If the price is right

It\'s all change in the group medical insurance market this year as a greater number of schemes switch insurers to fend off financial pressures.

“We’re seeing between 30 and 40 per cent of SME schemes moving this year, up from around 20 per cent in a normal year,” says Mike Izzard, managing director of Premier Choice Healthcare, and chairman of the Association of Medical Insurance Intermediaries. “The recession is hitting home, employers are looking for savings and we’re seeing SMEs moving to save as little as 5 per cent on their premiums.”

Over at Enrich, healthcare manager Claire Ascott is also seeing an increase in movement. “It’s not a significant increase in switching but it has become very competitive out there. Last year was fairly stagnant but there are lots more opportunities for clients now. We’re seeing some big price decreases on schemes,” she explains.

Savings vary. Izzard says that as an example a ten man scheme could realise a saving of 10 per cent by shopping around. “Savings of between 5 and 10 per cent are fairly standard at the moment,” he adds.

It’s not just financial incentives that are spurring the movement in the market. As well as competing on price, some insurers are looking at ways they can be more flexible on cover to secure new business. For instance, Ascott says that insurers are more open to different ideas about scheme design. “They’re looking at tailoring for smaller companies now,” she explains. “There are plenty of benefits that can be adjusted to save money for clients.”

As an example she points to psychiatric care, questioning why some of the comprehensive schemes have as much as 90 days when most people would look to the NHS for this level of care. “I do expect to see more movement in benefits and this is a good thing,” she says, adding that she checks with clients several times a year to make sure benefits are still in line with their requirements.

Further, although medical insurance is an annual contract, the current climate is driving many insurers to make changes mid-term rather than force the client to wait until renewal. “They shouldn’t really allow mid-term adjustments, but where a client needs to save money then I suppose the insurers must be open to it,” says Izzard.

Although the amount of business moving around is evidence of price cutting to win business, it’s not a game every insurer wants to play. Alistair Sclare, director of healthcare at Groupama, says that although some insurers are aggressively cutting premiums, especially to defend their own books of business, he won’t go lower than the price the risk reflects. “There is huge pressure on price, but we believe that consistency of pricing is essential. Medical inflation runs at somewhere between 7 and 12 per cent and if you don’t pass this level of increase on one year, it’s very difficult to catch up the following year,” he explains.

Certainly, whether or not all this movement is good for business is debatable. While an annual market review is a key part of an adviser’s service to their client, and nobody wants to pay over the odds for their cover, chasing low premiums year after year can become an endless task. Once an insurer gets a whiff of the level of claims on a scheme, premiums have to rise. This is particularly true where an insurer has lowered its premium to attract the business in the first place.

“The current price cutting activity doesn’t make economic sense,” says Izzard. “The insurers are being commercial up to a point as they don’t want to lose market share but they are their own worst enemies. If they shared claims experience they wouldn’t find themselves importing rubbish and then having to hike the premium up.”

Ascott agrees. She is careful that where clients move they’re not going to a hugely under-priced scheme. “We wouldn’t expect to move someone every year to chase price. If we move them to an insurer with an accurately priced scheme they won’t face a huge premium increase the following year,” she explains.

As well as meaning losses for insurers and potentially locking clients into an annual change of insurer, this activity isn’t necessarily good for advisers.

Where initial commission is higher than renewal, moving clients will mean more revenue for them but the pain could come next year. “It’s like taking next year’s profit this year. When schemes renew next year, many of them will be smaller as a result of downsizing too,” says Izzard.

Not every intermediary is seeing an increase in the number of schemes switching though. For instance, Stuart Scullion, sales and marketing director at specialist intermediaries the Private Health Partnership, says the switch rates across the company are around half what they were last year. “We did expect to see an increase in switching because of the inclement economic climate but the percentage of clients switching has fallen,” he says. On average, he says between 8 and 9 per cent of clients switch but, over the first quarter of 2009, only 5 per cent have moved.

He puts this low switching rate down to the service provided to the company’s clients. As well as finding the most appropriate cover and insurer for the client, it also negotiates commission levels with insurers, looking to equalise initial and renewal commissions so there is no financial incentive to shift clients. “We want to work with insurers so that business can stay where it is,” says Scullion. “But some insurers are so keen to win business they won’t reduce initial commission levels.”

Where he has seen an increase in activity though is in the number of companies asking for a full market review. “They want to know what’s out there,” he says. “Some will move, especially if they’ve been with an insurer for a reasonable length of time but it can be expensive for a company to move insurers,” he adds.

Certainly costs can be racked up as a result of a switch, cancelling out any savings. Among the costs an employer may have to pick up are reprints for employee handbooks and marketing literature. Additionally, there is the time involved in setting up the administration for the new insurer.

Because of this, where there isn’t a huge variance between the quotations, Scullion recommends going back to the incumbent insurer for some good old-fashioned negotiating. “Most insurers have adopted a sensible approach and will offer a discount to retain business, especially if it’s a decent risk,” he says. “We then go back to the client and, even if it’s not the cheapest quote, as long as they’re happy with the service and believe they get good value, they’re likely to stay.”

Whatever the motive for moving or staying put, it’s essential that customers understand the implications of the current price war. “Intermediaries need to explain the implications of going for a cheaper premium. The average loss ratio is very high in medical insurance compared with other commercial insurances and you can’t expect a Rolls Royce product with a Skoda price tag,” he explains

In focus Cost-saving alternatives to switching

Alistair Sclare, director of healthcare, Groupama

Moving a scheme to a different insurer can save a client money, but there are ways to trim costs without switching insurer.

Excesses are an effective way to reduce premiums, shifting some of the cost responsibility on to the employee. A saving of around 5 per cent can be achieved with a meagre £50 excess, while a £5,000 excess can bring premiums down by as much as 75 per cent.

Shifting to a more restrictive hospital network will also reduce the cost, without requiring the employee to make any contribution. This can save between 10 and 30 per cent, depending on the insurer.

Another take on this is a guided option. By giving the insurer the say on where an employee is treated, a saving of between 10 and 15 per cent can be made.

A six-week option can also work, bringing savings of 15 per cent if private treatment is only available where NHS waiting lists are longer than six weeks.

As well as using pricing mechanisms, simply cutting cover will achieve savings. This could either be in terms of the level of cover or by altering who receives cover, for example, requiring employees to pay for dependant’s cover.

Modular products offer pricing flexibility, allowing benefits to be traded up and down. By trading down, employers can make substantial savings while retaining the option to increase cover at a future point.

But Alistair Sclare, director of healthcare at Groupama, isn’t convinced by the modular approach. “It would be a disaster for a company to have had cover for several years and then find out that the thing they cut out to save money was the very thing they needed,” he explains.