actuarial involvement in phi - unsw 2015 v2

7/23/2019 Actuarial Involvement in PHI - UNSW 2015 v2

http://slidepdf.com/reader/full/actuarial-involvement-in-phi-unsw-2015-v2 1/25

Actuarial Practice inPrivate Health Insurance (PHI)

Bevan Damm

30 April 2015



Overview

►Features of the Australian PHI market

►The actuarial role

►Key risk areas



Private Health Insurance

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

► 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 25 Not-for-profit insurers

1 Restricted membership 8 Open membership 11 Restricted membership 14 Open membership

-Doctors Health Fund -Medibank Private

-BUPA Australia-NIB Health Funds-Australian Unity Health-Grand United CorporateHealth

-Hospitals Contribution Fund

of Australia (HCF)-HBF Health-GMHBA-Westfund-Latrobe Health Services

-Teachers Federation Health

-Defence Health-CBHS Health Fund-Queensland Teachers’Union Health Fund-Railway and TransportHealth Fund



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

► The two market leadershave positionedthemselves strongly andcontrol almost 60% of themarket

► Acquisition options for astrong number 3 are

becoming increasinglylimited

► Further consolidation of theindustry is expected infuture

► Rollup of smaller players ispotentially tedious and

time-consuming due tomutual ownership

Private Health Insurance




Market size and profitability ($B)

Year to30 June

2014 2013 2012 2011 2010 2009 2008 2007 2006

Contributionincome

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

Expenses 1.6 1.6 1.6 1.4 1.3 1.4 1.3 1.1 1.0

Benefits

(% cont)87.4% 86.9% 85.7% 85.3% 86.3% 86.8% 85.2% 84.8% 85.3%

Net margin 4.1% 4.3% 4.9% 5.6% 4.5% 2.5% 4.3% 5.6% 5.3%

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



Industry financial performance Year to 30 June 2014

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

Notes:

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

► MER - Management expense ratio

More efficient Less efficient

Highergross profit

Lowergross profit



Markets comparison

PHIAC, APRA

► 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 insurersSource: APRA Quarterly Life Insurance Statistics



Features of Australian PHI industry

► Community rating

► Guaranteed insurability and renewability

► Portability

► High level of regulation / government interest

► Pricing

► Funding basis

► Low underwriting margins



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



Consequences of community rating withoutincentives…

PayoutsRise

HigherPremiums

Healthy:“PHI

poor value”

DropInsurance

AdverseSelection

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



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 noeligible hospital cover is held



Impact of Government incentives

Total Hospital Coverage (persons covered % of population)


0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

Introduction of Life TimeHealth Cover from 1 July

Commonwealth medical benefits at 30% flat raterestricted to those with at least basic medicalcover from September 1981

Introduction of Medicare from1 February 1984

Medibank began on 1 July 1975. A programof universal, non contributory, healthinsurance it replaced a system of

government subsidised voluntary health

Introduction of 30% Rebate

from 1 January 1999

Higher rebates for older

persons from 1 April 2005

1 July 1997. A Medicare LevySurcharge (MLS) of 1% oftaxable income is introduced forhigher income earners who donot take out private health

31 October 2008. Increase inMLS income thresholds, subjectto annual adjustment.

Introduction of 30%Rebate means testingfrom 1 July 2012



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 andCash Management Amount)

► Liability risks (Prudent Liabilities Amount)

► Operational risks (Operational Risk Amount)



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



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



Key risk areas

► Reserving

► Claims

► Asset risks

► Membership movements

► Pricing

► Legislation

► Industry issues



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



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) becontrolled?

► Analysis by► Type of claim

► Product type

► Family type

► Age of claimants



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



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



Pricing control cycle

Assumptions:claims,

membership

DeterminePrice

CollateExperience

Data

Analysis:claims,

membership

ModifyBenefitsand/ or

Marketing

DevelopProduct /

MarketingStrategy



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



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 (NZ’s 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 HealthFund (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► Increased political focus on contribution rates

► Historically high levels of industry profitability and capital adequacy



Industry issues

► Medicare Levy Surcharge► Indexation and increase

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

► 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 risksof the policyholder

► Transition arrangements

► Impact still unclear

► Broader Health Cover► 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)► Reform of health system

► Denticare

► Activity based funding



Industry issues

► Impact of ageing population

► Health costs increase rapidly with advancing age► Results in claim cost inflation greater than CPI

► Medical cost escalation► 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?► Alternative provisions around the world

► Public versus private provision

► Pooled (insurance) versus individual (medical savings accounts)

► Prevention

► How do health funds raise capital?► Traditionally mutual

► Potential for debt raisings

► National Commission of Audit (NCOA)► 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

actuarial involvement in phi - unsw 2015 v2

Documents