This has not been a good year for customers of Equitable Life or Independent Insurance. Although Independent was sometimes seen as brash or even arrogant, few expected it to collapse quite so disastrously.
Independent was a “new” company, having only been floated in 1993. But it is not just new companies that can flounder. Equitable Life’s fall has not been so complete but many policyholders have lost money backing an organisation that predated the French revolution and was the first in the world to adopt actuarial premium rating.
Although neither Independent nor Equitable was involved in private medical insurance (PMI), it is common for insurers to join or leave markets, and PMI is no exception (see table 1).
No PMI insurer in recent years has gone bust and left clients without cover. But if this happened, the Policyholder’s Protection Act would ensure 90 per cent of individuals’ claims would be met.
PMI clients run a risk not faced by most general insurance policyholders. Although PMI is usually written as annually renewable, for individuals at least, it is effectively a long-term product as medical conditions arising before a policy starts are normally excluded.
A client taking out PMI today, diagnosed with a heart condition in five years’ time, would still get full cover under his or her policy, but switching to any new provider could mean treatment for the condition being excluded, just when cover may be needed.
One complication is that almost half of PMI providers do not underwrite the risk themselves (see table 2). New products and companies typically offer attractive and innovative plans, and undercut better-known rivals.
There are few restrictions on who can set up a new PMI scheme, as long as the underlying risk is properly insured. So how can an intermediary ensure any new provider is trustworthy?
Table 3 sets out some questions to ask but these are not a rigid test – caution and common sense should prevail.
Some years ago, for example, Allied Dunbar switched underwriters from Lloyd’s of London to a French insurer and subsequently switched again, this time to Cigna. In practice, whoever underwrites the plan, the major safeguard is the Allied Dunbar brand name.
Ohra, now part of the giant Norwich Union group, underwrote its risks through its Dutch parent. Even though the risk was not written in the UK, it was placed in the EU and, despite later concerns about Norwich Union’s plans for the company, Ohra’s financial strength was not an issue.
Criterion Insurance underwrites policies across a number of markets. But how does it look into providers’ backgrounds? “We view both short and long-term risks the same way,” says group chief executive Nigel Cooke. “That means we have to be prepared to be the administrator of last resort.”
In other words, if the provider fails, Criterion will step in to take over or give help to get around any short-term difficulty. “Aside from any moral issue, we are very concerned commercially to make sure our partners are in it for the long-term and that they are likely to survive,” he says.
For insurers, one test is to find out their credit rating. Largest of the rating agencies is Standard & Poor’s (S&P) and any intermediary or client can phone its ratings desk on 020 7847 7400 to get a current rating or ask for a copy of the S&P credit report on the organisation.
S&P aims to rate 85 to 90 per cent of all general (including PMI) insurers and has ratings for some 830 insurers in Europe, the Middle East and Africa.
The General Insurance Standards Council (GISC), general insurance’s self-regulatory organisation, asserts that assessing the financial viability of insurers is really a matter for prudential regulators.
“Our general approach is that an intermediary should be giving out information so customers can make their own informed judgments,” says GISC head of communications Catherine Nicoll.
Although some might see that as an abrogation of responsibility, few intermediaries will have the expertise to undertake such a task, while even the experts can get it wrong. Until it ceased trading, Independent enjoyed the support of its auditors, had a high credit rating and a regulator that saw no reason to impose trading restrictions.
Ultimately, all UK authorised insurers are regulated by the Financial Services Authority (FSA) on behalf of the Treasury, and a key FSA role is to monitor insurers.
The FSA consumer helpline on 0845 606 1234 will confirm whether any particular insurer is authorised. To ascertain an insurer’s financial position, copies of its FSA financial returns can be obtained from Companies House, but these 90-odd forms are highly technical and not always up to date.
Insurers that are well-established household names and trusted brands are unlikely to come under scrutiny from nervous clients. But even there, if it is a quoted company you can look at its published report and accounts, advises Andy Sampson, head of planning and research at Legal & General. These can be obtained from the company secretary or from a broker consultant.
Some intermediaries only support established players. Valerie Levene, a PMI specialist from North London, says: “I support only top providers, as my clients are looking for security.”
She adds that as well as financial security she wants to be sure her clients will get good service and claims paid without delay.
For new providers, establishing credibility can take time but that can be helped to some extent by the market already knowing some of the key individuals. Healthcare 4 Life, for example, includes many ex-Ohra staff, while Health-on-Line founder Peter Dalby was the man behind what is now Standard Life Healthcare.
Healthcare 4 Life chief executive Wendy Young joined the provider in June. How has she found intermediaries’ attitude to financial strength?
“Unless they are excited by the product, issues like financial strength will not even be raised,” she says, adding that intermediaries will want to see the provider is registered with GISC and the insurer is a member of the Association of British Insurers (ABI).
Steve Sharrock, the broker consultant manager at Universal Provident, adds that most brokers want to know who underwrites the plan. “Once they know it’s Cassidy Davis [Universal Provident’s underwriter], most are happy with that because this is a well-known name,” he says.
Most intermediaries are not a slow in asking direct questions of providers but Sampson believes you should not be afraid to ask questions of any company. In fact, a key test is that any reputable provider should have nothing to hide.
Ultimately, the key element for advisers and their clients is trust. If a provider cannot be trusted to pay claims or offers poor service, that trust can quickly break down, regardless of the insurer’s underlying financial strength.
As Equitable has proved, being a blue-chip name is not a sufficient guarantee that things won’t go wrong, while the list of insurers that have withdrawn from the PMI market (see table 1) shows even major names can leave the market if they so decide.
Trying to second-guess which insurers are here for the long haul is far from a scientific exercise and, while it may be reassuring to know a company has been in the market for many years, no PMI insurer is even close to Equitable’s 238 years of trading.
For intermediaries as well as clients, the critical factors are whether the provider offers the right product at the right price and whether its systems, people and service are up to scratch. Like worrying about whether the earth will be hit by an asteroid, over-concern about financial strength is perhaps best left to the experts – even if they will occasionally get it wrong.
So far, PMI has a good track record and the market has avoided the scandals that have so beset other financial services areas. Intermediaries will be hoping this will continue and that the FSA will redouble its efforts in monitoring insurers to avoid another situation like Independent or Equitable Life.