Pricing in the SME private medical insurance market has always been complex – to say the least. But are things getting even more confusing for brokers? Sam Barrett reports
After several years of shrinkage in the SME private medical insurance (PMI) market, there are finally signs that this could be about to change. But while the sales figures are beginning to tick upwards, concerns are growing that insurers’ pricing strategies will affect employers’ perceptions of their cover.
While Laing & Buisson’s Health Cover UK Market Report 2013 contained the first news of growth in sales of corporate PMI – with 22,800 new company PMI schemes sold in 2012 – anecdotal evidence suggests this year’s report will contain even better news.
“We’re getting a lot more quote requests for start-ups,” says Marcia Reid, head of healthcare at Stackhouse Poland, a specialist intermediary. “Seeing this level of interest in virgin business is very positive.”
Sales figures are also benefitting from other market forces. As well as renewed confidence in the economy, auto-enrolment is driving employers to think about the benefits package they offer employees with PMI seen as a means to help keep employees healthy and productive.
In addition, falling unemployment figures mean that some employers are having to fight to attract and retain key personnel.
“Some sectors are having to look at offering better benefits to address the talent retention issue,” says Mike Blake, compliance director at PMI Health Group, pointing to a client who had beefed up its benefit package in a bid to attract more engineers.
But, while it is encouraging to see this new business coming into the market, some advisers are worried that some of these customers will not stick around.
Tim Smithers, healthcare manager at specialist intermediary Healthcare Partners, says: “We see clients who’ve had cover for several years but feel trapped by the insurer as they don’t want to stop offering it to their employees. We even lost one client recently as he was so disillusioned with the way insurers treated him he left the market altogether.”
Perhaps as a result of the new stream of business giving them an opportunity to clear out some of their more claims heavy customers, some insurers do appear to be taking a more creative approach with their pricing. As an example, Reid says she recently received renewal terms for an age-related policy for an SME client where, although there were no information officially available regarding claims, the premium had increased from £186,000 to over £300,000.
While this may be an extreme example, Reid says large movements in price are not uncommon.
“Some insurers appear to be using a casino method of pricing – the scheme seems to have been on black for a few years so let’s assume it will hit the red next go,” she says. “You used to be able to predict an SME’s renewal premium but it’s much harder to do this now as insurers factor in their varying profit requirements which seem unrelated to perceived risk.”
Differences between SME and large corporate business is also making price hikes appear more stark according to Blake.
He says: “There’s greater use of directional healthcare in the large group market and managing the cost and quality of healthcare in this way is helping to suppress premium increases. It’s still relatively uncommon among SMEs though.”
Premiums are not only going up either. Smithers says he recently dealt with an SME scheme where the incumbent insurer offered renewal terms taking the premium from £62,000 to £80,000 only for another insurer to come in at £30,000.
This yo-yoing of premiums is something also seen by Stuart Scullion, managing director at specialist advisers the Private Health Partnership.
“When premiums move this much in either direction there needs to be an explanation such as high claims or a change in the benefit structure or the cost of treatment,” he says. “Where there doesn’t appear to be a reason behind the movement, a client can end up feeling they’re being ripped off. It does nothing for the reputation of the market.”
It is a strategy that can reflect badly on an adviser’s business too. While it is possible to use product features such as excesses, hospital lists and reduced benefits to make hefty renewal premiums more palatable, this can only have limited effect. Premiums will fall initially but as employees adapt the way they use their cover, premiums will still suffer the same rate of increase.
Understanding how an insurer has arrived at a price is important, especially with the renewed interest in PMI in the SME sector. But, while large corporate pricing is transparent, advisers say this is not the case in the SME sector.
Insurers tend to base renewal prices for SME business on a combination of medical inflation, the age profile of the group, and claims experience. As an example, Scullion says that when he worked for an insurer, a percentage of the premium would be based on the group’s claims experience, with this percentage increasing as the group got larger.
While this model delivers transparent pricing, he believes that competition is helping to distort the market.
“There are always one or two insurers who think they can steal a march and go out with long term unsustainable pricing,” he says. “This attracts business but a couple of years down the line, when claims start to come through, they have to push the premium up to protect their loss ratio. You end up with a vicious circle where, when the premium invariably moves upwards, you have to turn to the next insurer that’s chasing market share.”
More innocent motives can also lie behind changes in pricing. In some cases the manner in which an insurer applies age-related increases on an SME scheme can add to the premium hiccup problem. While most have moved to one year age bands to create a more gradual age-related increase, five year age bands do still exist. Unfortunately, as the workforce ages, the effect of these chunky age bands can be exacerbated.
Insurers can also alter their pricing methodologies, which, however subtle, will invariably affect some schemes more than others. For instance, at the beginning of the year PruHealth changed the methodology it uses to calculate premiums. This will now be feeding through to renewals.
With this, rather than base premiums on the previous year’s claims experience, it assesses the likelihood of claims going forward and adjusts the premium accordingly. As an example, take a group of 20 employees where 95% of the claims experience is down to a series of high cost claims. Instead of automatically pumping up the premium to reflect this, PruHealth’s approach is to assess the nature of the claims and find out whether the employee is still in the scheme. If a repeat is unlikely, perhaps because they’ve left, premiums don’t need to rise so sharply.
While there is logic in the approach, Dave Priestley, sales director at PruHealth, acknowledges that by aiming to introduce greater transparency it has resulted in some confusion.
“Traditional pricing methods, where claims experience is factored in to the renewal price, unduly penalise clients for a risk that may no longer be on the scheme,” he explains. “It will take time for people to get used to our new approach as it means renewal pricing won’t necessarily give them the increases they expect.”
Whatever the reason for SME premiums to move unexpectedly, advisers would like to see more sustainable pricing in the market. Scullion says this would suit the needs of his clients.
“Some clients are happy to move every year to get a hot price but most want to see consistent pricing. It fits with their budgets and is also much healthier for the market,” he explains.
To help achieve this sustainability, advisers are calling for more disclosure around SME claims experience to enable them to assess the type of premium they can expect for the business. This would also allow underwriters to take a more sensible and pragmatic approach to pricing the business while still enabling insurers to compete on areas such as the breadth of benefits and the service they provide.
The type of claims information that would enable this more informed approach would include the scheme’s current and projected loss ratio and whether there had been any high claims, for instance anything in excess of £10,000.
While producing this could potentially lead to a risk that insurers and advisers would use the claims experience to cherry pick business, Scullion argues that this would not be the case. When he was at Clinicare – the PMI provider which was later acquired by Groupama – he says the insurer was happy to disclose claims experience to advisers to help with the renewal process.
“If an adviser used the information unfairly against us we would stop supplying them with it or terminate their agency. Where it was used fairly it worked really well,” he adds.
But, although this type of disclosure makes sense as a group’s claims experience increasingly plays into the premium calculation, insurers are still reluctant to provide this information.
PruHealth’s Priestley explains: “We don’t rely on information provided on loss ratios and claims history. In our experience it’s not always reliable or useable. I also think we’re doing ourselves a disservice by focusing so much on price: there’s always someone who can negotiate a better deal. Let’s talk about the differences between products instead.”
But, while advisers would very much like to be able to focus on product features, erratic price movements make this difficult. More sustainable pricing will help to shift the focus and deliver greater confidence to both existing and new SME clients.