'Fundamental forces' have not been halted by pandemic

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APRA's John Huijsen has told the Health Insurance Summit the sector is successfully navigating the challenges of the pandemic but that its long-term strategic challenges remain unchanged.

Mr Huijsen is the general manager of the prudential regulator's insurance division. He told the summit the "fundamental forces undermining the industry’s long-term sustainability have not been halted, let alone reversed," despite a series of reforms.

"In such circumstances, some may have predicted a global pandemic would threaten, if not the PHI industry, then at least some of the more vulnerable health funds. Yet the industry has stood strong under challenging conditions – supporting policyholders financially through premium freezes and hardship provisions, and medically to the limited extent possible due to COVID restrictions.

"Remarkably, the proportion of Australians with hospital cover has risen slightly for each of the past three quarters after falling almost continuously since 2015, while further important Government reforms designed to address the affordability conundrum are either underway or under review."

Mr Huijsen said the regulator understands that the creation of a 'deferred claims liability' (DCL) is a "sensitive issue."

"Rather than gouging policyholders, the DCL has been established as a means of protecting them by reducing the risk of PHIs being caught short of funds as a result of a surge of deferred claims, and unable to meet their financial obligations," he said, adding at the end of March 2021 private health insurers held a total of $1.75 billion for their DCL.

"APRA urges PHIs to remain prudent in their treatment of the DCL. It’s unclear how the longer-term health of Australians will be affected by COVID-19. We don’t yet know the impact on underlying health conditions due to deferred health screening and delayed preventative health treatment.

"As a result, there is a significant degree of uncertainty with regards to future claims activity and the overall economic and social impact of COVID-19 on membership mix, profitability and capital. It is therefore important that insurers continue to adopt a prudent approach when considering factors that determine the size of the DCL, and the timing of future releases," he said.

Mr Huijsen said the positive outcome during the pandemic does not mean the "key challenges facing the industry have fundamentally changed."

"The industry’s COVID response is a positive story, the long-term trajectory of the industry remains substantially unchanged: premiums continue to increase faster than wage growth; underlying costs in the system are still accelerating more quickly than premiums, further squeezing profits, service delivery and policy features; the recent increase in policyholders is dominated by older members, rather than the younger, healthier demographic needed for a sustainable community rated system; and existing policyholders keep downgrading their cover.

"All PHI stakeholders recognise this is not sustainable, and over the past year in particular we have seen some genuine progress in finding long-term solutions to the structural issues at the heart of the affordability dilemma. These include Government reforms such as modernising the prosthesis list, as well as reviews of Risk Equalisation and Lifetime Health Cover loading. We are seeing greater momentum in expanding out-of-hospital and online care, which has the potential to deliver substantial cost savings to insurers, and reduce upward pressure on premiums."

He said the regulator's strategy is focused on building 'entity and industry resilience' through strengthening the legislative and framework, intensifying its supervisory focus and reducing the risk of disorderly failure.

Mr Huijsen said the regulator will be seeking insights from the sector on how individual insurers are resourcing their affordability strategies, monitoring key metrics, their views on the future and how the regulator can help with the management of these risks. 

On reducing the risk of disorderly failure, he said the regulator is requiring insurers to have a 'credible recovery plan' to survive a shock, and restore themselves to sound financial health, without public sector support. 

"By even mentioning the possibility of mergers, APRA is often accused of having a consolidation agenda in PHI," he said, adding "we are not at, or close to, the point where a PHI may need to be wound up or forced into a merger."

Mr Huijsen said the agenda is "financial safety" with the goal of "creating a stable, resilient and sustainable PHI industry."

"We are perfectly happy to achieve this with the existing PHI mix, but if consolidation becomes necessary to protect policyholders’ interests, then so be it – the industry will be better off if we are all prepared, and actions are orderly," he added.