It's a bit beyond the scope of this blog to explain the detailed in's and out's of pool risk in insurance (the idea that a group of people paying together carry the overall cumulative risk for all individuals with the pool as a whole, single unit - this being one of the basic premises of general insurance) but some insurers have chose to dilute or even divert this pure form element of their pricing model and offer clients an element of individual risk pricing for members either transparently or via a behind the schemes process of applying claims an individual makes to their renewal pricing on an on-going basis.
Insurers call this addition of risk pricing by several different names but the most common idea is one that people will be familiar with form their car insurance : No Claims Discounts or 'NCD's'.
The medical insurance NCD (offered by many insurers) is however subtly different to that offered by car insurers. At its most basic a client is placed at plan outset on an NCD pricing band and moves up and down these multiple price bands depending on their claims status for the year. In principle NCD is fairer. Creating a situation where individual clients pay more if they claim and the idea of low claimers subsidising their claiming equivalents is theoretically reduced.
There are though some significant drawbacks with this NCD model of pricing. Non claimers of course still subsidise to an extent, especially given that most insurers have a maximum NCD level - once you get to that point and do not claim you are still subsidising those who claim, although to a lesser extent. But also insurers tend to move clients down a higher number of bands when they claim than they move them up when they don't. This means that, especially in the early years of a plan, it can seem punitive in terms of increases following claims. In particular a punitive NCD regime can prevent clients from claiming for low level claims if they understand that the price can increase following the NCD being applied far more than the actual notional cost of the claim itself.
In other words you claim for a private consult and a couple of tests - total cost £ 200 but the premiums increase the following year by £ 30 a month - £ 360 total - £ 160 more than the claim itself. This example seems counter-intuitive that insurers would do this and expect to get away with it (in terms of clients not going postal following this situation). I can assure you that it does happen, regularly. Two factors prevent it causing insurers problems. Firstly people often don't check their renewal pricing very carefully (read other blog posts where I rail about regularly reviewing renewal pricing being totally essential). Secondly, if you've made a claim in the last 12 months it can be problematical to move insurers immediately following that claim. This means that insurers literally have their policy holders by the proverbials, cancelling the plan becomes an exercise in cutting off your own nose to spite your face when moving insurers is not an immediate possibility.
Some insurers have therefore either shied away from the strict NCD model (WPA, The Exeter) or offer a differentiated version of the same thing (Vitality's ABC version) in the attempt to either give clients an alternative to NCD mechanics or attempt to offer more transparent often through complexity.
My experience is that NCD are a bit like high street banks - every client has one insurers version that they hate/like and if you asked 10 clients whether they like the NCD or a different approach you'd probably get 10 subtly different answers. Certainly I speak to clients on this subject on a weekly basis and remain ambivalent about it myself as a PMI client in my own right.
My current view (from an advisory standpoint) is this. Like a lot of situations it's all about knowledge and applying that knowledge during and the following a claim. As NCD based plans tend to be set at a lower premium cost at outset as opposed to non NCD insurers plans there is an initial budgetary advantage in applying for this kind of product. For new and younger clients who are actuarially less likely to claim perhaps the NCD model works best initially. As clients age and therefore (in theory) claim more there is likely to be more pricing stability in a non NCD, traditionally risk pooled pricing model. This means though that those insurers who offer a traditional fully pooled risk product (Exeter as an example) tend to be more expensive - simply because they will have more older, sicker clients who are more likely to claim. This is also, in my opinion one of the flaws in the current implementation of standard risk pooling - those insurers who offer this capability will have to increase everybody's rate more often by a larger amount because their book tends to carry more claims - I've seen this happen a couple of times in recent years.
That said, neither type of product is perfect and insurers offering both can make pricing mistakes that require correction over time. Again this is simply the market in which they insurers operate - any broker claiming to offer guaranteed pricing stability to their clients is frankly making it up.
If you make a claim on your PMI plan, expect an increase is my advice - if you know the claims is going to be minor maybe consider self funding the first element of the claim and seeing where it goes (do check though that the condition, doctor and hospital are all covered just in case the claim needs to go further - any insurer will talk you through this element of coverage without formally setting up a claim on their system). If the claim is small and self limiting you haven't activated an NCD. If the condition is more serious you revert back to the private claim and will you likely be ok with an increase the following year anyway having used the plan and obtained value from it.
In the end NCD is actually a bit of a red herring. A product feature that whilst avoidable neither adds nor detracts from the efficacy of the benefits - large increases year on year are possible with any insurer regardless of the underlying pricing model they apply to their renewal and new business pricing. In the end I've worked in medical insurance since 1994 and have lost count of insurers who have needed to re-set their pricing following adverse claims experience and/or a pricing snafu. This is the market in which we operate and clients have to understand this. The best plan for a client should, in my opinion, be based not on the technical framework underpinning the price calculation but rather on the benefits package and the best (i.e. most comprehensive) version of this they can afford or are prepared to pay within their budget. If the price of a plan is initially fine but increases over time we need to review the market and consider moving insurer.
NCD is, in my opinion really only 'window dressing' the renewal pricing chosen by the insurer. It is not, or rather shouldn't be, a primary concern for policy holders.
Ask me to review your medical insurance plan if you'd like expert help or even contact me just if you want to know if you have an NCD built in to your cover - always happy to help.
Phil Knight
Independent Healthcare Consultant
07792 075748
philknight@pch.uk.com
March 2018
