Health insurers get a poor report

The charges are substantial: that customers are confused about cover and don't realise how quickly premiums can increase. The industry is in trouble, says Andrew Verity

Health insurers have been issued with a "final warning" by the Office of Fair Trading to eliminate policies that are harmful to consumers or face full statutory controls.

The OFT, the competition watchdog, this week gave insurers until 30 September to transform their practices or face direct regulation by the Financial Services Authority.

In the OFT's second bid to reform private medical insurance in barely two years, John Bridgeman, the watchdog's director general, said the industry had broadly failed to respond to a damning report in 1996. That report highlighted rampant inflation in premiums and widespread confusion among customers, who were often unaware that the policies failed to cover a whole swathe of medical needs.

Mr Bridgeman said this week: "Health insurers have not shown much concern for improving the information, choice and service to their consumers. If the industry wishes to retain self-regulation it should carefully consider, and then act decisively upon, the recommendations in my new report."

The OFT argues that sales literature confuses customers to such an extent that in one survey 79 per cent of them wrongly thought they were covered for chronic, ongoing medical conditions such as arthritis or Alzheimer's disease. They also thought their policy would pay for drugs needed after an operation.

In fact most private medical insurance covers only acute conditions that require one-off operations. Many policies exclude claims for outpatient treatment and few pay for drugs needed after an operation.

The OFT wants health insurers to develop a new code of practice which provides for a core of "benchmarked" products with simple, standardised terms.

Insurers must show customers how quickly premiums can increase, the OFT said. Premiums in the last decade have risen by an average of 3.5 per cent a year above inflation. Many customers failed to realise that premiums increase with age.

The regulator's report says the Financial Services Authority should monitor the use of "moratoria" by health insurance companies.

Under moratoria, customers can buy a policy without the need for a medical examination, but cannot claim if they are treated for a pre-existing condition within the first two years. This makes premiums cheaper and a quicker sale can be made. The snag is that consumers with pre-existing conditions may try to avoid seeking treatment. The OFT claims some patients recovering from serious illness had been sold moratorium policies - even though they had been advised to go for regular medical check-ups.

Other kinds of health insurance should also be standardised, the OFT says. These include critical illness insurance, permanent health insurance and long-term care insurance.

The pounds 2bn health insurance market is dominated by two players: Bupa, with 40 per cent of the market, and PPP, now owned by Guardian Royal, with 30 per cent. Norwich Union has 10 per cent.

Bupa said this week it supported the OFT's call for benchmarked products and opposed the use of moratoria on policies. But it resists calls for customers to be shown how quickly premiums have risen. The Association of British Insurers, the industry trade body, this week said it would be studying the OFT's report in detail, although it did not agree with some of its findings.