Landscape of opportunity

Health insurance providers have small and medium-sized enterprises firmly in their sights, eyeing what they believe is significant growth potential. Guy Anker investigates

AA Insurance Services is the latest in a long line of insurance companies to target small and medium-sized enterprises, after announcing its intention to penetrate this hotly contested market two weeks ago (PM, 4 November, p1).

SMEs are now firmly under the radar of insurers and brokers when it comes to marketing policies with the latest product modifications or new offerings.

This fertile ground is also increasingly being exploited by private medical insurers and cash-plan providers. Like their general insurance counterparts, health insurers see a rich landscape of opportunity and some estimates suggest less than 3% of SMEs provide private medical insurance for their employees. It is clear that the potential for growth is massive.

The SME onslaught by medical insurers and brokers gathered further pace this year when cash-plan providers BHSF and Healthsure both launched products targeting the market amid claims that provision of corporate healthcare is taking advantage of a slump in personal uptake.

"In the past few years there has been a significant growth in the demand for healthcare in the SME market," confirms Graeme Warner, managing director of Manson Warner Healthcare. "In general, employees are demanding better employment packages and better benefits but the increase of the 'sick note culture' among UK employees has also encouraged employers to invest in benefits that can protect them against long-term ill employees."

Staff awareness

This overview is echoed by many other sector experts, with the three key factors driving increased demand being a rise in sickness absences; greater staff awareness about the advantages of having healthcare as part of their benefits package; and the need for employers to protect staff.

Take, for example, claims by the Labour Force Survey and Confederation of British Industry that the cost of sickness absence to the economy is £11bn a year; or the fact that about 40 million working days are lost annually through absence, and it is clear there is a huge cost to employers if staff are absent from work (PM, 4 November, p48).

This factor alone is the major driving force behind moves by SMEs to seek cover for their workforce and by insurers to capitalise on employer concerns, claims Alistair Sclare, PMI product manager at First Assist, and also Wayne Pontin, director of broker Jelf.

In fact, one of Jelf's main marketing messages is to highlight that staff shortages caused by sickness are more crucial and costly to SMEs than to larger corporations, due to the increased strain involved in trying to cover for absent colleagues when staff numbers are small. Jelf is targeting such businesses via e-mail campaigns and seminars on the topic.

The reported interest shown by employees in having medical cover included in their benefits package is backed up by Amanda Blanc, distribution and customer service director at insurer Groupama. She argues that staff increasingly see PMI as a "value add-on". Mark Noble, head of intermediary schemes at Norwich Union Healthcare, adds that as the workforce is becoming more aware of the benefits of PMI it is a growing part of package negotiations with employers.

But it is not just staff that increasingly value healthcare provision.

Mike O'Brien, head of small corporate business at Axa PPP, believes that SMEs are also more aware of their staff's economic worth as individuals.

"All small businesses are made up of human beings, so you need to have adequate healthcare as protection," he says. "SMEs are beginning to value their employees as part of their bottom line, meaning more and more brokers and insurers are targeting SMEs with healthcare as a result."

Mr Sclare adds that medical cover is particularly important at the start of an SME's life when building the business. He says that this is the most critical time for small companies and any loss of staff for a sustained period could be disastrous. "As a business grows, you need everyone on board," he asserts.

Individual take-up

Other factors cited for greater take-up include bad press about NHS waiting lists and the damaging publicity surrounding the alleged increase in deadly hospital superbugs in NHS wards. It has also been claimed by some that the purchase of PMI by individuals customers is falling, meaning businesses are filling the void by protecting their workers instead.

Yet, while Jonathon Byfield, new business development director at SecureHealth, agrees that SMEs are increasing their purchase of health cover, he denies the personal market is witnessing a downturn. "There is massive growth on the individual side but we also believe more SMEs are getting involved in benefit packages for employees," he says. If correct, that would suggest there is not a trade-off between personal and commercial PMI uptake.

Ms Blanc says the ratio of individual policies to commercial policies in the UK is 60:40, although the gap between the two is shrinking. She estimates that 11% of the country is covered by PMI, either via corporate schemes or individual initiatives. Mr Pontin, however, puts the overall number of people covered at 13% of the population. He points out that the number of people covered by private healthcare is disproportionately weighted towards London and the South-east, which, he claims, accounts for almost a quarter of total coverage.

Mr O'Brien adds that growth areas have sprung up on the back of London's prominence. He says many companies on the M4 and M40 corridors now buy PMI, as do offshoots of businesses from the capital in other parts of the country. "There is growth in the provincial areas but not the sort of take-up as in London," he says.

This is hardly surprising given that many of the nation's businesses are now headquartered in the South-east. But Mr O'Brien mentions another decisive factor: "Decisions are often based on experience of what local NHS trusts do for people, which is not always positive in London where the larger population means that people believe waiting lists are longer and service is poorer."

The London bias has prompted Jelf to specifically target businesses in other regions such as Wales, which it says only accounts for 5% of the UK PMI market. And it will take an upsurge in such areas to fulfil projections made by Raman Sankaran, head of marketing at Healthsure, that there will be a further increase of SME take-up of healthcare provision in the next 10 years. But the company has reasons for such optimism. It says its plan to address health-related absenteeism, launched two months ago, has proved to be successful so far. In the past three weeks of October alone, it claims it took around 40 SMEs on board. And Ms Blanc adds that the main growth area is with companies comprising between three and nine employees.

Not everyone agrees with such optimistic projections, however. Cigna marketing manager Ann Dougon believes take-up is still low among SMEs and plenty of work is required before more buy PMI. The health and employee benefits company has traditionally targeted larger corporates but added SMEs to its target audience last year.

"As margins are tighter, there is still a job to do to convince SMEs to buy cover for their staff," Ms Dougon warns. "Penetration is still low among small companies so we have made changes to make plans more appropriate to SMEs. What will help is competition, which will stimulate the market and keep costs down."

Quality control

On the other hand, it is claimed the same competition is hindering the quality of health products offered to SMEs. Mr Sclare claims that because many intermediaries compete on price, the increased competition means brokers are looking to cut costs by offering fewer add-ons, therefore reducing the scope of cover offered. "Intermediaries are nervous about competition and, hence, price. That leads to an inferior product offering."

Few doubt that price has an important part to play in how healthcare cover is offered to SMEs, especially given their tighter margins compared to large corporations, which often see medical cover for staff as a standard offering. But that is not necessarily a hindrance given the industry's ability to adapt to its clients' needs, according to Mr O'Brien. "SMEs are cost-conscious, but when a small proposition is put to them it often comes in at a lower price than they expected. Cost can be tailored to include the needs of the smaller companies."

One initiative that could further drive costs down via economies of scale is packages that include healthcare with typical everyday commercial insurances, such as property cover and liability. This is something Axa PPP is already considering for the commercial market, having begun to offer personal packages that include healthcare benefits on top of standard cover.

However, the insurer says it will be months - if not years - before a similar proposition is made to businesses. Mr O'Brien explains: "We are testing the consumer side at the moment but the problem for the commercial arena is the complication of dealing with corporate entities, which are far more complicated than individuals."

Yet, while insurers such as Axa and, to a greater extent, Norwich Union, query the viability of marketing PMI in a complete insurance package for businesses, some intermediaries do offer this service.

Wider bundles

Mr Sclare points to some of First Assist's policies that are being sold as part of wider bundles by intermediaries. "Some brokers are trying to extend healthcare into packages but, as a rule, it stays in the health arena where insurers are concerned as they see it as more of a stand-alone cover - with health-related add-ons, such as dental care."

Another possible initiative is Groupama's feasibility study into linking PMI with employers' liability under a rehabilitation programme to help staff get back to work. "Although we have made that connection, we are some way off that," Ms Blanc concedes.

Mr Noble argues that one of the obstacles to providing all-encompassing insurance deals is that it is difficult to know whether to pigeon-hole medical protection under general insurance or life cover.

One possible change for the future is a call by Ms Blanc to improve the efficiency of the PMI process. She claims too much is paper-based and technological change is required if moves are to be made to improve service and drive down cost - the latter being the crucial selling point to SMEs with tight margins.

With price being such an important factor, it is no surprise that PMI is traditionally associated with high net worth personal customers and big firms providing a package of benefits to staff. But as Mr Noble declares the SME market is "our biggest potential for growth" and Mr Pontin says that "90% of our business is from the SME market", that association may soon be shattered, despite the current low numbers of these firms purchasing healthcare cover for their staff.

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