The $2 billion problem facing private health insurers like Medibank Private and Bupa. Photo: iStock
Private health insurance customers are switching providers at an unprecedented rate because of confusion about their coverage, putting $2 billion of revenue at risk each year, according to industry consultant Avnesh Ratnanesan.
?Just under one million policyholders, or about 10 per cent, are switching providers in the $21 billion industry each year.
The main driver of that customer churn is confusion about the 48,000 different products being sold by funds, private health insurance executives told Dr Ratnanesan as part of a report to be released on Tuesday by his advisory outfit Energesse.
“Choice is not always a good thing for customers,” head of customer experience at market leader Medibank Private, Harriet Wakelam, told the report.
Dr Ratnanesan said the lapse rate for customers is highest in the first six to 12 months after joining an insurer. Customers who are bewildered by the range on offer, may just sign up to the cheapest provider or the one with the most attractive marketing campaign, he said. “When people do something like that and make quick decisions without doing a lot of research they can then become disappointed when something they had hoped would be covered isn’t covered by their policy,” Dr Ratnanesan said.
Rhod McKensey, the executive in charge of private health for Australians at listed insurer nib, told the report that “the probability of a customer lapsing is double in the first six months.”
Confusion
Mr McKensey said that the rate of customers calling nib’s call centres was increasing at a greater rate than overall costs, highlighting how confusion is adding to insurers’ expenses. The cost of acquiring customers to replace the churners, through advertising and other marketing, eats away at insurers’ profits as well.
At its half year results newly listed Medibank said the lapse rate for its core Medibank brand and budget brand ahm were 4.9 and 6.9 per cent, respectively. Both rates were worse than the prior period. For the same period nib said its lapse rate was 5.7 per cent.
Morgan Stanley analyst Daniel Toohey agreed that confusion was a factor in the rising rate of customers leaving or switching providers. “The trend has certainly been an increasing propensity to lapse, which is a function of the confusion and the increasing role of online brokers,” he said. “There’s a wide variation in prices, coverage, rates of benefit payment and inconsistent naming of the top, medium and basic products across health insurers.”
The rising cost of health insurance – premiums rose by an average of 6.2 per cent on April 1 – was also driving the churn rates because people could not reconcile the higher prices with increased value, he said. Premiums are climbing because of rising medical costs, but Dr Ratnanesan said recent government policy, such as increasing the rebate at the rate of inflation as opposed to the rate of premium increases, was also adding to the affordability and value conundrum.
“No one company alone can solve this problem,” he said. “It needs to be funds working together with government.”