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Market Overview - Looking forward to a healthy year?

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As the Laing and Buisson annual health report is published, Stephanie Denton talks to its author, Philip Blackburn, about the changes the healthcare market has seen over the past 12 months

Spending on health and care cover products in the UK, including private medical insurance, health cash plans, dental benefit plans and long-term care insurance, has grown by £200m in the last year and reached £4.4bn in 2005, according to independent analyst Laing and Buisson's annual health market report Health and Care Cover - UK Market Report 2006 sponsored by Accenture.

The report found that the largest portion of health and care cover, £3.56bn, was spent on private medical expenses cover such as PMI and self-insured corporate medical schemes. The remainder consisted of £440m spent on health cash plans, £316m on dental benefit plans and £114m on long-term care cover products.

Allowing for overlap, the report states that health and care cover products reach approximately 20% of the UK population. Private medical schemes cover 12.5% of the population, 7.9% of the population have health cash plans, 3.5% have private dental cover but less than 0.1% have long-term care cover.

Rise in demand

The number of people with PMI policies in the UK or enrolled in medical schemes self-insured by employers fell marginally by 0.4% in 2005 but is holding firm to be 4.17 million at the start of 2006. This followed a small rise in demand in 2004 (up 0.6%) and overall growth of 3.8% in the past five years. The total number of people covered by PMI and self-insured medical expenses schemes was 7.52 million at the start of 2006, which is 12.5% of the UK population.

According to the report durability, the PMI market has been underpinned by stable corporate demand for private medical cover in 2005, both traditional insured schemes and a burgeoning self-insured market.

However, the downward trend in individual PMI demand continued in 2005, following a temporary minor recovery in 2004. Individual policyholders fell from a peak of 1.46 million in 1996 to a low of 1.16 million in 2005.

Revenue for these products grew just above the rate of inflation, up 3.8% to reach £3.15bn after growth below inflation in 2004 (up 2.4%). Overall, revenue growth slowed in the past three years and Laing and Buisson believed this was due to a combination of some moderation in average PMI premium increases in both the competitive corporate sector and for individuals, which saw increases in single figures.

It also identified a small but significant shift in the PMI product mix towards lower cost policies, from 'trading down' and increased subscription to budget options. Claims costs also grew behind revenue in 2005, up 3.3%, leading to a small increase in insurer margins.

PMI performance

The author of the report, economist Philip Blackburn, says that given the fact that there have been general predictions of an uncertain long-term future for the PMI market it continues to hold up well.

He comments: "Key to this is the continued popularity of private medical cover and other flexible health and protection solutions with large employers and increasing interest in PMI options from smaller employers.

"However, it seems that the stability of individual PMI demand recorded in 2004 was temporary, and the familiar falling trend, which started in the late 1990s, returned in 2005. A wide array of cover choices and cost options for both individuals and companies remains a strong feature of the market. Price inflation has remained relatively modest in the past three years, as average premium increases have moderated to some degree and more consumers are taking advantage of lower cost cover options."

He adds that in the long-term a public health service where waiting has less significance and where patient choice is a central theme, poses some threat to the private product that already offers full consumer choice and no waiting - but at a price.

He says: "The future is also likely to offer insurers opportunities to develop their private cover proposition to meet rising medical and healthcare expectations across primary, secondary and long-term health and care. Key will be the adaptability and ability to innovate to meet consumer demand in the future, while keeping products at affordable prices."

According to the report, spending on health cash plans in the UK reached £440m in 2005, up 3.7% from 2004, following growth of 3.3% a year earlier. In the past five years, contribution income has grown strongly by 28%. Benefits paid remained unchanged in 2005 leading to a sharp rise in provider margins.

Cash contributors

At the start of 2006, there were 2.81 million contributors to health cash plans in the UK, covering 4.74 million people or 7.9% of the UK population. The number of contributors fell 8.8% from a peak of 3.08 million in 1999.

Mr Blackburn says spending on health cash plans continues to grow in real terms, despite continued marginal falls in the volume of demand year on year, and that this confirms that contributors are willing to pay higher average premiums for increasing cash benefits.

He adds: "Health cash plans remain a strong product that has wide appeal to individuals, families, employees and employers. A key strength of the product in the future will be its flexibility to cover new benefits that consumers' demand."

Dental plans are the fastest growing market sector. At the start of 2006, Laing and Buisson estimates there were 2.11 million subscribers to stand-alone dental benefit plans in the UK, which shows a strong rise of 9.3% in 2005, following growth of 3.3% in 2004.

The majority of these, 85%, subscribed to dental capitation plans, whether individual or community risk, with the remaining 15% subscribed to dental insurance plans. Therefore, the report reveals that dental benefit plans now cover 3.5% of the UK population.

Spending on dental benefit plans also grew strongly to £316m in 2005, an estimated increase of 16.8% from 2004, following static growth in 2003.

"Strong growth in the dental benefit plan market in 2005, primarily private dental capitation, has been underpinned by fresh momentum towards private dentistry from more dentists ahead of the new NHS general dental contract, which started in April 2006," explains Mr Blackburn.

"Experience of the new NHS remuneration system in 2006/2007 will determine the scale of this momentum in the future. The dental indemnity insurance market in the UK remains small but demand picked up in 2005, which reaffirms that dental insurance, as an employee benefit, is growing in popularity."

Long-term care

Whereas other sectors of the market have grown or continued to make profit, Laing and Buisson's report shows that the LTCI market has suffered in the past year. It found that annual spending on LTCI fell sharply by 20% in 2005 to an estimated £113.5m, the lowest annual spending figure since 1999. Spending had previously grown from more than £80m in 1995, to reach a peak of £142m in 2004.

According to the Association of British Insurers, there were 41 370 LTCI policies in force at the end of calendar year 2005, of which 23 950 were single premium policies and 17 420 were yearly premium policies. Within the single premium policies, marginally the largest proportion were pre-funded at 41.5%, just ahead of long-term care bonds, which accounted for 40.5%, and the remaining 18% were 'point of need'.

Mass withdrawal

Laing and Buisson believes the decline in LTCI was precipitated by the mass withdrawal by insurers from the pre-funded market, the decline of the LTC bond market, and a key insurer withdrawal from the point of need market.

According to Mr Blackburn: "The LTCI market is resting on 'rocky' foundations at the moment. Consumers are uncertain over whether policies will fully meet care needs, and with a small risk pool and little claims evidence to go on, the pre-funded market is considered high-risk, is heavily re-insured and pricing is difficult.

"Insurer withdrawals have left the LTCI market bereft of competition, and it is heavily reliant on demand for point of need insurance for market growth. It's future in the medium term will be decided by the scale of product development and commitment by insurers."

With spending across the health insurance sector increasing by £200m to £4.4bn in 2005, the health insurance sector looks to be expanding steadily, however, as Laing and Buisson's figures show not all sectors have improved. Therefore, the next 12 months may well see an increased demand for product innovation or the rapid decline of some sectors.

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