Health insurers must evolve: APRA

APRA’s Geoff Summerhayes says health insurers are responsible for the fate of their industry.

Government reforms aimed at supporting the private health sector have been unable to halt the increasing number of Australians ditching their private health insurance policies, according to the nation’s financial regulator who says insurers must also pull their weight to ensure the sector’s long-term health.

Writing exclusively in The Australian today, Australian Prudential Regulatory Authority executive Geoff Summerhayes warned consolidation among private health insurers was inevitable unless “whole-of-industry response” is taken.

Mr Summerhayes said last week only three private health insurers would have a sustainable business model by 2022 as young health fund members continue to dump cover as more older, costlier members continue to take up insurance.

“Over a number of years, the government has undertaken a range of reforms and measures designed to support the industry, including on affordability, as well as welcome steps to make the health insurance system easier for consumers to understand. Despite this help, insurers have been unable to halt or reverse the broader trends,” Mr Summerhayes writes in The Australian.

He stressed the private health insurance industry remained profitable and well-capitalised.

“That’s important, because it means policyholders can continue to be confident their insurer has the financial means to pay all legitimate claims it receives. APRA’s role is to help keep it that way. But the outlook is increasingly challenging: the trends that are slowly diminishing insurers’ financial sustainability are not abating, in spite of efforts by the industry, and substantial ongoing support and action by the government, to address the affordability conundrum.”

Since 2017, Health Minister Greg Hunt has unveiled a number of reforms, including tiered pricing structures for health insurance policies, changes on what health insurers can fund, including cuts in prosthetics prices which aimed to $800m in savings over three years alone.

Meanwhile, government subsidies for the industry already top $6bn. Mr Summerhayes said it was up to private health insurers as well to help provide a cure.

He said last week APRA was drawing up plans to force smaller, unsustainable private health funds out of the industry through mergers with bigger companies — Medibank Private, NIB, and HCF — which are likely the only ones to continue to have a viable, well-capitalised business model.

“When I last spoke to you, I mentioned that APRA had yet to form a view on whether industry consolidation in private health insurance is necessary to protect policyholders’ interests. That’s broadly still true, but as smaller PHIs take limited action to address affordability challenges, we’re increasingly coming to the conclusion that it’s probably inevitable,” Mr Summerhayes said at a speech to the Members Health Directors Professional Development Program.

“In response, APRA has begun preparing to ensure we have sufficiently developed processes and powers to facilitate – or force, if necessary – mergers or transfers of policies if we come to the view that policyholders’ interests are under threat.”

Mr Summerhayes said given the challenges facing private health, a whole-of-industry response is needed to reverse the downward trends and prevent industry consolidation.

“Many of the most significant factors driving the sustainability crisis are outside the control of insurers, such as the ageing population or the rising cost of medical procedures and equipment,” Mr Summerhayes said.

“Consequently, APRA believes a whole-of-industry response is needed to reverse the trends that challenge the sector’s long-term viability. But equally, insurers cannot be complacent, and shouldn’t be waiting for others to provide a cure.

“In recent years, for example, premium revenue has been growing in the order of 3 per cent. But benefit payments are growing roughly 2 percentage points faster. Profitability, and therefore capital generation, is under pressure as a result.

“Taken together, this combination of factors — cost growth that exceeds premium growth, compounded by an adverse shift in the demographic profile of policyholders — is placing increasing pressure on the industry.

Unless something significant changes, significant industry consolidation, particularly amongst smaller insurers, seems inevitable.”