Summary:

STRATEGIC OVERVIEW Medical and health-related insurances extend across the general and long-term insurance markets, but form minor components of both. The leading medical insurers are BUPA, AXA PPP, Norwich Union and Standard Life. The keenest buyers of protection insurances are managers and professionals — ABs — whose employers often pay the premiums. Full-time workers with young families and mortgages are also core customers. LONG-TERM INSURANCE CATEGORIES OF PROTECTION COVER Income protection insurance enjoyed annual growth between 1999 and 2002, but slipped back in 2003. In 2004, income protection insurance, including critical illness and mortgage payment protection cover, is worth an estimated £2bn to £2.1bn in net premiums in the UK. A lack of advertising promotion suggests that insurers do not expect the market to expand. As yet, few adults insure against redundancy, although penetration doubled in 2002/2003, albeit to 2% of households. Premiums for redundancy cover in 2004 are fairly low because employment rates are high. Cover costs for illness are rising because of both negative factors (e.g. stress and obesity) and positive factors (e.g. improved treatments that keep people alive for longer). Mortgage payment protection insurance, covering policyholders against the inability to make repayments due to accident, sickness or unemployment, expanded from 1.7 million policies in force at the end of 1998, to 2.7 million at 30th June 2003. Mortgage protection, or mortgage-related term assurance, repays the mortgage if the policyholder dies. The number of new contracts, 1.2 million in 2003 against 510,000 in 1999, indicates the huge churn in the mortgage market as borrowers remortgage to release cash. Standalone critical illness insurance sold to individuals is not a lively market. Critical illness cover is far more popular as an add-on to another form of policy than as a separate product. A fall in average premium value suggests a degree of under insurance — a factor also pertaining to private medical insurance (PMI) policies sold to individual customers. The long-term care insurance market is tiny and did not increase in 2003. The long-term care market highlights two negative factors afflicting insurers: consumers' reluctance to think ahead and to trust other people with their money. GENERAL INSURANCE CATEGORIES OF PROTECTION COVER The number of people covered by both corporate and personal PMI has fallen since 1984. However, the typical annual premium paid for an individual rose by 50% between 1998 and 2003, far outstripping inflation. Corporate schemes covered 2.6 million subscribers by the end of 2002, compared with fewer than 1.2 million in 1984. Employer-funded PMI is a perk for staff whose services are valuable enough for them to be able to negotiate benefit packages. BUPA leads the overall PMI market, followed by AXA PPP and Norwich Union. Budget plans such as AIG's HealthNow offer a way forward. HealthNow concentrates on cover for conditions that the NHS generally does not treat quickly. Cash plans such as Groupama's Cashwise (which focuses on treatments not available from the NHS, such as dental and optical care, and complementary therapies) are also gaining popularity. Gross written premium income for accident insurance rose strongly between 1999 and 2002. Under government pressure, insurers are now moving away from one-off lump-sum payments for serious personal injury and towards regular payments. The Government's action makes accident insurance less desirable for some potential victims, because the insurance payment substitutes for state benefits that could be obtained without paying any premiums. Since its introduction in 1995 and its extension to civil non-family proceedings in 1998, conditional fee insurance has promoted post-accident claims in the UK. In 1999, the Access to Justice Act gave claimants the right to reclaim insurance costs from the losing party. Rapid escalation in legal fees insurance for accident compensation claims saw both gross earned premiums and claims incurred more than double between 1999 and 2001. AN INTERNATIONAL PERSPECTIVE In the US, public spending accounted for a higher proportion of total healthcare spending in 2001 than in 1970. Voluntary insurance cannot fund universal healthcare anywhere in the world. In the UK, the significance of private healthcare rose in the 1980s and 1990s, but the NHS is now making a comeback. Throughout the more developed world, the state will remain the main provider of healthcare and emergency incomes. However, the ageing populations of the mature economies will create such huge demands on state healthcare provision that something will have to give. Forms of healthcare rationing appear inevitable. In China, sales of workplace accident insurance policies are growing fast, partly as a reaction to employers' patchy response to health and safety guidelines. This is a hazardous path for insurers. Similar risks apply to accident policies in all rapidly growing economies with indifferent or weak health and safety regulation. PEST ANALYSIS The 'third way' followed by New Labour — essentially, public-private partnerships (PPPs) — is highly beneficial for the private healthcare sector. The inclusion of private companies as NHS treatment providers will enable the private sector to grow significantly. The PPPs now being established, including deals with South African, Canadian and US healthcare companies, should create a lot more competition with the private sector, keeping the lid on prices and thus also on medical insurance premiums. The converse of downward pressures on private-sector costs is the rising capacity in the NHS, provided by the private sector. This is likely to limit demand for PMI, so that there will be little change for PMI in the short and medium term. Only the top 30% of households by income spend more than £2 a week, on average, on medical insurance. The highest earners are also the most likely to receive medical insurance as part of their remuneration package, while few employers provide this benefit for casual or low-paid permanent staff. THE FUTURE The private healthcare sector has good prospects as a result of the NHS's new willingness to work in partnerships with the private sector. At least 80 privately-operated treatment centres for NHS patients are expected to be functioning by 2005. If inflation climbs upwards the resulting job losses would mean higher state benefit payments and lower tax revenues, so commitments to the NHS would have to be reviewed. A substantial rise in the real value of net premiums is not expected between 2004 and 2009. The group PMI and protection market has better prospects in the short and medium term than the individual market, because of employers' wishes to safeguard their prime staff. For individual purchasers, cash plans for treatments not covered by the NHS, and budget PMI for treatments requiring long NHS waits, have a bright outlook. Fixed-price treatments — from organisations such as Nuffield Hospitals — are expected to continue their rise in popularity. Income protection should assume more importance from 2008/2009 onwards if, as expected, unemployment rises in the wake of insecure energy supplies. Demand will be constrained by above-inflation rises in premiums as insurers seek to cushion themselves against higher numbers of claims. The long-term care insurance market should continue to grow at a steady pace, albeit from a low base. Much of the growth will be in immediate annuities to meet care costs when they are unavoidable.