Aggregators have become an important part of the Australian Private Health Insurance (PHI) industry, however, they are often discussed within submissions to government as having negative impacts and pushing up prices. In Part One of this two part series, health actuary Andrew Gower discusses the history and impact of aggregators.
While there have been small aggregators in the past, the most recent phase started with iSelect opening in 2000. They commenced operations with a focus on health insurance, and then expanded into other insurance classes, home loans, energy services, internet and telephone services. Health insurance remains their most important product, and sales of PHI generates about 50% of revenue and is the largest contributor to profits.
As iSelect developed a strong and profitable presence within Australian PHI marketplace; other aggregators also entered the market. While many of these have remained small (or stopped operating), Compare the Market has grown to a similar size to iSelect in PHI. They are backed by the Budget Insurance group based in the UK who also operate Auto & General Insurance and other general insurance brands.
These two aggregators have become an important distribution channel for some health insurers and are likely remain part of the environment within health insurance in the future.
Why do aggregators like selling PHI?
Aggregators are attracted to PHI for a range of reasons:
- An easy pricing basis, that is based on 2 core rating factors. This makes it easier to train staff and is easier to build and develop internet and customer relationship systems. In addition to these factors, insurers are more comfortable sharing pricing since the underlying pricing algorithm isn’t as material a driver of performance like it is in other personal lines of insurance. All prices (and most key product features) are also publicly available allowing easy comparisons to be developed.
- Unlike other classes of insurance, health insurance isn't a financial product. This reduces the compliance costs for the aggregators as there aren’t the product disclosure or training requirements compared to financial products. More importantly, this means that commission terms don’t need to be disclosed to customers, hence assisting aggregators with their contracting with insurers.
- The products are complex and health risks are not well understood by customers. Aggregators have developed easier to understand approaches to explain what was covered and have increased the transparency in PHI.
- The PHI industry is highly fragmented with over 30 insurers; many of whom were regional players. Hence, many insurers had very limited market share outside of a small region and the costs of expansion (e.g. brand development and distribution) would have been prohibitive. By using aggregators, these regional insurers have greater access to customers outside of their local region without the need to build their own brand.
- Customers have a complex relationship with any insurance product. For many customers, PHI was purchased for either a specific health need (e.g. obstetrics), tax purposes or since they are about to turn 31 and want to avoid lifetime health cover. While these are valid reasons to purchase, they require additional effort to develop broader, long term relationships between insurers and their customers.
The impact seen within the PHI industry
Since they launched, iSelect has had a material impact on the Australian PHI industry. They have been the third highest spender on marketing (behind Medibank and Bupa), and have played an important part of increasing customer focus within the industry as a whole.
They have also increased the level of churn within the overall industry. Seven years was once considered an appropriate average length of retaining customers, with this having reduced to four years. This leads to reduced time to repay any acquisition expenses; pushing up prices or reducing returns within the industry.
By taking sales away from other channels, insurers have also had to review their own distribution approaches. For the larger insurers (who operate on a national scale), this has meant a reduction in branches which in turn reduces the brand presence they have and removes an important service channel for customers.
For smaller, regionally focused insurers; the aggregators have opened up a new sales channel and offered growth outside of their traditional region. For many this has been a positive and offered increased scale and an increased ability to invest in their local community. There have also been cases where pricing, which was appropriate for their historical region, has needed to increase to cover the changes in risk. Due to the capital held, this hasn't led to insurers facing financial destress but has challenged pricing assumptions.
Aggregators have also increased the focus on the price paid by customers. This is not to say there is no focus on coverage by aggregators, just that there is an increased focus on price once coverage needs are decided. For insurers, this has increased the internal focus on commercial pricing, the value that customers see within their products and ensuring that the business is as efficient as possible.
In Part Two, we discuss the key response taken by insurers to date, look at possible reforms that may counter some of these challenges and the potential for actuaries to assist insurers understand and meet the challenge.
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