• APRA prudential policy outlook for Private Health Insurance

APRA have released their prudential policy outlook for Private Health Insurance (PHI) following consultation with the industry and other stakeholders.

Grant Thornton welcomes APRA’s commitment to consultation with the industry and looks forward to our involvement in shaping the future of the PHI prudential framework.

Key messages:

  • It is reassuring for the PHI industry to note that from APRA’s observation of the industry to date, they have no significant prudential concerns and therefore see no urgency to modify the PHI prudential framework.
  • APRA is committed to ensuring that the PHI prudential framework remains fit for purpose and relevant to the PHI industry.
  • APRA has re-iterated that it understands that PHI is different and that in aligning the prudential requirements a one-size fits all approach will not be taken. Where relevant specific PHI requirements will be considered to ensure the framework remains fit for purpose for the PHI industry. It is clear that APRA intends to use as a starting point the prudential frameworks as they apply to other regulated industries. As a result, Grant Thornton expects that the core principles from existing prudential standards and best practice from other regulated industries are likely to be used in deriving the new PHI prudential framework. Whilst harmonisation is not the main goal, they do see significant benefits particularly for those entities that operate across APRA regulate industries.
  • APRA is mindful of not burdening the industry with significant change and at a measure pace will be inviting submission to consultation with industry and stakeholders. We encourage your leadership team to take advantage of the consultation process to ensure that your individual specific circumstances are considered by APRA as outcomes may be difficult to change once APRA’s position is finalised.

Prior to the release of this letter, the last of the roundtables were held with APRA and the Appointed Auditors of private health insurers. At this meeting the Auditors had the opportunity to discuss the three phase plan and APRA's supervisory role moving forward.

APRA in our discussion over role in relation to policies, (such as sustainability and premium setting) noted that these are outside their mandate and are dealt with by the Department of Health.  However insurers should be aware that under their mandate they will be interested observers of policy. In particular assessing the impact any changes in policies may have on their ability to comply with prudential requirements that may give rise to prudential concerns.

Phase one: Risk

Risk Management – the Thematic reviews of 18 health insurers have been completed with respect to risk management.  APRA’s feedback from these reviews is that overall the industry is more advanced than they anticipated and are well progressed in the implementation of risk management arrangements. It was also clear from our discussion that you can anticipate the core principles of CPS 220 will be introduced to the PHI prudential framework. We recommend that leadership teams familiarise themselves with the CPS 220 and the related practice guide CPG 220 Risk Management.

Outsourcing and Business Continuity – APRA acknowledge there is significant concentration risk particularly in relation to IT service providers. Whilst this has its benefits it does also pose significant risk. As highlighted in the letter a broader cross industry review will commence in 2017. Grant Thornton recommends a submission to APRA to ensure any potential impacts on your industry are brought to APRA’s attention and the final position does not inadvertently disadvantage the health insurance industry, in its alignment of these standards.

Phase two: Governance

Audit and Related Matters – this was a key topic of discussion. APRA’s view was very clear that they want to gain greater comfort over compliance by private health insurers with prudential standards, consistent with the other APRA regulated industries. An audit specific prudential standard is likely to be introduced encompassing the external audit function.  This will include the requirement for independent assurance to be provided over prudential matters however the full extent of this additional assurance is yet to be determined.

In our experience, we expect this to encompass elements of assurance over the effectiveness of internal controls in addressing compliance with prudential requirements as well as an opinion on compliance with the Prudential Standards. As private health insurers move to this new level of regulation and reporting compliance, we welcome the opportunity to discuss best practice leveraging from our extensive experience with other regulated bodies.

Phase three: Capital

A cautious message is currently being conveyed by APRA so as to not disrupt the current macro environment. APRA commented that they do not see this as an area of immediate priority in the medium term and they don’t see any fundamental weaknesses in the current Capital Management Plan (CMP).  APRA noted that in their view there is not much difference between the current CMP and Internal Capital Adequacy Assessment Process (ICAAP) in place for other regulated entities. There is likely to be little change proposed until significant groundwork has been made on risk and governance.

Given the measured pace for implementing changing and the drive for consultation by APRA, the industry is well placed to participate in shaping the future of the PHI prudential framework.

Overall, the consultation process and outlook APRA has put forward is a positive move and we look forward to our ongoing involvement in the process. It’s very clear APRA will be seeking to leverage from comparable prudential standards within other regulated industries. We welcome the opportunity to discuss any of the prudential standards and likely changes. including best practice from our extensive experience with other APRA regulated industries and our experience in providing assurance over prudential matters.