Brian Walters, Managing Director, Regency Health
Ask a room full of private medical insurance (PMI) brokers their biggest frustration with the individual market and most, if not all, will give the same answer – claims loadings.
Insurers also recognise this as a problem, and in the last few years attempts have been made to finesse the flawed no-claims discount model – VitalityHealth’s ABC approach and The Exeter’s sophisticated value-based mechanism are both commendable efforts.
However, neither are perfect and can still result in the absurd situation where the claims-related increase exceeds the cost of the claim itself.
The problem of claims loadings in the individual PMI market is a tough nut to crack – insurers need to price their products keenly in order to attract new customers, and loading at the back end allows them to square the circle. This is especially pertinent for insurers that offer extensive cancer and mental health cover, given the strain that these conditions put on the claims fund. That the various insurers all operate different claims-loading mechanisms, each with their pros and cons, illustrates the difficulty of devising a system that penalises claims in a way that is fair and proportionate.
It is the point of fairness that vexes advisers, especially those that have had the soul-sapping experience of clients questioning the point of having bought PMI in the first place when a claim is met with a disproportionate increase. There is much to be said on the subject of claims loadings and it is unlikely that a room full of brokers would reach a consensus on some of the more nuanced points. However, one point that is likely to be uncontentious is that of repaying claims at renewal in order to reverse claims loadings, known in the industry as ‘buyback’.
At present, it seems that AXA PPP healthcare is the only PMI provider that contractually allows buyback at renewal, with other insurers resistant or outright opposed to the concept.
Some argue that buyback is less important on more progressive structures, where the severity of the loading depends on the value of the claim. With The Exeter, for example, a member needs to claim more than £2,000 over the excess in order to trigger the maximum penalty. However, even under this sort of structure it is possible for a customer to attract a loading that exceeds the value of their claim(s), and the likelihood increases as the premium is ramped up.
This issue is particularly pertinent in a market where ‘shopping around’ often isn’t a viable solution, because medical history can preclude a change of insurer without loss of cover for pre-existing conditions. In the most egregious cases, a client may see a claims-related increase that is twice the value of a claim. For example, we were approached by a client of one insurer who had claimed £1,800 and was met with a claims-related increase of around £3,600. With an extensive medical and claims history, there was little that could be done and the insurer steadfastly refused to allow a repayment in order to reverse the claims loading.
This is an issue that reflects badly on us as an industry and it is self-defeating to alienate our customers at a time when our subscriber base is steadily eroding and the self-pay market is growing. It could also attract regulatory scrutiny given the Financial Conduct Authority’s focus on consumer outcomes at renewal and the long-standing requirement that products be fit for purpose. If the benefit that a consumer sees from a policy is outweighed by the penalty for claiming at the following renewal, a product’s fitness for purpose is surely called into question.
Unfortunately, it is not practical for a policyholder to ‘save up’ their claims and submit them at the end of the policy year, given that the market operates on a direct settlement basis and that the insurer’s contracted rates are often lower than self-pay rates.
It is perplexing that insurers refuse to allow buyback when it is a win-win situation. Understandably, clients begrudge repaying their claims, but when they stand to save more than they are repaying, it is the lesser of two evils. The insurer has the administrative cost of having processed the claim in the first place and the cost of administering the buyback, but they have then otherwise taken in a year’s premium with nothing paid out in return and get to retain the member with, hopefully, at least a soupçon of goodwill.
Even if the commercial case is not compelling, the regulatory case should be – it surely fails any test of fairness that the financial penalty for claiming should exceed the value of the claim itself.