Extra expenditure before Christmas is commonplace, but Guardian Royal Exchange has gone to town, paying £435 million for PPP healthcare. GRE became the UK’s second largest provider of private medical insurance, effectively changing the face of health insurance provision.
The takeover was driven by PPP which had been seeking a suitable partner for the last 18 months. A wide range of companies, including GE Capital and Halifax, were interested, but PPP decided GRE suited its plans.
John Neville, press officer at PPP healthcare, explains: “Back in 1995 we envisaged a need to combine with another company to enable us to continue to compete and grow. Price had become an issue within the PMI market but we have never wanted to compete on this as quality of service is a key element of our operation.”
The price war started in the late 1980s with the entry of several large insurance companies on the PMI stage.
These included GRE, Nor- Union, Standard Life through Prime Health and Royal & SunAlliance. With significant life, pension and insurance sales channels already established, distribution of healthcare products could often be achieved more cost-effectively than the traditional healthcare providers.
Quickly and efficiently, these insurance companies commanded significant market share, putting increasing pressure on the likes of PPP and BUPA.
Both companies felt the squeeze. BUPA’s individual PMI market share has fallen by approximately 20% since 1991 although it has seen an increase in its group PMI market share.
PPP has also seen its market share decrease during the last few years. Ben Dutton, business analyst at Datamonitor points to PPP’s escalating costs as another indication of the difficulties it was encountering. He comments: “Since 1993 PPP’s costs have been rising. There has been a 10% increase in management and claims costs over the three years to 1996. And despite a £20 million advertising campaign, PPP’s individual PMI market share has dropped from 20% to 17% between 1994 and 1996.”
Conversely, Guardian Health has, since its creation in 1993, gained a market share of approximately 4.5%. Dutton comments: “Guardian Health has been doing very well. It is a highly efficient organisation which has seen its costs fall over the last few years while enjoying an increase in market share. It also benefits from a very large distribution channel.”
This distribution channel is one of the reasons behind PPP’s decision to choose GRE. The combined force of GRE and PPP now has access to more than 2.5 million direct customers.
However, having an increased distribution channel may not be sufficient to increase market penetration of PMI. Dutton explains: “The PMI market has been very flat. Any growth in 1997 was largely a result of new entrants into the market. Much now depends on how the Government acts, and where it places the responsibility to provide for one’s healthcare. In 1998 there will be a realisation of what the Government has in store for the NHS which should lead to growth.”
GRE is confident the Government will act to improve sales potential. One of its reasons for acquiring PPP is to be a market leader. This is based on the belief that the healthcare market will, in the next few years, be subject to rapid growth as the Government’s plans become known.
Ensuring GRE is prepared for this growth will initially demand some rationalisation of the two organisations. A saving of around £14m has been suggested. John Sinclair, group executive director at GRE, explains how these savings are likely to be made: “The cost cutting exercise will mainly be a result of integration. Back office operations will change as duplicated departments such as information technology merge. Similarly, once the product details are finalised under the PPP brand, we will no longer be marketing Guardian Health. However, in the front office it is unlikely that there will be any real change in people.”
Reports are suggesting that there will be about 100 job losses within PPP as a result of this integration. However, a spokesperson from GRE stressed that it was unlikely at this stage that there would be any need for compulsory redundancies and that the cuts could be achieved through natural wastage.
The products will change although it is still too early for either GRE or PPP to comment on the final shape of those which will be available. Sinclair comments: “Following a review there is likely to be an enlarged product range. The PPP range will probably continue although some of the best elements of the Guardian products will be included or incorporated into the range.” Guardian Health’s strengths have been primarily in the corporate market, while PPP has a good command of the individual market. This may be reflected in the new product range.
Another significant issue which will not be resolved until much later is how the merger will impact on premiums. Sinclair explains how he envisages the premiums will be affected: “For the time being premiums will remain the same. Beyond that it is too difficult to say how they will move. Factors like medical inflation need to be considered, which make any predictions simply guesswork. However, any savings which come about through the combining of the two company’s systems will be passed on to our customers. We aim for value for money but, with health insurance, you do get what you pay for and we wouldn’t want to compromise on the service offered.”
William Laing of Laing & Buisson firmly believes that a market which will be of increased interest to PPP is that of partnership products and network initiatives.
He explains: “To operate effectively in these markets critical mass is necessary. Now that PPP is strengthened by having GRE as its parent it can compete with BUPA on an equal footing.” Involvement in these markets can lead to savings for PPP, helping it to pass on lower premiums to its clients.
The role for intermediaries may also change. Sinclair comments that one of GRE’s aims is to be able to offer its full product range to all its customers. A substantial part of its customer base is the 2.5 to 3 million direct customers it now has through its own operation, Guardian Direct and that of the acquisitions it has made, PPP and the insurance arm of the RAC.
Sinclair adds that whether selling healthcare direct becomes big business will depend on the action taken by the Government.
He explains: “Presently the sale of, for example, long-term care is fine through intermediaries. However if the need to provide for one’s own healthcare is increased by Government action then it will become increasingly viable to sell it direct.”
Commitment to intermediaries
This does not necessarily mean that connections with intermediaries will suffer. Sinclair likens the change to other insurance products which have moved from being sold solely through brokers to being sold direct, as the public has gained confidence in buying in this manner. He confirms that commitment and support to intermediaries will continue but adds that the key driver behind using any distribution channel is to get the product to the customer.
And what of the other health insurance providers? The new combined force of Guardian Health and PPP could potentially lead to further merger activity within the sector.
Regarding GRE, Dutton does not believe that it needs to make any further acquisitions to strengthen its position. He comments: “The combination of Guardian Health and PPP creates a company which will be strong enough to challenge BUPA. Further acquisitions to increase market share are not really necessary.” However, Sinclair feels that if other health insurance providers approached GRE, they would not necessarily be turned away.
Sinclair also disagrees with Dutton regarding the motive behind the acquisition of PPP. He explains: “The healthcare market is still relatively immature which means that competition is not really an issue yet. With only a quarter of people in the A and B socio-economic groups having PMI cover there is still much to be done.”
Unlike PPP, BUPA, Dutton believes, has no real need to find a parent company. He comments: “BUPA has the lowest costs of those providing PMI and also benefits from a very strong distribution channel. Merging with another company would offer it no real advantage.” And a spokesperson from BUPA confirmed Dutton’s view, adding that the company had no intentions to follow PPP down the merger route.
Views on the remainder of the healthcare market vary. Laing believes that any mergers among the smaller players will be the result of predatory activity from the large insurance companies. He comments on the future for the smaller PMI providers: “The small players will be unable to compete with the likes of BUPA and PPP for the mainstream business so their involvement in the niche areas of PMI will have to continue.”
Conversely Dutton believes there will be some consolidation among the smaller PMI providers.
However he does not think this is likely to pose any real threat to the positions of PPP and BUPA, which he believes will remain as market leaders, commanding around 50% of the PMI market.
A market dominated by two giants may be unnerving for the smaller players. However, the action of PPP in seeking a parent to give it heightened financial strength does makes the need to evolve more acceptable, and necessary.