Consolidation. Unmistakably the current theme among large group PMI layers. Over the last few years we have seen Guardian acquire PPP, then, in turn, be bought by Axa, Cornhill swallowing Healthsave, and the merger of Royal Life and Sun Alliance.
As a result of consolidation, the choice of insurers inevitably narrows. And, according to most industry experts, it’s not over yet. Larry Bulmer, partner at Healthcare Decisions in Kent, agrees that the future offers a high possibility of further market shifts. “I think, in terms of large groups, the number of providers will contract.” And consolidation is not restricted to the providers. Bulmer comments: “Consolidation in the market means that there will be fewer customers with bigger schemes.”
The shape of the market is changing beyond recognition. Job losses are an. unavoidable consequence of mergers and takeovers. But while some see this as a boost to efficiency and expertise, Andrew Green, specialist PMI broker at Green Denman, East Sussex, is dubious. “The fact that companies merge is not good in terms of looking after policyholders,” he says. “Good people often leave before the merger and staff morale frequently dips.”
The large group PMI market is dominated by a few players, the majority of which are the larger providers. Claims experience has been poor and the area is not one recognised as a profit generator, particularly by small insurers. Even the large providers aren’t in it for the money. It is generally accepted that most providers take on large group business to boost their portfolio, decorating it with the names of impressive corporations. But it works both ways, as Bulmer acknowledges: “Large groups would rather pay for big names, preferring to offer their employees a well-known insurer.”
Smaller providers have tended to pay less attention to the market, often because they feel it is impossible to offer the high service standards that their niche marketing promises. “Our book of large membership schemes is growing, but growth is not that huge,” says Richard Esler, commercial manager at BCWA. “It is a very competitive area because of the large membership numbers. We like to offer good service, so we need a structure that offers a reasonable return.”
David Ashdown, WPA marketing director, says that it does not see the market as a growth area. “Prices will continue to increase as costs are rising all the time,” he says. “We don’t anticipate a surge in large group business.”
Because of the sheer volume of employees, underwriting large groups is perceived as time consuming and arduous, as Liz Hammond, director of Private Medicine Intermediaries, explains. “With published rate groups there is a lot of initial administration, because each member is priced according to their age group. Corporate bulk schemes are written on numbers only so they are much easier to administrate.”
But this is not the only element involved in winning large group business. She continues: “Writing very large groups does mean a lot of work. Medium size groups are a lot easier.
“On very large schemes the process can be long and complex because they need full account management. So intermediaries will have their work cut out. It involves a lot of client visits and claims analysis.”
But, for larger broker corporations, the picture is different. Chris Goodeve-Ballard, director, healthcare, at employee benefits consultants Gissings, explains that a number of new strategies are emerging to overcome the difficulties inherent to large group PMI.
Risk assessment has been a recurrent problem for large group PMI business. But, as Goodeve-Ballard explains, Gissings has taken steps to address the obstacle. “We have the advantage of in-house actuaries and we are using these actuaries to accurately assess the risk,” he says. “That way clients can be assured that they have an accurate claims fund.”
Inevitably, if risk is not adequately calculated, claims management can pose problems. Goodeve-Ballard, noting that difficulties have arisen from large group PMI claims management, explains that a new, remedial approach has been developed. “QBE, the Australian-based insurer, is taking a much closer look at claims experience. One of the ways it is looking to do this is through spot negotiation with hospitals, and also closer underwriting.”
Although QBE is new to the market, its employees are not. With many ex-Guardian recruits, it has picked up experienced and impressive individuals. Barry Allsworth, PMI division manager, was cited by one intermediary as one of the best underwriters in the UK.
But James Kenrick, sales director for Cigna, is uncertain about the merit of QBE’s strategies. “Because QBE is a new brand, it may not have the negotiating power,” he comments. “There is competitive pricing in the market. This could be a risk as it may only be to draw in sales. My advice to intermediaries is to see where QBE is in two or three year’s time and if its prices are still the same.”
And while network hospitals may seem to provide the solution for high-maintenance large group plans, could their bad public image act as a deterrent? Goodeve-Ballard thinks not. “Lots of individual cases have been brought out where the network system has been disastrous,” he acknowledges. “But I think we will follow the United State’s way of doing things, where networks are still going strong, and will continue to do so.”
At the moment, Goodeve-Ballard is not impressed by the majority of the industry’s attempts to modify purchasing costs. “Insurers say they have negotiated but never really come up with the goods,” he says. “We are asking them to show us how they purchase and will continue to ask that question until we see a change.”
He does not share the fear that this may force smaller insurers out of the market, explaining that they have the unique selling point of choosing not to subscribe to the network system. “So a balance is likely to be formed where smaller insurers are non-network while larger insurers are.”
While Goodeve-Ballard implies a long-term dominance of networks, at Cigna, Kenrick disagrees. Referring to the American system, he foresees the network solution as short-lived. “The effect of hospital networking maybe that smaller, especially independent, hospitals go out of business,” he acknowledges. “But once there are fewer hospitals, negotiating power is likely to go back to the hospital. We saw it happen in the United States where networks have had their day.”
Cigna’s attitude to cost management is centred on preventing non-essential hospital treatment in the first place. A team of nurses works around the clock advising concerned customers as to whether or not their symptoms require further examination. The consequence is the elimination of unnecessary medical expenditure. “Companies who buy, demand service excellence. We decided to become a niche player in the large group market by offering this service excellence and cost control through the managed care system,” explains Kenrick.
He concedes: “Customers may pay 25 per cent more but we only have to have a five per cent cost impact on claims costs. That is a lot more than a 20 per cent lift on the cost of services.”
Kenrick agrees with Goodeve-Ballard that the ever-consolidating market is not a threat to smaller providers. “They have a small band of followers who really like them, so I think that smaller niche players will probably keep their places,” he says. “They do give a consistently good service and their clients value that.”
This optimism is not shared by Hammond, who feels that consolidation may have an adverse effect on providers of large group PMI. “In future we may see fewer providers because I think that smaller insurers may back out,” she says.
But there are other threats. Self-insurance has been a furtive menace to the large group PMI market, and, with rising premiums, it may pose a more visible problem. Bulmer comments: “Self-insurance is definitely a rising occurrence and many groups are choosing to use a third party to put their money in a trust.”
Goodeve-Ballard also recognises the possibilities: “Provided the government doesn’t close that particular avenue, it will probably come to the fore. Large insurers need to be very careful and sensible.”
Attractions of the self-insurance method include more control over the provision of services and benefits. Some firms prefer to be detached from the bridles of an insurer, as Gary Thomas, assistant benefits manager at publisher emap, which has a self-insurance scheme in place, explains: “PMI can be an emotive subject, so it can be better to have discretion and control over what happens.”
He adds: “Insurers need to make a profit and, as we pay a third party administrator, we are able to avoid all the overheads.”
Although it is not presently a widespread feature of the market, recent alterations to insurance premium tax (IPT) and future changes to national insurance (NI) may increase the incidence of self-insurance.
As Hammond explains, “We haven’t found that it is really rising in popularity at the moment, but IPT increases may affect this. Also, employers will have to contribute to NI which will be put on premiums.”
Some brokers have taken the concept of third party intervention further, negotiating add-on features, such as optical tests for the staff of large companies. This compensates for any benefits that are not included in the customer’s insurance policy.
But however the market shapes up, there is almost exclusive agreement that the spell of merger mania is not over yet. “I think we will see more consolidation,” says Kenrick. “We have a few big players with the potential to be multi-national asking how they can compete.”
Until they decide the rest of the market must watch carefully to see what part it will play in the future.