Current market conditions
There was little doubt that both insurers and intermediaries at the inaugural Health Insurance Leadership Debate expect the tough conditions in the private medical insurance (PMI) market to continue in the short term, at least.
Providers across the market have announced falls in membership numbers over recent months and CIGNA HealthCare’s Louise Dolley conceded that all insurers are finding conditions challenging.
“We are anticipating a reduction in lives, not due to lapsing schemes but due to redundancies and reorganisations across businesses,” Dolley said.
However, Dolley and her fellow participants at the table agreed it is difficult to generalise as different sectors of the market are performing better than others.
“It really does depend on the sector as to whether you are seeing growth or decline at the moment,” she went on. “In some sectors we are seeing joint ventures, growth and improving performance, but with some of them – the finance sector for example – the redundancies are there. We are seeing a large increase in continuation options.”
Simplyhealth’s Jack Briggs said the PMI industry does have to be “worried” about membership shrinkage. However, for a brokerage whose remuneration is based on a percentage of rates there is “no doubt” that if rates go up because the claims experience is poor then they might think the situation is in fact “reasonably rosy”.
Representing the Association of Medical Insurance Intermediaries (AMII), the organisation’s chairman Mike Izzard said some insurers are indeed suffering “a little bit more” on shrinkage on SME schemes – and probably corporate schemes as well – than brokers are.
“Maybe brokers’ businesses will be more affected next year but certainly from what I glean from AMII members then yes, there is slight shrinkage on certain schemes but a very miniscule drop-off or lapses of schemes,” he said, adding that there is some evidence of new schemes appearing in the market.
Simplyhealth’s Briggs conceded that insurers across the market are seeing some shrinkage in SME and large corporate schemes but noted that there are some areas of growth.
“We are seeing many companies who are telling you that we want to take three people off the scheme and we are not replacing them,” he said. “But equally we are seeing three are coming off and four are going on. It is quite complex because some parts of the market are actually doing reasonably well.”
According to Briggs, taking a snapshot of the state of the PMI market is difficult because some observers do so by membership, while income might be a more accurate indicator.
“It is interesting that if your measurements of success are based on income only then will you perhaps have a different view of the health of your business,” he said. “Membership drives income but whenever one of my guys comes in and says they have just won a scheme, I do have to admit that I used to tend to say ‘who is it and how much is it worth?’ rather than ‘how many members are in it?’.”
Tal Gilbert of PruHealth, meanwhile, said that the recession is a threat for some but it also presents an opportunity for others.
“Both individuals and employers are still spending money on valued benefits but they are thinking a lot harder about whether their value is there and what they want to spend it on and who they want to spend it with,” he said, adding that the market has “actually been incredibly resilient” throughout the recession.
Alex Bennett of Aon Consulting also expressed confidence, stating that his organisation’s healthcare business is still growing.
“We have come off two years of quite aggressive growth and we are still planning to grow through this year,” he said. “We are cautious but pushing on.”
The art of selling
A surprising finding in the debate was a widespread acknowledgement that both the direct and intermediated distribution markets have lost their talent for selling the benefits of PMI.
“For the market to continue to grow and be healthy the concept of the benefits of health insurance needs to be sold,” said Jack Briggs of Simplyhealth.
“Once that stops then the market effectively just starts to naturally shrink because it has always been refreshed with a pool of new businesses that are being invited to think about why they should give PMI as a benefit to their staff.”
There are two main reasons for that, according to Briggs: historically direct salesforces have been “much larger” than they are today and some of the larger consulting firms do not see it as their role to “sell” health insurance as such.
“And if a broker effectively fails to sell health insurance then who is selling it?” he asked. “It is down, basically, to providers’ direct salesforces but they are shrinking.”
However, even those intermediaries with a strong sales ethos have a responsibility to the wider market to think about long-term sustainability, according to The Private Health Partnership’s Stuart Scullion.
“There needs to be more responsibility from every single party,” he said. “Intermediaries need to remember to not be frightened of your client. Some clients need to be told a few home truths. You have to deliver to them some really clear cut choices. You have to tell them that they simply can’t have £5m worth of benefits for £3m. It doesn’t stack up, it isn’t sustainable.”
CIGNA HealthCare’s Louise Dolley welcomed this professional and far- sighted approach and said she would like to see more intermediaries adopt it.
“There are a lot of intermediaries who don’t have that experience or the capacity and the confidence to sit down and have that debate with their client,” she said. “They want to please the client, they want their fees [or commission] paid and they’re quite happy to say, ‘OK, this is what you want, I’ll go and get it’ rather than say, ‘Is this really what you want’ and challenge it. I don’t think there are enough intermediaries out there who are prepared to have that debate, particularly because in the past it has been so easy for them.”
Competition from non-specialist brokers
Healthcare intermediaries are seeing increased competition not just from rival specialists. General and mortgage brokers are also looking at PMI as a potential way to fill “black holes” in their income caused by the recession.
However that does not mean specialist intermediaries should feel an additional threat to their businesses, participants said. Representing the Association of Medical Insurance Intermediaries, Mike Izzard said mortgage brokers, for example, are going “all out” to generate income from PMI.
“Now, should specialist healthcare intermediaries feel threatened?” he asked. “I don’t think so. It is a sure opportunity, a partnership. They could either mentor them or have an introducer arrangement in place. There is a huge opportunity for non-specialist PMI brokers to get into the market. I believe they will grow the market because they have generic client bases they have held for years and probably those people have not been exposed to PMI before or they may buy it direct from an insurer.”
Stuart Scullion of The Private Health Partnership said that any specialist intermediary “worth his salt” should be able to “knock a generalist into a cocked hat”.
“It is actually quite a complex market,” he said. “It is a difficult product to get your head around and a general broker is unlikely to have either the breadth of agencies or the detailed product knowledge to genuinely say to his or her client that he or she is independent, that they are doing a full market review for the client and so on. My experience has been that they will go to two or three insurers, they will put them on the table and if that does not fit then it does not happen.”
Simplyhealth’s Jack Briggs said it would be “interesting” to know how many of these newcomers to the PMI market are actually “quality selling organisations” and how many of them are “basically just content to be price comparators”. “If they are just going to be price comparators I would suggest that the specialist PMI market is probably getting pretty close to saturation,” Briggs said. “The PMI market is pretty saturated at the moment and if new brokers believe they can genuinely come in and drive up demand for PMI then great, that will be a very positive scenario. But if all they do is basically emulate a kind of price comparison service then I think there will be troubled times ahead.”
Rebroking – an unhealthy obsession
Participants in the debate expressed concern that an unhealthy amount of rebroking is currently taking place in the PMI market as intermediaries and insurers seek to hold onto business and as customers seek to drive down costs.
“Is there more broking going on? Absolutely,” said Jack Briggs of Simplyhealth. “I’ve been told on some schemes that brokers are competing with two, three, sometimes even four other brokerages. Every large corporate scheme that would normally review every three or five years seems to be up for tender at the moment.”
The effect of that, of course, is to put an additional administrative strain onto intermediaries and insurers. While rebroking forms an important part of the intermediary’s service to their client, the panel agreed that excessive rebroking is self-defeating, adding costs to the process and negating any discount secured in the short-term.
The encouraging news for the market is that the more responsible intermediaries and insurers are not participating in what Stuart Scullion of The Private Health Partnership described as a “Dutch auction”.
“If a client comes to me and says he or she is getting four or five brokers to work for them, we just say ‘good luck, give me a ring if you need some further advice’,” Scullion said. “We have no problem at all with people saying they just want to benchmark what we are doing for them. In that instance we would say fine. But when you get the finance director who says they are just going to hawk it around the market and this is going to the lowest bidder, then we let them get on with it.”
The influence of procurement departments
The role of the finance director and procurement in the corporate PMI market also came under the spotlight, with the panel suggesting that the majority of employers are turning to them to reduce their benefits spend in the short term.
“I don’t think I have seen an HR- driven tender this year,” said Simplyhealth’s Jack Briggs. “They have all been procurement led.”
“Procurement are the ones making the decisions at the moment,” agreed Perfect Health’s Stav O’Doherty. “They’re actually sitting in the meetings a lot more. In the past they were in the background, but they’re now making the decisions.”
However, dj healthcare’s John Crisford said that procurement has a role to play, often adding “a bit of sanity” to the equation.
“Advances in healthcare and cancer treatment are, of course, to be welcomed but if a procurement guy suddenly realises that he had to pay for the wife of an employee for the next two years and that the claims cost will increase his premium, he somehow will reassess the benefits,” Crisford said. “Of course he would love to be able to do it, but because it is procurement the sentimentality comes out of it. I do think that procurement will bring perhaps some sanity to what we have seen.”
The focus on cost
With individuals and employers looking at their outgoings closely during the current economic downturn, intermediaries and insurers are being faced with huge challenges to provide meaningful benefits and insurance at a realistic price.
Even intermediaries which take a more consultative approach, such as Aon Consulting, run the risk of being dragged into bloody rebroking battles with those who give advice based purely on price.
“The focus for this year is in cost reduction,” conceded Aon’s Alex Bennett. “Although there are pockets of activity around return on investment or wellness and productivity, that area continues to be an opportunity for future growth. Right now it is all about consolidating what is in place.”
Bennett said it is vital that intermediaries make their corporate clients aware that any decisions to drive down the cost of healthcare provision should be based on a long- term strategy.
“To remain relevant to employers you have to listen very hard to what they are hoping to achieve,” he said. “In the immediate future that is about cost reduction and what we are trying to do is say that if you make basic changes, some benefit redesign, then that absolutely should be aligned with where you are going. It shouldn’t just be about what’s most convenient for budgets this year.”
Such a consultative approach is one which was warmly welcomed by CIGNA HealthCare’s Louise Dolley.
“We have brought together our absence sales and account managers with our large corporate sales and account managers, so they are working together now in teams,” she said. “Each are still specialising but they are working together with clients and prospects. I think it is really showing an increase in our ability to look at return on investment and integrated activity.”
“Sometimes clients put benefits in place and then they forget about them until you get hit with a recession and then they have got to look at costs,” agreed Perfect Health’s Stav O’Doherty. “Then you have to take them back to first principles and remind them of what they were thinking of in the first place. How does PMI align with your business, is this relevant to your business to have this kind of design? If it is not relevant then you need to redesign it, not just look at the price of it. A client is looking at completely the wrong thing if all he or she is doing is focusing just on price.”
Simplyhealth’s Jack Briggs expressed similar concerns that the PMI industry could do itself lasting damage if all it could offer clients – both consumer and corporate – were propositions based solely on the lowest possible price.
“My fear is at what point do purchasers basically squeeze every bit of margin out of it?” he said. “That could mean that providers have to make money wherever they can. Direct clients – especially individuals – who do not have an adviser who can lean on the provider could be paying more.”
The fact that consolidation in the healthcare intermediary market has slowed could also be a sign that the PMI maket is less lucrative than in previous times, although participants stressed that any potential purchaser of an adviser’s business would likely be under budgetary constraints of their own.
After spending several years at Towergate, one of the largest broker consolidators in the UK, John Crisford of dj healthcare said that larger brokers appear to have lost their appetite for acquisitions in the PMI space, while “the days of insurers buying brokers are probably gone for now” as well.
“The fact is that broker consolidators when viewing their options might prefer to purchase general brokers since the fundamentals are different coupled with poorer returns they can get out of a healthcare book versus what they could get out of a general book.”
That was a theory that chimed with Stuart Scullion of the Private Health Partnership, one of the largest healthcare intermediaries in the UK which itself has been acquisitive over recent years.
“We probably do not proceed with as many potential acquisitions as we could because there are some intermediaries that will enter into a discussion with you and have a totally unrealistic value of their business,” Scullion said. “The return on a PMI business is different to the return on the general insurance business.”
Association of Medical Insurance Intermediaries chairman Mike Izzard said, however, that some members have “pretty good” businesses and are keen to sell up.
“They would make ideal acquisitions for larger brokers if they could find them but that is difficult at the moment,” he said. “There are various models, but any transactions going through now are at a lower multiple on either formula than they were 12 months ago.”
What does the future hold for pmi intermediaries?
“Intermediaries and providers who are willing to actually listen to what clients are looking for and respond to that, be flexible and think differently will do very well,” said PruHealth’s Tal Gilbert. “Those that do not will suffer. The pressures of the economic climate just will not let people stand still. That applies both in the individual and the company markets. If you are responding to what customers are looking for, which will probably be around value for money, certainty and trusted brands, then I think there will be opportunity there. If you are responding to what employers are looking for, which again is value for money, but delivering to the business need and helping to keep the workforce productive and healthy, helping them to deal with absenteeism, then I think people will do well.”
While the panel expressed no doubt that consumers and companies are spending less, Gilbert stressed that people still rank their health and the health of their family at the top of the list.
“Employers more so than ever need the people who are staying at work to be productive and to be healthy and so the core demand is there,” he said. “There actually really is opportunity and if you look two to three years ahead as the economy starts to recover more and as the impact of the government finances on the NHS starts to play out, the market should actually be in very healthy shape.”
However, the majority of participants expected tough market conditions to persist. The Private Health Partnership’s Stuart Scullion said that while his own business might be in a different position, over the next 12 months he expects to see wider market contraction.
“I don’t think it will be 10% but I wouldn’t be surprised if it was 5%,” he forecast. “There is and there will be increased competition for distribution. We need to make sure that the proposition meets the clients’ needs but we have a responsibility to make sure that we get the client to understand what those needs are.”
Intermediaries need to stay “lean and focused”, Scullion said, adding that “the strong will flourish and the weak will die”.
“However, a recession and a crisis financially does not mean that our business has to shrink,” he said. “It means it has to be better at what it does.” Simplyhealth’s Jack Briggs threw down a similar gauntlet to all parties involved in the PMI market.
“If we can get compelling propositions that people believe are relevant to their needs and if we can engage more intermediaries to do that as opposed to simply comparing prices then I am reasonably optimistic,” he said. “If we can’t and all we get is just round after round of more and more price comparison and more and more intermediaries chasing big and bigger commissions, then…”