PMI in poor health

The soft market has hit all insurance sectors, and private medical insurance (PMI) is no exception. In the highly competitive group market, this is one of the most difficult areas to make a profit.

Employers want their staff to have quality cover, but face paying double digit premium increases every year. They know they can shop around, however, and to win market share, hungry insurers are cutting margins.

Even so, it appears some employees are complacent about having cover, despite the view that PMI is one of the most popular employee benefits. While bosses in sexier sectors like media know they can get away with not providing it, those in less appealing industries such as financial services will almost certainly have to fork out, at least for their more senior employees.

But, are staff who have access to this pricey insurance grateful? According to a recent survey by actuary Watson Wyatt, one in three employees would not continue with PMI if their employer were to stop providing it.

This is because many do not appreciate the cost of the benefit - some 42% of workers did not know how much their companies were paying for the cover.

Consultant Elliott Hurst explains that the survey spoke to around 1,200 employees, working primarily for large companies. When asked much how much they believed it would cost to buy it themselves, they put this at £451. In fact, for a 40-year-old with a £100 excess, the cost would be closer to £1,000.

"It's clear that companies are often not communicating the value of PMI. Many explain pensions a lot better and this is a more profile issue right now. But, considering that PMI is a major investment and can help attract and retain staff, it's crucial they let them know about it. This means employees should be able to understand what is available, how the cover breaks down and the cost implications of not having it," says Hurst.

The survey also found that only 37% of employees felt their employer was doing a good job in communicating their medical benefits to them, but 47% said their pension plan was well explained.

But, this failure to communicate could have another reason - if some remain ignorant, they may be less likely to claim.

Adrian Norris, managing director of Buck Consultants Healthcare, comments: "There is some evidence that a few employers won't want to be overt - if there are too many claims, then costs go up even more.

"But, in more cases, the employer will want employees to know about it - and when there are cases of redundancy for example, there is always a surprise from those leaving about how much PMI costs to buy individually. "

Norris adds however, that the number one benefit for many employees is still likely to be a company car.

"Given their importance, pensions ought to be, but a car still has a lot of appeal as does annual leave, either a generous allowance or the ability to buy more through flexible benefits."

Certainly in the larger group market, there is no doubt that any profits to be made are small. In recent years, a number of options to make schemes more affordable have developed such as corporate healthcare trusts - these are funds set up by the employer with employees' health needs administered by a PMI provider.

The big issue is how to manage cost. Trusts won't suit all larger employers and they are expensive to set up and administer. So in recent years insurers have done more to make cover more affordable. Bupa, for example, has stated publicly that more has to be done to stop premiums rising so fast.

Bupa managing director Fergus Kee says: "Anyone who believes the current healthcare model is sustainable in today's environment is in denial. The status quo is not an option."

Kee argues that the industry needs to make far more of an effort to make PMI affordable. "We cannot just accept medical inflation as a given and simply continue to pass it on to the customer. The only way to address this fundamental issue is for insurers and providers - hospitals and consultants - to work together.

"They need to be joined up and grown up on this issue and not to seek short term advantage over each other. It is disappointing that some private hospital groups still seem to believe that consumers will simply keep on paying more and more for the same thing - they won't. We have to ruthlessly drive for clinical quality and value for money."

Hurst says the fact that the NHS is now increasingly using private hospitals should help insurers negotiate better rates. He also points out that Pru Health, which although only available for small groups and individuals, has taken a welcome and innovative approach by offering lower premiums to those who take steps to live healthier lives.

But, even if hospitals and consultants bring their charges down, drug companies will continue to exert massive pressure on insurers.

The recent row over new breast cancer drug Herceptin has seen AXA PPP healthcare receive a mauling in the press. The company has stated it will not pay for the drug for the disease in its early stages, claiming that this would be classed as "preventative" and therefore outside the policy conditions.

Herceptin is expensive and the costs have been put at around £25,000 a year. Norris has some empathy with AXA PPP's stance.

"Policies can contain grey areas. Some insurers will be more generous than others, but AXA PPP has been direct and said what it will not cover.

"There is a whole raft of other drugs out there and insurers may not be able to afford to pay for them - what is important is that there is clarity from the outset."

But, other insurers, such as Bupa, WPA, Standard Life and Norwich Union have said they will meet the costs of Herceptin. Time will tell if AXA PPP's decision will lose it customers.

The strong jobs economy - and the latest figures from analysts Laing & Buisson which showed PMI figures were holding firm - will have provided insurers with hope that this is a sustainable sector. But, they face many challenges ahead if they are to start making big money. IT