The cash plan market is currently experiencing a major boom with sales rising by nearly 10 per cent last year. And major new players, such as BUPA, Boots, HSBC and Barclays, are entering the market, while established providers are busy revamping their product ranges to fend off any potential threat from these new competitors.
More importantly, IFAs are, for the first time in many cases, being identified as a key distribution channel. Reflecting this trend, the payment of commission – which was virtually unheard of not so long ago – is now becoming more common.
But it is far from being the first change in this sector. Cash plans date back to the late 1880s. The introduction of the NHS in 1948 might well have been expected to sound the death knell for them, but they adapted well and in recent years the increased financial burden of healthcare on the State, resulting from an ageing population and increasingly advanced medical technology, has placed a greater emphasis than ever on private provision. In fact, research conducted by Forester Health suggests that dental and optical are now the two most popular benefits among members followed by physiotherapy. Cash during hospital stays – once the bedrock of a cash plan – is now fourth.
Jill Davies, general manager sales and marketing at Westfield, says: “There is a growing market for cash plans because the government is keen to educate people to look after themselves. Cash plans cover everyday healthcare essentials. They are all about health maintenance and early intervention. The NHS will never provide for this and cash plans bridge the gap between what is provided by the NHS and what people have to pay for to maintain their general health.” Although a greater emphasis on self-reliance is one factor providing a fillip for the cash plan market, the second, and perhaps more important reason, comes from the difficulties being experienced by the private medical insurance market.
PMI costs are rising far in excess of inflation and attracting new business is proving extremely difficult for providers. Most commentators agree that the PMI market is stagnating and new business is only put on the books at the expense of another provider.
Escalating costs are making it impossible for many companies to operate a PMI scheme for employees other than senior managers and directors. Andy Parker, marketing manager at Norwich Union Healthcare, which entered the cash plan market last year, said: “There is no doubt that the PMI market is under pressure in terms of growth which is somewhat stifled.” PMI premiums are rising by typically between 15 per cent and 25 per cent a year – not to mention the recent removal of tax relief which has increased costs for the over 60s.
There are two reasons costs are rising so fast. First, more treatments are currently available than ever before – Viagra being a classic example – and many of these treatments are expensive. Second, there is a greater tendency for people to claim on their medical insurance policies.
To make matters worse, because costs are rising, anyone who is unlikely to make a claim is cashing in their policy leaving only the people who know they are likely to need to claim – pushing costs even higher.
Cash plans represent a much more affordable alternative to a full blown PMI scheme, especially for anyone who would not be making regular claims. Premiums are typically low – in some cases as little as £1 a week, making it an affordable benefit for employers to offer to the bulk of their workforces.
And this goes a long way to explaining why large companies such as Norwich Union, Boots and BUPA are suddenly so interested in the cash plan market. Norwich Union’s Parker says: “It would be true to say that the pressure on PMI forms part of the rationale for our move into the cash plan market, although even if the PMI market were buoyant we would probably still be looking at cash plans as a natural extension of our business.”
Despite the problems facing PMI providers, cash plans are such a low margin product that it may still seem surprising that big players such as NU and Boots are keen to muscle in. It is generally accepted that 80 per cent of premium income goes back out again in claims – this is why commission has not been paid in the past.
But, as Parker explains: “While it is true that on a per unit basis the margins on this product are low, providing we get critical mass, there is no reason why cash plan business shouldn’t be as profitable as any other business.”
But it is not only product providers for whom cash plans represent a source of potential new business. IFAs too can benefit from this new opportunity.
Peter Drummond, head of corporate sales and marketing at HSA, market leader with £ 130m of the estimated £250m premium income in this sector in 1997/98, says: “If I were an IFA, I would be looking to sell this product to the corporate market – trying to sell directly to individuals could well prove a waste of time because of the low profit margins. I would be targeting companies with at least 50 employees who were considering contributing £15 a month or more per employee.”
Cash plans are ideal for employees who will eventually step up to a PMI scheme or for those who might be stepping down from a PMI scheme either because they are leaving the company or retiring, he adds.
“Cash plans offer IFAs the opportunity to make all employees customers and there may well be a spin off when employees become eligible to join a group PMI scheme or the company pension scheme,” he says.
Not only can cash plans be sold as an alternative to PMI for the main workforce, they can also be sold in addition to a PMI policy for senior executives because they provide some benefits PMI plans do not.
But given the obvious potential of the sector, IFAs could be forgiven for wondering why providers have decided to cut them into the deal. The answer lies in part in the fact that most of the growth in the cash plan market is in the corporate market – and IFAs provide a foot in the door. Keith Cunningham, head of BUPA Cash Plan, says: “We feel IFAs can open the doors of organisations for us. They are often already in there selling other employee benefits such as PMI and pensions to a company – cash plans are a natural extension.”
When it comes to paying commission, providers do vary considerably. HSA pays renewal rather than initial commission. “We like IFAs to think in terms of renewal commission. We are a mutual organisation and we would make a loss if we paid initial commission,” says Drummond.
BUPA on the other hand pays 15 per cent initial commission but no renewal commission. BCWA offers 20 per cent initial commission and five per cent renewal. Other providers, such as Westfield, pay commission on a negotiable basis. Davies explains: “We pay as much commission as we can afford out of the product.”
The non profit making mutuals stress that the difference between themselves and the “big boys” is that they are run purely for the benefit of their members. Davies adds: “The fact that we are a non profit making organisation gives us an edge. We do not have to satisfy shareholders. Our aim is to satisfy those who contribute to us – we are not motivated by profit.”
And obviously the more commission paid to IFAs, the less there is to plough back for the benefit of members.
Any IFAs considering moving into this market will quickly realise that what seems like a simple, straightforward product is, in fact, quite complex. And comparing the benefits available under the plethora of products can present a minefield. Jeremy Tanner, head of sales at Forester Health, says: “Typically when considering which product to recommend, IFAs tend to get a big piece of paper, write down all the benefits, all the providers and how much benefit each is paying.”
But comparing policies on a pound for pound basis can prove extremely difficult, he says.
Some companies pay a 50 per cent refund for certain benefits, whereas others pay 60 per cent or give a full refund. Once a member has claimed a maximum amount, say under optical cover, some companies insist they have to wait two years before making another claim whereas others allow reclaims after one year.
Then IFAs have to realise that some benefits are really only there as window dressing. If, for example, a policy refunds 50 per cent of physiotherapy costs up to £ 1,000 – the member needs to spend £2,000 to get the full use of this benefit. So although such a benefit might look generous it is just window dressing, Tanner explains.
Another problem is that policies might only pay for some treatments if the patient has a GP referral and this can prove problematic. This can be the case for some of the alternative treatments where getting a GP referral can be close to impossible.
Some policies pay for the first consultation but not subsequent ones. Others pay for consultations but require the member to pay for diagnostic tests such as X-rays. A few providers pay cash sums for outpatient appointments, others do not. And qualifying periods can vary from six months to immediate cover.
HSA only provides family cover. Sue Richmond, publicity executive, says: “Our policies are very good value. As members’ circumstances change, for example, if they marry or have children, new names can simply be added to the policy.”
Knowing these differences exist is beneficial but picking a good value product may not necessarily pose such a quandry. Tanner concludes: “I think it is important for an IFA to take an overview. While it is important to read the small print, our research has shown us that what customers really value is the four top benefits – cash for dental and optical benefits, physiotherapy and hospital stays. Therefore, my advice to IFAs would be to ensure that any one company they are considering recommending is strong in these areas.”
But with increasing levels of competition, IFAs are still far more likely to be able to spot a winner.