www.the-actuary.org.uk
C
laims data is accepted as being of
pivotal importance to the accurate
pricing of most commercial insurance
policies.
The brokers that arrange the bulk of UK
commercial insurance routinely obtain this
information from the holding insurer, and
then pass it to competing underwriters with
other relevant risk information so they can
choose whether to quote and, if so, how
much to charge. This has become standard
operating procedure.
Except, that is, in one area -- health
insurance for small to medium-sized
enterprises (SMEs). Here, the tradition is for
the handful of insurers who dominate the
market to hold on to claims information,
often ignoring the requests of brokers.
This prevents brokers from working
with rival insurers to generate accurate,
tailored quotations. The result is that most
policyholders renew with the holding insurer
because any other quote they see -- if they
see any -- seems to have little relevance and is
not based on all the relevant information.
It is not difficult to divine the motivations
at play. The insurers that hold the business
naturally do not want to lose it, so they
refrain from facilitating a competitive market.
Brokers and rival insurers, meanwhile, rail at
the injustice of not being able to expose their
wares on a level playing field.
The major insurers say this is a
redundant argument because the past
claims experience of a small group cannot
be taken as an accurate predictor of future
claims performance.
They argue that the health insurance
claims submitted by a firm employing,
say, 50 staff are unlikely to evidence a
trend that might affect pricing. Unless, of
course, everyone is suffering from the same
industrial illness or injury, in which case it
should be the employer's liability policy that
is under the microscope.
Their point is that the 50 employees, as
individuals, will suffer a random and varied
selection of ailments over the years. Therefore,
it is unlikely that these will coalesce into a
pattern that is sufficiently unique to that
organisation to have genuine impact on
underwriting calculations.
According to holding insurers, if you want
to price the firm's health insurance risks,
simply build a model using 50 sample people
of working age who are fit for employment in
that sector.
However, the emerging market argues that,
if past claims data is of no use in determining
accurate pricing, why keep it secret?
Fair play
The disagreement is given added impetus
by the Financial Services Authority's (FSA)
Treating Customers Fairly (TCF) principle.
The TCF provisions are notoriously thin
on detailed requirements but the overall
obligation is overwhelming -- firms must act
in a way that treats their customers fairly by
promoting their best interests at all times.
Indeed, the first of the FSA's TCF outcomes
requires that: "Consumers can be confident
that they are dealing with firms where the
fair treatment of customers is central to the
corporate culture." (Outcome 1: www.fsa.gov.
uk/Pages/Doing/Regulated/tcf/index.shtml)
Okay, say the competitive insurers, if claims
information is of no use, there's no barrier
to sharing it. If it is of use in setting accurate
premiums, the precepts of TCF give you, the
holding insurer, no option but to release it.
Not to do so means you are denying your
customers access to a competitive market that
might improve the terms of their insurance,
provide them with access to superior risk
management and deliver better value.
As stated at the outset, it is common
practice for commercial insurers to share
claims data via the broker market. Indeed, if a
seasoned commercial insurance practitioner is
introduced to the corporate health sector, the
first question they ask is how the business can
function without the essential underwriting
lubricant of shared claims information.
The current situation has endured for
years and has only come to light because new
entrants to the underwriting market, who are
primarily pro-broker in distribution outlook,
are making a fuss. What is more, these brokers
and insurers have recognised the implications
of TCF for this sector.
By the end of 2008, the FSA expects all
firms to have systems and controls that
ensure cultural adherence to TCF, and which
document the effectiveness of TCF activity.
This matter has ceased to be a competitive
squabble between insurers looking to secure
a larger slice of pie. Neither is it an arcane
debate about the use of claims data from a
small group of individuals in underwriting
and forecasting. It is now one of regulatory
compliance and, as such, cannot be ignored.
Search for more articles on this topic at
www.the-actuary.org.uk
Be fair and share
Alistair Sclare argues the case for sharing claims data for small
to medium-sized businesses in the health insurance market
Alistair Sclare is
head of healthcare
underwriting at
Groupama Healthcare
and is responsible
for technical
underwriting, pricing
and operations
Health insurance Claims sharing
36 October 2008

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