Mutuals Survey: The multi-billion pound medical insurance sector is under the weather

If mutual societies appear to have fallen victim to the conversion fad in the banking and life insurance sectors, their cousins the provident associations continue to dominate the multi-billion pound private medical insurance (PMI) market. Richard Shackleton reports on this relatively unknown sector.

Despite a mixed outlook for the industry, provident associations have been the backbone of PMI provision in the UK. Three of the four largest companies are providents.

Non-profit making and governed by charter, providents have been around for a long time. Most were formed in the early years of this century, before the formation of the National Health Service, to provide health care for their members. Fees for doctors and hospital treatment came out of the members' subscriptions. WPA, for example, can trace its origins back to the 1901 Reading District Works People's Hospital Fund.

Because of their history, the providents have boards of governors appointed by technical members, including experts from the medical profession, unlike the mutuals, which are owned by their depositors or policyholders. This unique structure insulates them from shareholder pressure. They can take a long-term view at a time when the once booming market for PMI has been experiencing a protracted slowdown.

Despite lengthening queues for NHS treatment, our readiness to sign up with private health providers remains at remarkably low levels. Since 1990, the number of people covered by PMI has been stuck at around 11 per cent of the population. For the last 17 years, the annual growth rate in those choosing to insure their healthcare outside the NHS has barely averaged 3 per cent per annum - almost insignificant in underwriting terms. Even sweeteners from the last Conservative government in the shape of tax breaks for the elderly did little to improve its popularity.

With the removal of tax allowances for PMI for the over-60s by the new Government, up to 100,000 people are estimated to have cancelled their policies, leaving insurers casting around for new buyers.

"Much of the current PMI marketing strategy is centred on poaching each others' clients," says William Laing of independent healthcare analysts Laing & Buisson. The result has been serious oversupply of private medical provision. Too many private hospitals, most with occupancies below 50 per cent, are chasing too few patients.

In addition, escalating costs associated with improved surgical techniques and superior drugs have driven the total value of claims ever higher, forcing private medical insurers into sharply rising premiums. These increases have not only been way above the rate of inflation, but above the increase in NHS spending, and significantly above even the rise in average earnings, according to last year's report from the Office of Fair Trading.

"Any product whose price goes up faster than average earnings over a long period plainly faces problems," John Bridgeman, the OFT's director- general then recorded. "It will become less and less affordable."

The inevitable result has been to further deter potential customers. Yet perversely, the supply of PMI continues to expand. New entrants, including general insurers and banks, have made the market more competitive. William Laing says most of the new arrivals see PMI as either a way of filling a gap in their current product portfolio or have deep-enough pockets to see them through to predicted better times ahead.

In reply, the providents have pioneered strategies aimed at restraining costs and rationalising the number of players in the sector.

The two largest insurers, Bupa and PPP Healthcare, have reduced consumer choice by adopting "preferred providers" that limit subscribers to a network of about 150-170 hospitals. The result should be higher volumes in fewer hospitals and, as a result, lower prices and premiums.

Longer term, the number of PMI insurers will reduce. PPP Healthcare is expected to be acquired by GE Capital as part of the US giant's assault on the UK market. The recently floated Halifax is also known to be on the lookout to make acquisitions in the sector. But in the meantime, the growth in the number of companies in this sector acts as a weak brake on rising prices.