Community Rated vs No Claims Discount
Historically private health insurance policies have been ‘community rated’. This means that at renewal, the provider looks at the overall performance of that book of business and calculate an increase accordingly for all members. In recent years, many health insurers have migrated to a ‘no claims discount’ model and instead look at each individual policy to see if they have claimed and apply a predetermined increase if you have. As clients want health insurance to remain sustainable for as long as possible, it’s important to understand the impact of these in the long-term and how to optimise the cost of private health insurance throughout the years.
Clients who have had individual health insurance for many years with the same provider, will likely have continued on a community rated legacy policy, which will no longer be available to new clients if they are taking out cover with that same insurer. These policies are typically expensive due to compound increases, which have accumulated over the years, however, there is often skepticism about the idea of losing a no claims discount if claims are submitted over the policy year.
No claims discounts were introduced to provide transparency and give an indication of the increase a client would see when they approach their renewal. They can be difficult to understand though and clients can see their premiums escalating over the years, unless they are given the right advice, not just at renewal but also at the point of claim. Unlike car insurance, where you build up a discount over the years; health insurers instead will offer an initial discount ranging from 60%-75% and therefore the premium the client pays, is only actually a much smaller amount than the true cost of the policy (base premium).
When considering claiming on your health insurance policy it is important to understand the financial implications to the renewal premium and whether it is worthwhile. If the renewal were to increase by £1,000 because a claim was submitted for £500, you wouldn’t make the claim on a no claims discount policy, whereas you would with a community rated plan.
Although community rated policies do not directly get affected by claims, they do have their shortfalls, when you are considering the longevity of a private medical insurance policy. Community rated policies have largely been discontinued for new clients and the number of members they have, dwindle on these policies because people switch away to save money with new providers or cease to have insurance. The remaining members on the scheme continue because of ongoing claims, serious pre-existing conditions that another insurer would deem to high risk to cover or the omittance to review the health insurance market. In the long-term the book of business reduces in size, but the claims value increases and subsequently the percent increase at renewal, increases exponentially over the years, whether claims are made or not.
When deciding whether a community rated or no claims discount is better, the key thing to consider is the way you are going to use your policy for new conditions and whether you are happy to revert back to the NHS or self-fund if a condition requires long-term management. If this is the case a regularly reviewed policy with a no claims discount would typically be much lower cost in the long-term.