Product development and pricing have helped to boost private medical insurance, but insurers are cautious. Michael Faulkner and Ellen Bennett report

In recent years the prognosis for the individual private medical insurance (PMI) market has looked pretty gloomy. Year after year the number of people with individual policies has been falling steadily.

In its most recent study, healthcare consultancy Laing & Buisson reported that the number of individual policyholders had fallen from a peak of nearly 1.5million in 1996 to a low of just over 1 million at the end of 2006, with a 2.2% fall in 2006.

The constant decline in the individual market has led to commentators branding the market as stagnating and fuelling speculation that it would slowly wither away, as the corporate PMI market grew ever stronger.

According to Laing & Buisson, the corporate demand for private medical insurance grew by 3.4% in 2006.

But there are signs of a possible reversal in fortunes for the individual PMI market. Its health could be taking a turn for the better.

A study published earlier this month by Datamonitor reported a growth in the individual market. Contradicting the Lang & Buisson study, Datamonitor said the market for individual PMI products grew by 4.1% in 2006.

This improvement, Datamonitor said, was achieved through an increase in policyholders and a rise in the average policy premium.

The corporate PMI market grew by only 1.7% in 2006 due to an increase in subscribers offsetting a slight decline in premiums, according to Datamonitor.

Private medical insurers appear optimistic saying this trend continued into 2007 and into the first month of 2008. They talk cautiously of an upturn in the market.

Fiona Harris, head of personal markets at healthcare giant Bupa, says that the PMI market could be beginning to see a reversal in its fortunes.

“We saw strong growth in 2007 and we also saw strong growth in January. So we are potentially seeing a change in that [declining] trend. We used to see a 3% deterioration [year-on-year], but we are now seeing that change.”

Healthcare insurers point to the continued woes of the NHS and insurers’ efforts to develop their products to make them more attractive to consumers, as the reasons for the increased demand for individual PMI.

Charlie MacEwan, spokesman for insurer WPA, says: “People thought the NHS was going to improve, but there are still bad headlines, with reports of queues [for treatment] and poor hygiene.

“Things have improved, but not as much as people hoped, so they are more open to buying PMI.”

High value

Meanwhile, Harris talks about PMI insurers being able to provide products that are better able to meet the needs of the customers. “People want products that are high in value, which enable them to make an informed choice about their healthcare,” she says.

“Healthcare is complex and it can be difficult to make an informed choice about the choice of hospital and the treatment type.”

The issue of affordability is one of the key challenges for the health insurers. Rising premium rates, caused by increasing claims costs, have put private healthcare out of the reach of many.

Insurers have managed to stem the rate increases in recent years. According to Datamonitor, premium rates rose by 7% in 2002 and 2003, but in each of 2005 and 2006 rates rose by only 2%.

Datamonitor said the slow down in rate increases will have contributed to the growth of the individual PMI market in 2006, as fewer people will have been priced out of the market.

Product innovation

Insurers have adopted a number of methods to make individual PMI products cheaper. These have fallen into two main categories. The first involves product innovation, while the second involves offering discounted premiums through the use of no claims discounts and excesses.

PruHealth made waves in the sector with a product that links the premium to a healthy lifestyle, such as taking exercise. The company says the product, Vitality, has opened up PMI to those who would not normally be covered fairly by a PMI policy.

With PruHealth setting its sights on those it defines as “engaging in a healthy lifestyle”, other insurers have found their own sectors to target.

WPA, for instance, is focused on the self-employed and professionals. MacEwan says that focusing on this segment has enabled WPA to provide a product that is appropriate to the needs of that market and is also cheaper.

“If you make a product that people want,‘ ‘ it will sell,” he says, adding that in the last three years other health insurers, such as PruHealth, have made a conscious decision to define the markets that they want to grow.

MacEwan argues that this more focused approach by health insurers has contributed to the upturn in the individual PMI market.

AXA PPP meanwhile is exploring new routes to market for its PMI product, hooking up with supermarket giant Tesco.

Cam Nichols, sales support and development manager at AXA PPP, says the relationship with Tesco, which began about a year ago, has enabled the company to access new customers.

“Some people don’t identify with the AXA PPP brand. And there is a feeling that PMI is elitist. Accessing new distribution channels such as supermarkets give us a new brand.”

AXA PPP’s product is sold under the Tesco brand. “It reaches a different consumer, people who would not normally buy PMI,” says Nichols.

She adds that the individual PMI sector is still a tough one in which to operate. “We’d like to think we are holding our own. We have enjoyed a fair few individual enrolments, but we don’t know if they are people who are switching providers or whether they are new to the PMI market.”

She points out that 80% of people don’t have PMI, which shows the opportunity for health insurers, but it also indicates the difficulty of penetrating the market.

“For an individual it is always a tough and considered purchase. It is not compulsory and comes down to people’s preference. It also depends on what happens with the NHS. But it will always be a challenge.”

Bupa’s Harris says that the challenge for insurers is producing PMI products that are affordable, but which also provide the quality of service that differentiates private healthcare from the NHS service.

She says some of the product options and innovations, such as linking premiums to lifestyle and high excesses are important, as they enable people to make choices and tailor the products to suit their needs and pockets.

Important drugs

But quality of cover is equally important. Harris highlights Bupa’s cancer cover, which has been recognised as providing access to important drugs and treatments.

“High quality cover does not come cheap,” Harris says. “It is a competitive market and consumers want to get good value. You need to price accordingly – but not at the expense of driving down service.”

She adds: “Tailoring [the product] and the effect on cost have been important in encouraging take-up, but also the quality of cover is important. We need to offer something that is better than the free alternative, and we have to make it affordable.”

Datamonitor’s report has a note of caution about the individual market. It says that despite the upturn in 2006, the market is not at a “turning point” and there is still work to be done in order to secure continued growth, according to the industry executives interviewed for the research.

“Industry executives further agree that the way to attract more people is to find a way of offering cheaper policies,” the report says. IT

How insurers are cutting the cost of PMI

Modular policies
All major insurers now allow customers to tailor their cover to suit their needs, with the premium being adjusted accordingly. Customers can choose the level of cover from a range of options, such as in-patient and psychiatric treatment.
No claims discount
This is favoured by some insurers as a way to cut the cost of PMI for those who do not claim. Other insurers say it discourages people from claiming.
Healthy lifestyle
Insurers such as PruHealth link the PMI premium to the customer’s lifestyle, looking at eating habits, exercise and health screening.
‘Six week rule’
The cover activates only if the policyholder is unable to obtain treatment on the NHS within a set time period, such as six weeks.
Health insurers, such as WPA enable customers to choose high policy excesses as a way to cut the cost of their PMI policies by as much as 75%. Insurers say that the use of an excess, also known as shared responsibility, makes the customer more aware of the cost of the treatment.
Another method for sharing responsibility, the policyholder bears a proportion of the treatment cost.