Fewer people are taking out private medical insurance (PMI) as a result of a massive hike in premiums, a report out today says.

Between 1996 and 2001, the number of individual PMI policyholders dropped by 191,000, according to market analysts Datamonitor who say this decline is largely due to the steep increase of premiums seen over recent years. In 1996, for example, the average annual premium for an individual was £715, while in 2001 that figure had increased to £1,135, while the average claim in that year is expected to have been around £850.

People belonging to group insurance schemes, on the other hand, have seen considerably less dramatic increases. Between 1991 and 2001, the price of PMI for a group member increased from £439 to £480, and the average claim in 2001 was around £383.

This difference in premium changes is largely because the vast majority of members in group or company schemes are of working age, while individual policyholders may be older, say Datamonitor. And since older people are more vulnerable to serious illnesses and are more likely to need surgery such as hip replacements, their claims are, on average, much higher than those younger policyholders, so pushing up the price of premiums.

In an effort to bring premiums back down and to lure policyholders back in, PMI providers have been developing a variety of new insurance products. For example, some insurers have introduced policies with unusually high excesses (the part of the cost the customer has to pay before the insurer starts paying.)

This way, a policyholder gets to pay a lower premium and can pay for cheaper treatments. The insurer will then pay for expensive healthcare needs. WPA and Standard Life Healthcare, for example, have products with an optional excess of £5,000, which they claim can result in a premium reduction of up to 80%.

WPA has also launched a 'co-insurance' policy. This means that the customer bears some of the cost of treatment and the insurance company pays the rest.

The report's author Fiona O'Regan says that insurers remain unconcerned about the government's increased spending on the NHS.

"Many insurers believe that merely investing vast quantities of money in the NHS might not be enough to overcome the fundamental problems crippling this service," she said. "This will drive people to make more provisions for their health care."