Prudential regulator proposes changes to PHI capital framework

Latest News

The prudential regulator has released a discussion paper for the third and final phase of its review of the capital framework for private health insurance.

The regulator's capital standards are designed to ensure health insurers have the financial resources available to meet their commitments to policyholders, including in the event of unexpected stress or losses.

According to the Australian Prudential Regulation Authority (APRA), the current capital framework for health insurers is less robust than the requirements that apply in other insurance sectors.

"APRA is concerned that the current PHI capital framework does not appropriately reflect the risks faced by insurers, and allows for inadequate consideration of extreme adverse events," it said in the new discussion paper.

It said the new proposals reflect its intention to increase the risk sensitivity of capital requirements to the activities of insurers and to improve the alignment of capital standards across the insurance industries it regulates. 

Importantly, while it says the proposals are expected to increase minimum capital requirements for insurers once implemented, "current strong capital levels mean APRA does not expect a material need to raise additional capital across industry."

It said, "The impact of these reforms on premiums is expected to be immaterial given that capital requirements are not a material driver of PHI premiums. Premium increases are mostly affected by growth in benefit payments which reflects changing policy holder demographics, increased utilisation and changes in medical technology and costs."

As well as aligning the capital framework for health insurers to that applying to life and general insurers, the proposals mean it will also apply to the insurer’s entire business, rather than just the health benefits fund.

APRA Executive Board Member Geoff Summerhayes said the proposals were not expected to result in significant changes to minimum capital requirements or materially impact premiums.

“With the PHI industry under pressure from the twin dilemmas of worsening affordability and adverse selection, a strong capital base is vital to keep insurers resilient and able to pay all legitimate claims from policyholders,” said Mr Summerhayes.

“While it’s possible the revised framework may increase some insurers’ minimum capital requirements, we don’t expect this to be significant. Importantly, APRA’s capital requirements do not have a material impact on premiums so they will not contribute to the affordability problem that has pushed many policyholders to cancel or downgrade their cover.

“A strengthened capital framework will boost insurer resilience, however it’s not enough in isolation to help the industry overcome with the challenges of a shrinking and ageing membership base. APRA continues to urge PHIs to develop robust, actionable strategies to address sustainability risks, and a recovery plan that outlines how they will respond if their strategy is not successful.

“While some insurers are evolving their business, innovating and looking at new models to provide services to their members, this is not the case with many. APRA has expressed concerns about the resilience of the sector and this has informed our approach to a comprehensive review of risk management, governance and now capital standards for PHIs.”

The consultation will close on 27 March 2020, with APRA expected to release draft updated prudential standards in the second half of next year for further consultation.