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Shaun Gath

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  • 1. 12th Annual Health Insurance Summit Current Regulatory Issues of Private Health Insurance Shaun Gath CEO, PHIAC Sydney, 23 July 2012
  • 2. Agenda • State of the PHI industry • New Capital Adequacy/Solvency Standards • Competition Review and forthcoming PACU work • Other work
  • 3. 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
  • 4. 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.
  • 5. 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.
  • 6. CAPITAL ADEQUACY AND SOLVENCY
  • 7. 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
  • 8. 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?’
  • 9. 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)
  • 10. 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
  • 11. 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
  • 12. COMPETITION REVIEW
  • 13. 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. […]
  • 14. 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.
  • 15. 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
  • 16. “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
  • 17. 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)
  • 18. New York Times, 18 July 2013
  • 19. Key Observations • Small funds do compete effectively with big ones • “general insurance only” is an emerging area
  • 20. 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
  • 21. From the Minister’s press release, 8 February 2013…
  • 22. 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
  • 23. 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
  • 24. PACU’s Work Program • Next project – Portability (discussion paper imminent) • Then - Risk Equalisation - Barriers to entry - Exclusions and Excesses
  • 25. [End of session]