APRA backs current capital adequacy standard

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APRA does not believe capital levels in the private health industry are too high or should be reduced.

Speaking at a conference in Sydney yesterday, APRA senior manager of policy development Peter Kohlhagen said, "Adequate capital buffers are crucial to achieving the mandate of the prudential regulator."

The statement is a potential challenge for Labor's plan to impose a two-year two percent cap on annual premium increases. Shadow health minister Catherine King has suggested a future Labor government could compel insurers to spend capital reserves held above and beyond their prudential requirements.

According to Mr Kohlhagen, the private health insurance industry is "under some duress at present".

"...it is in all our interests – insurers, the policyholders they serve, APRA and the broader system – that it is able to respond to those challenges," he said.

Mr Kohlhagen said the challenges identified by APRA are not exclusive to large or small insurers, for-profits or mutuals.

"We see challenges affecting insurers across all sections of the industry. Larger and more sophisticated players may be better resourced to face the challenges, but you will see shortly that there are points of stress across all insurers."

He said affordability is a key issue, affecting all insurers with implications for participation rates and industry growth.

Mr Kohlhagen showed data revealing a significant range of growth rates across the industry with some consistently growing at "well above" 10 percent per year and others much more slowly.

"Rapid rates of growth need to be appropriately managed to ensure sustainability, and have historically been an indicator that an insurer may be under-priced. These matters warrant particularly close monitoring in a time of constrained system growth."

He added that some insurers are operating with narrow margins. Some have narrow margins as a result of deliberate commercial decisions while for others it "may be an unintended outcome of deficiencies in product pricing or design."

"The past tells us that under-pricing can lead to rapid growth and rapid change in the risk profile of the pool of policyholders. This can lead in turn to sustainability challenges," he said.