The Financial Conduct Authority’s (FCA) PS21/5 policy statement published in May barely caused a ripple in the private medical insurance (PMI) market.
This is probably because rules preventing ‘price walking’ will only apply to home and motor insurance, and PMI has been exempted from new rules on allowing clients to opt out of auto-renewals.
However, the product-governance rules will apply across all general insurance products and need to be implemented by October this year. Central to these rules is ensuring that insurance products offer fair value to both retail and commercial customers.
Interestingly, given that general insurance products are annually renewable, the FCA requires firms to ‘consider the value that a product is likely to offer throughout the life of the product – at inception, through the initial insured period and at subsequent anticipated renewals.’
The policy statement goes on to talk about how firms ‘expect to price renewals’ and whether products offer ‘fair value both to those customers who choose to renew after the premium increases, and to those customers who choose to drop out because of the premium increases.’
This couldn’t be more relevant to PMI.
Doubling of premiums
The most common complaint from consumers about the value of PMI is the rate of annual increase for age and medical inflation, which is an unfortunate but unavoidable aspect of the market.
However, a more valid complaint is the degree to which insurers load premiums in the event of claims – personal clients typically see an increase of 40 to 50 percent following a claim and, in the group market, we have seen three eye-watering increases in the past few months of 60, 80 and 100 per cent.
This last example was a straight doubling of the premium.
Protestations about these excessive increases are invariably met with the same response – that the client has been loss-making for the insurer.
Well, some clients will be loss-making for insurers – that’s kind of the point.
Most consumers are reasonable enough to expect a higher increase at the renewal following a claim, but some of the increases exceed the bounds of reasonableness.
This is everything that consumers fear about insurance, and this is particularly salient in our market, where pre-existing conditions can prevent shopping around, such that an insurer can price the client out of the market when they most need their cover.
Indefensible scenario
Alas, ‘fair value’ is a subjective term and one person’s excessive increase is another’s prudent risk pricing.
I have little confidence these new rules will cause mountains to shift in the PMI market, but they should.
At the very least, they should call a halt to the indefensible scenario where consumers see claims-related increases that exceed the value of the claim itself – there is no reasonable case to be made that this represents fair value.
Regardless of the regulator’s edicts, is this really what we want for our industry – to impose excessive increases when our customers have the temerity to use the products that we have designed and sold to them?
Any increase over 50 per cent feels excessive, regardless of the loss ratio, and any risk pricing over this threshold should be applied at community level.
As an industry, we should be more protective of our reputation and apply our own tests of reasonableness without compulsion from the regulator.