Actuarial Practice in

Private Health Insurance (PHI)

Bevan Damm
30 April 2015

Overview
Features

of the Australian PHI market

The actuarial role
Key risk areas

Page 2

Private Health Insurance

Products

Hospital: theatre, accommodation, medical

Ancillary: dental, optical, physio

Coverage as at 30 June 2014

47.2% of Australians (Hospital)

55.2% of Australians (General Treatment)

Significant industry consolidation has occurred since 2000 (44 insurers).
By total policies: Six largest funds cover 84.9% while the remaining cover 15.1%
34 private health insurers as at 30 June 2014*
9 For-profit insurers

1 Restricted membership
-Doctors Health Fund

8 Open membership
-Medibank Private
-BUPA Australia
-NIB Health Funds
-Australian Unity Health
-Grand United Corporate
Health

25 Not-for-profit insurers
11 Restricted membership
-Teachers Federation Health
-Defence Health
-CBHS Health Fund
-Queensland Teachers
Union Health Fund
-Railway and Transport
Health Fund

Source: Private Health Insurance Administration Council Operations of the Private Health Insurers Annual Report 2013-2014
* Top 5 funds by revenue shown in each category

Page 3

14 Open membership
-Hospitals Contribution Fund
of Australia (HCF)
-HBF Health
-GMHBA
-Westfund
-Latrobe Health Services

Private Health Insurance

Key Competitors National Market Share by total policies at 30 June 2014

Source: Private Health Insurance Administration Council Operations of the Private Health Insurers Annual Report 2013-2014

Page 4

The two market leaders

have positioned
themselves strongly and
control almost 60% of the
market

Acquisition options for a

strong number 3 are
becoming increasingly
limited

Further consolidation of the

industry is expected in
future

Rollup of smaller players is

potentially tedious and
time-consuming due to
mutual ownership

Market size and profitability ($B)

Year to
30 June

2014

2013

2012

2011

2010

2009

2008

2007

2006

Contribution
income

19.3

18.0

16.7

15.4

14.2

13.1

12.2

11.1

10.3

Benefits paid

16.7

15.6

14.3

13.2

12.2

11.3

10.4

9.4

8.8

1.6

1.6

1.6

1.4

1.3

1.4

1.3

1.1

1.0

87.4%

86.9%

85.7%

85.3%

86.3%

86.8%

85.2%

84.8%

85.3%

4.1%

4.3%

4.9%

5.6%

4.5%

2.5%

4.3%

5.6%

5.3%

Expenses
Benefits
(% cont)
Net margin

Source: Private Health Insurance Administration Council Operations of the Private Health Insurers Annual Reports

Page 5

Industry financial performance

Year to 30 June 2014
Lower
gross profit

Higher
gross profit
More efficient
Notes:

Area of circles corresponds to PHI Industry market share (average insured persons)

MER - Management expense ratio

Source: Private Health Insurance Administration Council Operations of the Private Health Insurers Annual Reports

Page 6

Less efficient

Markets comparison

Private health insurers (year to Jun 14)

$19.0b revenue (earned premium); $1.1b profit after tax

34 insurers
Source: PHIAC Operations of Private Health Insurers 2014

GI direct insurers (year to Dec 14)

$30.1b revenue (net earned premium); $4.1b net profit

103 insurers

Source: APRA Quarter General Insurance Statistics

Life insurers (year to Dec 14)

$41.7b revenue (includes policy and investment revenue); $2.3b profit

28 insurers
Source: APRA Quarterly Life Insurance Statistics

PHIAC, APRA
Page 7

Features of Australian PHI industry

Community rating

Guaranteed insurability and renewability

Portability

High level of regulation / government interest

Pricing

Funding basis

Low underwriting margins

Page 8

Community rating

Same premium charged on any given product regardless of:

Age or gender

Health status

Previous medical conditions

Lifestyle choices

Other risk factors

Couple and family

2x single premium (regardless of number of children in family)

Single parent families

Varies between funds typically range from 1.5 to 2x single premium

Page 9

Consequences of community rating without

incentives
Adverse
Selection

Payouts
Rise

Drop
Insurance

Higher
Premiums
Healthy:
PHI
poor value

Applies to funds with sicker than average membership and to industry as whole

Page 10

Addressing falling membership

Individual funds: risk equalisation

Pool and re-spread % claims for older age groups and high cost claimants

Whole industry: Government incentives

PHI rebate

0-40% depending on age and means testing

Means testing for annual income of $90k and above in FY2015

Indexation of rebate lower of CPI or annual premium increase

Lifetime Health Cover

2% a year if >30 when commencing hospital cover

Stops after 10 years of continuous payment of the LHC loading

Tax incentives (Medicare Levy Surcharge)

Extra tax (1.0-1.5%) on taxable income > $90k/$180k (FY2015), indexed if no

eligible hospital cover is held

Page 11

Impact of Government incentives

Total Hospital Coverage (persons covered % of population)

90.00%
80.00%

Commonwealth medical benefits at 30% flat rate

restricted to those with at least basic medical
cover from September 1981

Introduction of Life Time

Health Cover from 1 July

70.00%

Introduction of Medicare from

1 February 1984

60.00%

Introduction of 30%
Rebate means testing
from 1 July 2012

Higher rebates for older

persons from 1 April 2005

50.00%
40.00%
30.00%
20.00%
10.00%

Medibank began on 1 July 1975. A program

of universal, non contributory, health
insurance it replaced a system of
government subsidised voluntary health

1 July 1997. A Medicare Levy

Surcharge (MLS) of 1% of
taxable income is introduced for
higher income earners who do
not take out private health

0.00%

Source: Private Health Insurance Administration Council Operations of the Private Health Insurers Annual Report 2013-14

Page 12

31 October 2008. Increase in

MLS income thresholds, subject
to annual adjustment.
Introduction of 30% Rebate
from 1 January 1999

Legislation and regulation

Two main government bodies

Department of Health and Ageing (DoHA)

Australian Prudential Regulation Authority (APRA)

2014 and earlier: Private Health Insurance Administration Council (PHIAC)

Product coverage regulated (CHIP)

Annual rate increase applications

Regulation to mitigate effects of community rating and encourage membership

PHIAC Solvency and Capital Adequacy Standards

Changed in 2014, at this stage materially unchanged by APRA

Insurance risks (Stress Test Amount)

Asset risks (Liquidity and Concentration risks through Stress Test Amount and
Cash Management Amount)

Liability risks (Prudent Liabilities Amount)

Operational risks (Operational Risk Amount)

Page 13

Portability and insurability

Fund cannot refuse membership

Waiting periods to deter hit and runs, particularly for pre-existing conditions
Anyone insured can change funds without re-serving waiting periods in the new fund

Page 14

Actuarial role

Appointed Actuary role set out in Legislation

Valuation of technical reserves

Determination of risk margins (financial statements and cap ad)

International Financial Reporting Standards advice

Rate submission

Product design and pricing

Financial condition report

Notifiable circumstances

Whistleblower provision

Page 15

Key risk areas

Reserving

Claims

Asset risks

Membership movements

Pricing

Legislation

Industry issues

Page 16

Reserving risks

Reserves typically short-term

Almost all claims settled < 3-4 months

Businesses run on a cash-flow basis

Main reserves held in health insurance

Outstanding claims

Risk equalisation payments/recoveries - accounting

Contributions in advance/Unexpired risk

Loyalty bonus provisions

Page 17

Claims analysis

Changing claims patterns

Trend vs. one-off
Impact of external factors
Change in utilisation or price
How can changes in utilisation (services per member) or price (cost per service) be
controlled?
Analysis by
Type of claim
Product type
Family type
Age of claimants

Page 18

Membership risks

Changing age profile

Impact on risk equalisation

Impact on expected claims costs

Attracting and retaining younger members

Loyalty bonuses

Impact of Lifetime Health Cover

Self-selection into products

Consider margins

Page 19

Pricing risks

Mispricing

Benefits

Risk equalisation

Expenses

Profit / Capital Adequacy criteria

Membership

Age profile

Claiming propensity

Volume of business

Ability to alter prices is limited

Page 20

Pricing control cycle

Develop
Product /
Marketing
Strategy

Assumptions:
claims,
membership

Modify
Benefits
and/ or
Marketing

Determine
Price

Analysis:
claims,
membership

Page 21

Collate
Experience
Data

Regulatory risk

PHIAC Solvency and Capital Adequacy Standards

Changed in 2014, 2007 and 2004

Government intervention

Government rebate increased for over 65/70s and indexation method

Means testing: rebate reductions for members with annual income $90k and over

MLS surcharge taxable income threshold indexation

PHI Act 2007 - Risk equalisation changes, statutory funds, Broader Health Cover,
specific Appointed Actuary provisions

Not always good for industry

APRA taking over prudential regulation 1 July 2015

Page 22

Industry issues

Changing structure of industry

Government sold Medibank through initial public offering in November 2014

NIB completed the acquisition of TOWER Medical Insurance Limited (NZs second largest health insurer)
Newly registered private health insurer health.com.au Pty Ltd has commenced trading
Avant Medical Group, the largest provider of medical indemnity cover in Australia, has acquired Doctors Health
Fund (DHF)
Transport Health sale to a health care provider in September 2014
General Practitioner services and PHI
Mutuals preparing for potential take-over offers

Popularity of iSelect is increasing churn

Private Health Insurance Rebate

Indexation of rebate, means testing and exclusion from LHC loading

Overall impact still uncertain but general economic principles dictate that demand reduces as prices increase

Regulatory solvency and capital adequacy standards

Transfer of prudential regulatory functions from PHIAC to APRA

Insurers without high levels of capital buffer risk breaching minimum capital requirements

Future rate rises

Page 23

Increased political focus on contribution rates

Historically high levels of industry profitability and capital adequacy

Industry issues

Medicare Levy Surcharge

Accounting standards - IFRS 4

Requirement for insurers to account for all future cash flows within the boundary of an insurance contract. The
contract boundary is the point where the insurer can set a price or level of benefits that fully reflect those risks
of the policyholder
Transition arrangements
Impact still unclear

Broader Health Cover

Indexation and increase

Not expected to affect PHI uptake as cheapest hospital policy is already less than the lowest MLS tax

Expansion of the range of health services that insurers can cover to include preventive care
Insurers need to react promptly to provide these new services or risk losing membership

National Health and Hospital Reform Commission (NHHRC)

Page 24

Reform of health system

Denticare
Activity based funding

Industry issues

Impact of ageing population

Medical cost escalation

Alternative provisions around the world

Public versus private provision
Pooled (insurance) versus individual (medical savings accounts)
Prevention

How do health funds raise capital?

Technology prostheses
Increase in number & complexity of services for older ages
Also results in claim cost inflation greater than CPI

Are there better ways of financing health costs?

Health costs increase rapidly with advancing age

Results in claim cost inflation greater than CPI

Traditionally mutual
Potential for debt raisings

National Commission of Audit (NCOA)

Page 25

Expanding PHI cover into primary care and increasing incentives for high income earners to purchase PHI
Allowing PHIs to partially risk rate (e.g. smoking)
Review of the risk equalisation scheme