With corporate clients scrutinising every penny of their employee benefit spend, the health insurance market hasn’t been immune from the post Lehman Brothers fallout. But in comparison with some sectors of the market that have reported 24 months of carnage, it has been reasonably resilient.
“The health insurance sector is fairly recession proof,” says Andrew Tripp, chief executive of Perfect Health and chairman of the Association of Medical Insurance Intermediaries. “It stood up well to the recession in the early 1990s and, although there have been some losses, it’s been pretty resilient this time too. Employees really value their health related benefits, which makes it difficult to take them away.”
This resilience can be seen in figures from Laing & Buisson. In its report, Health and Care Cover – UK Market Report 2010, it found that over the course of 2009 there was a 4.7 per cent drop in the number of corporate medical policies, across both insurance and trusts.
Industry experts believe the bulk of this decline resulted from companies downsizing or going out of business rather than the withdrawal of medical insurance as a benefit. “Our retention rates have held up well,” says Kevin Jones, SME new business director at Jelf Employee Benefits. “Although we’ve seen some companies go under and large schemes reduce as a result of redundancies, lapses have only really been among the very small companies where they can’t afford anything but the business essentials.”
But, while the statistics might suggest a relatively calm time for the health insurance industry, this is far from the entire picture as employers have looked at ways to cut the costs of healthcare benefits. “Cost containment is much more important than it was two years ago,” says Jones. “They still want comprehensive cover from a reputable provider but they’re much more open to looking at different ways to provide benefit.”
Popular mechanisms for cost containment have included increasing excesses and removing dependants from employer-paid cover. Others have taken a tougher stance and trimmed back benefits, going from full refund to a cap on benefits. For example Tripp says that supermarket chain Somerfield introduced a £50,000 claims cap, a move that can reduce the premium by up to 20 per cent.
But it hasn’t always been a matter of delicate manoeuvring of benefits between the client and the broker. Keen to get value for money, employers have looked to buy cover more cost-effectively too. David Castling, intermediary distribution manager at National Friendly, says: “We’re seeing corporate clients that have been looked after for years by one broker, inviting other brokers in to pitch for the business. They want to know they’re getting the best possible value.”
The focus on cost cutting means that the responsibility for buying cover has often shifted to procurement too. This hasn’t always been a comfortable move as Dr Doug Wright, principal clinical consultant at Aviva Health UK, explains: “Generally it’s been positive but healthcare is very different to other purchases such as office furniture or supplies. This focus on price can make the product much more commoditised.”
Insurers have also responded to the demand for value with new products developed to tap into the more cost conscious approach. Examples of this include Axa PPP’s Pathways, where the decision regarding where the employee is treated is passed back to the insurer for a saving of around 15 per cent, Aviva’s Speedy Diagnostics, which covers initial diagnostic tests and Health Assured’s Work Assured plan, which targets those conditions that prevent employees from working with a combination of occupational health, employee assistance programme and medical insurance.
Other lower cost options have also fared well. For instance, Castling says he has seen a lot of interest in the society’s five year fixed price plan. “Employers like the certainty as it means they can budget without fear of premiums increasing,” he says. “There’s going to be a crunch with some of the strategies being used to keep premiums low. Some of the premiums being used to win business aren’t sustainable and mechanisms such as no claims discounts can backfire if someone needs to make a claim.”
Unfortunately it hasn’t been entirely innocent behaviour from the insurers as, for some, the effect of the intense financial pressures experienced by companies over the last two years has been the growth of something of a price war. Jones explains: “We have seen some very erratic pricing over the last couple of years. The insurers have started talking about margins and profitability this year, with an eye more on profits and sustainability, but we’re still seeing cases where insurers have won business and then been forced to load it at renewal.”
Although this has delivered lower premiums to the corporate client, this undercutting has arguably not necessarily been good for the market. For instance, Paul Moulton, director of sales and client relationships at Axa PPP healthcare says it’s resulted in some anomalies. “I’ve seen some companies move from a medical expenses trust to full insurance. They like the idea of shifting the risk to the insurer but it’s only been possible as a result of some financially suicidal pricing,” he explains. “This isn’t sustainable.”
Another less than attractive trend that has been noted by Tripp is an increase in the number of shortfalls on claims. “I claimed recently and was shortfalled four times,” he says. “These totalled more than £600, which is around 60 per cent of my annual premium.”
He believes this is a result of two factors – consultants charging more for procedures and insurers taking a tougher stance on claims. “I think the insurers are looking harder at what’s being claimed but, with margins tight, neither are they indexing the amount they’ll pay. This will be a big issue going forward,” he adds.
Against a background of price cutting and reductions in sales, there’s also been a bit of a shake-up among the insurers, with the acquisition of Standard Life Healthcare by Discovery rocketing PruHealth into fourth place in terms of market share. Although this means there are now four players with a decent market share, the market is still very concentrated, with around 88 per cent of policies held by them. Further, while advisers are bemoaning the reduction in choice, Dr Wright believes there could still be scope for further consolidation. “There are plenty of small insurers that might look to consolidate to take advantage of the scale and cost efficiency this would give them. However, I do wonder if the appetite is there. Additionally some of the smaller players are not for profit organisations that would find it more difficult to merge,” he explains.
As far as future predictions for the market go, few expect to see a return to growth anytime soon. For instance, Moulton is not expecting an upturn until late 2011 or even 2012. “Spend lags the recession. The budgets for 2009/2010 may have been set before the recession kicked in so we might yet see further falls before it starts to pick up again,” he says.
What may prove to be more of a catalyst for the upturn may be the performance and public perception of the NHS and the health insurance industry is closely watching its fortunes under the coalition government. Wright says the crunch may be coming with the extra funding that enabled waiting lists to come down now being withdrawn. “The budgets are now flat or reducing and this presents a real challenge,” he says. “I think we could start to see waiting lists increase again, especially for some of the elective procedures that are within the traditional medical insurance territory.”
This could have very positive implications for the health insurance market. “More doors will open when we start to see the effect of cuts in the NHS,” says Castling. “Companies emerging from the recession with fewer employees won’t be able to afford having someone off work waiting for treatment on the NHS. Medical insurance will become more attractive.”
On top of this the government’s position on tax is important. On the negative side, the increase in insurance premium tax (IPT), rising to 6 per cent from next January, is seen as the beginning of an upward trend. Tripp expects it will be in excess of 10 per cent in a few years but believes insurers will respond to this with product innovations such as WPA’s Corporate Deductible plan, which can minimise IPT for groups of 100 plus.
A more positive move may come in the shape of tax breaks for health insurance. Although it’s far from a pressing step, cuts within the NHS could necessitate the introduction of incentives to make medical insurance more attractive. “The health insurers are lobbying for tax relief on premiums,” says Jones. “There has to be a radical shake-up of the NHS if it’s going to save £20 billion by 2014. Encouraging people to take out medical insurance will mean opportunities for the industry.”