This document summarizes the key points from Shaun Gath's presentation at the 12th Annual Health Insurance Summit on current regulatory issues in the private health insurance industry in Australia. The presentation covered: membership growth in private hospital and general treatment insurance; the financial position of the industry; proposed updates to capital adequacy and solvency standards; and an overview of the Private Health Insurance Administration Council's work reviewing competition in the industry.

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

21. 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

22. From the Minister’s press release,
8 February 2013…

23. 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

24. 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

25. PACU’s Work Program
• Next project
– Portability (discussion paper imminent)
• Then
- Risk Equalisation
- Barriers to entry
- Exclusions and Excesses

26. [End of session]