Comprehensive PMI is an expensive luxury. Take a fit and healthy 35-year old and the chances are the...
Comprehensive PMI is an expensive luxury. Take a fit and healthy 35-year old and the chances are they are looking at premiums in excess of £50 a month. A client over 60 is likely to pay well over £100.
Add to this the inevitable premium hikes of anywhere between 8% and 30% a year, and it is no wonder that the individual PMI market has been stagnant for more than a decade.
It is not surprising, therefore, that many potential clients interested in the benefits PMI has to offer are being priced out of the market. Nor is it any wonder that healthy policyholders are cutting their losses and lapsing their cover as premiums spiral out of control.
As a result, providers are constantly investigating new product designs that control cost without compromising cover.
While factors such as the rising cost of medical treatment cannot be controlled, policyholders' propensity to claim can. The current costs of comprehensive cover means policyholders will claim to recoup some of their costs. But the more this happens, the more the insurer pays out and the higher the premiums rise.
The insurers' solution to this has been the launch of the compulsory high excess plan. By asking the policyholder to pay an excess of between £1,000 and £5,000, either per claim or per policy year, premiums become more affordable and insurers are faced with fewer claims.
It has always been possible for policyholders to opt for excesses on their PMI, but insurers have not made a feature of this option until recently. The first plan with compulsory high excess levels was launched by WPA over a year ago and has since been followed by Standard Life Healthcare and BUPA.
Geoff Brown, chief actuary at BUPA, says: "There were three issues that we needed to address in our product - affordability, comprehensive cover and cover against premium increases. The high excess approach means premiums can be cut by up to 65%. In the past, people looking to reduce premiums opted for budget plans but had to lose out on cover."
WPA's plan, XS health, was initially launched on the internet, but is now available via intermediaries. It offers fully comprehensive cover, but policyholders must foot the first £1,500 of claims made per policy year (£3,000 if aged over 65), before the insurance kicks in.
David Ashdown, communications director at WPA, says: "Research we carried out showed that there were lots of people wanting PMI that did not want to pay the premium.
"The people in our research said they could find £1,500 or so to cover some treatment, but wanted some insurance in case something serious and costly happens."
He adds: "This has an appeal to those new to PMI and 50% of our customers so far have not had this type of cover before. Some had bought PMI in the past and lapsed it because they were healthy and had not claimed."
While £1,500 is a substantial commitment, the cost savings such an excess can achieve are impressive. A 30-year old living in London would pay £108 a year for XS health compared with £991 for WPA's comprehensive Cedar scheme. Using this example, the premium saving in two years is sufficient to cover one year's excess.
The BUPA and Standard Life Healthcare products work in a similar way. BUPA offers the choice of a £1,000 or £2,000 excess on its Fixed Price Plus range, while Standard Life Healthcare offers excesses of £1,000, £2,500 and £5,000 on its Choices product. This is backed by a free treatment information service that helps policyholders source hospitals and treatment and it will negotiate with hospitals on policyholders' behalf. It also offers an investment fund for the purpose of saving for the excess through a collaboration with Standard Life Assurance.
While high excess plans are likely to attract healthy individuals who do not think they are likely to make a claim, Mandy Blanks, press officer at Standard Life Healthcare, says the product has widespread appeal. "This product suits people that want to control their healthcare. They will use the NHS if it is available but if the NHS cannot cope and they go private they want a safety net to take care of the bigger bills."
She adds: "Older people usually have savings and investments they can call on and younger people can take advantage of the health saving fund we offer."
New and innovative PMI products have come and gone - what looks good on paper is not always welcomed by IFAs and their clients. This was demonstrated when insurers introduced six week wait plans during the mid 90s in the hope that this would encourage policyholders to use the NHS where the waiting lists were shorter than six weeks. The idea was that this would result in fewer claims for the insurer and lower premiums for the policyholder.
However, six weeks turned out to be an unrealistic target with most waiting lists more than twice this length, so claims did not fall as much as anticipated and cost savings were small. As a result, most providers were forced to pull their products only a few years after launch.
However, the outlook for high excess plans is more encouraging. Shaun Newcomb, proprietor at the protection IFA, Healthguard, says this type of product has proved popular with his clients. "When you consider the rising cost of PMI this is the sort of approach that is needed. More and more people, who in the past would not have considered an excess, are now using this approach. Until now, the only option has been a budget plan that has no outpatient benefits."
As medical science evolves, more and more treatments and procedures are being performed on an outpatient basis, so budget plans are likely to become even less appropriate.
However, some in the market are more cautious. Louise Zucchi, public relations manager at Norwich Union Healthcare, says the value of excesses ultimately depends on what happens to the policyholder, and this is something that, unfortunately we cannot second guess.
She says: "If you need major heart surgery costing £40,000 and you pay an excess of £5,000, you will probably be satisfied with the plan. However, you could end up never getting anything back in return for the premium if the excess is always larger than the claim."
But perhaps the most important determinant of their value is the way the excess is applied.
Stephen Walker, proprietor at Medical Insurance Services, says: "An excess can be a good way of reducing the premium as long as the excess is affordable. It is better than a budget plan as benefits are not compromised. However, people must look very carefully at the policy first to determine whether the excess is per claim or per policy year. If the excess is per claim and there are several claims in a year then it can work out to be very expensive."
Paying the excess
While WPA will only charge an excess per policy year, both BUPA and Standard Life Healthcare apply theirs per claim.
But Blanks says that even though an excess is charged on every claim the plan can provide good value if the policyholder only requires 'safety-net' cover. "This is good for crisis cover. If something serious happened, like cancer for example, the excess would soon be superceded," she says.
Because the excess is charged by claim, Brown says that the product will not be suited to everyone. "These products are not for those that cannot afford the excess - if treatment runs over a long period they will have to keep finding the excess."
This is a concern for Derry Andrews, managing director at Clinicare. "Most people do not think about paying the excess more than once. They think they will have one operation and pay one excess and that is it. With an excess the risk is being carried by the policyholder."
In an attempt to take the edge off this risk BUPA has worked a critical illness benefit into its policy. This means that should the policyholder require treatment for a condition covered by the critical illness policy, a lump sum payment will be made that will cover the excess.
For healthy people who are not likely to make regular claims, high excess PMI may be a practical alternative to comprehensive products. But the downside is that if claims are frequent, or treatment lengthy, policyholders may find themselves paying out an awful lot in excesses. And once health problems set in, policyholders will not be able to transfer onto a comprehensive product, as existing conditions would not be covered.
'Stop-loss' insurance
While high excess products may have their faults they can play a role in the growing self-pay market. According to Laing and Buisson, self-pay is likely to account for 25% of all private healthcare spending by 2002/03.
A high excess plan could help those that do not mind paying for their own treatment but would like some 'stop-loss' insurance in case costs escalate out of their budget. This may prove to be an effective way for IFAs to increase their PMI sales.
Blanks says: "A £5,000 excess could be attractive to people wanting to self-pay. The cost of some procedures can be daunting. A knee replacement, for example, costs around £7,400 and a replacement heart valve £14,500. Cancer treatment will go well over £20,000. Even those wanting to self-pay may find this falls out of their price range. It is reassuring to know that once they have spent £5,000 that they are covered."
Nye Jones, channel development manager at PPP healthcare, says high excess products do have the potential to be used as stop-loss insurance in the self-pay market, but says changes still need to be made to make them more suitable.
"I think the products currently available are prevented from being used in this way as the policyholder still has an open-ended liability if they have repeated claims. There is still a need for more innovation in terms of product design. People need the assurance of knowing how much of their capital is exposed," he says.
The very nature of a product that aims to reduce premiums is going to have flaws. Comprehensive cover comes at a price, and if the cost needs to fall, corners have to be cut. But in a market where comprehensive cover is out of many peoples' price range, any attempts that can bring such a desired benefit to a wider audience have to be welcomed.
However, customer expectations must fall in line with the reduction in premiums, and it is here that the advice of an IFA is essential. Policyholders need to be aware of their liabilities and the limits to their cover before buying their policy and not when they come to claim.
Rachel Williams is deputy editor
