Despite being a highly valued employee benefit, the take-up of corporate private healthcare schemes remains very low. Peter Madigan reports
When it comes to employee benefits in the UK, company-paid pension plans are far and away the benefit most frequently provided by employers. Yet, research from Sterry Communications has shown that employees value a company paid private medical insurance plan (PMI) as much as a pension, with both polling 40% of the vote in a recent survey. While almost all employers offer some kind of pension scheme to their staff, only 7.7% of the UK population are covered under a company paid PMI plan.
During the favourable economic climate of the mid-to-late 90s, company-paid subscriber numbers grew by an impressive 23%. However, 2001 was the last year of real growth and since then the market has failed to recover its previous buoyancy despite the moderate economic growth in recent years.
"Anecdotally, 2004 was a better year than previous ones; it was a year that saw a steadying of the ship," says Brian Mulreany, marketing director at Essential Healthcare. "Our commission income rose 18% last year and I think similar growth was seen across the board."
All PMI providers report the strongest growth in subscriber numbers in several years. Standard Life Healthcare saw company paid PMI subscriptions rise by 4-5% while Norwich Union Healthcare saw growth of 5-6% and BUPA witnessed "positive growth". Although no independent figures have been released, most providers and advisers agree that 2004 was yet another year of static sales for the PMI market as a whole, even though individual companies performed well.
"The reason for this is that only around 40% of our business in 2004 was new business, while the remaining 60% came from switch business as existing PMI customers changed providers," reveals Claire Ginnelly, national intermediary sales manager at Standard Life Healthcare.
Other providers confirm the prevalence of switch business. "Last year we saw strong sales in the SME market with around 15-20% of our new business coming from the sector and the remaining 80% being switch business," says Mark Noble, head of intermediary sales at Norwich Union Healthcare.
Stagnant
Similarly, advisers also report that a large proportion of their time is taken up by securing business from competitors. "The majority of our schemes are renewed but our new business predominantly comes from the take over of existing schemes via other IFAs," explains Graham Laverick, managing director at WR Financial Management. If the bulk of intermediaries' time is spent chasing existing PMI customers for their business, it is hardly surprising that the market has turned stagnant. Perhaps a greater emphasis on targeting new clients could give the group market a much-needed jolt.
The problem of lacklustre subscription is compounded by evidence that almost all activity in the PMI sector comes from switch business. The Laing & Buisson Health and Care Sector Report 2004 reveals that company paid new business stood at 23% in 2003, a figure that was accompanied by a 23% lapse rate. Included in this figure are customers who simply switched providers and although there is no way to separate the genuine lapsed business from clients who are switching, most advisers are adamant that most of this figure is switch business. "You don't simply lose companies unless there's a significant development such as a merger or bankruptcy. I would say at most only 1% of policies truly lapse, if that," says Mulreany.
This is good news for advisers, as it seems to suggest that with such a small lapse rate, employers realise the cost-effectiveness of PMI once it is in place. More troubling however, is the implication that the group PMI market is simply sustaining itself on the regurgitation of existing business, passing clients from one provider to the next. With nothing to suggest that this cycle will be broken in 2005, it is more important than ever that advisers take the initiative in attracting new business into the potentially ailing sector.
"The real growth opportunities now are in the SME sector. We've been getting a lot of business from small white collar firms such as IT and PR companies who are happy to look for PMI over the internet," says Mulreany. Although it is undoubtedly good news that employers are actively seeking PMI for their staff, advisers cannot be complacent. If the group PMI sector is to be reinvigorated it is crucial they illustrate to employers how much of an employee benefit private healthcare actually is.
"Companies just need to know two points when they're sold private medical insurance," says Mulreany. "The first is that they will look like a caring employer so their staff will be happier and the second is that in the event that an employee does get ill, it will get them treated and back to work as quickly and as cheaply as possible."
Demonstrating PMI to be a valuable benefit rather than an unnecessary expense appears to be key. "Intermediaries should be placing greater emphasis on private medical insurance as an absence management tool," suggests Noble. "Many providers also offer 'virgin' companies some sort of financial incentive such as a no claims bonus or discount."
Such discounts, while a good short-term incentive for employers, have been identified by some observers as a contributing factor to the PMI market's current woes. Laing & Buisson suggests that competitive pricing in the late 90s contributed to the surge in PMI business. In 2001, insurers had to raise premiums to ensure profits were realised and these increases may be a major factor in the market's current lack of growth.
At best, these discounts are a short-term solution and prices will inevitably have to rise sooner or later, discouraging new subscribers and stagnating the market once again.
Confidence
If providers are having difficulty enticing new clients into the market they are also having trouble keeping existing clients on their books. While PMI subscriptions have faltered over the last four years, self-insured medical expense schemes, such as trusts, have grown strongly of late. Although trust subscriptions dipped in 2003, interest appeared to swell in 2004 leaving insurers and advisers unsure about just how serious a threat trust schemes are to the PMI market.
"Non-insured schemes and trusts present little to worry about since they are not suitable for the majority of the market. They are only a possibility for large companies that constitute a relatively small part of the marketplace," claims Marco Bannerman, head of corporate sales at BUPA.
It is easy to see why large companies find trust schemes such an attractive option. "I would estimate that most large employers would begin to reassess their PMI provision when their premium reaches about £300,000 a year," says Noble. "Most clients would be able to make a 6% saving simply by switching over to a trust but I would agree that only large clients can self-insure safely. A small company could be sunk by one or two expensive claims in the same year."
In spite of the disappointing performance of the group PMI sector, it is not all bad news for the market. Last month, cash plan provider HSA announced it had acquired BCWA, the Bristol-based PMI mutual. The acquisition, which will see the provider claim a 3% share of the PMI market, seems to confirm that confidence in the long-term prospects of the PMI market is far from wavering.
Despite the problems that have beset the group PMI market it would be safe to say that it does work as an effective employee benefit that not only adds value to a business but also increases staff morale and saves money. The fact that the true lapse rate for group PMI hovers around 1-2% shows employers find it an effective employee benefit. The challenge for advisers is simply to get employers to buy. Once they have, the product itself ensures that they keep the benefit in place.
New companies taking out PMI cover should be pushing subscriber numbers up, however negligibly. The reality that numbers aren't increasing seems to indicate that this new business, predominantly coming from the SME sector, is simply plugging a gap - perhaps the one left by large companies moving over to trust schemes. Advisers and providers will have to work together to attract new clients and retain large companies from abandoning PMI in favour of the self-insured option. By stopping the haemorrhage of existing business at the large corporate end of the market and providing a much needed transfusion of new blood at the SME end, perhaps the group PMI sector will see growth resume.
COVER notes
• Only 7.7% of the UK population are covered under a company paid PMI plan.
• Real growth opportunities lie in the small to medium-sized enterprise sector.
• Despite the rise in popularity of trust funds, they are ideally best suited for larger companies that represent a small part of the market.
