Cash plans: Why provider solvency will prove crucial in 2010

“2009 is the first year of our new five year business plan to increase market share, membership and premium income,” says Philip Wood, executive director of sales and marketing at Health Shield. “We had already invested for growth including further costs in recruiting and increasing the size of the sales team at the end of 2008. As a long-term business provider, we also do not defer our acquisition costs over the lifetime of the membership. We incur them in the operating year in line with budgets and targets.

“We use all operating income to pay all claims and meet all expenses during the year. Obviously sometimes claims returns are higher than forecast, and vice versa, and during the year there was an impact on the accounts.”

Cash plan providers are keen to point out that they are subject to the Financial Services Authority’s (FSA) solvency requirements. The FSA undertakes a careful look at the cash plan industry though the reporting of solvency margins, and any dramatic decline or sharp deterioration will catch its attention.

“Overall with a regulator who is promoting Treating Customers Fairly, the brokers and customers appear fairly relaxed, especially given the high value reserves that the health cash plan industry has, along with a long trading history,” says Lauris.

There may also be a number of good reasons for the apparent weakness of providers’ reserves, including business acquisitions, investment disposal and the funding of expansion plans. Colin Boxall, director at intermediary ADVO Group, points out that to be competitive cash plan providers have to run on narrow margins.

“It will be difficult for smaller providers to offer the innovation, service, technology and sales support staff to retain their traditional market share, let alone break into new markets. Mergers and acquisitions are the result. As we have seen in recent years business failures have no respect for longevity,” adds Boxall.

Nevertheless, despite concerns about financial stability, the cash plan industry still has a good reputation among most intermediaries. Tom McGuinness, business development and HR director at national intermediary Premier Choice Group, says: “As far as clients are concerned, getting a claim paid is probably their biggest concern, so while this is still happening the client is happy and has no reason to question providers’ reputation or stability.”

The main role of reserves is to protect against a cash plan provider being unable to meet their obligations, such as claims. Reserves are created and added to when the provider receives more in premiums than has to be paid out in claims and expenses. Investment returns also add to the reserves. The Financial Services Authority lays down minimum standards below which they do not want insurers to drop, called minimum solvency margins. BHSF’s Brian Hall says operating close to these margins is ill-advised as a fall in investment values might cause an insurer to fall below them.

Although the cash plan industry is still generally well-regarded, Medicash’s Peter Lauris says that during the recession some providers have undertaken an aggressive approach to gaining market share through pricing that appears unsustainable.

“It will be interesting to see how this affects those providers in the medium term, as entering into a price war does not deliver any winners, and can only damage the proposition and company reputations,” he says.

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