APRA: The risks of affordability, policy change and consolidation


The private health insurance industry finds itself at "somewhat of a crossroads", according to Peter Kohlhagen, a senior manager at the Australian Prudential Regulation Authority.

In a speech to the Private Health Insurance Summit in Sydney, Mr Kohlhagen said, the industry faces the challenge of navigating a path through "declining affordability and participation".

"Approaches that were successful for navigating past challenges cannot be assumed to be successful in the future as the environment shifts dramatically," he said.

His speech followed a call by APRA executive board member Geoff Summerhayes for the industry to urgently address rising challenges that threaten the industry’s financial sustainability.

“Despite APRA’s work with industry to improve governance and risk management capability over recent years, it is frustrating to see little evidence that insurers are taking actions that reflect their own assessment of the heightened risks in this challenging environment,” said Mr Summerhayes.

“APRA recognises the industry has been under duress for some time, and the main factors, such as rising demand for health services and the soaring cost of treatments, are beyond insurers’ direct control. But that’s not an excuse for doing nothing and hoping the Government will fix everything.”

Mr Kohlhagen said healthcare costs are rising across the private and public systems.

"It is these increasing costs, together with higher demand for healthcare services, which are the root cause of increasing premiums. Rising premiums are only a symptom; as long as the costs of healthcare grow at 5-6 per cent per annum, there will be pressure on premiums to rise by a similar amount, continuing to damage affordability. The affordability challenge in private health insurance then is part of a broader context – how should society fund healthcare costs?" he asked.

On the industry's response to affordability, Mr Kohlhagen said, "...often the strategies are vague, fail to address the material risk or rely heavily on actions by others. This is especially the case for insurers that use third parties to support core business functions that are critical to the strategy. "

He continued, "When it comes to thinking about what insurers can do to mitigate affordability risk, APRA considers promising strategies are those where the insurer is actively changing how they provide services to their members – for example where insurers are facilitating substitutes for traditional in-hospital services, revising their health supplier contracts or developing preventative health and well-being offerings for members.

"These are actions which are well within the control of insurers. Those that move early can benefit from a more open field, with less need to navigate through what others have already implemented."

Mr Kohlhagen said APRA is also concerned over the "passivity among insurers" when it comes to the risk of policy change.

"APRA expects to see insurers drawing on their expertise to develop specific policy proposals, undertaking evidence-based analysis and using these insights to engage with policy makers and others in the health care system on reform proposals.

"Looking within their business, APRA would expect that better prepared insurers are taking actions to improve the value of services for members. This might be via service quality offerings, non-PHI benefits or strategies that can control costs. Together these types of actions may help insurers address affordability risk and so position them to tolerate policy changes."

He said the period of constrained premium growth, at a level below growth in underlying costs, "will challenge the sustainability of insurers and that it is likely to lead to consolidation if it continues for an extended period."

"APRA has already commenced bilateral discussions with a number of insurers who we have identified as the most likely to face sustainability challenges," said Mr Kohlhagen.

"As flagged in our letter to industry this week, our work with relevant insurers on recovery plans will continue to intensify. Our key message is that insurers should proactively develop recovery options, including a Plan B. For many insurers, the likely Plan B will be a merger with a like-minded partner.

"APRA will not hesitate to act to protect the interests of policyholders should it become necessary due to viability concerns with an insurer. That can take the form of an orderly merger or other exits from the market. Importantly, an insurer that has a plan and executes it when it becomes necessary can control its own destiny; an insurer that fails to plan will find that it loses that opportunity."