In Part Two of this two-part series, Andrew Gower discusses how growth of aggregators has led to material impacts within the Australian health insurance market. These impacts have made acquisition of new customers less profitable; leading to an increased focus on loyalty and developing deeper relationships with customers.
What insurers are doing to improve loyalty
To counter the impacts of increased churn and higher acquisition costs, there has been an increased focus within PHI on improving loyalty and developing deeper relationships. These approaches seek to create a broader barrier for customers to shop around for a better deal or leave the industry (which has been happening in recent quarters). Essentially, insurers are offering a deeper value proposition outside of the core insurance offering. This is moving PHI from being in a customer’s pocket, to being in their mind as a key part of their life; although this remains challenging with the current regulatory environment of the health system.
One approach is using additional brands where deep customer relationships have already been developed. This has seen a number of new brands, such as Qantas and Suncorp, enter the PHI market; allowing these brands to share brand development costs over a broader base as well as deepening the customer relationships they have in their key product offerings.
These additional brands have changed the traditional integrated operating model within PHI with the underwriting margin being separated from the brand and customer service margins; something that has already partially occurred in investments and life insurance. This in turn requires deeper understanding of operational expenses and ensuring that the business is efficiently allocating its resources.
Another approach has been the development of wellness programs. While these can assist with claims cost over the long term, the increased relationship can assist with retention and loyalty of customers in the short term. Two examples of this have been the Qantas Assure and AIA Vitality programs. Both programs offer discounts and rewards for undertaking exercise or healthy eating. Medibank has partnered with Flybuys to offer a similar program.
The third approach has been expanding the value offering into health services. This has seen insurers purchase (or develop) dental or optical practices. These have assisted the insurers keep profits within the group, have additional brand presence within the community and provide a consistent brand experience in another part of the value chain (healthcare delivery).
The final approach is embedding loyalty into products (mostly ancillary products) through increased limits or benefits. This approach endeavours to provide additional value for loyal customers while balancing the risks of anti-selection that can occur within PHI. Using this approach requires careful consideration of equity within product portfolios, something that actuaries have extensive experience in.
The need for reforms
In addition to these developments, insurers have been working hard to drive reform to improve the value proposition, increase loyalty and drive transparency with broker commissions.
Health Insurers are heavily regulated in what services they can pay for and how much they can pay. While these regulations remain important to ensure that insurers don’t refuse to pay for health services; they have limited the development of broader health offerings.
Changing these regulations to allow deeper customer relationships would also assist loyalty as they move from being purely payers within the health system to more active players in broader health. A key aspect of this is payment for out-of-hospital medical services (instead of admission to hospitals), which can provide improved patient outcomes at lower cost.
Another reform needed is greater transparency of commissions payable to aggregators. As outlined in part 1, PHI products aren’t financial products and the disclosure requirements seen within other insurance and superannuation products don’t apply. The approach proposed by government is to make PHI a financial product, although this would require greater disclosure requirements from insurers as well. This may increase the pressure on premiums; hence a more balanced approach is preferred by insurers.
The federal government announced a series of reforms for private health insurance in October 2017. These focused on transparency of coverage and improving the value proposition for younger customers, rather than just ensuring that the sales process was transparent and in the best interest of all stakeholders in the system. Considering the continued focus on transparent selling behaviour within other classes of insurance and financial services; it is expected that discussions on reform will continue with health insurance for some time.
Actuaries have a broad range of skills to assist insurers in meeting these challenges.
Our deep analytical and financial modelling skills can be used in (amongst other areas):
- Identifying possible anti-selection that can occur with sales from aggregators, and assist in developing appropriate management actions.
- Understanding the holistic impacts on profitability and capital due to differences in distribution and service approaches.
- Assessing the impacts on customers, insurers and the health system of various potential reforms over various time periods.
We need actuaries to challenge themselves to step into broader roles within Health and show the important value and assistance we can provide to meet these (and other) challenges in meeting the health needs now and into the future.
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