Brexit and its eventual impact on the British economy remain nearly as uncertain today as on the day of the referendum. In this blog series, we consider the effect of Brexit (in its various guises) on business drivers for insurers within the UK private medical insurance (PMI) industry.

In this first post, we consider some of the key factors that affect demand for PMI policies and how they impact the average risk cost per life for an insurer.

Impact from outwards migration

A significant number of reports show that a growing number of corporations are moving their headquarters abroad or rearranging assets to move substantial amounts out of the UK market. These companies range from Dyson and Sony to investment banks such as JP Morgan and Goldman Sachs. If large numbers of jobs and staff are relocated out of the UK, particularly from within the financial sector, PMI insurers may see the size of group policies reducing after Brexit, or potentially a total loss of some contracts if whole firms or subsidiaries are relocated. We can expect the majority of migrating employees will hold mid- to high-level positions, and as such would qualify for employee benefits such as group PMI cover.

Historically, when an overall corporate portfolio has been downsized, we have seen a spike in claims from employees who are aware that they may lose their cover imminently and seek to take advantage of accessing private care while it is still available.

NHS pressures

As the British government spends more of its budget on Brexit at a time of increasing public demand for National Health Service (NHS) services, individuals may become frustrated with the increasing waiting times and consider purchasing PMI to meet their healthcare needs.

The government is also currently reviewing the insurance premium tax (IPT) rate. This follows from insurers urging a review of the fairness of the tax, and the potential barriers it creates to accessing healthcare. Lower taxes could help make PMI more affordable and appealing to the public and we may reach a point where the government perceives that making PMI more attractive will remove some pressures from the NHS, leading to a growth in the PMI market. This has been a perennial hope of the PMI industry for 20 years, however, so don't hold your breath.

Impact due to economic uncertainty

Given the supplementary nature of PMI, it does not classify as a "necessity' product for the majority, and, in the absence of changes in government policy, economic cycles can impact demand for the product heavily.

If there is a recession, individual customers may find themselves reconsidering a PMI policy renewal and companies may be less inclined to keep the benefit at the expense of other more pressing costs, particularly if they have incurred heavy Brexit-related direct costs, such as exchange rate impacts, tariffs, or just additional internal compliance costs. Following the 2008 global financial crisis, the UK healthcare market for PMI cover reduced by 4.3%, as measured by change in the number of PMI-covered lives. The graph^[1] below highlights how, during the height of the global financial crisis (2007-2009), PMI market size and gross domestic product (GDP) growth rate exhibited nearly identical decreases in growth. In the years following the crisis, PMI market size has shown a slower growth rate than GDP.

In the individual market, lapses are more likely if policyholders are in good health and do not foresee use of their policies anytime soon. Those using their cover, or generally in poorer health, are less likely to lapse their policies. Therefore, insurers may experience an acceleration of the selective lapsing many have already been experiencing over the last few years, leading to an increase in medical inflation and overall reduction in total market size. Those who have measures in place to combat selective lapsing will tend to fare better than those who have less attractive offerings for healthier customers. These measures can include reward programmes with wellness benefits such as gym discounts and mobile health apps.

Corporate markets may also experience increased utilisation, in a fashion similar to migrating employees, fro policyholders wishing to use their cover before it ceases.

Conclusion

The overall impact of all factors affecting the demand for PMI services on the total market size is difficult to ascertain, and the direction and magnitude of impact for each factor will certainly differ.

Insurers may experience higher claims from policyholders about to lose corporate cover, as well as the risk of overall reduction to the market size due to smaller corporate books.

There is a possible silver lining if demand increases as a result of tighter government budgets and more delayed access to the NHS, coupled with possible reductions in IPT. However, the risks from general market uncertainty are greater. Risks of uncertainty can leave people less committed to their PMI cover, and companies with a higher risk of selective lapses.

In our next blog we look at key factors impacting medical inflation, including the availability of medical practitioners and nurses, as well as speculating on what might happen to the cost of drugs.

^[1] PMI market size in terms of PMI covered lives from Laing & Buisson, Health Cover, fourteenth edition. GDP growth rate from the World Bank Group resources, http://www.worldbank.org