Profits of the private health insurance (PHI) industry are in good health, the segment is soundly capitalised and the solvency level is comfortably above minimum requirements, according to Mr Geoff Summerhayes, Executive Board Member of APRA.
“At face value, then, the PHI industry appears firmly resilient,” he said in a speech delivered last week. “But we also see data that gives us cause for concern.”
He outlined APRA’s perspective on the strengths and weaknesses of the PHI industry at the beginning of 2018, as well as the current and emerging risks which APRA sees. APRA assumed responsibility for regulating the PHI sector in Australia in mid-2015.
Cyber security, and trust and reputation have been on APRA’s radar for some time as significant risks facing the private health insurance industry. More recently, APRA has become increasingly concerned by the risks posed by two further issues: affordability and consumer behaviour; and policy and regulatory changes, he said.
“What concerns APRA is we see no indication that an improvement in affordability is imminent. In fact, the data points to the trend worsening,” said Mr Summerhayes.
“Based on the trends, the proportion of the population covered by private health insurance is likely to fall further.”
He said that this is not necessarily a prudential concern on its own, but it certainly will be if the proportion of younger, healthier policyholders keeps declining, raising costs and forcing premiums higher still, further pushing younger members out of the system. The percentage of the population covered by insurance for hospital treatment has declined over the past two years to 46%.
Drivers of rising health premiums
He said: “APRA does not consider industry profits or capital levels to be the primary drivers of rising premiums. The underlying cost of Australia’s health system is the ailment; rising insurance premiums are just a symptom. Specifically, the fundamental forces pushing premiums up are higher claims costs experienced by insurers, through such factors as a greater uptake of medical services among policyholders and the rising cost of treatments and procedures.”
He added: “APRA recognises that health insurers have a limited ability to fix the major structural issues that are chiefly driving the affordability dilemma. But that doesn’t mean you are powerless to respond. Beyond individual funds lifting their resilience, the entire industry can raise further awareness of the affordability factors that threaten the sector’s long-term viability and yet are outside its direct control.”
For its part, APRA is progressing with changes to the prudential framework designed to bolster industry resilience and performance. In August 2016, it released a letter to the industry outlining its proposed private health insurance policy roadmap, identifying three priorities: risk management, governance and capital.
However, Mr Summerhayes added, implementing and complying with all these important government and regulatory changes represents a significant challenge to the industry, and APRA has concerns about the ability of some insurers to deal with the scale and pace of reform.
APRA believes mergers should be at least under active consideration by health insurers with low or negative member growth, and which only have small membership bases to begin with.
By strengthening the prudential framework for private health insurance, APRA wants to ensure all insurers are adequately prepared for whatever challenges lie ahead.
“By complying with those standards, following the prudential guidance, and working cooperatively with APRA supervisors, insurers, no matter their size, put themselves in the best position to remain resilient and viable to enable them to serve their communities for many more generations to come,” said Mr Summerhayes.