Analysis: Cash plans and PMI excesses

Hughes is also keen to reassure advisers that it will monitor claims on both its cash plan and its medical insurance.

"We do have a foot in both camps so will be able to see whether any changes in behaviour occur," he says. "It was already being used to cover excesses so we don’t expect to see any significant changes in claims."

Further, while there are potential issues for cash plan providers, even the critics admit there are ways to use excess cover without affecting the sustainability of the product. For example, Scullion says he is comfortable using a cash plan to mop up an excess where only a small proportion of employees have medical insurance.

"We often implement a cash plan in these situations, using the savings to extend the cash plan to the entire workforce," he says. "You need critical mass to make it work."

Hall is also happy to offer excess cover in these situations.

"We do it if we’re asked but you do have to charge for it," he adds. "I’m glad that Simplyhealth are charging for it: they do understand the cost implications."

Another instance where adding excess cover can work is when a policy has a particularly large excess, for instance £750, and the cash plan only looks to cover a small proportion of this, say £150. This model allows the cash plan provider to offer a capped benefit, in keeping with its model for other benefits, while also ensuring the medical insurance excess continues to work as a claims deterrent.  

A more radical way to make excess cover viable in the long-term is to adjust the price of a cash plan. Simplyhealth is charging between 25p and 75p a week for its cover. This means that for every five employees on the £100 excess benefit level, £65 is collected over the course of a year. This would put Simplyhealth only slightly behind if medical insurance claims ran at 20%, which could probably be made up by a reduction in claims for specialist consultation benefit.

But, while Hughes believes this is the right price for the excess cover, he would like to see premiums increase across the market.

"The cash plan market is wedded to the £1 a week entry level product but it’s putting a straitjacket on product development," he says. "You can’t keep adding benefits at no extra cost. Even with a price increase, plans will continue to offer exceptional value for money."

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