A little disclosure can make all the difference

Claims experience is an essential piece of information when insurers price a risk. Knowing whether the policyholder has made a claim can give a good picture of the type of risk the insurer is taking on and enable it to be priced accurately.

But this isn’t the case when it comes to medical insurance in the SME market. Here, with the exception of one insurer, obtaining the claims history for a scheme isn’t an option, and quotations from competing insurers must be based on the make-up of the scheme alone.

“How can an insurer write a risk appropriately if it doesn’t have a record of the risk?” says Peter Staddon, head of technical services at the British Insurance Brokers’ Association (Biba). “We are in a ridiculous situation where the information is readily available for a scheme with 50 members, but if it has 49 members, you won’t automatically be able to receive it.”

Only one insurer, Groupama, will automatically provide details of the claims history for SME schemes, with some of the other insurers providing it on a less formal basis. For example, Staddon says that when Biba’s medical insurance scheme was rebroked, the incumbent insurer, WPA, released details when asked. Additionally, anecdotal evidence from brokers suggests that an insurer’s willingness to disclose claims experience will depend on the size of the intermediary and its relationship with the insurer, with smaller intermediaries unlikely to be successful at obtaining the information.

While many of the big providers we spoke to would not even entertain discussion on the subject beyond a blanket rejection of the concept, for Groupama, the process is simple. “We release information for schemes of any size. For small groups we provide details for the previous three years, showing the number of claims and the amount that has been claimed,” explains Alistair Sclare, director of healthcare at Groupama. “Presenting the information in this way ensures we do not breach the Data Protection Act.”

Indeed, the Data Protection Act is often cited as a reason for non-disclosure. While the claims experience of larger schemes can be anonymous, the insurers argue that for smaller schemes it is impossible to do this, and employees that have claimed risk being identified. This, they say, is in breach of medical confidentiality.

But many say this argument isn’t valid. “Insurers can’t hide behind the Data Protection Act,” says Wayne Pontin, business development director at Jelf Employee Benefits. “If they can disclose for 50 or more employees, they can disclose for smaller groups. Including a consent clause in their contracts with employees would get round this too.”

The other argument that insurers use to support non-disclosure is that, as SME schemes are community rated, claims experience has little bearing on the premium. “People are confusing experience and community rating,” says Charlie MacEwan, corporate communications director at WPA. “In our eyes, if you have a company with 100 or more employees, you can be experience rated. If you have less than 100, you must be community rated. WPA does not price community rated schemes based on the claims experience of that customer.”

But Pontin doesn’t believe this is the case. “A scheme might be community rated at inception but not at renewal. All insurers will adjust individually at renewal to reflect the claims experience,” he says.

Some insurers do acknowledge that they include an element of claims experience in their SME pricing model. “There is some rating by scheme, but it only plays a very small part in the premium,” says Julian Ross, head of policy communications at Standard Life Healthcare. As an illustration he says that if a scheme with a £2,000 annual premium experienced some large claims, say £20,000 a year for three years, they might end up with a 40 per cent or 50 per cent loading as a result, but the premium wouldn’t shoot up to £20,000 a year to reflect the claims experience. “It does have an influence but not as much as is being suggested. Additionally, the smaller the scheme, the less it will have an influence,” he adds.

Insurers also point to the make-up of the SME market to support their argument for non-disclosure of claims history. Around 70 per cent of SMEs have less than 10 employees, with more than two thirds of these having less five. “The SME market is much closer to the individual market in the way it has to be priced. I don’t see that changing,” says MacEwan.

The other argument that often crops up when discussing disclosure relates to cherry picking. “The larger insurers fear that cherry picking would occur if claims experience was revealed,” says Sclare. With more risk information revealed, ‘better’ risks would be offered the most competitive quotes, leaving the ‘poor’ risks to take any premium they could find. “If this did happen, I don’t understand why they would suffer any more than any other insurer. Everyone has the right to shop around for a better price,” he adds.

But, Ross argues that, for groups of this size, even if it was disclosed, claims experience wouldn’t indicate enough to enable an insurer to cherry pick schemes. “The existing insurer might know that there’s a big claim coming or a closed claim or that an employee that had made a lot of claims has left the scheme. A new insurer wouldn’t see this so it couldn’t really make a fair assessment,” he explains. “It’s what insurance is all about when risk is pooled.”

To illustrate this, he says that at Standard Life Healthcare there’s a 50 per cent chance that the loss ratio will be 30 per cent or lower in any year for a group of 10 employees, and a 10 per cent chance that it will exceed 180 per cent. This means it’s fairly normal for an SME to have one or more good years followed by a third where a medium-sized claim dramatically alters the loss ratio. “This unpredictability means that SME claims experience can be very misleading and open to misinterpretation,” he adds.

However, while the insurers use a number of arguments against releasing claims experience, those in favour of disclosure come back to the customer’s position in support of their case. “If we haven’t got the full claims history then how can we treat our customers fairly?” says Pontin. “Every provider you ask to submit quotes should have the same information. How can they quote accurately without this? By withholding claims information, insurers are protecting their books by holding on to the best risks. This is cherry picking.”

Staddon also believes that the SME insurers are failing customers, and draws comparisons with other areas of the insurance market to support his view for change. “Motor insurance quotes used to come out a week before renewal to prevent policyholders from shopping around for a better deal. This was changed many years ago to make it fairer to customers. The same should happen for medical insurance for SME schemes,” he explains.

A compromise could be on the cards. With so much resistance to disclosure, it is possible that rather than arguing for an all or nothing approach, its supporters may push initially for disclosure on the larger SME schemes.

As an example, Pontin says a pilot scheme could be run where claims experience is disclosed for groups with 20 or more members. “We could see how this works for 18 months to two years and, if the insurers were happy it hadn’t had a detrimental effect on the market, extend the practice to smaller schemes,” he adds.

This sort of compromise is welcomed by Sclare. “We wouldn’t be against the progress that’s been made if a compromise was struck, but we would push for it to be extended across the SME market,” he says. “The longer it goes on the more out of line we are with other markets.”

Ultimately though, with both parties vehement that they are behaving in the best interests of the customer, it would be a shame if some agreement couldn’t be met without another party, such as the Financial Services Authority, being brought into the fray.

AMII VIEW: Clear and transparent

The Transparency of Claims discussion panel was set up by the Association of Medical Insurance Intermediaries in September 2008 to bring together UK medical insurers and intermediaries to focus on the issue of transparency of claims information in medical insurance.

The panel consists of Andy Couchman, as the independent chairperson, Mike Izzard (pictured right), chairman of AMII to represent specialist healthcare intermediaries and IFAs, and Peter Staddon, head of technical services at Biba to represent the wider general insurance broker sector.

Representatives from three medical insurance companies – Cigna, Groupama and Standard Life Healthcare – made up the insurer part of the panel at the first meeting, with Axa PPP healthcare and Bupa attending in an observing capacity.

The first meeting was held in January, with a second taking place later this month. Following the first meeting, Izzard said: “At this stage there are no proposals on the table to change industry practice, but it is important that all parties understand the issues if we are to develop a consensus on best practice that is in the best long term interests of all our SME clients.”