Shaun Gath

12th Annual Health

Insurance Summit

Current Regulatory Issues of Private Health Insurance

Shaun Gath

CEO, PHIAC

Sydney, 23 July 2012

Agenda

• State of the PHI industry

• New Capital Adequacy/Solvency

Standards

• Competition Review and forthcoming

PACU work

• Other work

PHI Membership – Mar Q 13

• Hospital coverage increased to 46.9%

– Up from 46.8 Dec Q (adjusted)

– 52,863 new members during Mar Q

– Total insured 10.76 million

• General treatment up to 54.7%

– Up from 54.6 Dec Q

– 86,974 new members during Mar Q

– Total insured 12.56 million

Prudential Snapshot – Mar 13

• Industry remains in very sound financial

condition with little change in key measures

– Gross margins: 13.92% (down from 14.34% in year

to Mar 12)

– MER: 8.93% (slightly down from 9.36%)

– Net margins: 4.99% (up from 4.98%)

– Profit before tax: $1.46 bill (up from $1.32 bill)

– HRB/Investment income: improved in the quarter to

go from $524mill to $602mill for the year to Mar 11.

Capital Position

Total Industry

Assets: $10.7

billion

(↑ from $9.8 billion

last Mar quarter –

June Quarter’s

unusual $1.2 billion

contributions in

advance has begun

to return to more

normal levels)

$4.0 billion in

excess of cap ad

requirement.

CAPITAL ADEQUACY AND

SOLVENCY

Capital Adequacy and Solvency

• One of PHIAC’s Core functions

• Current standards were made in 2000

• They have done their central job

(protecting consumers) well, but:

– Difficult to understand

– Inconsistent in their final application

– “template approach” not sufficiently related to

actual risk

– disconnection from the board

So, what is our aim again?

• The fundamental question posed by the Capital

Adequacy Standard would ask:

‘Are the health fund’s assets large enough to ensure that it can

survive a very bad year with its balance sheet intact?’

• The fundamental question posed by the Solvency

Standard would ask:

‘Are the health fund’s highly liquid assets large enough to meet

three months of stressed cash outflows?’

Key features • Principles based approach:

– Avoidance of excessive prescription.

– Let the insurer figure it out.

• Increased insurer engagement with business risk and

information supporting assessment of that risk

• Resulting in, we think:

– Less prudential capital needed for most insurers

• Small insurers will have to adequately cover volatility risks

– Some provision for future claims risk on unearned premium and

“other liabilities” – not in current standard

• No transition period required (except for limited

instances of approved subordinated debt)

Key Change: Quantum of Assets

• Insurers will be

responsible for

determining their

own provision

through a stress test

amount

• 98% level of

sufficiency

• 12 month rolling test

• Operational risk

added (0.5% of

premium)

• Possibility of a

“supervisory

adjustment” where

PHIAC disagrees

Consultation Period

• Please examine the standards closely and

see how they apply to your business

• We have been meeting directly with most

of you the funds

• Feedback due by 31 July 2013

• Standards will be made at September

meeting of Council, start 31 March 2014

COMPETITION REVIEW

In a Senate Committee Room…

An intriguing exchange Senator

Cormann (Lib,

WA)

Mr Savvides, just going back to some more serious

matters: what is your assessment of the impact on

Medibank Private of PHIAC—the regulator—seeking

to extend its supervisory jurisdiction, especially into

competition?

Mr George

Savvides

(MD, Medibank

Private)

[…] They have an extended role—I think it is PACU,

the unit that they have developed. It does provide a

market assessment and commentary. It is still young

in its phasing and we have not been disappointed

about what we have seen. We have a positive and

constructive relationship with the regulator. […]

PHI Act 2007, Section 264-5

Objectives of the Council

In performing its functions and exercising its powers, the

Council must take all reasonable steps to achieve an

appropriate balance between the following objectives:

(a) fostering an efficient and competitive health

insurance industry;

(b) protecting the interests of consumers;

(c) ensuring the prudential safety of individual private

health insurers.

So, just to be clear...

• PHIAC’s interest in fostering competition

and promoting efficiency in the PHI

industry is not a “new” role

• It has been a part of our statutory mandate

since 2007

• We undertake this role, because

parliament has instructed us to do so

“Competition in the Australian

PHI Market” • PHIAC published its paper on

3 June 2013

– Followed a discussion paper

published in November 2012

which prompted 27

submissions

– 6 submissions confidential,

one partially

– The rest are available on the

PHIAC website

• Discussion continues on the

paper and issues raised on the

PACU website

Key Observations • Competition in the PHI market is best described

as a “mixed bag”

• The good news:

– PHI has strong commercial visibility (Advertising,

sponsorship)

– Vigorous retail presence (unlike many other

countries)

– Consumers have a strong awareness of the price of

the product (cf. US experience – now changing)

New York Times, 18 July 2013

Key Observations

• Small funds do compete effectively with

big ones

• “general insurance only” is an emerging

area

Key Observations

• The not-so-good news:

– Australian consumers are turned off by the complexity

– Consumers exhibit strong degree of “stickiness”

despite very real pricing opportunities

From the Minister’s press release,

8 February 2013…

Key observations

• Consumers are being sold on “up front”

elements of the product with little

awareness of long run issues such as:

– Operation of the gap arrangements

– Operation of exclusions and excesses

– Availability and cost of particular providers

when treatment is being considered

Key observations

• Role of “aggregators” is contested

– One person’s “churn” is another’s “competition”

• We said: – “switching behaviour is, arguably, beneficial when it leads to a

better matching of consumers with appropriate policies. It should

also be a positive for competition if consumers feel they are

getting better value for money… seen in this way, switching is

welfare-enhancing if consumers trade off forms of cover they

don’t required for a lower premium

– However, …. “churn” can create longer term inefficiencies

PACU’s Work Program

• Next project

– Portability (discussion paper imminent)

• Then

- Risk Equalisation

- Barriers to entry

- Exclusions and Excesses

[End of session]