PHIAC's vision for 'Protecting consumers of private health insurance by ensuring an industry which is competitive, efficient and financially sound' was delivered through five key goals:
- Ensuring that PHIAC's supervision of the PHI industry promotes its efficiency and prudential soundness;
- Safeguarding both public and consumer interests through supervision of the PHI industry;
- Being a trusted and valued adviser to Ministers, Government and Parliament;
- Being a collector, repository and publisher of useful information about the PHI industry and the setting in which it operates; and
- Performing our role efficiently, ethically and lawfully reflecting at all times the values of the Australian Public Service.
The focus for this chapter is on the activities undertaken by PHIAC including monitoring of the PHI industry, prudential standards, information and statistics, risk management, and how these activities continued to support the vision and goals in 2014-15.
PHIAC proactively monitors the industry through a rolling program of PHI industry visits, office based reviews, statistical analysis and actuarial reviews. The aim of this ongoing analysis and dialogue is to ensure that PHIAC identifies early, actual or potential non-compliance in the operations of an insurer or the industry.
During 2014-15, PHIAC conducted 25 onsite fund reviews focused on assessing the efficacy of an insurer's operations across a wide range of areas including strategy, governance, board oversight, capital reporting, capital management, pricing and information systems. The reviews highlighted an improved level of commercial and actuarial capacity in the industry.
PHIAC's fund review program also provided a means of assessing the PHI industry's ongoing compliance with PHIAC's new Capital Adequacy and Solvency Standards, parts of which came into effect on 1 July 2014. These reviews indicated that overall the industry was compliant with the requirements of the standards. It was also clear that the implementation of the standards had improved the capital management practices of the PHI industry as a whole.
As part of PHIAC's prudential oversight activities, PHIAC regularly monitored and performed regular analysis of all insurers through:
- quarterly and annual insurer returns detailing financial and membership position;
- submissions related to annual premium increase applications;
- annual financial condition reports;
- regular interaction with insurers; and
- whistleblower information.
Through these processes PHIAC identified that a number of insurers were non-compliant with the reporting requirements of the Disclosure Standard and/or the Governance Standard during the year.
On each occasion PHIAC was able to work collaboratively with the insurer to resolve the issues.
However, in the more serious instances, discussions were elevated to an insurer's board resulting in assurance being given to PHIAC that compliance systems would be upgraded. This ensured breaches were rectified and that the risk of further breaches was minimised. The breaches did not impact policyholders.
As part of its regulatory oversight, PHIAC's actuarial team monitored and reported on financial risks. Quarterly reviews of each insurer's capital position and forecasts enabled PHIAC to consider emerging risks unique to each health fund. PHIAC's analysis provided forward estimates on the range of profit and capital outcomes for each insurer and assessed their ability to meet minimum capital requirements over the subsequent 12 to 18 months.
Outcomes of PHIAC's analysis activities have assisted PHIAC to develop the 2014-15 fund review program and its premium analysis work. In the last 12 months, the actuarial team continued to maintain and refine PHIAC's analysis approach, and improved internal reporting capabilities.
PHIAC's actuarial team also engaged frequently with the actuarial profession through regular discussions with actuaries working in the PHI industry, and in particular, with the Appointed Actuaries of insurers.
Through part of the year PHIAC also had a representative on the Actuaries Institute Health Practice Committee.
Over the year a key area of actuarial discussion was insurer's progress with the implementation of the new Capital and Solvency Standards. Another important topic was insurers' forecast assumptions related to the Capital Standards and PHIAC's contribution to the assessment of annual health insurance premium applications.
The involvement of PHIAC's actuarial team, and in some instances insurer's actuaries, contributed to the scope and depth of fund reviews conducted over the year. This was reflected in the range of exception-based recommendations provided to insurers to support improvements in capital management practices.
The Capital Adequacy Standard required that insurers maintain sufficient capital within each health benefit fund to enable the ongoing conduct of the business of the fund. The standard required that each fund holds sufficient capital to give at least a 98 per cent certainty that it could maintain operations in the next 12 months. The Capital Adequacy and Solvency Standard also required that each insurer had in place and complied with a board-endorsed capital management policy and a liquidity management plan respectively.
The Solvency Standard required insurers to maintain assets of sufficient quality to allow them to meet all the liabilities of the fund as they became due. The focus of this standard was on liquidity and ensuring each fund holds sufficient cash to meet stressed cash needs.
PHIAC liaised extensively with the PHI industry, the Department of Treasury, DoH and APRA during the latter part of 2014-15 to ensure that during the remaking of these standards under subsection 92(1) of the Private Health Insurance (Prudential Supervision) Act 2015 (the PHIPS Act), there were no changes of substance to PHIAC's existing standards.
The Capital Standards can be referenced on the APRA website as:
- Prudential Standard HPS 100: Solvency Standard; and
- Prudential Standard HPS 110: Capital Adequacy.
Prudential Standard HPS 001: definitions also includes key terms referred to in the Capital Standards.
The Prudential Standards imposed mandatory requirements on insurers to conduct their affairs in ways which ensure they maintain a sound financial position, reduce the risk of contagion in the industry and conduct their operations with integrity, prudence and professional skill.
Four Prudential Standards were in place in 2014-15:
- Appointed Actuaries Standard (2007) articulated PHIAC's expectation of the roles, rights and responsibilities of the Appointed Actuary, an important advisory role mandated by Division 160 of the PHI Act.
- Governance Standard (2009) outlined PHIAC's minimum expectations in relation to an insurer's governance practices by establishing regulatory requirements around board composition, independence, audit committee practices, board evaluation and renewal.
- Disclosure Standard (2010) assisted PHIAC in its supervision of the industry by ensuring PHIAC was informed early about unusual events or significant changes for an insurer.
- Outsourcing Standard (2012) was designed to control risk related to the outsourcing of material business activities to a third party, often to an entity beyond PHIAC regulatory reach.
PHIAC worked closely with the PHI industry, Department of Treasury, DoH and APRA during 2014-15 to ensure the smooth transition of these standards to APRA under subsection 92(1) of the Private Health Insurance (Prudential Supervision) Act 2015 (PHIPS Act).
The standards can be referenced on the APRA website as:
- Prudential Standard HPS 231: Outsourcing;
- Prudential Standard HPS 320: Actuarial and Related Matters;
- Prudential Standard HPS 350: Disclosure to APRA; and
- Prudential Standard HPS 510: Governance.
During 2014-15 the reporting obligations of private health insurers to PHIAC were issued by APRA as a series of reporting standards to align with APRA's existing reporting format for other APRA regulated entities as described in the Financial Sector (Collection of Data) Act 2001.
PHIAC worked closely with APRA and the PHI industry during the year to ensure the new reporting standards broadly replicated PHIAC's reporting requirements and did not impose any additional regulatory burden on the industry.
The new PHI reporting standards can be found on the APRA website as:
- Reporting Standard HRS 601 Statistical Data by State;
- Reporting Standard HRS 602 Financial and Capital Data;
- Reporting Standard HRS 603 Statistical Data on Prosthetic Benefits; and
- Reporting Standard HRS 604 Medical Specialty Block Grouping Information.
The new reporting standards (HRS 601 to HRS 604) collect the same data as the previous PHIAC reporting requirements.
PHIAC developed a series of Standard Operating Procedures (SOPs) to explain to the industry and the general public how PHIAC, in the normal course of business, exercised its key regulatory powers. The SOPs also aided PHIAC in exercising its regulatory powers in a lawful and transparent way.
In 2014-15, the five SOPs were:
||Accepting a written undertaking given by a private health insurer |
||Giving a Council Direction |
||Information Acquisition Powers |
||Appointing an Inspector to a private health insurer. |
||Appointment of an External Manager to a private health insurer |
APRA has retained these documents on its website post transition as important industry reference material.
During 2014-15, PHIAC participated in a series of industry workshops hosted by the Department of the Treasury, DoH and APRA on the proposed changes to the PHI Act and subordinate legislation. These forums were designed to facilitate the transition from PHIAC to APRA for industry.
During 2014-15 PHIAC carried out the functions of collecting and disseminating PHI industry statistics. These functions satisfied the requirements of administering the RETF and oversight of the prudential soundness of the industry, as well as informing industry stakeholders including government, private health insurers and consumers about the PHI industry.
The data collected by PHIAC, mostly reported on PHIAC's website for reference by the PHI industry and the general public, covered utilisation of health services paid for by private health insurers, and financial accounts statistics from the insurers. This information included statistical trends, PHI industry specific information such as data on gap payments and statistics on specific service areas, all provided with state and national comparisons.
PHIAC's Quarterly Statistics report provided a summary and commentary of all the statistical reports produced by PHIAC.
PHIAC was responsible for administering the RETF which supported a cornerstone of PHI in Australia, community rating. The RETF was established to ensure that insurers whose members have higher risk profiles were not unduly impacted by higher cost claims. The RETF ensured that certain benefit claims which arose out of community rating requirements were shared across all insurers in the PHI industry.
PHIAC administered the RETF. Based on claims data provided by each insurer, PHIAC calculates payments into and out of the RETF every quarter, in each state and territory based jurisdiction and ensures that the payments are timely, accurate and in compliance with legislative requirements.
In 2014-15, PHIAC administered and processed approximately $441 million in RETF payments as presented in Table 2.
Note: The June quarter 2014 returns were processed in the 2014-15 period.
The $441 million in RETF payments represented a 4 per cent increase in RETF payments compared to 2013-14. This increase reflected a trend in the current system of risk equalisation increasing as a proportion of benefits over time due to the ageing population.
PHIAC's interaction with other regulators was an important element in the framework for maintaining financial stability and industry compliance in 2014-15. Whilst some consultations occurred within the formal constructs of a Memorandum of Understanding (MoU), most occurred less formally primarily to facilitate knowledge sharing and to reduce the regulatory burden on the industry and consumers.
PHIAC maintained a strong working relationship with the DoH during 2014-15. The focus of PHIAC's liaison with DoH during the financial year was to:
- facilitate the transition of PHIAC's prudential supervision function to APRA;
- minimise the regulatory and cost burdens on the PHI industry during the transition period;
- advise on the proposed amendments to the PHI Act and the drafting of the PHIPS Act to facilitate the transfer of PHIAC's regulatory framework to APRA by 30 June 2015; and
- undertake shared co-regulatory activity.
The work in relation to effecting the transition into APRA was achieved primarily through PHIAC's active participation on the intra-agency steering committee, working group and sub committees chaired by DoH.
PHIAC also maintained a strong focus on regulatory oversight during the transition period, having frequent discussions with DoH on prudential matters including breaches of the PHI Act, planned industry expansion, the annual health insurance premium applications, data collection, portability, risk equalisation and consumer protection.
PHIAC worked closely with the Department of Finance in the first half of 2014-15 in relation to the Commonwealth due diligence process for the sale of Medibank Private Ltd by Initial Public Offering (IPO). PHIAC's participation in the due diligence disclosure process assisted the Commonwealth to meet the statutory requirements of an IPO.
PHIAC also regularly engaged with the Department of Finance throughout the year to ensure no additional costs were shouldered by the PHI industry during the transition year. This was achieved primarily through the approvals processes allowing PHIAC to draw down on its reserve, rather than imposing a supplementary levy on the industry to cover the costs of transition.
The Private Health Insurance Ombudsman (PHIO) protects the interests of people with private health insurance policies by receiving and investigating complaints against insurers and private health service providers and by providing consumer information on its website: www.phio.org.au.
In 2014-15, PHIAC's discussions with PHIO included the resolution of consumer enquiries, the provision of information on the annual pricing round and information to assist PHIO in publishing the annual State of the Health Funds Report.
PHIO functions were transferred to the Commonwealth Ombudsman's Office on 1 July 2015 following passage of the Private Health Insurance Amendment Act 2015.
PHIAC's MoU with APRA has facilitated the development of a close dialogue between the two regulators in recent years. This was further strengthened in 2014-15 by the increased sharing of information and the provision of specialised regulatory training which facilitated the transition of key staff and functions to APRA following the planned transfer of PHIAC's prudential supervision functions to APRA on 1 July 2015.
In 2014-15 PHIAC signed a supplementary MoU with APRA which established a framework for the payment of specified administrative costs incurred by APRA in undertaking its responsibilities in transferring the prudential supervision functions of PHIAC to APRA.
Since 2011 the level of cooperation between the Australian Competition and Consumer Commission (ACCC) and PHIAC has been facilitated by the development of a Memorandum of Understanding (MoU). This formalised a more robust framework of cooperation and contributed to improved liaison and cooperation on emerging issues of relevance to both agencies.
The MoU between PHIAC and the Australian Securities and Investments Commission (ASIC) recognised the high level of cooperation and liaison between the two agencies. One of the drivers for this MoU was the requirement in section 126-10 of the PHI Act that all insurers be registered as a company under the Corporations Act 2001. This requirement has meant that all insurers operate within the regulatory purview of both PHIAC and ASIC.
Over many years the International Association of Insurance Supervisors (IAIS) provided a reliable forum for PHIAC to interact with international regulators and to ensure that its prudential settings and activities aligned appropriately with international best practice. In particular, PHIAC has, through adoption of, and benchmarking against the IAIS Insurance Core Principles sought to ensure that its regulatory decision-making was informed by appropriate international standards. This will be maintained through APRA's continued participation in the IAIS.
As part of its obligation under the PHI Act regarding the dissemination of useful statistics to the public, PHIAC provided statistical information to other agencies to assist in their public information functions. These agencies included the Private Health Insurance Ombudsman (PHIO), the Australian Competition and Consumer Commission (ACCC), the Australian Bureau of Statistics (ABS) and the Australian Institute of Health and Welfare (AIHW). For example:
- The PHIO utilised PHIAC-provided data in its State of the Health Funds Report. Through this report, the PHIO provided consumers with important information to assist them to make decisions about their health insurance.
- PHIAC contributed to the ACCC annual report to the Senate on anti-competitive and other practices by health funds and providers in relation to private health insurance. This contribution included statistical data, charts and commentary.
- Statistics provided to the ABS included data on benefits paid by insurers and the utilisation of services by policy holders. This data was used in Consumer Price Index (CPI) and Gross Domestic Product (GDP) calculations.
- The AIHW used PHIAC data in its Health Expenditure Australia and Australian Hospital Statistics reports.