The sixth Think Tank debates the future role of individual PMI products in the UK. Kirstie Redford reports
Alex Broad: How does profitability in the individual private medical insurance (PMI) market compare with that in the group market?
Howard Hughes: Market analyst Laing & Buisson would point out that last year we saw a 2% decline in the individual market, yet a 3% increase in the small company market. BCWA is more active in the small company market and that seems to be the right place to be at the moment. It is where we see growth coming from.
Rod Bramston: The large corporate sector is not particularly profitable and an area that WPA has also actively moved away from. The margins are extremely low. You just do not get the investment returns now. The small corporate market and the individual market are both similar in terms of profitability ' it depends on the product design and how it is targeted.
Les Curson: Is there a difference in loss ratios between different methods of underwriting?
Rod Bramston: We only underwrite ' we made the decision that we would no longer offer a moratorium scheme. When people are medically underwritten, it makes a huge difference to the cost of the claims.
Les Curson: So full underwriting has a better loss ratio?
Rod Bramston: Absolutely.
Stephen Walker: I agree. I do not think the moratorium does a proper job in the industry. If you look back a few years, renewals on moratoriums after a couple of years were loaded 5%. This reflects that moratoriums do not do a good job.
Mike Williams: I would agree in broad terms against moratoriums. The only exception I would say is with a moratorium, conditions that would often be underwritten out permanently can come back on cover.
Stephen Walker: But is that doing a proper job for the industry? You are taking on risk that perhaps you should not be taking on board, meaning price will increase in later years.
Mike Williams: I think you are right. However, some of the medical underwriting some insurers have applied in the past have perhaps been more stringent than they should have been.
Alex Broad: How does market penetration differ in the individual market to the group market?
Rod Bramston: The individual market is taking a decline. But it is also suffering from the effect of people switching from the equivalent of gold to bronze cover. They are moving down levels of cover.
Stephen Walker: Could it be that people are leaving the individual market to go to the corporate market?
Rod Bramston: It could be. However, the key reason we have found is it is getting too expensive, that medical inflation is driving people out.
Roger Hymas: Are young people coming into the individual market?
Andy Sampson: On the internet, certainly, the age group applying for PMI is coming down.
Roger Hymas: When I worked at BUPA,I asked what the average age of individual members was. I was told 58 and a half. The market is ageing and is not being replaced by younger members.
Stephen Walker: We have talked about people leaving individual cover to go to group schemes. But at the other end of the scale, people are retiring and want individual PMI to replace their group cover. After having medical insurance for so long, they feel exposed without it. That is why a large part of our portfolio is now aged over 65.
Rod Bramston: Younger people are generally healthy. The only reason many people aged 21 have PMI in place is because their parents are buying it for them.
Roger Hymas: Less fit people get PMI, young and fit people don't. In the case of BUPA and PPP, after 30 or 40 years you have an ancient book where you have to charge £3,500 a year. Health insurance on the Continent and in the US has a much more inclusive pool, where you get more young people balancing the price of the older people.
The problem with the market is the products offered have to be priced the way they are and this is a disincentive to growth. The individual market has lost around 17% of its customers in five years. This is a huge problem.
Stephen Walker: Yet people like the concept of health insurance.
Rod Bramston: Yes, but I do not think full cover will last more than 10 years. When people have full cover they want to claim and you see a greater increase in usage. How do you change that behaviour? You need shared responsibility, where the customer pays a percentage of the cost. This makes a huge difference in their behaviour.
Andy Sampson: I would agree there is a major future in partially-paid healthcare.
Mike Williams: The concept of very high excess policies is not new ' it has been around a long time. The time is coming where people understand pay as you go is a viable option, providing there is some sort of cap to exposure. As the treatment gets expensive the insurance has to kick in. A lot of that is about consumer understanding, rather than product innovation or capability.
Alex Broad: Do you all agree the self-pay market is prime for growth?
Mike Williams: Absolutely.
Roger Hymas: The self-pay market is now a £1bn market and growing. It has grown by a third over the past five years and it is a phenomenon that has happened all on its own.
Andy Samson: I think it is indicative people have more choice.
Roger Hymas: That is right. People want quality and appropriateness ' they are asking more questions, not only on price, but the best place to go for treatment.
Rod Bramston: Once you start paying you become the customer and you seek value and quality. With the NHS you do not have that.
Stephen Walker: There is one word or caution ' we have had feedback from the hospital sector that self-pay is not profitable business.
Roger Hymas: I am in touch with this every day and what has happened is that it has gone from being marginal price business to different tariffs in different areas. In terms of value for money, self-pay is better value for the customer than what insurers buy.
Rod Bramston: That is right. By mentioning you are paying for it yourself, the price goes down as there is no claim form to fill in.
Les Curson: We have a situation where the biggest barrier to growth in the individual market is cost. On one hand people are paying X out of their own pocket, whereas people with insurance are paying X plus another figure. At the end of the day, PMI costs must be controllable.
Roger Hymas: If PMI cannot create the risk pool to keep pricing under control it cannot do anything. You cannot fix PMI by tackling just one small piece of it, cost. The actual cost of healthcare in the UK on a global basis is, after all, not expensive.
Les Curson: But the cost to UK purchasers is higher than they are prepared to pay.
Alex Broad: Do you think we will see more hybrid products ' including elements of other protection such as critical illness and income protection ' on the market?
Stephen Walker: As long as it does not increase cost.
Roger Hymas: It is not about increasing cost; it's about what people are prepared to pay for, allowing them to mix and match.
Les Curson: I disagree; I do not think we will see hybrid products in the next five to 10 years. People cannot afford today's prices. If you add other products, the price will inevitably go up. And people will not pay more.
Mike Williams: Another element of hybrid products is down grading. There has been a move from PMI to lower forms of PMI, to cash plans. It may be there is a substitution here or a new combination of products that could cap the cost of what people have to pay out in cash. I agree layering more layers of protection into one product and a huge bill for the consumer is not attractive.
Stephen Walker: I think it is counter-productive.
Rod Bramston: In Australia, there are elements of cash plans and PMI in the same policy and it works. Similarly, dental cover would obviously work with those two. When it comes to other cover such as critical illness, it is to protect your assets rather than your health. However, I can see a great mix of high excess products and critical illness ' there is some clever product design to be had, bringing these ideas together.
Alex Broad: How can we make the market less complex for consumers to understand?
Howard Hughes: It is a horribly complex world out there for people to make decisions. If I was an individual purchaser of PMI, I would not know where to begin. I suppose we have to market our products effectively and make people aware of the choices they do have.
Les Curson: People have the same plan for 10 or 15 years ' they find it hard to move around the market. When you look at their current product, you can see they have not realised products have moved on and they are often over-insuring. You can even reduce the cost quite substantially with the same provider, by moving products. There is too much choice in lots of ways for people to understand.
Stephen Walker: I think there is a lack of good advice. I have had clients who retire from a company scheme and do not downgrade. I have to explain to them they can still have adequate cover by down-grading and pay less in premiums.
Les Curson: I think many people are suspicious of insurers and if a new, lower-cost plan comes out, they think there is a catch and do not believe they will still get the same benefit for less money. That is part of the problem ' people do not trust insurance companies. This is where the intermediary has a role to play ' reassuring and explaining the differences between the plans.
Bob Cheesewright: If the regulator is to be a driver in the future of the market, it would not surprise me if ' as part of the new regime ' we have to address all the challenges you have set out. What regulation will have to do, and what I have not yet seen explained, is how to explain their suitability, why it is that different cover is better than other cover, and why it represents good value.
Stephen Walker: This is what advisers should do, if they are doing their job properly.
Les Curson: There are different categories of intermediary which just confuses the whole issue as well. There is a mix with IFAs ' some will do PMI once a month, some will do PMI every three months. And because they do not do much business they will recommend the insurer they have done the most business with. To me, those people are not getting best advice as they are not talking to someone who knows the PMI market.
Andy Sampson: In most of the IFA focus groups we have held, many also seem frightened of the PMI market ' they think they should know so much about medicine before they can advise on it.
Alex Broad: If IFAs do not want to get involved with PMI, it isn't really going to help sales, is it?
Bob Cheesewright: With the new regulatory regime they will have to have training and competency certification. If they do not have this, they can tell customers they do not have the expertise to advise in this field, but they can introduce them to specialist advisers.
Stephen Walker: One point, from an IFA's angle, is if they send a client to a specialist PMI broker, they could end up losing all their other business.
Howard Hughes: Trust is so important and we need to build that consumer confidence.
Alex Broad: How do you see things changing with the new regulation coming into force in 2004?
Les Curson: I do not have any problem at all with regulation in the PMI market because it must be better for the consumer to know the person advising them knows what they are talking about. But if we get bogged down with paperwork, that worries me.
Bob Cheesewright: The hope is we will get light touch regulation where suitability will not mean the kind of fact find and needs analysis that has been such a burden to the investment industry. As long as you have something that equips the customer with what they need to know about the product, why they need it and where the intermediary is coming from, they can make a rational decision.
Alex Broad: What will be the main drivers in the market?
Mike Williams: I do not see this market growing in the future unless the Government is prepared to engage with it. Working with the NHS could lead to a better spread of risk and a more dynamic market.
Stephen Walker: We need to ask ourselves how the PMI industry can help to provide a better overall health service for the people in this country, in conjunction with the NHS and with the blessing from the Government.
