APRA review: Consolidation is likely

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The Australian Prudential Regulation Authority has used its 2019 review to restate its view on the challenges facing private health sector while indicating consolidation in the sector is likely.

According to the prudential regulator, "The private health insurance industry continued to face significant tests of its financial resilience during the year, including continuing and long-term pressure on margins from rising health care costs and declining membership.

"Against a backdrop of premium increases that have exceeded average wage growth for more than a decade, the cumulative toll on household budgets saw more members downgrade or cancel their policies during the year."

It said, "The challenge of financial sustainability for insurers was exacerbated by a skewing in the age profile of the membership base. Many younger members, who typically have a lower risk profile and may perceive health insurance to be of low value, have opted to abandon or not take up cover.

"Older Australians, who tend to have higher claims costs, have by contrast been more likely to take up cover or retain their coverage – resulting in increasing benefits payments from insurers."

APRA said in 2019 it "stepped up pressure on private health insurers (PHIs) to address the various headwinds, including affordability and adverse selection."

"In June 2019, APRA issued a letter to all PHIs calling on them to urgently address these issues by developing effective strategies to meet the sustainability challenge and credible recovery plans as a contingency should those strategies fail," it said.

"In the event of continuing inaction, APRA flagged its preparedness to intervene more assertively via entity-specific supervisory action."

On the industry landscape, it said while the number of private health insurers remained stable at 37, "a number of insurers have commenced engagements with APRA on potential amalgamations."

It said it has anticipated possible industry consolidation by establishing "new framework and processes for facilitating mergers of health benefit funds under the Private Health Insurance (Prudential Administration) Act 2015."

"This was a major piece of work in terms of APRA’s supervision and oversight of the PHI industry, and established sound and efficient steps for handling merger applications. This can be expected, in turn, to benefit policyholders by facilitating the efficient transfer of policies in cases of market consolidation, ensuring continuity of their private health insurance cover," it said