Cash plans: Why provider solvency will prove crucial in 2010

Financial services companies’ reputations took a battering in 2009 – have cash plan providers slipped under the radar or can employers have faith in their heritage? Emily Perryman reports

Cash plan providers have traditionally had a strong reputation, but the economic downturn is raising questions about their financial stability and accountability.

Unlike most insurance companies, not for profit cash plan providers do not have shareholders to actively scrutinise how the company is performing. Although cash plan providers have members, they are not necessarily financially astute investors who would take an interest in or understand the company’s balance sheet. While this may be fine during periods of economic stability, there are concerns that when cash plan providers make large losses they are not called to account in the same way that commercial organisations are.

The losses recorded by several cash plan providers for the year to 31 December 2008 have therefore gone largely unnoticed. However, figures obtained by Health Insurance show that HSA (now Simplyhealth) recorded a loss before tax of £39.5m in 2008, BHSF £1.45m and Medicash £0.77m. The accounts also show that some providers are eating into their reserves: HSA (now Simplyhealth) had a combined claims and expense ratio of 103.8% of earned premiums in 2008, Health Shield 111.5% and Medicash 103.1%. Brian Hall, sales and marketing director at BHSF, finds the excessive combined ratios particularly worrying, as it is a provider’s reserves that give it the security to pay claims.

“If these companies were commercial organisations their shareholders would be taking an active interest in the financial results and long-term future, but because they are in the not-for-profit arena no one asks. In the long-term providers who are currently running with excessive combined ratios will need to return to generating surpluses and strengthening their reserves and this could involve them charging policyholders more,” says Hall.

Providers with weak balance sheets could see their popularity among intermediaries start to wane. Most intermediaries will take a company’s financial stability into account when making a recommendation to their clients, and some have questioned the reasoning behind providers eating into their reserves.

Steve Herbert, head of benefits strategy at employee benefit consultants Origen, says: “For some this may have been a deliberate marketing gambit to up their profile and market share, but I suspect that the severity of the economic downturn has made some of these business decisions more questionable, or possibly an outright gamble, in terms of financial stability. Does it concern us? Absolutely. You would not survive as an intermediary unless you consider financial stability in recommendations.”

The strength of cash plan providers is also an important concern to clients, particularly since the onset of the recession. Amy Osmond, consultant at intermediary Lorica Consulting, says financial security is a key question that clients wish to focus on in tenders that have been submitted of late. And Paul Roberts, a consultant at healthcare intermediary IHC, says clients are curious at to how providers can offer high value benefits at low premiums.

“I have had customers question the sustainability of such a business strategy and have felt uneasy about this,” he says.

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