In its second attempt to reform private medical insurance in two years, the OFT yesterday gave health insurers until 30 September to transform their practice or face direct regulation by the Financial Services Authority.
John Bridgeman, the director-general, said the industry had broadly failed to respond to a damning OFT report in 1996. The report highlighted rampant inflation in premiums and widespread confusion among customers, who were often unaware that the policies failed to cover a whole swathe of medical needs. Mr Bridgeman said: "Health insurers have not shown much concern for improving the information, choice and service to their consumers. If the industry wishes to retain self-regulation it should carefully consider, and then act decisively upon, the recommendations in my new report."
The OFT said sales literature had confused customers to such an extent that 79 per cent of customers wrongly thought they were covered for chronic, ongoing medical conditions such as arthritis or Alzheimer's disease. They also thought their policy would pay for drugs needed after an operation.
In fact, private medical insurance only covers acute conditions that require one-off operations. Many policies exclude claims for outpatient treatment and few pay for drugs needed after an operation. The OFT wants health insurers to develop a code of practice which provides for a core of "benchmarked" products with simple, standardised terms.
Insurers must also show customers how quickly premiums can increase, the OFT said. Premiums in the past decade have risen by an average of 3.5 per cent a year above inflation. Many customers failed to realise that premiums also increased with age.
The regulator also said the Financial Services Authority should monitor the use of moratoria by health insurance companies. Under moratoria, customers can buy a policy without the need for a medical examination, but cannot claim if they are treated for a condition they already have within two years. This makes premiums cheaper and a quicker sale can be made.
The snag is that consumers with pre-existing conditions can be put off seeking treatment. The OFT said some patients recovering from serious illness had been sold moratorium policies even though they had been advised to go for regular medical check-ups.
It said other kinds of health insurance should also be standardised. These included critical illness insurance, permanent health insurance and long-term care insurance.
The pounds 2bn-a-year health insurance market is dominated by two players - Bupa, with 40 per cent of the market, and PPP, now owned by Guardian Royal, with 30 per cent. Norwich Union has 10 per cent. Bupa said it supported the OFT's call for benchmarked products and opposed the use of moratoria. But is resisted calls for customers to be shown how quickly premiums had risen.