The no-claims discount comes to health cover

You could slash the cost of your private medical policy but could you afford to be ill?

The no-claims discount (NCD) is familiar to millions of motorists. By careful driving or not making a claim after minor accidents, you can slash the cost of your insurance.

The same principle applied to health cover, though, may take a little more getting used to.

While private medical insurance (PMI) allows policyholders to avoid NHS waiting lists and qualify for immediate treatment in private hospitals, it has traditionally been regarded as more of a luxury than a necessity. Indeed, soaring premiums have contributed to a decrease in the number of people buying a policy.

"Medical inflation goes up faster than [general] inflation due to expensive treatments," says Mike Naylor of consumer group Which?, adding that the average PMI premium is now well over £1,000 a year.

Further, the older you get, the higher the premiums, as there is a greater chance of falling ill - and costly claims being lodged.

But now, faced with a fall in demand, insurers such as Standard Life, Axa PPP and Saga are developing more innovative schemes to win customers back. And one of these is an NCD on health cover.

"It works in much the same way as it does for car insurance, helping to reduce costs in the longer term," says Justin Modray at independent financial adviser (IFA) Bestinvest.

To entice new customers, insurers typically start by offering a discount of around 25 per cent. Stay healthy and don't claim and these discounts can grow to as high as 60 per cent (see the box above). In many cases, you can transfer NCDs if you switch insurers.

While they sound attractive in theory, they are clearly not suitable for everyone thinking about PMI. "They are no use if you have a medical history and are going to claim frequently," says Stephen Walker of the Association of Medical Insurance Intermediaries (AMII), who adds that, whatever your health record, you should go into these polices with your eyes open. "You need to check if your discount relates to each year you hold the cover - or each claim you make. If it's the latter, you could end up going back many steps [on the discount chain] very quickly."

Even small claims - say, £35 for physiotherapy or osteopathy - can have a big impact when you renew your premium. In these cases, Bill Poynton of broker Health Care Plus suggests you may well be better off paying the cost and keeping your NCD intact.

However, Charlie Mac-Ewan from insurer WPA amplifies industry concerns over NCDs in health cover. "We are opposed to [them] as they encourage people not to claim," he says. And that defeats the whole object of taking out insurance.

For example, not claiming for osteopathy is one thing, but holding off if you are in hospital with pneumonia could be far more costly.

Dermot Cox of advice website carehealth.co.uk warns that the way medical insurers promote their NCD policies carries a "real risk of confusing consumers".

"They engage in a lot of heavy marketing to make premiums appear cheaper," he says, "but promises of 50 per cent off aren't all they seem." In other words, all policyholders qualify for an initial discount regardless of NCDs, so the offers seem more generous than they really are.

In the hunt for cheaper PMI premiums, Mr Cox also warns of the potential dangers of changing policy if you have developed a medical history including periods of hospital treatment. Conditions covered by the old insurer might be omitted under a new policy.

If these types of NCD sound too rigid, there are variations. For example, Prudential's PruHealth policy has taken the idea of an NCD one step further with its "Vitality" scheme. This rewards people who care for their health, on the premise they will make fewer claims. Discounts start at 25 per cent and rise depending on the number of "Vitality points" achieved through improving your diet, giving up smoking or working out at the gym.

Another option is a "shared responsibility" scheme, offered by the likes of WPA, where you in effect split the cost of private treatment with your insurer by paying a proportion of claims up to an agreed maximum. The more you pay, the lower the premium.

You can also keep a PMI premium down by opting for an excess above the traditional £100. The maximum voluntary excess varies between insurers but is around £1,000, and should get you discounts of up to a third.

Richard Mason of the advice website insuresupermarket.com adds that PMI should not be taken out in isolation, but considered alongside life insurance, critical illness cover and income protection.

How the deals work

Norwich Union's Health Solutions plan is underpinned by an NCD, with new PMI applicants beginning at level six (a 45 per cent discount). This rises by one point (between 5 and 10 per cent) if no claims are made per annual contract, and continues up to 60 per cent. It decreases by three points for each claim made per annual contract.