Is private medical insurance worth it?

Despite the economic slump, the number of people with private medical insurance is on the rise, but does this cover offer good value?

According to figures released today by trade body the Association of British Insurers (ABI), the number of people covered by private medical insurance (PMI) is rising. Here are the latest figures from the ABI regarding PMI:

Source: ABI

Private medical insurance is gaining favour

As you can see, the number of people covered by PMI peaked in 2001 at 6.589 million. Membership then fell until 2005, but has risen for three years in a row to today's 6.224 million. Indeed, despite the credit crunch and economic recession, the number of people with private medical insurance actually rose by 3.7% last year.

Having spent the first four years of my career at the UK's biggest private medical insurer (BUPA), I've always taken the view that PMI is 'nice to have' rather than 'must have' protection. Indeed, in many ways, it's a policy for WOOPies (well-off older people) and those with generous employer benefits.

In fact, most of the people covered by PMI are covered by corporate - rather than individual - policies. In 2008, almost three-quarters (73%) of those with PMI were covered by a work-based policy (4.571 million people), versus 1.653 million with self-bought policies.

Do PMI policies offer good value for money?

One way to measure whether an insurance policy offers decent value for money is to check how much of the money taken in (premiums) is paid out (in claims). In this respect, PMI offers a pretty good return, as you can see from the table below:

Source: ABI

As you can see, in 2008, 76p out of every £1 collected in premiums was returned to PMI policyholders in payouts. This payout ratio - roughly three pounds in every four - is broadly in line with other mass-market insurance policies, such as car, home and life insurance. However, it is much more attractive than the payout ratios for rip-off cover such as payment protection insurance and extended warranties, where payouts are often less than 20% of premiums!

Then again, PMI premiums do tend to rise steeply over the years, thanks to inflation (rising prices) and age-related premium rises. One disappointing trend is that the payout ratio has fallen from 83% in 1998 to 76% in 2008. This suggests the attractiveness of PMI has fallen, despite the arrival of new entrants leading to fiercer market competition.

To buy or not to buy PMI?

As with all insurance, private medical insurance provides a largely hazy benefit: peace of mind. It acts as an additional safety-net to that provided to all UK residents by the National Health Service (NHS). What's more, PMI provides limited or no cover for emergency treatment or chronic conditions, Thus, it really provides protection against the cost of private treatment for acute or short-lived medical problems.

If your employer provides PMI at nil or low cost, then it's well worth having this additional protection. Indeed, after a good workplace pension, PMI is the second-most desirable employee benefit, according to research from market leader BUPA. However, buying an individual policy can be complex and costly, so I'd give it a miss if I were you.

While PMI can give you faster access to specialists, plus cleaner hospitals, a private room and better meals, it's not a universal panacea. Also, while it may help you to jump the waiting list for treatment (up to eighteen weeks) and get you back to work fitter and faster, it is by no means a miracle cure.

To be honest, the recent rise in the number of PMI policyholders surprises me, given the severity of the current recession. In the final analysis, PMI is a luxury item and, therefore, one which can be set aside if your budget is under severe strain. However, before cancelling any insurance policy, do look for easier savings elsewhere.

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