,' says McMillan.

Like the individual market, there is a huge choice of products out there aimed at pushing down costs for group schemes. More sophisticated risk pooling is allowing smaller companies to take advantage of the kind of premiums only larger groups would be able to benefit from just a few years ago.

For advisers who have yet to make their first leap into the PMI market, it seems there has never been a better time to do so.

Kirstie Redford is deputy editor