Glasses £30…

Courtney Marsh
15 May 2008

Contents

1. What is a Health/Hospital Cash Plan (HCP)?

ƒ History
ƒ Benefits
2. Overview of the market
ƒ Market Trends
ƒ HCP v PMI
ƒ Claims
ƒ Distribution
3. Actuarial issues
ƒ Pricing
ƒ Risks
4. The future for HCP
ƒ Reverse declining membership
ƒ Potential for growth
ƒ Tailored pricing

Section 1

What is a Hospital Cash

Plan?

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What is a Health/Hospital Cash Plan?
Who has actually ever heard of one?

ƒ 40% of the public have never heard of a hospital cash plan

ƒ If you have…

What is a Health/Hospital Cash Plan?

Quick history lesson

ƒ Started in 1870s
ƒ Developed from the hospital contributory scheme movement -
Saturday Funds
ƒ 1930s – National network covering hospitalisation and covering 10
million people
ƒ Government decided they had no place in the NHS
ƒ Restructured themselves to provide cash benefits during periods of
sickness, along with convalescent, dental and optical care
ƒ Known today as health or hospital cash plans

What is a Health/Hospital Cash Plan?

They provide a wide range of everyday benefits

Common Benefits Other Benefits

ƒ Dental ƒ CI
ƒ Optical ƒ PA
ƒ Hospital In Patient / ƒ Consultation helpline
Day Case ƒ Fitness benefits
ƒ Physiotherapy ƒ Prescriptions
ƒ Maternity
ƒ Chiropody

And all you pay is a level monthly or weekly premium…

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What is a Health/Hospital Cash Plan?
…well it’s not quite that simple

ƒ Generally one price fits all (premiums don’t rise with age)
ƒ However, some insurers are bringing in different schemes/higher
premiums for older members
ƒ Most plans have an age limit of 65
ƒ Work on guaranteed acceptance (no medical examination)
ƒ Exclude pre-existing conditions
ƒ Initial waiting period
ƒ Don’t always get a full refund

What is a Health/Hospital Cash Plan?

Benefits are offered over a range of different levels

Cover Level Level 1 Level 2 Level 3 Level 4

Weekly Payment for You £1.65 £3.40 £5.50 £6.90

Weekly Payment for You £3.20 £6.70 £10.90 £13.75

and Your Partner
Dental £55 £110 £150 £205

Optical £50 £110 £150 £205

Hospital Benefit (per £20 £45 £65 £85

night/day)
Physiotherapy etc £120 £280 £370 £500

Specialist Consultation etc £120 £280 £370 £500

Chiropody £40 £120 £160 £205

Maternity £150 £300 £560 £695

Health Screening £40 £120 £160 £205

Other Benefits Fitness Benefit, Personal Accident, 24hr Helpline, Prescriptions, CI Cover

Source: Health Shield Friendly Society

Section 2

Overview of the Market

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Overview of the Market – Market Trends
Unlike PMI, the vast majority of HCPs are taken out by
individuals
ƒ In 2006, 92%of HCPs were wither paid in full or part paid by individual
consumers
ƒ Average income per contributor is £159
ƒ Persons covered 4.9 million (8.1% of UK population)
500 3300
400 3200

Thousands
3100
300
£MM

3000
200
2900
100 2800
0 2700
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Contribution Income No of Contributors

Source: Health Cash Plans, Finance Intelligence, November 2007

Overview of the Market – Market Trends

Claims ratios have remained quite steady over the last 10
years
ƒ In 2006, the average benefit paid per contributor is £113
350 100
300 95
90
250 85
200 80
£MM

71 73 73 73 73 71 72 71
71 75
%

69
150 70
100 65
60
50 55
0 50
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Cash Benefits paid Benefits as % Contributions

Source: Health Cash Plans, Finance Intelligence, November 2007

Overview of the Market – Market Trends

Contributions and claims have increased in real terms

10
8
6
4
%

2
0
-2 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
-4
Annual % change in contribution income
Annual % change in benefits paid
Real Annual % change in contribution income (deflated by RPI)
Real Annual % change in benefits paid (deflated by RPI)

Since 1996, the average annual increase in claims and

premiums has been 5.6%
Source: Health Cash Plans, Finance Intelligence, November 2007

4
Overview of the Market – Market Trends
There is currently one dominant player in the market…
Market share by contribution income
Simplyhealth Group* 47.1%
46.7%
11.1%
Westfield Health 11.6%
5.9%
BHSF** 6.0%
4.8%
Medicash 5.8%
3.9%
FirstAssist
3.7%
Health Shield 3.7%
2.6%
HSF Health Plan*** 3.7%
2.0%
Sovereign Health 1.9%
1.7%
Paycare 1.5%
1.7%
Forester Health 1.5%
1.1%
WHA
14.3%
Others 17.6%

0% 10% 20% 30% 40% 50%

2005 2006
Source: Health Cash Plans, Finance Intelligence, November 2007
* includes subsidiaries HSA, LHF and HealthSure
** includes The Health Scheme
*** includes Benenden Best Health

Overview of the Market – Market Trends

But who offers the best plan…

Annual HIP/ Physio

Provider Level Premium Premium Dental Optical HOP etc Notes
HSA 1 £2.25 pw £117 £77 £77 £0 £50 100% Optical, 100% Dental, 75% Physio,
4 £6.75 pw £352 £165 £165 £20 £200 20 nights/days HIP/HOP
Leeds HF 1 £3.45 pw £180 £95 £95 £30 £600 100% Optical, 100% Dental, 50% Physio,
3 £5.61 pw £293 £155 £135 £40 £800 20 nights/days HIP/HOP
HealthSure 1 £11.95 pm £143 £90 £100 £35 £250 100% (24m) Optical, 50% on Physio, 20
4 £36.25 pm £435 £240 £280 £95 £750 nights/days HIP/HOP
Westfield 1 £4.76 pm £57 £26 £37 £12 £200 100% (24m) Optical, 75%/100% Physio,
5 £30.33 pm £364 £195 £252 £77 £1,250 30/10 nights/days HIP/HOP
BHSF 1 £7-£20 pm £84-£240 £100 £100 £32 £250 70% Dental, 50%/70% Optical, 50%/70%
3 £12-£35 pm £144-£420 £150 £150 £48 £500 Physio, 91/6 HIP/HOP
Medicash 1 £9.75 pm £117 £80 £80 £24 £220 100% Optical, 100% Dental, 50% Physio,
5 £29.25 pm £351 £240 £240 £72 £660 50 nights/days HIP/HOP
Health 1 £7.85 pm £94 £55 £50 £20 £120 100% Optical, 100% Dental, 100%
Shield 5 £42.90 pm £515 £270 £270 £110 £640 Physio, 25 nights/days HIP/HOP

Something for all budgets and benefit requirements but

you need to do your research!

Overview of the Market – HCP v PMI

The main rival products are PMI and standalone dental
and optical plans
ƒ PMI may be viewed as a complimentary product
ƒ Dental and optical plans are subsets of HCP
Penetration of HCPs and related health insurance products
16
14 11% of adults in the UK are
covered by some form of health,
12 dental or vision plan
10
%

8
6
4
2
0
PMI Dental HCP Savings for Vision LTC
Health Plans
Needs
Source: Health Cash Plans, Finance Intelligence, November 2007
Based on survey of 2045 adults aged 18+

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Overview of the Market – HCP v PMI
The main differences between PMI and HCP are:

PMI HCP

Provides indemnity against Provides cash to cover

Benefits costs of treatment for acute expenses associated with
medical conditions defined health benefits

Exclude pre-existing
Underwriting Medical questionnaire
conditions (or load for them)

Individual ages based on One premium suits all or

Pricing
underlying risk costs wide age bands

Average premium £680 p.a. Average premium £160 p.a.

Features Loss Ratio 77% Loss Ratio 71%
31% individual business 92% individual business

Overview of the Market – HCP v PMI

The differences between HCP and PMI are becoming
blurred

PMI Innovation Effect on HCP

ƒ Challenging the perception ƒ Benefit from increase in
that PMI is only for the wealthy promotional activity
ƒ New appealing benefits (e.g. ƒ Growing demand for health
subsidised gym) cover
ƒ High street distributors ƒ Distinction becoming blurred

Examples
ƒ PMI – Flexible insurance products launched where customers pick options –
include cancer and heart treatment as well as dental and optical benefits
ƒ HCP – Trend to enhance and expand cover, for example adding access to help
lines and stress counselling

Overview of the Market – Claims

Three categories dominate claims

100
90 17 18
80 10 14 Others
70
60 23 Physiotherapy &
Complementary Medicine
%

50 41
40 Dental
24
30
6 Hospital Inpatient/Outpatient
20
10 26 21 Optical
0
% Benefits Paid % Claims

ƒ In dentistry more people are entering private sector

ƒ Top 3 categories account for almost 75% of benefits paid
Source: Health Cash Plans, Finance Intelligence, November 2007

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Overview of the Market – Claims
Want to attract male members…

Membership Breakdown Claims Breakdown

Individual Members Individual Members

Female Male
50% 38%
Male
50% Female
62%

Would rather the workforce from Kwik Fit than Kwik Save!

Overview of the Market – Claims

…and young members

400%
350%
300%
250%
200%
150%
100%
50%
0%
25-29 35-39 45-49 55-59 65-69 75-79

Would rather Jamie than Delia!

Overview of the Market – Claims

Members can do rather well

ƒ Take for example a lady taking out individual cover

Contributions Claims

Maternity x 1 = £900
Female, Age £42.90 per Dental x 3 = £480
37 month Physio x 9 = £505
Optical x 1 = £50

TOTAL = £515 TOTAL = £1,935

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Overview of the Market – Claims
Members can do rather well

ƒ However, Sharon’s policy also covers her children…and she has

9…

Overview of the Market – Claims

Members can do rather well

ƒ And they claimed….

Contributions Claims

9 Children Dental x 8 = £975

of Female, £0 Physio x 106 = £5,530
Age 37 Optical x 10 = £930

TOTAL = £0 TOTAL = £7,435

And she could hold policies with more than one HCP
provider!

Overview of the Market – Claims

And Sharon doesn’t have to wait long to be paid

50%
40%
30%
20%
10%
0%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Notification Handling & Settlement

ƒ Natural delay ƒ Cover in force
ƒ Complete claim form ƒ Limits not breached
ƒ Receipt based ƒ Pre-existing conditions
ƒ Fraud

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Overview of the Market – Distribution
The majority of HCPs are sold directly to individuals

IFA Sales Direct Sales

ƒ 4% of 2006 total sales (Rising
to 11% for company paid,
reducing to 3% for personal/
employee paid)
ƒ Increasing importance in
company paid sector
ƒ Low commission
ƒ Mainly direct salesforce
ƒ Increasing use of internet
sales
ƒ Potential to grow due to
underwriting
ƒ Use of online technology to
improve customer service

ƒ Easy product to sell ƒ Includes over the counter

sales

The workplace
ƒ Most HCPs sold in the workplace using worksite marketing
ƒ Employees get corporate discount
ƒ Paid via salary deduction

Section 3

Actuarial issues

Actuarial Issues – Pricing

Price is risk costs plus “others”

Others include Considerations

ƒ Expenses ƒ Benefits
ƒ Acquisition ƒ Inflation (and at what rate)
ƒ Maintenance ƒ Fixed
ƒ Profit ƒ Proportional refund
ƒ Tax ƒ Levels of cover

ƒ ROCE ƒ Cyclical claims

ƒ Rating
ƒ Factors
ƒ Average age
ƒ Tailored pricing
ƒ Reviews
ƒ Data
ƒ Competition

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Actuarial Issues – Risks
Insurance and Operational risks require the most
supporting capital
1 ƒ Depends on attitude to risk
Market
ƒ Free assets
Risk ƒ General/Life insurer

2 ƒ Reinsurance – Personal accident/Critical Illness

Credit Risk ƒ Corporate bonds
ƒ Debtors – Employers

3 ƒ Claims
Insurance ƒ Lapses
Risk ƒ Expenses

4 ƒ IT issues
Operational ƒ Policy wording
Risk ƒ Data

5
Liquidity ƒ High number of small cashflows
Risk ƒ Premiums in, claims out

Section 4

The future for HCP

The future for HCPs

A number of factors have reduced demand but could this
trend could be set for a reversal…
ƒ Strain on NHS
ƒ Onus shifted to ƒ Gym membership
Individual ƒ Spa treatments

New Migration to Pressure on Consumer

Innovations Private Sector Employers Health
Obsession

ƒ Combine with ƒ Duty of care

PMI ƒ Rising demand
ƒ Additional
benefits

And as 40% of the population has not heard of a cash plan

there is plenty of scope for increasing awareness

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The future for HCPs
Potential for the market to grow fivefold

Potential size of subscriber Targets v Subscribers

base 30

HCP
subscribers
25
5%

HCP targets
20
18%
%

15

10

0
Targets Current Subscribers

18-24 25-34 35-44

45-54 55-64 65+

Source: Health Cash Plans, Finance Intelligence, November 2007

The future for HCPs

Benefit popularity varies greatly between HCP subscribers
and the population

HCP subscribers

All

0 10 20 30 40 50 60 70
%
Dental benefit Optical benefit Health screening
Specialist consultation Outpatient admission Inpatient admission
Maternity/paternity benefit 24/7 GP helpline Chiropody
Allergy testing Complementary treatment Online health information/assesment

Source: Health Cash Plans, Finance Intelligence, November 2007

The future for HCPs

There is a need for providers to offer flexible plans

Chose
Benefits

Adjust to Select
Suit Level(s)
Tailored
Scheme

Enter
Employee Or Budget
Data

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The future for HCP
Who is a typical HCP Subscriber?

HCP subscribers are model citizens Also use more health services
ƒ Eat better ƒ Visit the doctor more
ƒ Drink less ƒ Visit the dentist more
ƒ Smoke less ƒ Visit the optician more
ƒ Exercise more ƒ More likely to wear glasses
ƒ … ƒ Use complementary treatments
ƒ Put out their bins on time ƒ Research on the internet
ƒ Help old ladies across the road ƒ …but varies between the sexes (and
you can guess which way!)

Opportunity?
ƒ Link up with Dentists/Opticians/Health Clubs
ƒ Use tailored website advertising
ƒ Gender specific benefits

The future for HCP

Summary

Strengths Weaknesses
ƒ Long established market ƒ Mature, making it difficult to increase
ƒ Flexible product penetration
ƒ Low cost alternative to PMI ƒ Low public awareness
ƒ Steady premium growth ƒ Overlap with dental/PMI
ƒ No underwriting ƒ Age limit on most plans
ƒ Integrated into broader benefits package ƒ Revenues reliant on personal sector

Opportunities
ƒ Increased healthcare needs
ƒ Changing NHS – more emphasis on self
provision
ƒ Growing interest from corporate sector
ƒ Scope to expand add-on benefits
ƒ Consumer obsession with health and
wellbeing – spas, gyms, retail brands
Threats
ƒ Ageing population – more claims
ƒ Competition from dental/vision plans
(and maybe PMI)
ƒ Rising healthcare costs push premiums
out of reach of traditional market

Any questions?
PLUG

FATTY
SYDNEY
DANNY
SMIFFY TOOTS

WILFRED SPOTTY ERBERT

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