Buyer’s Guide: Private medical insurance

Provider competition is rendering increasingly savvy organisations with a wider selection of more tailored solutions, says Jamin Robertson

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Private medical insurance (PMI) providers operating in a tightly congested market admit healthy competition and a beefed-up NHS make for hard-fought new business. But astute firms are responding to employer demand by offering fresh options for this favourite staple of the benefits menu.

Latest figures from the Association of British Insurers (ABI) show the number of corporate policies edged up to 2,613,641 in 2004, an increase of 0.42% on 2003 subscriptions. With individual business down some 39,758 policies over the same period, corporate PMI remains the darling of provider business, but the statistics are hardly cause for excitement.

Ann Greenwood, director of business markets for Bupa, says employer demand is changing. "Customers want more flexibility and better value. There’s more attention now to sickness absence, and managing the return to work. People were spending less on healthcare, but they’re spending more [this year]."

In turn, Ann Dougan, marketing director for Cigna Healthcare, highlights the battle for floor space. "[The market’s] pretty saturated. There’s a lot of competition."

The continued growth of corporate PMI business is dependent on meeting the demands of employers, who want cost-effective healthcare benefits rolled into a customised product helping to keep workers at the coalface.

Providers catering to small and medium-sized enterprises (SMEs) are meeting that need, with this side of the market appearing to buck the overall trend of sluggish growth.

Employers are signing on, attracted by an increased range of bespoke products tailored to their needs. Andrew Santoni, PMI product manager at provider First Assist, sees a lot of newcomers. "In the SME sector, we are seeing the growth of virgin business rather than people just switching from another provider. I think the market has been flat in places but it’s quite buoyant in others." Clinicare is one provider to concentrate on small operators, recently introducing PMI that allows a wide-ranging choice over product design including risk share, benefit options, and co-insurance, and full employer choice of benefit limits and entitlements.

Other PMI add-ons offered by providers might include employee assistance programmes (EAPs), legal advice, travel insurance, sickness absence monitoring and rehabilitation services.

Co-insurance schemes and company self-insurance schemes remain popular. Co-insurance plans introduce a degree of user-pays to PMI cover, with employees typically contributing up to 25% of the cost of minor treatment. The product is designed to discourage over-consumption. "It’s like going to Sainsbury’s. If I said ‘buy as much as you like’, you would be a much larger person than you presently are," says Charlie MacEwan, head of communications at provider WPA. He says cost savings of 35% are not unusual with co-insurance schemes, and points out premiums are currently decreasing compared to between 8% and 15% increases for full-coverage products. MacEwan describes the shared responsibility business as "gathering momentum".

Company self-insurance schemes are continuing to attract large employers lured in by reduced costs in exchange for heightened risk. Large companies often invest funds in a tax-efficient vehicle (such as an employee benefit trust), based on previous claim costs. When claims total less than the investment, the company pockets the difference rather than the insurance provider as is the case under a normal contract. Such schemes also escape the insurance premium tax (IPT). Cost savings are estimated at between 20% and 30% for employers with enough staff (at least 300) to benefit from the economies of scale. It is not all plain sailing, as VAT and administration costs apply, and employers may need to buy stop-loss insurance to prevent a crippling claim from derailing the company PMI. But that hasn’t deterred employers, with WPA growing its self-insured business 50% in 2004. Paul Moulton, director of corporate sales for Axa PPP Healthcare, has seen a similar spike: "Our trust business has grown considerably, as more and more [employers] are moving to trust vehicles with the confidence that others have tried it and like it."

Cigna’s Dougan also identifies self-insured plans as an area of future growth, with employers looking to control costs amid upwardly spiralling premiums. She says technology such as online systems aid cost control with increased accuracy.

Looking forward, First Assist’s Santoni defends traditional PMI provision. "I still believe PMI is the primary driver [but employers want] more flexibility of options." He says attention to occupational health and sickness absence prevention will drive new business over the next 12 months. Dougan agrees: "It’s not so much a change to the product but linking it with other products. Employers are not just thinking about healthcare, from the perspective of PMI, but also other sorts of interventions. There’s more focus on wellbeing, and avoiding sickness. Sickness absence is something that’s at the top of people’s minds." Axa PPP’s Moulton says early intervention is required to tackle long-term absence problems. Like the market for healthcare cash plans, he sees potential in a company-paid core PMI product that allows workers to upgrade coverage out of their own pocket. WPA’s MacEwan sums up the outlook: "Innovative insurers are expanding, while those trying to stick to old models are contracting."

Providers have clearly started to act to supply that shifting demand. Rebecca Freebody, product development manager for Norwich Union, adds providers are facing an increasingly savvy consumer. "Corporate demands are much higher than they were. We have to win on price and product. There’s a lot of demand from companies to get more out of their PMI, they’re looking for more than health insurance."

The Facts

What is private medical insurance? Private medical insurance (PMI) covers customers for the cost of acute treatment for short-term curable illnesses, and often costs for hospital treatment, outpatient and consultant services. PMI typically excludes chronic long-lasting and pre-existing conditions, alcoholism and HIV/Aids treatment. It is favoured as a faster alternative to NHS treatment, with customers normally able to book appointments at a time and location to suit.

What are the origins of the product? PMI pre-dates the NHS, which was set up in 1948, and evolved from friendly societies when people paid contributions in return for financial assistance when needed. Until the mid-1980s, long-established providers such as Bupa and PPP Healthcare (now Axa PPP Healthcare) completely dominated the market but as NHS waiting lists grew, more commercial providers entered the fray.

Where can employers get more information and advice? The Association of British Insurers (ABI) is the UK’s trade association for the insurance industry and has comprehensive information on the PMI market (visit

Nitty Gritty

What are the costs involved? According to figures from the Association of British Insurers (ABI), the average cost of a corporate policy reflects the buy-in-bulk savings potential, at £561, compared with an average price tag of £1,370 for a personal policy.

What are the legal implications? Employers enter into a legal agreement with the insurance company. Should a dispute strike a stalemate between the consumer and insurer, it can be referred to the FSA’s dispute resolutions service, the Financial Ombudsman Service.

What are the tax issues? Private medical insurance is taxed as a benefit-in-kind. Similarly, employers operating tax-efficient vehicles such as trusts will be taxed in the same manner.

In Practice

What is the annual spend on the product? According to the Association of British Insurers (ABI), in 2004 there were 2,613,641 corporate policies grossing over £1.46bn. Taken together, corporate and individual policies provide total private medical insurance business of £2.93bn.

Which providers have the biggest market share? Industry figures consider Bupa to be the largest provider, with a market share of around 40%. Axa PPP is the second biggest player, with a stake estimated at 25%, followed by Norwich Union (10%), and smaller organisations WPA, First Assist, and Standard Life, with a market share of around 5% each.

Which providers increased their share the most over the past year? Although there has been fairly stagnant growth overall, all providers targeting small- and medium-sized enterprises report good levels of growth, with some increasing this side of the business by 50%.