Planet Insurance: working with the Government

Last month’s issue included a fascinating article on the concept of outsourcing disability benefits to the mutual insurance sector and an income replacement top-up which would be paid in addition to State Benefit (page 6 COVER Aug 2010).

Under the previous government there were a lot of discussions about increasing the health of the workforce, rehabilitation and return to work. This focused on the role of group IP and elements of group PMI. It ran into two problems.

First was PMI itself – the previous government was never going to provide incentives for this product. Second was the ‘poor’ evidence base that tax incentives for group IP would encourage large companies to buy it and, even if they did, that the impact on employee return to work rates would be cost-effective. This nag is due another walk round the paddock.

It has the advantage of an existing large scale business model which continues to be the main form of disability and health insurance in the UK and it only covers the employed population. It is difficult to see why an insurer would want to take on the long-term ‘unemployed’ state sector – beyond what rehabilitation and disability assessment providers are already doing.

But let’s have a look at the more radical model. In essence, it is a move towards an EU social insurance model, except that it would be provided through private/mutual insurers. Such a model has existed for about four years in the Netherlands. Like all such schemes, it has guaranteed acceptance and underwriting does not affect the premiums individuals pay – although companies can, and do, charge different premiums. So how do insurers protect themselves against anti-selection and the State against uninsurable people?

The starting point is that it is compulsory for people to buy it and for companies to take them on – bad risks cannot opt in and good ones out. But this only gives limited protection because people are able to choose from a range of companies – based on the level of their premium or service provision. There is also to be an incentive for insurers to ‘cherry pick’ the best risks, for example younger people or more affluent postcodes.

To address this, governments have produced immensely complex risk equalisation schemes. Again, the Netherlands is a good case in point. These are centrally set subsidies between companies based on the aggregated estimate of each one’s level of underwriting risk. But even such complex arrangements can go very wrong in practice. This was the direct cause of Bupa’s exit from the Irish health insurance market a few years back.

Putting all this aside, will the UK Government actually want to go down this route? Some evidence suggests that the Dutch health insurance model may not control costs. Consumer premiums have gone up (as with PMI) and some insurance companies have reported losses.

And will insurers? Regulated schemes will be difficult for consumers to understand and their faults will be blamed on the insurers and not the State. Currently there are huge numbers of appeals against people being moved from invalidity benefit to jobseekers allowance – and 40% are going in claimants’ favour. On planet insurance, these will be declined claims reversed by the FOS.

It will be interesting to see how the proposal develops. And any debate on the role of IP is to be welcomed. Beware what you ask for though – you might just get it. Remember stakeholder pensions.... 

Richard Walsh is a director and fellow of SAMI Consulting www.samiconsulting.co.uk