As the group PMI market continues to evolve, Charlie MacEwan looks to the future and discusses how insurers are looking to control growing costs in the sector
Unrelenting upward pressures on premiums means that companies are looking for more affordable alternatives to traditional private medical insurance (PMI). Insurers must evolve their products to meet this need.
In January 2003, Adrian Norris of Buck and Willis, said: 'In five years time, businesses will face an additional £1.1bn PMI bill, a 70% rise in the current cost of healthcare'. Considering the amount of debate since, it is an issue that still needs to be resolved. So let us take a look at what is happening in the corporate PMI market and ask how it might evolve in the next five years.
In June 2002, there were nine provident associations and 21 commercial companies selling PMI in the UK. The margins are not high ' so those insurers that can keep their administration costs low will thrive. As competition increases, like in the intermediary market, it is likely some insurers will focus solely on PMI while others will diversify. The market is also watching First Assist ' the healthcare and assistance division bought from Royal & SunAlliance ' and the potential demutualisation of Standard Life with interest.
An insurer's primary task is to assess risk. A net premium should, approximately, equal the price of the risk plus the insurer's costs to administer the claim. People who know they are going to be ill and purchase PMI are buying assurance not insurance.
Another factor of the corporate market is that the larger the scheme, the more predictable the risk. If, as a large corporate customer, you are told that you will claim £1m next year and you do, you should not be buying conventional PMI. This is the over-riding reason for the growth of the Third Party Administrator (TPA) market.
Increased premiums
There are a number of well-rehearsed reasons as to why premiums are increasing. Depending which insurer you speak to and the definition you use, medical inflation is running at between 5% and 15%. Two decades ago, someone with a knee problem would have been given a £20 walking stick. Today, he would be given an MRI scan and several consultations with little change for £1,000. The cost of claims further increases because patients are better informed and more demanding. In the corporate market most, if not all, employees regard their PMI cover as free. Without being seen to generalise, people do not value things that cost them nothing. Corporate PMI could go the way of final salary pension schemes if premiums continue to escalate.
Five years ago, investment returns allowed premium rates to be sub-economic. Since 1999, the FTSE has halved having two significant effects. First, cost pressures are prevailing on the purchasing power of corporate customers and the margins of the insurers. Second, if an insurer had not changed its investment strategy, reserves would have halved.
This illustrates why solvency rules have been revised four times in the last year. Some economists are optimistic there will be a 'peace dividend'. However, the view that there will be limited GDP growth over the next five years tends to be more credible.
There is now an imperative for insurers to make underwriting profits. This partially explains the increased competition in the large corporate insured market.
Market changes
Regulation by the Financial Services Authority and Government policy will affect how the market evolves. In the last decade, tax relief on policies for the over 60s has been removed, the Insurance Premium Tax (IPT) loophole has been closed, IPT has been raised from 2.5% to 5%, and there has been a 1% increase in employer and employee National Insurance contributions. People who have PMI are, in effect, paying for their healthcare twice.
Plans to improve the NHS ' by modernising facilities, improving service levels, boosting staff numbers and reducing waiting times ' have also been initiated. We are now seeing public sector wage demands. The private sector has to compete. Throwing money at a problem is not the solution. Yet we see in the media that Gordon Brown has asked Derek Wanless to review whether allocating £40bn to the NHS over the next five years is enough. The media is speculating whether National Insurance contributions will again have to be increased in a future budget. What seems clear is the NHS needs long-term vision, not short-term repairs.
The result is that employers are actively looking for alternatives because PMI is too expensive. The PMI industry is slowly evolving in order to stem the outflow. In the large corporate arena ' and it is suspected this will happen for small corporates ' insurers are 'bespokeing to win'. The number of company-paid subscribers grew by 2.7% in 2001. A total of 11.1% of the UK population have PMI, 7.7% of which are members of a corporate PMI scheme.
Over the last decade insurers have attempted to control claims costs with limited success. BUPA, AXA PPP healthcare, Standard Life Healthcare, Norwich Union Healthcare and Legal & General offer networks. This could be extended to a consultant's network in the coming years. The case for managed care remains unproven despite being the flagship for a few insurers. Some in the market are promoting the philosophy that costs can be more effectively controlled through contracts with providers rather than interfering with a treatment plan that has been agreed between a consultant and their patient.
All of these help but none have reversed the upwardly spiralling premiums. BUPA, Norwich Union and AXA PPP have refuted Adrian Norris' predictions. The solution, as far as Buck and Willis is concerned is 'defined liability'. Companies gain greater control on how much they spend.
Robert Hymas, chairman at consultancy Health Care Navigator, backs the Buck and Willis forecast. He believes that a move towards self-pay is the only way to control escalating costs in the future: 'Businesses that allow their employees to shop around could make savings of up to 20%'.
Financing options have been rumoured, but are not yet established in the UK. The mechanics involve a company allocating an amount per annum into an employee's health fund, which can be used when an employee is ill. This could be complemented by stop loss insurance.
WPA is actively promoting 'shared responsibility'. The patient bears responsibility for a proportion of their initial treatment costs. Customers will then value their insurance, behave reasonably and work in partnership with their insurer for the long term. It is popular among the individual market where premiums can be reduced by up to 55%.
TPA is positioned to expand exponentially. 12.3% of everyone PMI policyholder in the UK is part of a self-insured scheme. The TPA market grew by 20% last year. The key criteria for a company to run its health scheme through a TPA is a consistent claims history. BUPA, Norwich Union, AXA PPP, Standard Life and WPA Protocol all now offer some form of TPA.
Much can happen in the next five years. It is likely the NHS will continue being repaired without a clear vision. The present bear market could have become a raging bull. Regulation will be well established and we may even have the Euro. Traditional full refund corporate PMI could be in the past. Self-pay is likely to have increased significantly, while co-payment and shared responsibility could be the accepted as normal. Those PMI providers that exist in five years time will be in business because they are serving the needs of their customers.
Charlie MacEwan is head of communications at Western Provident Association
COVER notes
• Factors such as the rising cost of medical treatment and more demanding customers are likely to push group PMI claims costs up over the next few years.
• It is likely more insurers will introduce elements of self-pay into their group PMI schemes to help control premium increases.
• The TPA markets looks likely to expand over the next few years as insurers strive to keep administration costs to a minimum.
