- APRA rounds out Private Health Insurance Policy
APRA has put into motion the third and final phase of its Private Health Insurance (PHI) Policy Roadmap – a review of the PHI capital framework – and has delivered frank advice regarding the sustainability of the sector.
Late last year APRA released a discussion paper outlining its proposed structure for a future PHI capital framework. The discussion paper included changes to capital arising from the new AASB 17 Insurance Contract accounting standard, which is expected to come into effect after 1 January 2021, but may be subject to further deferral.
In short, PHI capital is being aligned with life and general insurers. The PHI capital framework would cover a health insurer’s entire business, rather than just an insurer’s health benefits fund.
APRA advised that these changes are aimed at improving resilience and addressing factors threatening the sustainability of PHIs – encouraging insurers to consider risks across the business, especially as they relate to “contagion risk”.
PHIs are currently under a lot of pressure due to falling member numbers and members reducing their levels of coverage, as well as pressures brought about by an ageing membership base. Add to the mix increasing medical costs and problems with the provision of related services – such as aged care due to the Royal Commission into Aged Care – and you have an incredibly challenging operating environment.
The new PHI capital framework will only add to this complexity – particularly the significant change under AASB 17 that will impact how the costs of third-party channels will be recognised. However, these changes are in keeping with APRA’s mandate to treat all financial services clients in the same manner – regulating PHIs on a level playing field with what they see as comparable sectors, particularly general insurance.
APRA Member Geoff Summerhayes’ recent speech to the Members Health Directors Professional Development Program diagnosed the status of the PHI industry as “stable but serious”, noting that some smaller PHIs may consider consolidation as a way to manage their environment and adapt to regulatory changes. But with increased consolidation in the small to mid-sized PHI market comes an altered competitive environment – ultimately leaving consumers with less choice.
What should you be considering now?
All PHIs and financial institutions with PHI businesses are urged to examine the impacts of these proposed changes and consider whether they would like to make a submission to APRA.
For those who wish to be part of the consultation process, we encourage you to take a view as to what you want the future of your industry to look like. How do you want to be sustainable? There’s now an opportunity to contribute to the agenda as opposed to being a bystander in APRA’s process.
We also encourage clients to take a holistic approach when considering these changes, as the AASB 17 accounting standard will form the building blocks for an entirely new capital regime.
We recommend reading the discussion paper, particularly considering the impacts of the following:
- The risk sensitivity using prescribed factors and/or adverse event stress scenarios;
- The extent of the proposed framework – covering a health insurer’s entire business, rather than just an insurer’s health benefits fund – particularly noting the effects on smaller PHIs with more diversified business models;
- Lifting the current level of Probability of Sufficiency (POS) from 98% to 99.5%;
- Replacing the quantitative solvency criteria with qualitative criteria;
- Imposing restrictions on the composition of an insurer’s capital that is eligible to be included in the capital base – particularly that the capital base be calculated after removing certain assets and the quality of capital instruments be assessed using rules and thresholds;
Introduction of Internal Capital Adequacy Assessment Process (ICAAP).
Are you a PHI navigating these proposed changes or considering making a submission?
We have extensive experience in financial services, including insurance and APRA regulations, as well as a dedicated team of advisors and consultants that understand the health sector more broadly. With a deep understanding of both the technical challenges and the broader operating environment, we are here to assist you.