A Health Insurance investigation
As concerns over the long-term sustainability of the private medical insurance market rise, and with increasing anxiety over the impact of churning, should the SME sector shift to a level commission model? Health Insurance editor David Sawers reports
When PruHealth’s sales & marketing director Dave Priestley told a private medical insurance (PMI) conference recently that the insurer had moved to a level commission structure – the current market mechanism had become “unsustainable” he said – it came as little surprise.
Delegates at the conference, organised by Laing & Buisson, had already heard some pretty scary statistics about the state of the PMI market. Overall subscriber numbers have plummeted across the market by 10.2% since 2008, they heard, while penetration of the population by the product has fallen 10% to 11.1%. And with prices on the rise, it is perhaps inevitable that the insurer has taken the plunge and scaled back from offering higher levels of initial commission.
Traditionally, intermediaries operating in the SME PMI market enjoy higher levels of commission for winning new business than renewing a scheme. While the differential between initial and renewal in SME PMI is much less marked than in the individual PMI market, whose dynamics are admittedly different, it nonetheless has led to increasing speculation that too many schemes are being churned around the market by brokers simply for the sake of earning the initial commission.
Speaking at the conference, Priestley said: “The current market focus on low new business premiums and high initial commissions is unsustainable and the industry needs to adapt in order to decrease churn and over-commoditising the group PMI market. Combined with strong market demand for lower premiums, the combination of claims costs, commission costs and operating costs, outstrip the premiums being charged. As a consequence, renewal premiums are forced up, resulting in more companies looking to switch or reduce their PMI cover.”
PruHealth’s model, operational since April, means that all SME new business is written on a 10:10 commission, with 10% initial commission and 10% at each renewal. It has been designed, PruHealth says, to reward long-term relationships with brokers who sign up to the scheme eligible for portfolio commission, whereby they could see a quarterly new business commission uplift of up to 20% dependent on portfolio retention, portfolio loss ratio and new business annual premium income.
But how does that model compare to other providers? Well, it’s difficult to tell. While AXA PPP healthcare offers 12:8 as standard, for example, Groupama Healthcare’s published standard rates are 10:10, like PruHealth’s new model. However, all insurers have specific deals with certain intermediary partners that makes direct comparisons almost impossible. Aviva UK Health has three main ways of operating: 20:7.5 or “a mixture in between”; special arrangements based on volume, margin and persistency; and panel/solus arrangements which are “predominately level”.
A smaller provider, Freedom Healthnet, meanwhile, also operates various commission structures. For small groups (three people) it pays 25:10; for schemes of four people and above it pays 15:10; and so on. To complicate the issue further, with its new Elite plan it allows the broker decide the level of commission they feel is “appropriate” to the work that has gone into administration of a scheme.