It was inevitable that the wave of mergers sweeping across UK and international companies would wash up on the shores of the private medical insurance industry. After all, few industries have been spared in the past few years.
Last year Guardian Royal Exchange swallowed up PPP healthcare, and is now itself preparing to be consumed by insurance giant AXA. On a smaller scale Cornhill Insurance has gobbled up PMI minnow Healthsave.
And now rumour has it that other mergers will follow, with Royal & SunAlliance and Norwich Union Healthcare the most frequently suggested.
But while, mergers and takeovers are exciting for journalists and PMI executives, are they a good thing for the industry as a whole?
There are obvious financial advantages for the companies who merge, as they benefit from economies of scale, a clear out of duplicated jobs, and savings on marketing costs. Mergers also offer a fast way to gain market share, avoiding the laborious task of attracting new customers in a single dramatic swoop.
But the individual customer buying PMI may not be so well served, according to Jan Lawson, partner in healthcare intermediary, the Private Health Partnership.
She says: “It is bad news for policyholders. I suspect it will lead to more standardisation of products and ultimately less choice.
“Before the merger Guardian had three individual contracts and PPP healthcare had half a dozen. Where there were nine in future there will be only five or six.”
Lawson says there must always be a place for niche products that meet the varying needs of individuals. Continuing competition is also necessary to keep a lid on price rises and ensure the market is not sewn up by a few key players.
Such concerns are unlikely to be shared by executives at PPP healthcare. Merger with Guardian in February last year saw its share of the PMI market rise from 28% to 33%, bringing into its sights market leader BUPA, which has 40% of the market.
Now PPP healthcare is recommending shareholders accept a £3.4 billion bid by AXA.
“The stronger your market position the better,” says PPP healthcare marketing development manager Nye Jones. “We do have critical mass in the market and that helps us increase operating efficiency.”
So, it seems, size is everything.
Jones says there is no evidence to suggest that these mergers do anything to hurt customers either, and adds that the resultant cost savings should help keep the price of policies down.
However, he believes that if the AXA merger goes through, any further savings will be less dramatic. AXA has a tiny PMI wing in UAP Provincial, but this has barely 1% of the market.
And he adds that talk of merger mania is “over-egging things”. He believes mania is barely possible in a market with such a small number of major players: “Once you have been through the largest 10 companies there is not that much left.”
Nor does he see much benefit to the larger providers in hoovering up the small players: “There is little to gain in terms of customer or shareholder value by that kind of activity.”
In the first merger the Guardian Health name was sacrificed in favour of the stronger PPP healthcare brand, and Jones says changes in individual PMI products will follow the same pattern, although some Guardian features will be retained.
Intermediaries will shortly be issued with a detailed support pack explaining the new products and what happens after their introduction in April.
However there are no clues as to what AXA will do with the PPP healthcare brand when the merger goes through – although a few hundred extra job losses seem likely.
However, PPP healthcare’s rivals will be hoping that rather than bolster its position, the effort of any integration will be to throw a spanner in the works.
Elaine Greenwood, membership marketing director with BUPA, says merging two companies with different cultures poses problems: “Guardian and PPP healthcare are still trying to come together and have not got there yet. Now they have to cope with AXA. It is easy to take your eye off the ball and fall behind.”
While in the short-term mergers can create uncertainty across the industry, Greenwood’s fears are greater for the long term. With AXA behind it, PPP healthcare could become a tough proposition.
“In France, AXA uses PMI as a loss leader in order to cross-sell other insurance. If it does that in the UK it could cause all sorts of problems. BUPA is better placed to cope but smaller companies could be hit,” she says.
With AXA having also recently acquired Sun Life, she is concerned it will be able to use its huge databases to win new custom through direct mailing and direct response marketing. It seems competition could start hotting up in the PMI market.
Greenwood argues that future prospects for mergers must be seen against the background of an industry facing losses following a recent large rise in expensive claims.
“The smaller companies will be suffering more and they may become targets for takeover – although it is difficult to see who would want to take them over,” she says.
She adds that as a provident association, any merger involving BUPA is “simply not on the cards”.
January saw the merger of Cornhill Insurance with Johnson Fry Healthsave, although Cornhill group life and healthcare co-ordinator Bryan Tomalin said this was more for its computer system than the PMI portfolio.
A good computer system is relatively easy to sell, he says, a PMI portfolio more difficult. He adds that taking over administration of even marginally different products can be trouble in the long term. Nevertheless, Cornhill has agreed to manage the Healthsave products and merge the two at renewal. Its gross annual income from corporate and individual PMI premiums will rise from £1 0m to £14m.
Sceptics doubt the PMI market is ripe for further mergers because of the downward pressure on profits. However, Tomalin believes the ageing population and increased pressure on the NHS will persuade insurers that PMI is a growth area and they will look to enter, meaning further mergers and takeovers could follow.
He says: “I would like to think it would give the customer a better deal, but who knows? Some say it can lead to less choice, although I believe there will always be enough companies in the market to maintain choice.”
Company spokesmen are paid to be bullish so it is no surprise the real worries reside with the IFAs. Like Jan Lawson, George Connelly, of PMI intermediaries Health Care Matters, says customer choice has already been hit.
He personally is disappointed he will no longer be able to offer Guardian policies to his customers, and concerned that current customers will be offered PPP healthcare policies at renewal.
He explains: “I am sad because Guardian had a good name, a good reputation and some good policies. It was very popular with intermediaries and won awards for customer service.”
Whether these concerns figure that highly in billion pound corporate mergers is doubtful. When PPP healthcare claims the Guardian merger is designed to make it “much more customer-focused and less function-focused”, the seeming dominance of management-speak in the expression rather undermines the message.
Connelly says that he has far fewer doubts about the recent Cornhill takeover, as it is much smaller beer: “It is one fairly small player taking over something even smaller that people had doubts about since inception,” he says.
And he is sceptical that insurance companies would wish to enter the market while current insurers are complaining of flat profits and sales resolutely fail to pick up.
Company mergers are the latest in corporate fashion. Rumours abound over which PMI providers will merge next and this can create uncertainty in a market that is already struggling. Further mergers will always be likely until this trend disappears.
But with PMI selling fewer policies than many in the industry feel it should, it is vital that any mergers will act ultimately to help woo new customers with better, more affordable policies.
The rest is just corporate fun and games.