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Cash plans are money in the bank

The future looks good for cash plans, particularly the corporate sector

where the growth opportunity is huge as demand among younger people grows.

The increase in demand among young people for cash plans is helping to

shake off the market&#39s reputation as the poor relation of private medical


Hardly a month goes by without a new provider ent-ering the cash plan

market. The recent arrival of these players highlights how the market has

come into its own.

There are currently five million people covered by cash plans, not far

behind thenumber of people with PMI, and the current market value in terms

of premium income is an impressive £300m a year.

Despite this, awareness of cash plans is far lower than that of PMI. The

cash plan market has been mainly in the blue-collar sector, with high

concentrations in the industrial heartlands of the UK. In contrast, PMI has

been the preserve of white-collar worker.

But this image is changing as more young people are buying cash plans. The

plans have been seen as a product for older people but the younger

generation is starting to view them as the first step on the ladder to

private healthcare.

The traditional image of cash plans is probably explained by its origins.

It came into existence during the second half of the 19th Century as part

of the Hospital Saturday fund movement.

Its main purpose was to allow working-class families to contribute small

sums to help pay for the running costs of their local hospital. These

payments gave people access to hospital services which they could not

otherwise afford.

While the formation of the National Health Service after the Second World

War took away the original reason for cash plans, many funds carried on and

used the contributions to give cash payments to help members in times of

need. This has since developed into the more sophisticated products we now

see in the market.

While the majority of cash plan purchasers are indivi-duals, it is clear

that more companies are providing cash plans as a company-paid benefit.

The relatively small cost of a cash plan is an affordable way for

employers to provide a meaningful healthcare benefit for a bigger

proportion of staff. This is especially the case in small to medium-sized

companies although bigger organisations are increasingly happy to include

cash plans as part of flexible benefit packages.

The low cost enables a mass-market presence which PMI does not. In

addition, many of the standard benefits offered by a cash plan,

particularly optical and dental cover, are not included in standard PMI

products. By having a cash plan as well as a PMI policy, the client has a

more comprehensive product covering an extensive range of healthcare needs.

The fact that fewer people are covered by cash plansthan PMI indicates

strongly there is room for significant growth and many insurance providers,

as well as other blue- chip organisations such as Boots, have entered the


The next few years are likely to see an increase in merger and acquisition

activity, resulting in a smaller number of bigger providers with the

resources to increase the profile of the humble cash plan. An early example

of this is Bupa&#39s acquisition of Mercia Health Benefits.

There will be major developments in the corporate sector and providers

will have to work closely with intermediaries – the gatekeepers of the

market. Over the last 12-18 months, a number of cash plan providers have

started to work closely with intermediaries and a small number of strategic

alliances have developed.

Over the next couple of years, it is likely that a huge amount of activity

will take place in this area.

Historically, cash plan margins have been low because providers have

prided themselves on giving back as much as possible in the way of claims

and handing any surplus, after admin costs, to charity.

Many have high claim rates, which cannot be reduced overnight. The more

commercially oriented organi- sations have lower loss ratios but much

higher marketing costs, which again squeeze margins.

With the average annual cash plan premium around £150 a year, commission

rates will be limited and 15-20 per cent is typical of initial commission


Renewal commission is still not standard but, where it is paid, it is

usually limited to corporate schemes and kept to single-figure percentages.

Despite these limitations, the rewards in the corporate market, mainly big

voluntary schemes, are potentially huge. The bigger cash plan providers

already have many groups with thousands of members but many remain

undeveloped, especially in the relatively untapped service sector.

As more people become aware of the value that health- care cash plans

offer, intermediaries will be able to reap the rewards.


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