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Secrets and eyes

The FSA will assume its full regulatory powers at N2, bringing into force its new strategy for regulating Britain&#39s financial sector.

The FSA has four statutory objectives: to maintain market confidence, to protect consumers, to fight financial crime and to promote public understanding of the financial system. This is the first time any financial regulator has been given a specific objective in the area of consumer education.

The FSA has publicly stated that it will “undertake significantly more work on promoting public awareness than the FSA&#39s constituent regulators have done in the past”. Is the FSA about to reveal the industry&#39s best kept secret?

Healthcare cash plans are sometimes referred to as just that. This is because remarkably few people have even heard of them, let alone understand how they work. Many consumers, intermediaries and commentators mistake them for private medical insurance.

However, although HCPs complement PMI, they are totally different. While PMI pays for more serious medical procedures, HCP policyholders receive cash benefits for everyday healthcare such as a filling at the dentist or a new pair of glasses.

But they also cover the policyholder for financial assistance after major operations in hospital or for specialised treatments such as acupuncture.

Although HCPs protect over six million people throughout the UK or, if you like, approximately 10 per cent of the UK&#39s population, few non-policyholders are aware of the good value the policies represent.

Most HCP providers are not-for-profit organisations and are able to offer good value because they do not have to pay dividends to shareholders.

The not-for-profit philosophy ensures that policyholders receive the maximum possible returns and substantial donations are made to the NHS, hospices and health-related charities.

However, recent research has shown that the man in the street has little or no knowledge of these organisations. Until recently, HCPs were a mystery even to brokers but at last the tide is beginning to turn – many brokers are now waking up to the opportunities that HCPs can provide.

Portfolio of protection

Many HCP providers believe the time has come for individuals to start making provisions for their own healthcare – in the same way that they are taking responsibility for their own retirement – because an ageing population is putting a financial burden on the NHS.

Stakeholder healthcare to pay for day-to-day treatments is also becoming the next fashionable employee benefit. Many companies already offer PMI but it is expensive and often limited to senior management.

Faced with high tax on an employee benefit that is frequently not used, employees are now asking for health cover that is affordable and can be used even if you are not ill.

The HCP sits comfortably with brokers selling stakeholder pensions as they are a complementary type of long-term protection for the individual. It is the long-term protection concept that brokers are able to sell.

Also, with the changes to the regulation of endowment mortgages, many brokers have been searching for newer forms of income and HCPs can supplement their bread-and-butter business because they provide excellent initial and ongoing commission rates.

But how?

One of the first questions asked by intermediaries and consumers interested in a HCP scheme is: “How can they afford to pay out such generous benefits for such modest premiums and operate when annual premiums are apparently lower than the potential benefits available?”

The answer is simple.

At any one point in time only some policyholders are making claims but all policyholders are paying premiums.

There are many reasons why policyholders do not make claims. These range from standard qualifying period stipulations to the basic fact that policyholders will not necessarily claim on all benefits simultaneously to lost receipts and forgetfulness.

Whatever the reason, the overall effect is that although some individual claims are far higher than the annual premium, the total income from all policyholders exceeds the total claims paid out.

Understanding the claims profiles of policyholders is fundamental. There is no hard and fast rule but it has been estimated that any HCP product should have at least 40,000 existing policies to ensure long-term sustainability and to guarantee the necessary levels of customer service provision.

Providers with less than 40,000 do exist successfully but the risk of claims volatility is far higher and they are less likely to have the necessary infrastructure to provide adequate support services.

HCPs also work well bec-ause the benefits are capped. This means that the premiums can be held down despite the rising costs of healthcare.

The history

The healthcare cash plan is an insurance hybrid with nineteenth century roots. The whole cash plan movement came about in the 1870s as an attempt to provide affordable hospital care at a time when the NHS did not exist.

There were many diverse local and regional funds formed with one common thread – workers paid a small contribution each week from their wage into a fund.

This would then allow them access to hospital treatment as and when it was needed. Payday was on Saturday at that time – hence the rather curious generic term “Hospital Saturday Funds”.

To this day, the modern healthcare cash plan continues to pay cash to the policyholder for expenses incurred for a wide variety of healthcare and medical treatments. The premiums are low and providing that the policyholder continues with their payments then cover is for life, with no inc-rease in premiums, irrespective of age or claim rates.

It will be a tremendous challenge for the FSA to promote consumer awareness of HCPs but it has already stated that it “will be developing specific proposals in this area”.

Cash plan providers are looking forward to working with the FSA to reveal the industry&#39s best kept secret.


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