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Chapter 1: PHIAC's performance in 2014-15

 

In the year under review, PHIAC's activities were conducted in accordance with the legislative and administrative requirements of the Private Health Insurance Act 2007 (the PHI Act), the Australian Government 2014-15 Health Portfolio Budget Statements and PHIAC's Corporate Plan 2014-16.
 
The focus for this chapter is the performance of PHIAC in relation to the achievement of its objectives in 2014-15.
 
Main functions of PHIAC
 
During 2014-15, the core functions and responsibilities of PHIAC were to:
  • regulate the prudential state of the PHI industry; » administer the Risk Equalisation Trust Fund (RETF);
  • review and approve PHI industry transactions;
  • provide information and statistics to the public and the PHI industry; and
  • close the agency and transition its functions, assets and liabilities to the Australian Prudential Regulation Authority (APRA) and the Department of Health (DoH) by 1 July 2015.
Corporate objectives
 
In order to continue to achieve the corporate objectives established by PHIAC in 2014, the organisation focussed on the following key work projects and initiatives from the Corporate Plan listed below.
 
Set Standards - PHIAC strongly believed that appropriate standards played a key role in promoting and maintaining good practices within the PHI industry. Accordingly, PHIAC continued its work monitoring compliance with the prudential standards to ensure that health funds conducted their affairs in accordance with best prudential practice, particularly in the areas of capital adequacy and solvency.
 
Engagement with the PHI Sector - PHIAC provided information and thought leadership to the industry and policy makers on issues of key interest. PHIAC continued to actively engage the sector, to ensure that trends, issues, and conduct relevant to the supervision of the industry were identified; that policies and standards had appropriate input from all stakeholders and that industry participants were aware of their compliance obligations.
 
Consumer Protection and Pricing of PHI Products - PHIAC reviewed and provided advice to Government on premium increases with appropriate consideration of consumer interests, industry competition and prudential safety.
 
Overseeing Insurer Operations and Compliance - PHIAC continued its program of reviewing the operations of health insurers to ensure that they were compliant with legislation and were soundly run.
 
Working Transparently - PHIAC continued its work in ensuring its policies and standard operating procedures were up to date and reflected better practice in the administration of the PHI Act.
 
Preparedness and Responsiveness - PHIAC ensured that it is as ready as it can be to deal with any crisis or emerging issue in the PHI industry. In particular, PHIAC continued to absorb the lessons of previous regulatory incidents and crisis simulations to ensure that it is capable and prepared for such eventualities.
 
Transactional Activity - PHIAC recognised that the industry is likely to continue to restructure through mergers and acquisitions. PHIAC provided information to the PHI industry which assisted those funds that were considering such moves to better appreciate their regulatory obligations. PHIAC managed a range of transactions in the period and completed them within regulatory timeframes and in close consultation with the relevant parties.
 
Support the Minister and the Department of Health (DoH) in their management of PHI - PHIAC supported the Minister and DoH in their management of private health insurance as part of the broader Australian health system.
 
Organisational Governance - PHIAC implemented changes to governance and financial accountability laws for Commonwealth statutory authorities to ensure that it remained fully compliant with both the law and government policies.
 
Performance highlights for the 2014-15 period included:
  • post implementation review of insurers' compliance with the new Capital Standards;
  • ongoing executive and operational engagement with individual insurers;
  • effective administration of the RETF;
  • further automation of insurer reporting;
  • enhanced data validation processes;
  • streamlining of report production;
  • pricing round and actuarial modelling of individual insurers;
  • a range of PHI industry transactions; and
  • strong business and project management in facilitating and supporting the integration of PHIAC with APRA.
PHIAC developed a business plan to operationalise the key priorities in the corporate plan and reported on the progress to each meeting of the Council.
 
Health Portfolio Budget Statements
 
In 2014-15 PHIAC reported to the Parliament on its operations and the operations of the private health insurance industry through the Health Minister.
 
The 2014-15 Health Portfolio Budget Statements - Private Health Insurance Administration Council Agency Resources and Planned Performance - provided the major public accountability framework against which PHIAC's performance was measured.
 
PHIAC's outcome and program structure was set out in Portfolio Budget Statements 2014-15 Budget Related Paper No. 1.10 — Health Portfolio. It consisted of one outcome and one program, each of which was consistent with the functions and objectives of PHIAC as set out in Division 264 of the PHI Act, namely:
 
Outcome 1—Prudential safety and competitiveness of the private health insurance industry in the interests of consumers, including through efficient industry regulation.
 
Program 1.1—Private health insurance prudential regulation and risk equalisation trust management.
 
In 2014-15, PHIAC achieved all performance targets described in the Portfolio Budget Statements, as detailed in Table 1.
 
Table 1: PHIAC's Deliverables in 2014-15 against Program 1.1 of the Health Portfolio Budget Statements
 
Closure of the entity, including windup and transfer of its functions, assets and liabilities to the Australian Prudential Regulation Authority and the Department of Health (DoH) by 1 July 2015
Deliverables 2014-15 Reference Point or Target 2014-15 Result
PHIAC programs and activities are transferred to the Australian Prudential Regulation Authority and the Department of Health Information and support is provided to the Australian Prudential Regulation Authority and the Department of Health to assist in the smooth transfer of programmes and activities ACHIEVED
PHIAC provided comprehensive information and support to APRA and Department of Health that resulted in the smooth transfer of programs and activities on 1 July 2015
PHIAC assets and liabilities are identified and transferred to the Australian Prudential Regulation Authority and the Department of Health Due diligence completed to identify all assets and liabilities ACHIEVED
The independent due diligence review confirmed all assets and liabilities were diligently identified
 
PHIAC assets and liabilities are identified and transferred to the Australian Prudential Regulation Authority and the Department of Health Support provided to transfer assets and liabilities to the Australian Prudential Regulation Authority and the Department of Health ACHIEVED
The independent due diligence review confirmed comprehensive planning and support was applied to the transfer of assets and liabilities
 
Prudential safety, industry competitiveness and consumer confidence
Deliverables 2014-15 Reference Point or Target 2014-15 Result
Private health insurance funds are assessed against Capital Adequacy and Solvency Standards to ensure their solvency Insurers are assessed at least quarterly as part of the examination of mandatory returns, and reports on matters of concern are prepared by management as required and considered by the Council in the discharge of its prudential oversight ACHIEVED
All health benefits funds (funds) operated by insurers were assessed quarterly against the Capital Standards.
 
PHIAC also continued to project each fund's capital strength and solvency over a 12 to 18 month period to provide greater certainty to the Parliament and consumers about the long term competitiveness and sustainability of the industry.
Percentage of funds continuing to be solvent and compliant with the Capital Adequacy Standard 100% 100%
Number of targeted reviews of insurers carried out 9 25
 
Prudential standards for the private health insurance industry
Deliverables 2014-15 Reference Point or Target 2014-15 Result
Prudential standards reflecting best regulatory practice are developed and implemented Relevant policies are prepared and submitted for industry consultation and feedback ACHIEVED
PHIAC worked with APRA and the industry to effectively transition the existing prudential standards by 30 June 2015
Percentage of insurers compliant with PHIAC obligations and zero financial loss for policy holders 100% 100%
 
Effectively manage the Risk Equalisation Trust Fund
Deliverables 2014-15 Reference Point or Target 2014-15 Result
Complete all trust fund transactions correctly and in accordance with legislation Transactions certified as accurate by the Australian National Audit Office (ANAO) ACHIEVED
All Risk Equalisation Trust Fund transactions were completed correctly in line with information provided by industry and certified as accurate by the Australian National Audit Office.
Percentage of quarterly payments calculated correctly and made on time 100% 100%
 
Financial performance
 
PHIAC's core regulatory activities were funded in 2014-15 by the PHI industry through an administration levy. The rate of the levy was set annually by the Minister for Health and could only be varied by an application to the Minister.
 
In 2015-16 the levy on the PHI industry for prudential supervisory activities was formalised under the Private Health Insurance Supervisory Levy Imposition Act 2015.
 
PHIAC's total operating expenditure in 2014-15 was $7.05 million, compared with a budget of $6.93 million. During the year, PHIAC earned $168,760 in interest.
 
Following consultations with APRA, DoH and the Departments of Treasury and Finance, approval was given for PHIAC's cash balance at 30 June 2015 to be transferred to APRA ($3.794 million) to facilitate the ongoing supervision of the PHI industry in early 2015-16.
 
PHIAC also managed the Risk Equalisation Trust Fund (RETF) on behalf of the PHI industry. During 2014-15, $441 million was processed through this account. PHIAC earned $48,205 in interest on the RETF account and there were no late payment penalties. The interest earned on the RETF was returned to the PHI industry under the RETF arrangements. No monies from the RETF were utilised by PHIAC.
 
Transfer to APRA
 
Following changes to the Private Health Insurance Act 2007 (PHI Act) in 2014-15, on 30 June 2015 PHIAC closed its operations and on 1 July 2015 its prudential supervision functions, assets and liabilities were transferred to APRA. This was part of the Government's Smaller Government Reform initiative announced in the 2014 Federal Budget.
 
The transition was effected through the combined efforts of a number of agencies including PHIAC, APRA, and the Commonwealth Departments of Health, the Treasury and Finance.
 
A project management approach was applied to the transition with detailed project plans developed, project managers identified and appropriate project governance structures and processes applied.
 
In April 2015 the Ministers for Health and Finance approved the Council covering the costs of transition by operating at a loss in 201415, rather than imposing a supplementary levy on the PHI industry. This approval enabled the Council to fund all transition-related expenses ($1.08 million) from the Council Reserve.
 
Confirmation was also received in April 2015 that the PHI industry would receive a short term financial benefit from the transition by not being levied for the final quarter of the 2014-15 financial year ($1.554 million). This was achieved by the Minister for Health amending the Private Health Insurance (Council Administration Levy) Rules 2007.
 
During the transition year 2014-15, PHIAC maintained a strong and visible presence in the industry to ensure that insurers remained efficiently run and prudentially sound.
 
A dedicated and professional transition team at PHIAC, DoH and APRA worked closely with the Department of the Treasury to develop the primary transitioning legislation. The team at PHIAC also worked with APRA to transfer the existing rules governing the operation of the levies and the prudential standards.
 
The high level of professionalism and collaboration between PHIAC and APRA will ensure that the diligent regulation and supervision of the health insurance industry will be maintained under APRA, with key staff transferring from PHIAC to APRA.
 
As a result of this transfer this is the final Annual Report as PHIAC.