Rising premiums and interest rates have done little to free up consumers' disposable income, so insurers are offering cheaper, bespoke plans to redress the balance. Edward Murray reports
Spiralling premiums have hit the private medical insurance (PMI) market hard in recent years, and although product innovation and budget PMI policies may stem the flow of consumers turning their back on the market, there is a long way to go before the industry can talk about a recovery.
According to information analyst Datamonitor, average individual premiums were just under £800 in 1999, but had risen by almost 55% to just over £1,200 in 2005. For an insurance seen by most people as a luxury product, it is no surprise that such a rise has been a bitter pill to swallow for consumers.
The positive news is that providers seem to have slowed down premium inflation and, in 2005, it had been reduced to 2.7%, according to Datamonitor. Given that it has been as high as 8.9% in previous years, this is a welcome development, and the introduction of specific policies, tailored to offer a limited amount of cover at affordable prices would certainly seem to be having quite an impact.
While providers may have applied the brakes, they have not managed to stop the decline in subscriber numbers and 2005 was the ninth consecutive year in a row that figures had fallen. There is no doubt that this has made for depressing reading, but, again, the hope is that the rate of decline is falling.
The big question is now whether the PMI market can turn a slowing decline into a genuine recovery and begin to build its client base in the years to come. If it is to do this, there is no question that budget PMI policies will have a huge part to play and they already seem to be helping.
Stephen Walker, director at Medical Insurance Services, is under no illusions as to the transformation the PMI market has undergone in recent years. "The market has moved forward in leaps and bounds over the last two years, with a rush of new products that all address the affordability factor."
Different insurers have taken different approaches and, he adds: "This has been achieved in a number of ways: traditional excess options, no-claims discounts, low-claims discounts, lifestyle discounts, managed care, shared responsibility and modular products that enable consumers to match benefits according to their budget."
In short, providers have brought a level of flexibility and choice to their cover that was not present in the past, and the possibilities are beginning to feed through to the end consumer.
As part of their education message, providers have been forced to advertise what they are offering to consumers and this has helped drive an awareness of what is on the market. Admittedly, this has been driven by the huge amount of revenue put into marketing by PruHealth in the last 12 months or so, but it has had a positive impact on raising profiles across the industry.
Dave Priestley, sales director at the provider, is acutely aware of the problems being faced in the PMI market and how subscriber numbers have fallen, and he comments: "Between 1995 and 2005, the number of individual PMI subscribers decreased by just under 18% to 1.16 million. Typically, insurers have sought to address the issue of affordability and decreasing subscriber numbers in the individual PMI market through the launch of lower-cost PMI plans offering reduced cover or reduced hospital access and pricing options, such as high excesses, no-claims discounts and six-week options, which only pay for inpatient or day-case treatment when the NHS waiting time for that treatment is six weeks or more."
It is not so much that there is something wrong with this approach, but rather PruHealth feels there is a different approach that will work more effectively. It is in taking this different tack that the provider has been forced into spending such large amounts on marketing, as it has sought to ensure consumers realise the choice that is on offer and the difference it can make to them.
PruHealth believes the best way to keep PMI premiums affordable is by rewarding people who make the effort to live a healthier life. For that reason, it has devised a system whereby policyholders can bring down their premiums by engaging in its Vitality scheme.
The idea is that by giving people an incentive to live a healthier life, they will have less need for the PMI cover they have bought and so premiums can be lowered on a sustainable basis.
Priestley says: "PMI is typically viewed as something for those who are unwell, we wanted to change that notion and make it applicable for everybody by rewarding all our policyholders for looking after their health and wellbeing. By fully engaging in our Vitality programme and making a sustained effort to actively look after their health, customers can increase this discount to 50%, 75% or even 100% of their current year's premiums towards the cost of the next year's cover."
There is no doubt that such discounts can make a substantial impact on the amount policyholders have to pay, and quickly add up to substantial savings. Indeed, it is not untypical for starter discounts of up to 30% to be offered and if no claim is made in the first year, then a discount in the region of 25% can be expected on the next year's premium.
Walker certainly believes the move to more flexible policies that have moved away from the traditional view of PMI is here to stay and will develop further in future years. Insurers are getting better at managing their own costs and have also taken huge steps in creating a more efficient environment for their policyholders to receive the treatment they need, again helping them to manage overall costs.
As he says: "I believe the trend to create more affordable products will continue, with insurers utilising managed care to contain costs and possibly developing products that are even more flexible, by using modules within modules to provide bespoke policies."
There is little doubt that providers have realised that simply offering a standard level of cover that proves too rich for consumers' blood is not going to drive the kind of volume they are looking for.
They have therefore embraced a risk management approach and invited consumers to take out cover for risks they perceive to be the most prevalent. Rather than try to cover every eventuality, consumers are increasingly taking out a level of cover that gives them a certain peace of mind, without breaking the bank.
Ben Faulkner, a spokesman at Axa PPP, comments: "We brought to market a low-cost medical insurance policy for people aged 55 and over, called Retirement Essentials, that covers treatment for four types of conditions that commonly affect older people - heart and eye conditions, joint replacements and hernia repair - costing around a third of the price of traditional cover."
Similarly, the provider has cover designed for people facing the pressures of mortgages or who have young families. One such policy provides up to £250,000 of healthcare benefits for policyholders struck down by a road traffic accident, heart disease, cancer or a stroke. Again, the idea is to cover major health issues, without having to take out a policy offering a level of cover that simply will not be required by the vast majority of holders at a price they are unable to afford.
Like many other providers, Axa PPP has also introduced policies that ensure treatment not available on the NHS within six weeks can then be covered privately. Explaining the effect this has on premiums, Faulkner says: "A 30-year-old who opts for a £200 excess with our Assure plan, would pay around £22 a month. They would pay around £15 a month if they chose our 'six-week' version of the policy."
There is little doubt that providers have made huge advances in the types of products they offer and that, for those looking at PMI on a budget, there is cover available. For brokers, the trick is going to be to match the needs of the client with the levels of cover that providers are offering and make sure they do not sign them up to policies that simply do not provide for the most likely problems they will face.
However, brokers will also be cursing the fact that the improvement in options for their clients in the PMI market has coincided with the rising interest rates experienced since the summer of 2003.
Premiums may be falling and cover may be more affordable, but consumers' disposable income is being squeezed and the Bank of England looks likely to wring a little more out of their pockets before it lets up. Getting consumers to spend what spare funds they have on PMI will remain difficult in the months ahead, despite the improvements that have been seen in the products that are available and the pricing structures that have been put in place.
Edward Murray is a freelance journalist
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