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Comment: A modest proposal…

…for how to grow the health insurance and protection market

July 2010 News

Just because insurable interest rules have been around for a century or two, that does not mean they must last for ever. Back in 1726, Jonathan Swift wrote Gulliver’s Travels. With battles between those who broke boiled eggs at the big end and those who started at the little end, he satirised pointless and incomprehensible battles such as IFA feuds over the Retail Distribution Review.

But less known – and certainly less read – is Swift’s 1729 volume A Modest Proposal For Preventing the Children of Poor People in Ireland from Being a Burden to Their Parents or Country, and for Making Them Beneficial to the Public (thankfully usually known as A Modest Proposal). Here he suggests the long suffering Irish could mitigate poverty by selling their children as food to rich English lords and ladies. Swift did not, of course, condone cannibalism. It was a satirical dig at Ireland’s English masters.

Now for my own (very) modest proposal. And I promise no children will need to be roasted with potatoes and parsnips.

From individual and corporate private medical insurance (PMI) to term assurance and critical illness cover, it’s is fair to say that everyone in the protection industry has to run very hard to have a chance of standing still.

So now for my modest proposal which will revolutionise both premium income and margins. At present, the entire industry is based on people only buying cover for themselves or for their partners or children and occasionally their business associates via keyperson cover. This limits sales as most of us, for instance, can only purchase policies for a handful of people.

What, however, if I could buy protection for others – my friends, neighbours, work colleagues or even strangers? In PMI, for instance, I could insure that apparently very healthy woman I see each morning after she has run five miles before going to her office – or the overweight guy I know at the pub who drinks and smokes heavily and whose idea of exercise is pressing the remote control on his TV set.

Obviously, the woman will attract lower premiums than the man. But in the event of either falling ill, they could be treated either on the NHS with the policyholder picking up a cash equivalent. It would not even matter if either this woman or man had their own or a workplace PMI policy as they could claim on this without having any effect on the parallel plan and its payouts.

With term cover or critical illness, I could insure an acquaintance’s life or health. I would pick up the payout if the person died or succumbed to a dread disease. Again it would not matter if that person was insured elsewhere because if there are two sets of premiums, then there can be two sets of payment. It is no different from someone insuring their life for £500,000 instead of £250,000 and paying twice as much in premium except this would spread the load among insurance companies.

The essential from my modest proposal is that more premiums will be created in this way, which is surely what everyone in the protection world wants. If brokers and underwriters could ensure just a 10% uplift in premium income, their financial prospects would be truly revolutionised. With costs fixed, much of the extra income would flow directly to the bottom line.

Additionally, anyone willing to buy such an arrangement on someone else would probably be happy to pay premiums which are higher than the cut-throat rates now on offer. Better margins again.

By now, some readers will have embraced my modest proposal and will demand technical departments design the products and create the paperwork, followed by marketing where wise heads will come up with slogans such as “you insure your family, now cover your friends”. Brokers could Twitter with “Don’t like your neighbour? Now win twice when he pops his clogs – get rid of him and collect a big cash sum!”

But many, I fear, will retreat into objections on legal, privacy, and taste grounds.

Yes, there is the problem of “insurable interest”. I realise that taking out term assurance on my detested neighbour, could tempt me to help him on his way. But the protection world already copes with viaticals. It would be far more difficult to ensure someone catches cancer to claim on critical illness or PMI.

Just because insurable interest rules have been around for a century or two, that does not mean they must last for ever. After all, who would have dreamt of the range of exotic financial instruments now available compared with just 10 or 20 years ago?

Privacy is a problem but not unsurmountable. Obviously, anyone who is happy to lend their lives or health to a third party would want some small reward so they would have to agree to this because of underwriting. Term assurance could be paid out automatically because death is a public event – anyone can check the latest certificates. PMI is more difficult but maybe the policy purchaser would smooth things over by offering a percentage of any successful claims.

But if privacy is an issue, then it can easily be overcome. Instead of insuring individuals, insure groups such as a firm’s employees. I would collect if total claims passed a certain level. As an individual, I might not have enough cash to double insure everyone at a big company, so I could buy a part-interest.

Policies like this used to feature in the marine market. Investors buying a “tonner” gained if the total shipping lost over a period were high.

As for taste, that’s a grey area although one that should not get in the way of increasing premium income. But buyers with concerns could purchase policies on health and longevity, claiming if a group’s medical fees were less than anticipated or a set of people lived longer. Again, the marine market once showed the way. A “Chinaman” was a policy where the bet was of shipping losses over a period that were lower than a set figure.

And under my proposal, readers are free to insure me so they can pick up when something nasty happens!