The Australian Prudential Regulatory Authority (APRA) has warned private health insurers (PHIs) to urgently address rising challenges that threaten the industry’s financial sustainability.
As the prudential regulator, APRA is responsible for ensuring PHIs have the financial means to pay all legitimate claims from their policyholders.
In a letter to industry released today, APRA urged PHIs to swiftly develop robust, actionable strategies to address sustainability risks, as well as a recovery plan that outlines how they will respond if their strategy is not successful or other material risks threaten their solvency.
The directive follows the completion of an APRA review of PHI resilience that raised concerns about insurers’ lack of preparedness to deal with growing risks, including declining affordability, a shrinking and ageing membership base, and changes in government policy.
The review found that while insurers were well aware of the risks, very few had credible strategies to mitigate their impact on sustainability. APRA observed a heavy reliance on lobbying politicians and other industry stakeholders due to a concerning assumption by many insurers that Government would provide solutions.
APRA Executive Board Member Geoff Summerhayes said insurers must be far more proactive in developing plans to boost their resilience.
“Despite APRA’s work with industry to improve governance and risk management capability over recent years, it is frustrating to see little evidence that insurers are taking actions that reflect their own assessment of the heightened risks in this challenging environment,” Mr Summerhayes said.
“APRA recognises the industry has been under duress for some time, and the main factors, such as rising demand for health services and the soaring cost of treatments, are beyond insurers’ direct control. But that’s not an excuse for doing nothing and hoping the Government will fix everything.”
The letter provides examples of better industry practice that can enhance sustainability, including by providing greater value for younger and healthier policyholders, putting more focus on preventative treatments and facilitating alternative models of care.
Recognising the scale of the sustainability challenge, Mr Summerhayes said APRA also expected PHIs to develop a
“Plan B”, including consideration of potential mergers or restructures, should their primary strategy prove ineffective.
“APRA has no immediate concerns for the financial viability of any PHI, but the coming challenges are likely to significantly threaten the business models of a number of insurers. On that basis, APRA expects every insurer to develop a recovery plan for how it would respond if its sustainability came under acute threat,” he said.
“Our message to private health insurers is simple: they must step-up and implement robust strategies to deal with these challenges. Insurers that continue to take a passive approach can expect more assertive action from APRA via entity-specific supervisory action.”
APRA has been raising concerns about the sustainability challenges facing PHIs for several years, and has focused on lifting industry resilience through its PHI Roadmap. APRA is currently reviewing PHI capital requirements, after previously working to lift standards of risk management and governance.