They say that a shut mouth catches no flies, but that does not stop it from catching a journalist’s attention. When a company is unusually secretive it is tempting to suspect that it has something to hide, especially if most of its competitors have no problem providing the same information.
Norwich Union Healthcare does not wish to reveal the proportion of its underlying investment portfolio that is invested in equities. It will say only that it has tended to take a relatively low risk approach and has not altered its equity weightings during recent years. Such generalities are unlikely to do much to deter the enthusiastic amateur sleuth who likes to have a stab at discovering what could be going on behind the scenes.
Penny O’Nions, principal at The Onion Group, an IFA company based in Iver, Buckinghamshire, is among those to express the type of scepticism that a glimpse at a few figures could probably cure.
She says: “In view of Norwich Union’s group investment expertise I think its healthcare subsidiary should have a better medical inflation rate. At a guess I would imagine it has a higher exposure to equity linked funds than most.”
Groupama Insurances and, somewhat predictably, Royal & SunAlliance, are others to take a notably stubborn stance in refusing to release details of equity weightings. There is no concrete evidence to suggest that any of these companies has problems with its private medical insurance (PMI) book but recent market conditions have made the way that PMI providers manage their underlying investments worth at least a cursory glance.
Some insurers report that they normally take no notice of investment returns when calculating premiums while others say that they allow them to have only a marginal impact. They point out that PMI business is relatively short-tailed and that they do not have the money for that long.
Specialist intermediaries endorse this line of thinking and highlight that industrywide premium increases have been lower over the past two years than during the bull market conditions of the late 1990s.
George Connelly, partner at Dorchester-based specialist intermediary Health Care Matters, says: “At the moment the trend is for lower premium increases and I can’t believe investment is that important. Health insurers are in the market to make a profit and I’m sure their calculations would stand and fall without investments being a factor.”
Many PMI providers willing to reveal figures have no more than 25% in equities and significantly Bupa, which has been making substantial fixed rate guarantees, has less than 20%. Furthermore those who have, or have had, much higher proportions do not exactly constitute disaster areas.
In September 2001 CS Healthcare, a major PMI underwriter for civil service and public sector employees, still had its main underlying fund invested 70% in equities and 30% in gilts. But falling markets inevitably resulted in a change of strategy and in the same month it incurred a £1.3m loss on the realisation of investments by reducing its equity holding to 30%. Nevertheless this dented its reserves by a mere 3% and had only a marginal impact on premiums – which rose by around 10% in April 2002.
WPA invested up to 70% in equities during the 1990s but went down to around 60% three years ago, before the market bubble burst. During the subsequent volatility it has reduced this level to around 45%, with no apparent impact on premiums.
Nevertheless, suppose a PMI provider still holds a very high proportion of equities and stockmarket returns continue to be poor for several years. Suppose also that its claims bill went through the roof because someone invented a cure for Alzheimer’s disease, meaning that it constituted an acute condition as opposed to a chronic one. It is not inconceivable that the insurer’s reserves could become so badly depleted that they threaten its legal minimum.
Paul Gibson, finance director at BCWA, says: “Putting premiums up can raise money but it is not a short term fix as it only applies from the policyholders’ next renewal and, because the bulk of policyholders pay by direct debit, the income from them only comes in during the following 12 months.
“Subordinated loans tend not to be given to companies in financial difficulties, because the lender will be at the back of the repayment queue if the company is wound up, and in practice there is no guarantee that a publicly quoted company will be able to raise money on the stockmarket. Independent Insurance failed to do so,” he concludes.
Even if there was sufficient breathing space to rebuild reserves from the proceeds of premium hikes any insurer that had to resort to such a tactic would be likely to go into a downward spiral. The good risks would inevitably be the first to leave because those who are healthy and unlikely to make claims tend to be the most cost conscious. The insurer would then be left with a book that was heavily skewed with bad risks.
Should such a situation arise it would be nice to think that there would be some safety in being with a PMI provider with a financially strong parent company, but football fans are unlikely to forget how readily ITV Digital’s parent companies disowned it!
It may be expected that parents as massive as Standard Life, Axa Insurance, Aviva (formerly CGNU) or Legal & General would come to their PMI operation’s rescue on the grounds that it would damage the image of the group as a whole if they did not. There are, however, no legally enforceable guarantees to ensure that they would do so.
Furthermore, Aviva’s basic strategy is to be a top five player in terms of market share in all areas of its activities and it admits that it could take the decision to withdraw from the PMI market if it ever feels that Norwich Union Healthcare cannot sustain such a position.
Some comfort can be found in the knowledge that Bupa has come to the rescue of PMI providers who have struggled in the past, offering to renew insurance without further medical evidence for Cornhill Insurance in December 1999 and The Telegraph’s PMI scheme in August 2001.
Bupa, which is synonymous with PMI in many households, has an unusually strong vested interest in preserving the industry’s integrity – which would be seriously undermined if an insurer was unable to honour its policyholders’ rights of renewal. But it is keen to stress that there is no guarantee that it will help out in the future. It will only do so if it makes commercial sense. PPP healthcare also emphasises that it would judge each case on its merits.
The Financial Services Compensation Scheme provides a valuable safety net for individual policyholders and small businesses if any PMI provider is unable or unlikely to be able to pay claims. It will provide compensation for 100% of the first £2,000 of the value of the claim, plus 90% of the remainder.
Nevertheless switchers who had previous claimed from the insurer concerned may have exclusions imposed by a new insurer for what would become pre-existing conditions.
The compensation scheme also offers no protection to members of large group schemes – if the employer is the medical insurance policyholder. Group schemes are only protected if the employer is classed as a small company or a small partnership.
A small company must meet two out of the following three criteria: less than 50 employees; a balance sheet of less than £1.4m; or turnover of less than £2.8m. A small partnership must have less than £1.4m net assets.
As far as it is possible to make simplistic generalisations the minimum reserves that PMI insurers are legally obliged to hold are typically in the region of 18% of annual premium income and as yet there is no indication that any player is in danger of breaching this requirement.
Most of the larger PMI providers tend to hold reserving levels of around twice the size of their legal minimum, but it is noticeable that some of their smaller competitors are able to boast significantly higher cushions.
BCWA has reserves of three and a half times its legal minimum and WPA and Exeter Friendly Society have reserves of four times their legal minimums. In Exeter Friendly Society’s case the reserving ratio is in fact far higher still because it is required to set aside an additional cushion earmarked to protect its “no age increase” approach.
BCWA goes so far as to suggest that it might even begin to consider using reserves to subsidise policyholders’ premiums once it has reached four times its legal minimum because, being a provident association, it would be able to pass on part of the benefits of a strong balance sheet to policyholders as opposed to shareholders.
Exeter Friendly Society rules this out and would invest any surplus assets in product development instead.
We are clearly some way from a situation in which investment prowess and reserving levels become major factors in the average intermediary’s decision making process. The longer the stockmarket turmoil continues for, however, the more important the issues will become.
There could therefore come a time when an insurer’s refusal to reveal its equity weighting is considered a good reason not to recommend it.