“The most competitive I have ever known it to be”; “devoid of fresh impetus and innovation”; “at best static and possibly marginally in decline”. The answers we got to our survey asking insurers and brokers to describe the current SME private medical insurance market made for disquieting reading. Madeleine Davies investigates the prognosis…
“There has to be something fundamentally wrong with this market when popular debates seem to revolve around intermediaries’ commissions and insurers leaving the market,” says Richard Bamford, key account director at intermediary Citrus Healthcare Consulting, just one of the many brokers who contributed to our analysis of the SME private medical insurance (PMI) market.
In fact, while it was these two topics that triggered our review of the landscape, online discussions between brokers, facilitated by Health Insurance, have encompassed a whole range of issues, from controversy about intermediaries designing products with providers to debates about the feasibility of challenging clients’ focus on price. What emerged was a huge divergence of views, highlighting tensions not only between insurers and brokers but among brokers themselves.
One thing everyone agrees on is that the SME PMI market is extremely cut-throat at the moment, for both providers and advisers. Nick Reynolds head of intermediary sales at Aviva UK Health, believes it is the most competitive he has ever known and is reluctant to blame the wider economy.
“I think we would probably be in this state even if the recession had not happened,” he says. “The insurance market has become more competitive across the board. The market is soft and the economic cycle has just accelerated the level of competitiveness.”
There is also widespread agreement with AXA PPP healthcare’s Paul Moulton that the market is “at best static and possible marginally in decline”.
“This is leading to increasing almost desperation and a focus on price as the differentiator rather than anything else,” the insurer’s sales and client relationship manager reports. “As a result we are seeing churn of what is a relatively static book.”
However, while insurers and intermediaries agree that in the current market “price is king”, there is debate about how best to respond.
“The more commoditised the market becomes in the short-term, potentially the more value some purchasers may see in the price they are paying,” says Moulton. “However, this is quite a short-term benefit and there are longer-term challenges around everyone articulating the value that this product brings to an SME. If we are unable to do that, it might bring into question why they continue to have PMI.”
Aviva’s Reynolds warns that underwriting margins are now “wafer thin” while claims costs are rising, forcing insurers to raise premiums.
Groupama Healthcare’s exit from the market (it has been acquired by Simplyhealth) was cited by many respondents as evidence of the difficulty of delivering a profit in this sector, with several predicting further consolidation.
Lindsey Joseph of independent intermediary LEBC Corporate Healthcare Solutions, believes the market is now reaping the bitter fruit of chasing low prices in previous years and argues that intermediaries have a duty to adopt a different approach.
“Unfortunately, it has been our best intentions as a sector that have contributed to excessive increases [in premiums] by chasing the cheapest price and while I accept that in these economic times clients are seeking to make cost efficiencies, there is a balance and as responsible healthcare professionals we have a duty to advise and inform to ensure the client makes an informed decision on the merits of chasing the cheapest price,” she says. “We are now at a place where many insurers are applying hefty increases based on adverse claims and what was once a very cost effective benefit or management tool has turned into a headache for many clients with cost accelerating well beyond medical inflation. As a result, more and more clients will be faced with considering whether they can afford to continue this benefit.”
Some intermediaries question the extent to which clients’ focus on price should or can be challenged in the current climate. Karen Gamble of Gallagher Employee Benefits reports that some clients are facing 25% increases.
“As an independent I can provide as much ethical and responsible advice as I like about ‘true value’ but what the company accountant or finance director sees is pounds on an expenditure sheet,” says Gillian Campbell of Medisave, a specialist intermediary in Northern Ireland.
Kevin Amphlett, chief executive of national intermediary Chase Templeton, believes that it is brokers’ duty to respond to clients’ needs, which are currently centred on cutting costs.
“They are more motivated by the sustainability of their business right now than they are about potentially higher premiums some years down the line”, he points out. “We are all duty bound to respond to that imperative and endeavour to deliver the best price and the best cover in the face of these requirements. If we feel a particular insurer’s premiums are unsustainable in the long term then we should highlight this at point of sale. However, second guessing which insurers premiums will rise and by how much is a dangerous and subjective game for brokers to play, I feel. Given our clients’ requirements to save cash, with the overriding proviso that cover is matched along with service provision, then in today’s marketplace, cheaper is often best practice.”
While Campbell and Amphlett have similar experiences of demanding clients, their analysis of the future for the market differs significantly, highlighting the divergent views of larger and smaller intermediaries.
Campbell believes that collaborations between big brokers and insurers for white label products and bespoke opportunities for large distribution channels are “not healthy” while Amphlett, unsurprisingly, is in favour of such evolution.
“Differentiation for brokers may well come through working with insurers on product design to match a particular client base or distribution opportunity,” he explains. “The insurers are geared to work on such projects only if they can see profit. Scale is only part of the equation they use when deciding to run with such initiatives.”
ONE RULE FOR THEM…
Discussions about pricing inevitably lead to debate about the level of “cosiness” between insurers and intermediaries.
Bamford of Citrus Healthcare (which does not to receive enhanced commission or offer bespoke deals) reports that the current focus on price is being exacerbated by insurers offering dual price and bespoke arrangements to certain intermediaries.
“If clients are being cold called by brokers and told that they can get cheaper cover with the same insurer, they are understandably starting to focus on price over and above the appropriateness of cover,” he reports. “As an industry, I believe that certain intermediaries need to go back to basics and start doing what’s best for their client and not what will earn them the most commission.”
“There are still a number of cases of dual pricing clashes as provider systems don’t talk to each other so account managers within the same company are often not aware that terms have been sent to another broker for that prospect or client,” reports Claire Ascott, health and wellness director for employee benefits solutions at JLT Benefit Solutions Limited.
She believes that the biggest threat to the SME PMI market is insurers holding shares in, or acquiring, SME brokers and SME arrangements.
“Do these clients really still receive genuine choice at renewal?” she asks.
Some of the inter-broker tensions are perhaps inevitable in a market where small intermediaries vie with larger ones, particularly as consolidation takes hold. This was evident in the responses we received to questions about relationships between insurers and intermediaries, with the larger ones much more likely to report positive relations. Nick Boyton of
Alexander Forbes Healthcare, for example, describes relations with insurers as “generally good”, with insurers “showing flexibility when required”.
“There is a clear threat to the smaller broker as insurers look to adopt a more commercially viable stance in dealing with intermediaries,” concludes Richard Holden, director at Chase Templeton. “As well as considering claims ratios and lapse rates, cost cutting may see a move that insurers have been mooting for some time, meaning the loss of insurer agencies for poor performing and smaller intermediaries.
“Insurers utilise much finer tuned management information to maintain a profitable portfolio. Gone are the days of the tail wagging the dog’ – a situation we suspect some intermediaries find difficult to accept.”
WPA’s MacEwan is also pulling no punches, reserving his ire for “lazy” intermediaries.
“Relations are great for those providers and intermediaries who have concentrated on genuine and sustainable partnerships,” he says. “The lazy will wither while the innovative, energetic and service-orientated will thrive.”
Aviva UK Health’s Reynolds believes that the key to productive relationships is to share information with advisers.
“Over the last couple of years we have been building up our management information and data analysis capability so that we can have meaningful and transparent conversations with intermediaries,” he reports. “So we can see it’s not all about volume but about value over time.”
He believes that profit share is one way to tie intermediaries bringing value to the market to a more long-term relationship but that remuneration must also be reviewed, describing commission as a “blunt instrument”.
Since PruHealth’s announcement that it has moved to a 10:10 level commission model, brokers have continued to debate the wisdom of the shift, with several welcoming the move.
“It will also help to address the issue of policy churning and will help providers build long-term partnerships with intermediaries,” says Kevin Jones, sales director (east) at national intermediary Jelf. However, Chase Templeton’s Holden believes that the market has “latched onto” the debate over commission “rather than searching for more original solutions” and Michael Payne, general secretary of the Association of Medical Insurance Intermediaries (AMII) believes that it is “hiding the real issue that is affecting the sustainability of the SME market”, namely the lack of new insured business.
“There is an opportunity here for insurers and intermediaries to have a real win-win, by moving to a level commission for SME renewals or transfers, but with an enhanced commission level for genuine new business for previously uninsured lives, including expansions of existing schemes, giving a real incentive for intermediaries to grow this market,” he says. “Having a greater pool of newly insured people coming into the market each year would improve the insurers’ loss ratios too.”
Medisave’s Campell argues that commission is not the primary cause of rising premiums.
“Premiums and costs are driven by the cost of new drugs, procedures, hospital networks and the marketing people inside insurers who come up with new products, launch them and then withdraw them after18 months,” she says. “We need to stake our claim more heavily as to our place in the market and work out what specialist brokers are truly worth.”
PruHealth itself has acknowledged that commission is just one part of what sales director Dave Priestley describes as the “unsustainable economics” of the market.
“For small businesses, the perceived value of the traditional PMI product has not kept pace with premium inflation and the strategies of insurers and brokers in this market segment continue to undermine value rather than promote it,” he says. “In short, SME PMI has become a commodity.”
He cites limited investment from insurers in product development as one cause of this (Chase Templeton’s Holden believes that the market is “devoid of fresh impetus and innovation”). The answer is to “drive up the perceived value of PMI with SME customers while continually looking for new ways to keep premiums affordable and sustainable”. Product differentiation must be matched by “high quality advice rather than basic price comparison”, he warns.
Gallagher’s Gamble agrees. “We have to work out as intermediaries, what is our value to insurers?” she says. “Do we bring them more business? Do we take admin away from them? Are there special deals going on between insurers and brokers? We really have got to get a proper dialogue going.”
PMI PROVIDER CONSOLIDATION – THE FACTS
Brokers have contacted Health Insurance with concerns that recent consolidation in the PMI market means less choice for them and their clients. However, during the past 18 months there have only been four major deals of note. Prior to the deals listed below, the last major example of consolidation was AXA PPP healthcare’s acquisition of Legal & General’s PMI business in 2007.
May 2010 – Discovery Holdings, the parent company of PruHealth, agrees to acquire Standard Life Healthcare
Standard Life Healthcare was the UK’s fourth-largest private medical insurer, with an 8% market share and 490,000 members. At the time the acquisition created the UK’s fourth largest PMI provider, with a customer base in excess of 700,000 lives and premiums of approximately £400m.
March 2011 – Westfield Health acquires PatientChoice
Britain’s second largest cash plan provider acquires the specialist hospital treatment plan provider.
June 2011 – AXA PPP healthcare announces intention to acquire Health-on-Line
Britain’s second largest PMI provider already underwrites Health-on-Line products
August 2011 – Simplyhealth agrees to acquire Groupama Healthcare
The deal, set to be completed in the next three to six months, adds 4,500 schemes and 88,000 members to Simplyhealth’s customer base. The cash plan and PMI provider will become the fifth largest player in the PMI market following the acquisition.
WHY ARE COSTS RISING?
PMI premiums for SMEs (companies employing up to 200 people) have increased by 10% since 2010 according to employee benefits consultancy Mercer. SMEs are now paying average annual premiums per member of £1,532 up from £1,499. Mercer believes that this was partly caused by insurers looking to boost margins that were eroded in the recession, when premiums were dropped in order to retain business, but also by rising healthcare costs, driven by expensive new forms of treatment and an ageing population. Employees aged over 65 constituted 3% of all workers in 2010, a percentage that has doubled over the last decade.
SME VIEW: A MANAGEMENT TOOL OR A HEADACHE?
While insurers often promote PMI as a tool for improving productivity and preventing absence, surveys suggest that it remains regarded as a “perk” by employers. According to Mercer’s 2010 employer survey, attraction and retention of talent is the most important objective behind offering health-related benefits. While 42% of employers use PMI as a means of managing long-term absence (Chartered Institute of Personnel and Development), just 11% cite it as a top three most effective method for tackling this problem, behind 14 other services and tools including occupational health involvement, restricting sick pay and flexible working. Aon Hewitt’s Benefits & Trends Survey 2011 found that nearly a third of employers are planning to revise their healthcare benefits, driven by the need to reduce expenditure.