A brighter outlook

Sales of private medical insurance (PMI) in the UK have not been so good in years, according to the latest market report from Laing & Buisson. However, this increase is solely attributable to another increase in sales of new company-paid business, a fact that has raised grave concerns in the industry over the state of the individual market.

The statistics from Laing & Buisson's Private Medical Insurance Market Sector Report show that by the end of 2000, the number of people covered by a PMI policy was 6,877,000. This represents an overall rise of 5.5% from 1999 and is the highest annual increase since 1990. But the growth was focused solely in the corporate market, which rose by 7.4% whereas the number of individual subscribers dropped by 3.2%.

This fall has again been attributed in part to the soaring cost of premiums in the individual market. It has been well documented over the last few years that the development of the individual market has been severely hampered by substantial price increases, which are linked to the high number of claims. This has been further compounded by the abolition of tax concessions for pensioners in 1997, which caused premiums to rise sharply in a large percentage of policies.

Iain McMillan, national sales manager of the intermediary sales division at Standard Life Healthcare, says: 'Over the last four years, there has been an increasing number of claims which has had a knock on effect on the premium increases and consequently resulted in more lapsed policies. Another thing is that the fall out from the abolition of tax concessions is taking much longer than expected. '

Advances in medical science mean the latest treatments are more effective, but they are also more expensive. So as the number of claims increases, the problems for providers are two-fold because it seems that the people who stick with their policies seem to be those who are more likely to make a claim. This means the risk pool is narrowed, which forces premiums up and perpetuates the problem.

Stephen Walker, specialist PMI intermediary at Medical Insurance Services, says: 'One problem is that people who tend not to claim will pay for several years and their premiums will keep rising so they then drop out, because they feel they are not getting any value from it. But those who stay on are those who are claiming, so a bigger proportion of the insurer's portfolio are claimants ' which pushes costs even higher.'

Providers are aware of this and have introduced a number of new products designed to keep existing customers, as well as to try to manage the number of claims.

Nye Jones at PPP healthcare, says: 'We have launched a major customer-retention programme that includes regular dialogue with customers and the offer of incentives and information. This active approach has helped us to improve retention levels, but the industry is finding that some of the lapses are part of the tail off from the abolition of tax incentives in 1997.'

Other providers have also launched new initiatives that go beyond traditional PMI, such as helplines to discuss cases before the customer makes a claim. Chris Jones, head of business development healthcare and assistance at Royal & SunAlliance, says: 'We have recently launched a new brand ' 'More Than' ' which provides PMI cover, but also provides medical advice and information through helplines and the internet to help with customers' wellbeing.'

New ideas

Despite the problems of individual PMI, most providers are still confident there is a wide market for it and advisers should continue discussing it with clients as one of the cornerstones of their protection portfolio.

Nye Jones says: 'It is not the first time the report has found that the individual market is falling. But the level of activity in the market each year varies with the numbers of lapsed policies and deaths, and also with those who are taking out policies for the first time, or are switching insurer. So from this point of view there is still a potential market.

'Product development is not a catalyst that can bring about major change alone. One of the biggest contributors will be the change at macro level. The concordat last year is indicative of a cultural change. I think major growth will happen when this gathers pace.'

Philip Blackburn, the author of the report and an economist at Laing & Buisson, also believes individual PMI will prosper in the future, whatever happens to the NHS, and that providers will soon develop products that will rejuvenate the market.

He says: 'People's attitudes towards the NHS have not shifted much. There are still seen to be some problems with it, but there is not so much dissatisfaction that they will suddenly shift en masse to the private sector. At the moment, demand for individual PMI seems fairly inelastic, those people who really want it will still buy it ' whatever the price. New product designs are testament to the fact that providers are still trying to increase sales in the individual PMI market.'

Back on track

Despite the current problems, there are now a number of indicators that the individual market may be about to grow again. One of the key findings of the report was that revenue growth from PMI rose by 10.7%. This was mostly attributed to the high premium increases in the individual market, and the increased number of new policies in the corporate market.

However, the cost of claims did not rise as fast as volume growth in the individual market, which meant that gross margins rose to 21% of subscription income in 2000 from 17.5% in 1999 the highest for nearly 10 years. Blackburn says: 'Claims have not risen as sharply as income as insurers look at ways to manage claims better. This may have combined to bring down claims costs, but it is too early to say. It could just be a blip. If it is not, the benefits could possibly be passed onto individuals as premium cuts.'

However, it should not be forgotten that the PMI market as a whole is growing, despite the problems of the individual market. And the sustained growth of group market has helped to drive overall premium income onwards. Blackburn says: 'These latest figures are still good news for private medical insurers. In general, the main reasons behind the strong growth of corporate PMI have been the strong and stable economy over the past year, and the growing levels of employment in business which have boosted the number and size of corporate schemes.'

McMillan believes the economic conditions have been an influence behind the growth of new small businesses especially in IT and the media, which have in turn, been a driving factor in sales of corporate PMI.

McMillan says: 'The growth in the corporate market has almost all come from small business. Because of the strength of the economy there are tens of thousands of new businesses out there. If there are only three or four people in a company, then PMI is a key insurance to have because if one person is on an NHS waiting list a quarter of the workforce is off work.'

Battling for business

Another key reason behind the rise in corporate sales has come from the increased competition between providers, which has seen a range of very competitive special deals and rates. Blackburn says: 'There has been strong competition between insurers over the last year with companies heavily marketing their corporate sector products. This means customers have been able to take advantage of competitive pricing policies. One major area of competition within company-paid schemes has come from insurers trying to win schemes from other providers by providing even better packages.'

Chris Jones adds that advisers should be using the fact that employee benefits are almost expected by employees to push PMI as one of the foundations of group cover. He says: 'There is an underlying trend for companies to now have PMI for their employees. It is almost expected of companies. But even in this market, product development is growing wider than this with employers looking for new ways to treat absence. This is helping to drive product development down the road towards rehabilitation and absence management.'

The increased penetration of corporate PMI is expected to increase in the short term as the economy continues to perform strongly, although even this is expected to slow down as insurers tend to fix their prices.

However, the downward slide of individual PMI may well begin to ease because lower premium increases are expected in the next few years. The outlook for PMI now looks brighter than it has for several years and advisers must remain abreast of the latest products as providers try to lower costs.