Buyer’s guide to private medical insurance (September 2009)

Many employers have been amending their PMI provision, but the perk is surviving the downturn, says Nicola Sullivan

Although the private medical insurance (PMI) market seems to be weathering the economic storm, this is mainly because it has been propped up by a rise in the number of individual policyholders, which helps to compensate for a decline in corporate customers.

Laing and Buisson’s Health and Care Cover – UK Market Report 2009, published in June, shows that for the first time since the 1990s, individuals paying for PMI cover were the main contributors to a rise in demand, which rose marginally by 0.6%.

Corporate market static

However, the corporate market remained virtually static in 2008, dipping by 0.2% after steady growth of 5.6% over the previous two years. Philip Blackburn, senior economist at Laing and Buisson, who wrote the report, says it was likely that job losses and business casualties among small and medium-sized enterprises (SMEs) had contributed to this decline.

The general consensus in the industry is that although many employers have had to keep a tight rein on spending to survive the recession, few have decided to slash PMI altogether. Howard Hughes, head of intermediary marketing at Simplyhealth, says: “So far, so good. I think PMI is actually quite a resilient market in times of recession. It is partly there as a perk, but also for a more hard-headed reason – to get people back to work promptly.”

Employers shopping around

But in a market where employers have started shopping around for the best deal, providers are under increasing pressure to do what they can to retain existing customers by renegotiating more competitive deals. Adrian Norris, managing director of Buck Consultants, says: “We used to say it needed at least a 10% differential on price to persuade an organisation to move [providers]. I would say that 10% has dropped to 5%.”

Employers are often faced with tough decisions about which elements of health cover to continue funding for employees. For instance, some organisations are putting a cap on the amount that can be claimed for illnesses such as cancer. Adrian Humphreys, head of corporate business at WPA, says: “A lot of companies are saying ‘look, this is ridiculous – we can’t sit here and pay £150,000 to £250,000 out for someone’s cancer cover, particularly when the cover in the NHS is actually jolly good’. Employers may pay just for the diagnoses, or we put a £25,000 cap on cancer cover.”

Difficult to bring down drug costs

Although some providers might succeed in controlling hospital costs by using their clout to negotiate competitive deals for clients, it is often more difficult for them to bring down the costs of drugs, especially those that are recently on the market.

Mark Noble, sales and marketing director at Aviva, says: “What we cannot control is what new drugs and cancer drugs come onto the market. It might be that a new drug is a lot more expensive.”

The emergence of hybrid cash plan and PMI products has created further opportunities for employers to save money on healthcare cover for staff. For instance, employees could have an initial consultation done privately, but then be treated on the NHS.

Patients can choose NHS treatment

In June, AIG Direct launched a product called HealthChoice, which is designed to give patients the option of selecting treatment on the NHS rather than private treatment. Staff that choose the NHS will receive a cash lump sum, equating to the amount the treatment would have cost privately. This money can be spent on anything they like.

Some providers, such as Aviva, have developed methods of minimising the costs associated with musculoskeletal claims. The provider recently launched a product called Back Up, which speeds up the referral process for back injuries.

“Rather than the employee going to their GP, they phone us and we do the triage for back conditions,” says Aviva’s Noble. “We will then propose a treatment plan for them. That might be an appointment with a physiotherapist or just some exercises.”

Management tool to collect information

PMI is increasingly becoming a management tool, with many products enabling employers to collect information on sickness absence rates, as well as the types of condition that trigger claims, says Dudley Lusted, head of corporate healthcare development at Axa PPP Healthcare. Providers can then develop bespoke packages to suit the needs of particular workforces.

“There has been a need for greater flexibility to actually provide what employers want rather than what the provider may want to offer them,” says Lusted. “This can be done by collecting the [relevant] data and information.”

Providers are also facing demands from employers to ensure that their PMI is fully integrated with other healthcare benefits, such as employee assistance programmes. This means staff are more likely to be directed to other relevant benefits that can help them, which ensures that the employer’s entire healthcare provision is being utilised.

Damian Lenihan, head of client management at Bupa UK Health Insurance, says: “It is moving away from doing just insurance and we are aligning all the provisions the customer has got, so it benefits them.”

Self-insured healthcare schemes

One area of growth in the corporate market has been self-insured healthcare schemes, also known as healthcare trusts. According to Laing and Buisson, the number of people enrolled in such schemes increased by 1.7% in 2008 to reach a total of 669,000.

Healthcare trusts can bring substantial savings to organisations, sometimes amounting to as much as 6% on the cost of premiums. This is partly because employers save on insurance premium tax. WPA says healthcare trusts are its biggest area of growth.

Switch to full insurance

On the other hand, Aviva has seen an increasing number of customers looking to switch from a trust arrangement to full insurance because they can be more certain about how much it will cost and how much they have to budget for.

“There are four large corporate schemes we are talking to, three of which are currently on trust and two of them are looking for full insurance terms,” says Aviva’s Noble. “Whatever happens to the claims cost in that time, an employer will know it is going to be £3,000 that it pays. With a trust, there is more flexibility about where that is going.”

For example, an employer that is on full insurance terms and is paying £3 million in premiums for year one may ask its providers to guarantee that the cost will not rise by more than 10% for year two and year three.

So although extravagant private healthcare cover may be a thing of the past for many organisations, it is fair to assume that PMI is one employee benefit that is far from being threatened with extinction.

Focus on facts:

What is private medical insurance?

Private medical insurance (PMI) allows employees to receive private medical treatment. Employers can provide PMI as a perk, as a management tool to reduce sickness absence, or both. From an employer’s point of view, PMI ensures staff can avoid the waiting lists of the National Health Service, receive treatment and return to work sooner.

What are the origins of PMI?

The roots of PMI can be traced back to the 19th century, when it first appeared in the form of workers’ co-operatives and friendly societies. These were later followed by provident organisations. The first provider organisations followed in 1938, when Axa PPP Healthcare was launched as a committee to establish a health insurance scheme for middle-income earners in London. In 1947, Bupa was created as an amalgamation of 17 provident associations.

Where can employers get more information and advice on PMI?

The Association of Medical Insurance Intermediaries ( and the British Insurance Brokers Association ( will both be able to help. The Association of British Insurers also produces a generic factsheet on PMI at

In practice:

What is the annual spend on PMI?

According to figures from Laing and Buisson, the revenue for private medical insurance grew well above the retail prices index (RPI), up 7.1% to reach £3.64bn in 2008. This followed steady growth in 2007.

Which PMI providers have the biggest market share?

According to figures from Laing and Buisson, the market in 2008 continued to be dominated by Bupa and Axa PPP Healthcare, which had a combined market share of two-thirds in terms of subscription income. Other PMI players include Aviva, Standard Life Healthcare, WPA and Simplyhealth.

Which PMI providers increased their share most in the past year?

As the market remained almost static in 2008, none of the larger providers reported significant rises in market share. Axa PPP Healthcare increased its share by 1%, from 24.5% in 2007 to 25.5% in 2008. Aviva also saw a 1% rise in to 11%, compared with 10% in 2007. Meanwhile, Bupa’s market share slipped from 42.5% to 41%.

The nuts and bolts:

What are the costs involved?

The average employer-paid subscription per employee was £768 in 2008, according to Laing and Buisson. Premiums depend on employer size, the nature of the work and whether the employees covered present a high risk.

What are the legal implications?

Savvy employers will take into account legislation around age discrimination, ensuring that they do not provide or cut benefits in ways that could be considered unfair to a specific age group.

What are the tax issues?

An employer should be able to get corporation tax relief on PMI provision. For employee-paid schemes, PMI premiums will be taxed as a benefit-in-kind.