With the PMI market already concentrated among very few major players, further industry consolidation could alter a delicate balance of power, according to Claire Ginnelly
The UK insurance market is currently undergoing constant change, and there is no exception when it comes to private medical insurance (PMI). As ever, this sort of dynamic transformation brings a mixture of threat and opportunity, with brokers and insurers obliged to defend their interests and seek advantage when prospects swing in their favour.
Some drivers of change operate right across the financial sector and regulatory developments. Market consolidation, technological advances and the war for talent are likely to have a significant impact on future success, or indeed, the survival of our businesses.
Other influences operate at a micro level and are more specific to PMI, such as tension over the sharing of small-to-medium sized enterprise (SME) claims data between underwriters. When combined, these forces will reshape the health insurance sector. If the 2008 market looks different to 2007, it is likely the picture in 2009 and beyond will show greater upheaval.
So what are the PMI issues that keep brokers and insurers awake at night?
Industry consolidation has the potential to trigger a seismic shift in the health insurance arena. There has already been a steep and dramatic reduction in the number of discrete businesses as a result of takeover and merger activity in the general insurance market. Aside from insurers buying other underwriters, they also buy distribution; while the brokers join forces in networks or merge to create larger and more powerful entities.
This consolidation will have huge impact for PMI companies because the market is already concentrated so the effect will be more pronounced and change can happen more quickly. There are probably no more than 400 dedicated PMI brokers, with maybe 120 of significant size. Merger and acquisition activity on any scale will soon result in a substantial and lasting shift in the balance of power, which will considerably alter market competition.
The same is true for the provider sector. According to Datamonitor, the top 10 PMI insurers account for 85% of the total PMI market. The biggest players - Bupa, Axa, Norwich Union and Standard Life - have hefty chunks of the available business and only major corporate takeover activity would affect their rankings.
When Standard Life bought the First Assist PMI book from Royal & Sun Alliance back in 2005, it increased its premium income by almost a third in one fell swoop, but still only edged a little closer to Norwich Union in third slot. The market is already heavily skewed and further shrinkage could cause concerns for customers being able to access genuinely competitive terms.
Teaming up
Consolidation in the wider general insurance market has almost halved the intermediary population in terms of the number of separate businesses. Unsurprisingly, insurers have been busily acquisitive and have invested in broking houses to establish a bridgehead in the distribution sector and to supplement traditional underwriting revenue streams.
Such activity clearly brings a fresh dynamic to the sector: if an intermediary is owned by a product provider, will its product recommendations change as a result? By the same token, will the insurer devise preferential and exclusive deals for its in-house distribution arm?
This is unlikely. Independence is a precious quality, and as soon as brokers start to recommend products on anything other than their merits, the interests of the consumer are compromised. Equally, if product providers start to favour brokers where they have an interest, there is a risk of alienating the rest of the broker community. At best, limited short-term gain would precede a terminal loss of credibility.
However, it remains to be seen how those with feet in both provider and distributor camps reconcile the inevitable tensions.
PMI brokers need to decide where they stand in the merger and acquisition maelstrom and whether they are open to offers. After all, selling to an acquisitive insurer or broker-consolidator is a pretty neat and complete exit strategy for someone approaching retirement or simply looking to realise value from the business. Or are they maybe interested in expansion through acquisition? If so, is demand pushing prices to unrealistic levels?
Even for a broker with no desire to sell or buy, it is important to develop a view of these changes. The ramifications for the market as a whole are too important to ignore. For example, if consolidators get a grip of the PMI market in the way they have in mainstream commercial lines, they will gain more influences in their negotiations with insurers and be able to demand greater rewards and more favourable terms.
So, who would pick up the tab if this happened? It seems hard to imagine either the individual or group PMI market could swallow substantial premium increases, especially in a period of economic downturn. Will insurers be expected to trim their already wafer thin margins? If so, the momentum behind further merger and acquisition activity will inevitably grow as the desire to secure a foothold in the distribution sector intensifies.
Behind the times
One area where real cost savings and efficiencies can be made is through increased e-trading. The general insurance sector has grasped the opportunities presented by communications technology in streamlining business processes, increasing effectiveness and delivering a better all round deal for customers. By comparison, the PMI market is stuck in the era of Morse code, or maybe even smoke signals. This situation cannot be sustained.
Progress was achieved in the general insurance arena because insurers were willing to set aside competitive concerns and work together with software houses and brokers to develop pan-industry solutions, or at least a solution that interested parties from across the industry could sign up to if they so chose. Lack of progress in the PMI arena is down to some insurers, including the biggest players, refusing to collaborate on any initiative that would bring universal benefit.
So why has this luddite tendency developed? The fundamental reason is that e-trading works most effectively if brokers have access to a risk's claims information when broking new business. But some insurers remain resolute in withholding data, despite it being common practice elsewhere in the general insurance market.
Groupama research in this area suggests 97% of brokers support SME claims data sharing with 89% saying they would "definitely" support sharing data within the entire PMI market as standard, while 8% said they would "probably" support the initiative.
Reluctant insurers cite data protection issues and commercial sensitivity. But such niceties might lose whatever purchase they possess in the face of the FSA's all-embracing Treating Customers Fairly principle. How can it be fair to maintain a market mechanism that demonstrably leads to customers being denied the optimum deal on their insurance arrangements?
The pro data-sharing camp believes companies that decline to share data are skating on thin ice in terms of compliance. It surely cannot be long before the FSA turns its searchlight onto this area.
Anyone who has read the regulator's Retail Distribution Review of the financial services market, and its subsequent Interim Report published in April, will know the FSA is very keen on transparency as a way of ensuring best practice and customer advantage. Once again, it is difficult to reconcile retaining claims information with this very clear regulatory trend.
It is hard to see the FSA settling for a two-tier market. Why should a PMI policyholder be treated any less fairly than someone buying a pension or investment bond?
These industry concerns must be viewed in the context of toughening market conditions. Individuals are reviewing their household budgets and wondering what savings can be made. It is not difficult to realise what this may mean for non-mandatory, distress purchase insurance policies like PMI.
Brokers and insurers will need to be absolutely on top of their game if they are to survive and prosper. The industry needs to embrace change, accept it as a positive force and work together for mutual benefit. The fact is it is already happening and intermediaries and insurers had better get used to it.
- Claire Ginnelly is head of business development at Groupama Healthcare.
