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Market forces

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A potential hike in Insurance Premium Tax and Solvency II are just two of the challenges facing a cash plan market offering premiums half of
advisers think are unsustainably low. Jenny Keefe reports

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Britain’s £178 billion budget deficit and the need to raise taxes whoever wins this spring’s general election make insurance premium tax an easy target for an incoming government, warn delegates at last month’s Corporate Adviser Cash Plan Forum.

At the moment, insurance tax on medical insurance and cash plans is 5 per cent. But panelists at the event, Coping with Recession - Strategies for Dealing with the Downturn, gave voice to a widespread fear that an incoming government could raise the tax on premiums to 10 per cent or even higher.

Perfect Health chairman Andrew Tripp said: “Insurance premium tax is an easy tax to collect. Everybody has to insure their car and everybody has to insure their house. It’s a soft target.” He predicted the next government will increase the tax first to 10 per cent and then to 15 per cent.

Delegates noted that insurance tax is already levied at 17.5 per cent on insurance policies covering caravans, boats and travel. Mike Izzard, chief executive of Premier Choice, said: “Whoever wins the election has got to fill the coffers somehow. I just hope it’s mitigated to as few policies as possible.”

Westfield Health chief executive Jill Davies said that if the next government increases premium tax to 10 per cent for every type of policy, it would be a “disaster”. She also said the tax would be passed directly to employers, as it would be impossible for providers to absorb.

“Engagement on cash plans is extremely high. On that basis, if you get it wrong and you continue to change on an annual basis, it’s going to be pretty horrific, so you’ve got to have sustainability”

Gary Smylie, consultancy manager at JLT Benefit Solutions, said: “Employers have got a legal responsibility to have some statutory cover and that probably is where the pressure will come from. Quite frankly, you’re not going to galvanise a million people to march down Whitehall, but get the CBI and some other corporate bodies behind it, and it may be a different problem for the Government.”

Izzard said if tax on insurance reached 20 per cent it could prompt an “explosion” in corporate medical trusts, where the company in effect self-insures. He added this would be among large corporates and larger SMEs.

Tripp said: “We had a client last week, where we’ve been talking about trusts with them for three years. They are spending £550,000 a year on their private medical insurance scheme, and are currently paying £25,000 in insurance premium tax. What if that becomes £100,000? What are you going to do?”

The threat from a change in UK taxes coincides with increasing pressure from the European insurance directive Solvency II. Health Shield sales director Peter McAndrew said his organisation had worked hard over the last year to prepare for the directive. He added that the directive may actually help providers because it will give their customers greater confidence in their financial stability. Solvency II requires insurers to hold more capital in reserve.

A poll of delegates found 33 per cent thought there should be greater scrutiny of cash plan providers’ financial strength by the FSA. Asked if he thought the FSA was unduly harsh on provident and friendly societies, McAndrew said: “At first I and my colleagues thought they were being unduly harsh … But over the years, I think we’ve come to a nice mutual understanding, where they understand the friendly society side of the business. In fairness, it makes you look at what the company needs, and it’s done us good in the long term.”

But Davies likened the regulations to using a “hammer to crack a nut”. She said: “We’ve always followed best practice, so it wasn’t a big difference to us in the concept. But, of course, it did add cost, because we had to prove what we were doing, rather than just doing it. I think it’s a one-size-fits-all approach, which doesn’t always quite match. I still don’t think they quite understand our industry. Cash plans are not the same as other types of policy in the health insurance market, and there should be dispensations because of the way we operate.”

The delegates discussed cash plan providers’ long-term solvency, and whether some low-cost insurers pay out more in claims than they get in. In a poll at the forum, only 50 per cent said premiums offered by some cash plan providers today were sustainable. Half the attendees said clients are asking more questions about cash plan providers’ financial stability than they did in the past.

Mike Wagg, head of intermediary sales at Simplyhealth, took a swipe at cheap providers. “It’s about building that long-term partnership. We’ve been pricing cash plans for 130 years, and it’s our responsibility to make sure we can do it for the next 130 years. If the intermediary or client wants a cheap price, well sorry, we will price in a way that we think is sustainable - not create a Blue Cross Sale.”

But Stephen Hackett, consultant at Bluefin, said: “I’m sure we’ve all been pushed by a particular client at renewal time who wants cuts. As long as that dialogue is open and the providers know that you’ve got to drive price down, there’s no harm in it.”

Izzard argued in favour of striking a balance. “You have to get good value for the client, but you have to make sure the insurer gets value for money and return on capital. The pot can run out.”

Asked if he had ever come up against providers with unsustainable prices, Hackett said: “Yes. I think historically throughout the healthcare market, at a certain point in the cycle, new providers buy market share rather than profitability. As an adviser, you put that price on the table, because you know your client and their needs. But a strong enough adviser could get to them and say it’s not sustainable, so your conversation
should cover sustainability and the long-term relationship.”

Wagg said: “Engagement on cash plans is extremely high. On that basis, if you get it wrong and you continue to change on an annual basis, it’s going to be pretty horrific, so you’ve got to have sustainability.”

Tripp agreed it was crucial that employees get no “aggravation”, because cash plans get so many claims. He added: “If you’ve got 400 people on a cash plan, the last thing you want is your phone ringing and the company secretary screaming down your ear because the provider’s making a mess of it. Our business is all about residual income and building the inherent value in the business. In the cash plan market, nobody’s paying big fat commissions, it’s always pretty flat. So there is absolutely no point whatsoever in acquiring a customer for 12 months. We all want a customer for 120 months.”

“I’m sure we’ve all been pushed by a particular client at renewal time who wants cuts. As long as that dialogue is open and the providers know that you’ve got to drive price down, there’s no harm in it”

As for the market’s prospects for growth, delegates were unanimous that the recession has made cash plans more popular. When asked what growth they predicted for the corporate cash plan market over the next two years, 50 per cent forecast that cash plan market will grow by more than 10 per cent a year.

Hackett said: “I think there’s a huge opportunity, because PMI isn’t moving forward in terms of market growth and its existing market is shrinking. I think if you look at the risk-benefit market, that’s fairly static. Critical illness hasn’t become the wonder product that we thought it would when it first launched and there’s a huge amount of discussion about this huge number of working people who are uninsured. It’s about how we create a wider insured market that extends to more people and that’s where cash plans have a great potential.”

Tripp supported Hackett’s point. He said: “Despite the recession, there is huge potential for intermediaries, who are creative with their advice, to sell more cash plans. Cash plans will be used more by employees, because they will claim their £50 for the dentist and £28 for their eye test, and they’ll value that benefit. Whereas at the moment, you get a small group PMI scheme with 8 to 10 employees and one person might
have some physio or one person might have breast cancer, but the other nine never use it, particularly with the cuts that are about to come over the next parliament with NHS provisions, which includes NHS dentistry charges, prescriptions and glasses. Try and get some physio on the NHS, it’s just not going to happen in 12 weeks.”

The panel was split 50/50 over whether cash plans were breaking out of their traditional markets. Wagg argued that some intermediaries would have to change their marketing strategies to tap into the potential growth in the sector. “We haven’t got a divine right to business. You’ve got to work hard to write that business. There are some good intermediaries in terms of their focus on cash plans. Some will remain PMI-centric and continue to remain PMI-centric.

“The good intermediaries will be able to capitalise by selling PMI to one category of employees and cash plans to another category. That other category of employees is often missed out by most intermediaries. We’ve got a key role to play here in terms of that education and broadening that knowledge.”

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