Defence Health boss Gerard Fogarty tips APRA scrutiny

Defence Health chief Gerard Fogarty says the regulator is likely to focus on sectors it oversees with “far more gusto”.

Kenneth Hayne on the opening day of the banking royal commission in Melbourne. (Image: Eddie Jim)

Defence Health chief Gerard Fogarty says the prudential regulator is likely to focus on sectors it oversees with “far more gusto” after feeling a “little bruised” by the financial services royal commission.

Mr Fogarty said while health insurers were expecting the Australian Prudential Regulation Authority to introduce new capital standards, it was likely there were other areas where the industry would now feel the impact of APRA regulation.

“I think they will be far more active in areas they haven’t been in the past, such as around stress testing, social licence and IT support systems, which are generally pretty aged in the (health insurance) industry,” he said.

“If you look at what is happening in the royal commission, many of the failures that have occurred are not just related to decision making. They have not been well supported by modern IT systems and I think APRA is turning its mind to that.

“APRA will use cyber security as a vehicle, but it is really around making sure the industry is supported by modern, agile systems and for many of the funds, in my opinion, it’s not.”

APRA took on prudential regulation for health insurers in 2015 and after a couple of years of “business as usual”, the regulator has been rolling out its expectations of the sector.

One of the next major issues it is set to tackle is capital standards. Macquarie’s analysts outlined recently that APRA’s review of capital standards was likely to start later this year, with revised standards to be implemented from 2021 at the earliest.

Medibank chief executive Craig Drummond said he expected APRA to implement a similar model to the life and general insurance standard.

He added that Medibank had already done modelling based on the LAGIC standard and was “pretty relaxed”.

“We have a robust capital position that we are very comfortable will meet the standards that APRA is contemplating,” Mr Drummond said.

“We do not know exactly what those standards will be but our assumption from conversations with them is that it will mirror the LAGIC requirements.”

Mr Drummond said he believed the regulator was relaxed with the capital in the industry, adding there was no particular surplus.

“There will be some that have surplus and some that are a little skinny on capital,” he said.

NIB chief executive Mark Fitzgibbon said he believed the insurer would be able to adjust to whatever capital regime APRA landed on.

There is an expectation in the sector that the regulator would push for consolidation, but the rules around capital are not expected to drive that agenda.

“It is more than likely the APRA issue for the smaller funds will be their ability to meet the APRA standards for risk management and governance that the regulator is insisting upon,” Mr Fitzgibbon said.

Industry sources said one risk for the smaller funds was the use of shared services.

One insider said APRA had formed a view, which it had been pushed into through the royal commission, that a company could not simply outsource to a shared service if that shared service was not operating efficiently. It is that issue that many believe could be the driver of future consolidation, given APRA could lean on smaller players to sort out any issues with shared services, which could lead to consolidation.

“It is the ability of the smaller funds to have the internal capability around meeting cyber security and other things they have previously done through shared services that APRA is now trying to form a view on,” one industry expert said.