Self-funded health insurance has traditionally been seen as the preserve of large employee benefit consultancies. But as Harvey Jones reports, there are numerous opportunities for smaller brokers in this space too
Smaller brokers have traditionally shied away from self-funded health insurance schemes and corporate healthcare trusts, assuming this sector is best left to the big employee benefits consultancies (EBCs).
There are all sorts of reasons for this. Status anxiety, low ambitions, inertia, the distractions of the daily grind, or the grudging assumption that smaller brokers can never match up to the likes of Mercer and Aon Hewitt.
On one level, they are right. A smaller broker will always be outgunned by the big boys. But they are wrong to abandon this market altogether. Self-funding and trusts are not just for the big blue chips these days, but are being targeted at ever smaller companies. If you are looking for new opportunities in 2013, this could be the one.
Smaller brokers will never be asked to run a corporate healthcare trust for FTSE 100 blue-chips such as British Gas or Vodafone, says James Henson, sales director at brokers Health Matters.
“It would be difficult to administrate companies of that size, but for schemes covering up to 1,000 people, it’s doable,” he says. “The administration at this level is not so much different from a scheme with 500 members, so it is well within the reach of an efficient medium-sized broker.”
Henson sees no reason why brokers can not move into self-funded schemes or corporate healthcare trusts.
“We run a number of trusts for smaller corporates with up to 1,000 staff, but many brokers automatically shy away from this area,” he explains. “There is no need. Most of the work we do is account management and the renewal review. The companies themselves will do a lot of the administration, as they have access to online portals to help them do this.”
Brokers can turn their smaller stature to their advantage, he continues.
“We speak to a lot of companies about medical insurance,” Henson says. “Many complain that they pay a fat fee to a broker, and for what? Smaller brokers often do a better job, because the client means more to us.”
CHALLENGES FOR SMALLER BROKERS
One challenge facing brokers is working out how much to charge larger companies.
“What hourly rate should you charge, to make the business turn a profit? This is difficult to calculate,” Henson says.
Another challenge is persuading the company to make the leap from insurance to self-funding.
“It is a hard sell because managers don’t like radical change,” Henson continues. “They are familiar with dealing with insurance companies such as Bupa, AXA and Aviva, and their head is on the block if the switch goes wrong. So you need to educate them, and explain the benefits.”
The benefits go beyond the instant saving of 6% insurance premium tax, Henson says, adding that most traditional insurers do little to control the cost of claims.
He says: “They simply take a claim and pay it. They are claims payers. Setting up a trust can help the client manage claims and get much better value for money. If they have low claims one year, they can set their savings aside for future years. In the long run, this saves them money.”
You can even set up a scheme for a few hundred employees, Henson says.
“You would have to use a smaller trust provider such as New Vision, which will look at anyone with a claims fund over £80,000,” Henson argues. “It is an area more brokers should be looking at.”
Rachel Riley, managing director of WPA Protocol, the insurer’s subsidiary administrator of corporate healthcare trusts, says smaller brokers have always been involved in self-funded arrangements and trusts.
The size of the broker is irrelevant, she says.
“What matters is their level of interest, expertise, experience and knowledge,” Riley explains. “We fully support any intermediary who is interested in this area and will work proactively to support their staff training requirements.”
WPA Protocol runs regular intermediary meetings, training sessions, roadshows and user groups.
“Our strategy is to grow with those brokers who want to grow with us,” Riley says. “It is a partnership where all sides invest time to understand each other. Our broker trust business enjoyed record growth in 2012, and we are planning a repeat performance in 2013.”
Riley suggests the Retail Distribution Review (RDR), which came into force at the beginning of this year and bans advisers from earning commission on retail investment products, may push more brokers into trusts.
“Most advisers working in this market charge fees rather than commission,” she explains. “Although RDR doesn’t cover health insurance brokers, many are steadily moving towards charging fees, and this could help nudge more of them in the direction of trusts, because it matches their charging model. More brokers will naturally talk about trusts after they have switched to a fee-based model.”
Richard Saunders, sales director at trust provider Healix Health Services, says smaller brokers are at their most creative in the “mid-corporate” market, dealing with companies of between 600 and 1,000 employees.
“Large corporates with 20,000 employees will continue to go to the likes of Mercer, Aon [Hewitt] and Towers Watson,” Saunders says. “Smaller brokers will never have access to that market, but that still leaves plenty of opportunities elsewhere.”
Companies such as Healix, Cigna UK HealthCare Benefits and WPA can help brokers give their clients a personal, bespoke service, Saunders says.
“You could, for example, increase the NHS cash benefit, or provide cover for chronic and other excluded conditions,” he explains. “A consultant with a big company can’t always get to that personal level.”
Many smaller brokers have one or two larger corporate clients, typically SMEs that have grown in size, Saunders says.
“We have several smaller brokers who still look after larger clients, and we work differently with them,” he explains. “We often have more direct contact with the client, because smaller brokers are more open to putting us before their clients than larger consultancies.”
SCALE OF THE CHALLENGE
Intermediaries should not underestimate the scale of the challenge, however, says Paul Moulton, sales and client relationships director at AXA PPP healthcare.
“The big EBCs and corporate specialist intermediaries offer consulting and technical expertise, and can advise on trust deeds, administration agreements and a range of healthcare-related contracts,” Moulton says. “Smaller intermediaries have to compete in these fields and offer a differentiated service.”
AXA PPP healthcare is equipped to support smaller intermediaries entering the trust market, Moulton says.
“We can offer technical support to the broker and client, approved trust deeds and administration agreements, guidance on tax issues such as VAT and ongoing account management support,” he explains.
It is currently developing a new trust-based solution aimed at smaller corporates that want to harness the benefits of a trust but do not have the appetite to set up their own, Moulton continues.
To an outsider, cracking this market looks a tough task, says Trevor Hunter, director at Halcyon HealthCare.
“I don’t have any experience of self-funded trusts but if the opportunity arose I would grab it with both hands,” Hunter says. “I have the financial and legal awareness, and commitment to deal with such accounts, but getting the opportunity is the difficult part.”
Some brokers simply are not interested, however.
Kath Grimshaw, senior partner at Caprica Healthcare, says: “We don’t work in this area. There are specialist brokers who have the dedicated software that can accommodate the schemes far better than we can.”
UNDERSTANDING THE RISKS
Meanwhile, other brokers have looked at trusts, but actively ruled it out.
Tim Smithers, healthcare manager at Essex-based HealthCare Partners, says: “We do work with larger corporates but it isn’t worth our while to get involved in healthcare trusts. We are busy and this is a complicated area. To tackle this properly, you would have to allocate one person to the job full time and it would be difficult to make it pay on that basis. We have looked at it again and again, and simply can’t find a way of making it cost-effective. You can’t do it successfully on a one-off basis.”
Smithers says many corporates are reluctant to switch anyway, because they enjoy the relationship they have with their insurer, and are usually reluctant to take even the relatively simple step of switching insurer at renewal.
Another major risk for brokers looking to break into the trust market is that they could unwittingly expose their corporate clients to needless risks, according to Patrick Watt, director, corporate at insurer Bupa.
Many brokers will be tempted by small, niche trust providers targeting “commoditised” off-the-peg trusts at ever-smaller corporates, without fully understanding the dangers, he says.
“Insurance and self-insurance present very different levels of risk,” explains Watt. “With insurance, the client carries no risk, their premiums are fixed for a 12-month period, regardless of their claims experience in that year. With self-insurance, clients are carrying most of the risk themselves. If the adviser doesn’t understand that, they may give inappropriate advice.”
Furthermore, claims experience in a trust can be a lot more volatile.
“The corporate may save on IPT but if, say, they have an expensive claim for cancer treatment, they could face a large bill at the end of the year,” he says.
This is particularly dangerous for smaller clients.
“The smaller the business, the more uncertain the claims experience, and the more volatile the risk,” continues Watt. “The cost of a scheme with less than 500 members will be a lot more volatile than a scheme with 5,000 or 10,000 members.”
If brokers are not completely transparent and fail to explain all the dangers, they risk bringing the trust industry into disrepute, he argues.
But despite these risks, Watt says brokers can still sell trusts to smaller companies.
“It all depends on the company,” he explains. “Some are more risk averse than others. We do insure arrangements with less than 500 people but they must be prepared for volatility. We are happy to speak to any small broker if this is an area of interest, but they have to tread carefully.”
Brokers should not be shy about exploring the self-funded and corporate healthcare trust sector, but they should be cautious.