A sustainable trajectory?

Its boom time for cash plans in an otherwise difficult benefits market. But is some product pricing flying too close to the sun? Sam Barrett investigates

The report shows that the number of people with company paid cash plans increased by 11.2 per cent in 2010, to 450,000, growth that comes as no surprise to the cash plan providers as understanding of the products grows and as cash-strapped employers look for visible but affordable benefits.

Part of that growth has to be attributed to advisers’ increased appetite for cash plans. Stephen Duff, managing director of HSF, says he’s seen more interest from advisers looking for an alternative revenue stream as sales of medical insurance struggle. Likewise, Raman Sankaran, sales and marketing director at Simplyhealth, says it can be a relatively easy sale for advisers. “Decision making can be very quick,” he says. “Once an adviser’s recommended a cash plan it only takes a couple of months for it to be up and running.”

There is also a sense amongst providers that corporate cash plans are no longer seen as a peripheral part of a benefits package.

“The corporate paid market is very vibrant,” says Paul Shires, sales and marketing director at Westfield Health. “Awareness of the benefits cash plans provide is growing in the market, both among employers and advisers, and this is helping to drive sales.”

As well as the increased awareness, the economic climate is benefitting the corporate cash plan market. With budgets stretched, cash plans have a number of benefits that appeal to employers. Prices are low, with plans starting from £1 a week per employee or less; plans are visible with the average employee claiming at least once a year; and premiums are stable, giving employers a better grasp on future costs. “We find a lot of employers take out the £1 a week cover for their employees but allow them to upgrade if required,” says Duff. “This is a successful strategy and around 50 per cent of employees will upgrade.”

But while the sales increase is welcomed by all in the market, with the poor economic climate fuelling at least some of the take-up, there are questions over whether the growth is sustainable.

Although he believes sales will be unable to continue to grow at the level seen in 2010, Wayne Pontin, director of Jelf Employee Benefits, doesn’t expect to see many cancellations. “Sales can’t continue at this level, especially when the economy picks up. When that happens employers will start looking at benefits like medical insurance to differentiate themselves from their competitors,” he says. “I don’t think employers will cancel schemes though. Once employees are used to claiming their dental and optical benefits every year it’s very difficult to take a scheme away.”

However, while a well used cash plan can be highly valued by employees, some providers fear that the current drive for market share is resulting in some schemes being less likely to remain in place for the long-term.

Brian Hall, sales and marketing director at BHSF, says that in the traditional environment, the cash plan provider would help the employer promote the scheme to drive usage. “With some providers cutting prices to grab market share, margin is so tight they don’t want to encourage claims so they’re not providing this promotional support. The employer is then questioning why he pays for a benefit no one uses,” he says. “I don’t think all the new business is being sold with an eye on its long-term sustainability.”

Although this strategy may be short-sighted, there is room for competitive pricing in the market. Many cash plan providers have built up significant reserves and it is common practice to use these to support marketing campaigns to build business. Shires says that as long as a provider models its prices for the long-term, it’s not unreasonable to use these reserves to build market share.

But he accepts that this isn’t always the case and he has seen examples where the long-term sustainability does appear to have been overlooked. “Our administration margin is around 16 per cent, so if the average premium is say £100 that’s a cost of £16 to run it each year,” he explains. “But I’ve seen schemes for as little as £25 a year. These will still cost around £16 a year to administer. It doesn’t leave much room, if any, for manoeuvre.”

As well as putting the provider under pressure, these tight margins can result in substantial price rises. For instance Pontin says he’s seen schemes that, after being in place for three years, experience a 100 per cent price increase. “One of the benefits of cash plans has been the stable pricing. This type of price rise isn’t good and we will always look for pricing stability when recommending providers,” he says.

While steering clear of the providers looking for short-term gains will help secure a solid future for the corporate cash plan, another risk is coming out of the increased take-up of benefits by employees. As sales grow, especially into the white collar market, so will claims.

Shires says: “One of our salespeople has found that more sophisticated buyers tend to claim more. We usually find that on a large book of business this type of activity is cancelled out by other customers who claim less but we are keeping an eye on this.”

But although a more sophisticated employee may be more switched on to claiming, Peter Smith, managing director of Benefex Financial Solutions, says there could be a safety mechanism in place. “A more sophisticated buyer may claim more but they’re likely to be healthier too so overall claims will be lower,” he says. “I think we would have seen this happening already if it was going to happen.”

While these factors may cancel each other out, another phenomenon may come into play that will push claims up. According to Hall, cash plans often experience something of a honeymoon period as employees get used to the benefits they can claim. “Plans take two to three years to mature,” he explains. “There are a number of providers with claims ratios close to 100 per cent. They are likely to come under further pressure as schemes mature.”

As well as paying close attention to claims ratios, many providers are also looking at how they develop their corporate cash plan to ensure it remains relevant to this new and growing audience. Given the changes happening in the NHS, one development that is expected is an increase in the medical insurance style benefits that are included on plans. This would enable policyholders to access treatment more quickly, with employers benefitting from a reduction in sickness absence.

Sankaran says that providers do need to look at this. “Greater integration with products such as medical insurance and dental plans would be beneficial. Employers would be able to select the cover they want rather than having to make a choice between one product or another,” he says.

Some providers have already blurred the line between cash plans and medical insurance. Westfield offers Surgery Choices as an option on its Foresight plan, giving access to 60 different non-urgent surgical procedures for conditions such as varicose veins, hernia and knee problems. Shires says it may look to extend this list if rationing within the NHS becomes more prevalent.

But Smith is slightly nervous about this approach, warning that providers need to be cautious when stepping into the medical insurance arena. “It’s a question of whether the product has been properly tested,” he says. “When you introduce medical insurance benefits it takes time for claims to come in as people adjust to going private for something they’re used to getting on the NHS. As they get more savvy, claims increase.”

An increase in claims would have a knock-on effect on premium, which is something that Shires is keen to avoid with Westfield’s Surgery Choices. “We are careful not to move too close to medical insurance. Too much medical inflation would affect price stability, which is an important characteristic on cash plans,” he adds.

To further protect its stable pricing, Westfield only offers moratorium cover for groups of less than 500 people which haven’t had medical insurance before and it restricts the number of procedures to three per employee in any 12 month period.

As well as extending towards medical insurance, there’s also a call for more low-cost online benefits. Pontin says he recently worked with a company that delivered all its employee benefits online and this was extended to the cash plan. “Online benefits such as screenings and health assessments are low cost but have a high perceived value. They also fit well with the move, by many companies, toward online delivery of benefits,” he explains.

Hall has also seen demand for these low cost benefits, packaging up benefits such as an EAP, GP helpline, online health assessment and shopping discounts in its BHSF Benefits Club product. “By taking out the claim sensitive areas there’s price certainty for us and the employer but the employees still get a high value product,” he explains. “This costs £12 a year per employee.”

While the increase in sales has stoked competition, with some providers using short term tactics to grab market share, a sensible long term approach coupled with product innovation will ensure a bright future for the corporate cash plan.