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]