According to Alistair Sclare, outdated industry practices are holding back the private medical insurance market from embracing new technologies - but this could change, he says.
Electronic trading has the potential to transform the group private medical insurance (PMI) sector. If the industry can harness the massive potential of technology, it can streamline processes, enhance communications and create a market that is characterised by enhanced efficiency at all points in the transaction and throughout the life of the policy.
Insurers and intermediaries would both benefit but, even more importantly, policyholders would enjoy the results of reduced costs and a more accurate service.
In today's regulated world, the sector cannot ignore the requirement to treat its customers fairly - and keeping costs low should be a given. How sympathetic will the Financial Services Authority (FSA) be when the PMI industry tries to justify the relative lack of sophistication in its processes compared with the wider insurance arena?
When looking at the PMI sector, technology is the elephant in the room. It is readily available, affordable and its potential benefits are significant. It is well embedded in other sectors, where it offers numerous tangible advantages. So why is the PMI community - or a significant part of it - still dragging its feet? When is it finally going to mature as a fully functioning, capable, customer-focused, modern sector?
A structural reform and a willingness to adapt is needed, but it is not as if the sector needs to start at the beginning. For example, the imarket facility, which is an e-commerce portal, already links insurers and intermediaries for commercial lines of business - all the PMI market needs to do is reconfigure such a system to meet its own specifications. However, surprisingly, this is not the major task. The really big issue is getting everyone to participate. What is lacking is market-wide support for such an initiative, and it will only work if such support is forthcoming.
This is especially the case when considering the effects that e-commerce has had on the commercial lines market. While in the past information had to be keyed in many times, it is now only entered once. Brokers can obtain quotes instantly and convert proposals into policies online in the time it takes to complete the typing. Compare that to the time it used to take, or to the PMI market's continued fascination with fax machines.
E-business also has the potential to have a major impact on expenses. According to imarket, it used to cost anything up to 35 pence in the pound to process a piece of commercial insurance, but this can now be reduced to as little as 10 pence. No wonder switched-on PMI brokers are green with envy.
If someone from the PMI market, either broker or insurer, talks to someone who works in general insurance (GI) about the way business is transacted, the GI individual will usually be astonished that PMI has so far failed to capitalise on the benefits of using technology. In addition, the PMI individual will probably struggle to come up with a convincing argument as to why progress has been so limited.
As an insurer with a foot in both camps, such conversations can happen between colleagues in the same building, and it is embarrassing for a PMI practitioner to appear so far off the pace.
The explanation for this unsatisfactory state of affairs comes down to one word - standards. Imarket is a market-wide initiative, and it works because parties from all sides agree a set of standards governing the way that business is transacted. With agreement in place, the sector can set about creating a facility that everyone can use, and market participants can see business flow if they can agree what information should be shared.
In the PMI market, as in GI, brokers need claims information so they can discuss the performance of accounts with policyholders, and provide all insurers with an opportunity to quote on the risk. However, unfortunately, most PMI insurers refuse to share this information. Therefore, the potential effectiveness of the system fails at the first hurdle because sharing claims information is fundamental to the success of electronic trading.
Insurers are coy about disclosing information because they do not want rivals to poach their best clients. On the face of it, there is some logic to this argument. However, this logic falters when it is compared with the GI market experience where firms routinely share claims information at renewal via the intermediary channel. This makes the market more efficient and it increases the benign effect of competition by enabling brokers to judge between different insurers and choose the best combination of cover, price, service and support for their clients.
Could it be that PMI has a level of complexity and sophistication that prevents the adoption of e-trading? This argument is flimsy - both PMI and GI policies run for a year, they have the same mid-term adjustments and renewal processes. There may be differences, but they are not chalk and cheese.
Missing out
So why should PMI brokers and progressive PMI insurers put up with the antiquated communications and business processing arrangements currently in place? Why should PMI policyholders continue to be denied the many benefits that could be obtained by mirroring the progress made elsewhere - progress that they may have viewed for themselves when arranging other insurances?
It should be remembered that the individuals who buy corporate PMI are also likely to buy personal insurances. Sooner or later they are going to question why PMI is so anachronistic when compared with other classes of insurance, where buying online is common.
Furthermore, surely the regulator will not be greatly impressed by the PMI market's assertion that it has always acted in this way. As progress is made elsewhere in the insurance market, the PMI sector has no choice but to keep up or edge further towards non-compliance with the FSA's Treating Customers Fairly initiative.
In order to treat a customer fairly, a broker needs to access as wide a section of the market as possible to secure the best terms. However, because of the failure to share claims information, brokers are effectively asking competitor insurers to quote blind. This results in potential insurers erring on the side of caution when setting premiums. Artificially and unnecessarily high premiums do not sound fair in anyone's rulebook.
The FSA may also be intrigued to find that, despite most risks being quoted-on before each renewal, less than 10% of the market moves each year. So while there is a high volume of quotations, the conversion rate is low, especially when considering the high expense ratio compared with the rest of the switched-on GI market. It is impossible to deny that online quotations would speed up the process, make quotes more accurate and, ultimately, make the products better value.
Homogenisation is another spectre summoned up by those who object to an electronic solution in the PMI market - they claim that all insurers will effectively end up selling the same commoditised product and price will dominate. However, e-business does not mean a firm cannot differentiate its products.
Professional brokers work hard to help clients reduce the number of claims they make, and for this they need claims data. This can be difficult with PMI because of confidentiality requirements, but brokers can still draw valuable conclusions by observing the trends and patterns revealed by the statistics. The ability to complete this valuable work is impossible if the data is withheld.
The need for a lean, efficient service that treats customers fairly is obvious. A similar challenge now exists in the health insurance arena, and there is an urgent need to make it happen. The one positive fact to which the sector can cling is that a ready-made, proven solution already exists and is there to help.
So it is time to ditch the excuses and start making some real progress. The industry has let an opportunity get away, through imarket. However, another is being considered with the support of a number of insurers. Let's not make the same mistake twice. When it comes to business processing, the only way the PMI sector is different from the insurance market is in how inefficient it is. n
Alistair Sclare is head of healthcare underwriting at Groupama Healthcare
