As competition heats up in the iPMI sector, Sam Barrett reports on some aggressive pricing strategies on the part of some providers.
Something of a price war is breaking out in the international private medical insurance (iPMI) market as providers fight for a larger share of the market. But, while this is good news for anyone looking for a deal, it can lead to longer-term problems for the market.
“It’s an extremely competitive market at the moment,” says Chris Beardshall, global account executive for PMI Health Group, the national intermediary. “We’re seeing some new entrants looking to establish themselves in the market but also other providers looking to grow their market share. It’s getting a bit aggressive and there are some very cheap prices out there.”
Philip Wright, director UK at Globality, the iPMI provider, agrees.
“There are a few players committing suicide out there, offering prices way below centre of the market. We’re not seeing the market follow them down yet though so I’m not convinced we’re plummeting into a price war,” he says.
There are a number of reasons why an insurer might look to lower its prices below the market average. For new players, it is a way to get established in the market, allowing them to gain critical mass and demonstrate their service proposition.
A spot of price manipulation is also used by more established players to grow market share. This could be to re-establish the brand, perhaps after losing market share; to increase the size of the business in anticipation of selling the company; or to compensate for other lines of business that are not performing so well.
Wright explains: “The UK domestic market is static at the moment so insurers are having to look elsewhere to get the volume. The international market offers this opportunity.”
But, while some of these strategies are fairly innocent, the long-term effect can be much less palatable. After a year of bargain basement cover, premiums inevitably rise and, coupled with medical inflation of anything from 8% to 18%, policyholders can be hit with a price hike of 20% to 30% plus.
“This can be problematic for brokers to explain to their clients,” says Ron Buchan, chief executive of Allianz Worldwide Care, the provider. “By recommending a cheap premium they’re storing up a difficult conversation for the following year. On top of this, where the client is medically underwritten, there can be cover issues if they’ve made a claim and need to switch to another insurer.”
NOW Health International is among those that have reduced their premiums this year. Although it only launched in January, it cut some of its rates towards the end of May. This price review saw reductions of at least 15% on its two most comprehensive products; reductions of between 10% and 20% on age bands over age 56; and, by adding new age bands for its group rates, a discount of up to 50% on book rates.
But while these are significant reductions, its marketing and ecommerce director Alison Massey insists it’s not a bid to win market share at any cost but a reflection of the way pricing has shifted across the market.
“The terms ‘suicidal rates’ and NOW Health International don’t appear in the same sentence. We didn’t want to remain in a place where intermediaries were saying we weren’t competitive,” she explains. “It’s a service market and our proposition remains about service. We offer very rich benefits and full medical underwriting. That’s not the model of an insurer looking to grab market share at any price.”
Timings of NOW Health International’s pricing negotiations show how the market has shifted. It negotiated its launch rates with its underwriter AXA PPP International last August and, although it was confident then that they were in line with the rest of the market at that time, feedback from intermediaries after launch indicated a need for a price review. Massey says she’s never known the market to be this price sensitive.
“We’ve had to respond,” she says. “Yes we want market share but we want it on the right terms. We’ve seen other providers price below the market rate but it is a false economy and it isn’t sustainable. We’re not doing that.”
Another insurer that has been able to pass on lower than average price rises is Aviva UK Health. It put a 5% rate increase through in April, the first increase on its Solutions range since it was launched in 2009.
“It reflects the performance of our book,” says Teresa Rogers, business lead for international at Aviva UK Health. “We haven’t seen a huge level of claims experience on our books.”
She believes this is largely down to product design. Although there is a broad range of benefits, there are limits on the amount that can be claimed.
“This cap drives behaviour and has helped to control claims,” she adds. “We don’t want to price our products too low. Buying market share in that way isn’t sustainable in any market.”
But while Aviva and NOW Health International are confident their pricing is set correctly and for the long-term, there is recognition that it’s a strategy that does come to the fore from time to time. Buchan is keen to see insurers taking a more responsible approach to pricing.
“Undercutting the market is unsustainable,” he says. “The majority of the costs making up a premium are claims costs. These account for 75% to 80% of the premium. Add on something for commission and to cover your own costs and you only have a very small margin to play with. You could reduce your administration costs but that only gives you a saving of a couple of percent. If you’re entering the market and need to build market share to prove yourself it’s more defensible but there’s no magic way to charge a price that’s below the market.”
Others argue that there is room to manoeuvre much more on price. Kevin Melton, sales and marketing director for AXA PPP international, agrees that there is a market price but adds that insurers can build in a lot more flexibility over pricing in the way they control costs. As an example, since joining AXA he has looking at reducing hard copy output by increasing online capacity.
“We’re moving as much as possible online,” he explains. “This covers documentation but also areas such as transactions where online functionality is greatly appreciated.
“However, the fundamental driver for controlling costs is the way you manage the healthcare providers. We have the benefit of being able to use other AXA companies around the world to negotiate with the providers. For example we can tap into the network that AXA Assistance has built up around the world to secure better deals with hospitals. This can create a real competitive advantage.”
Other insurers are also leveraging their global reach in this way. For instance, as part of Munich Re, Globality is able to use the expertise of other health companies within the group. This gives it access to more than 5,000 people in 26 locations.
“If we find ourselves with clients in a new market, chances are there’s already someone out there,” adds Wright. “They will have built a relationship with the providers, understanding the way healthcare works in the region and how to get the best rates. This local knowledge is important.”
There are also indications that insurers are looking at ways to completely avoid accusations of short-termism on pricing. For example at Globality, a two year fixed price model is helping to build sustainability into the pricing. Wright says this developed out of feedback from brokers.
“Health insurance costs increase year after year but brokers wanted to be able to go to a client and offer the reassurance of a fixed price for the next two years,” he explains.
The downside of this is that because premiums are averaged over the two year period they can appear expensive in the first year. Wright says that this can cause difficulties, especially when the market is as competitive as it is at the moment.
Just how long this price war may last is anyone’s guess but PMI Health Group’s Beardshall expects the market to settle down again in the next couple of years.
“I expect the market will continue to be fairly aggressive for the foreseeable future. This type of activity happens from time to time but ultimately this market is all about service not price. When we place business we need to be certain the insurer can deliver when the policyholder makes a claim, not worry about future pricing,” he says.
Additionally, while undercutting prices is common in a stagnant market, there is less need for this survival of the fittest tactic in the international medical insurance market. Strong growth is taking place as the economy recovers and businesses in particular start to send employees overseas again.
“It’s tough for any provider to come into the international market as you need to prove yourself but you don’t need to do this by pricing your product too low,” says Aviva’s Rogers. “There’s plenty of growth out there: we don’t need a price war.”