The private health insurance policy roadmap: Where are we now?
Insight Issue 3 2018
Private health insurers face a dynamic and challenging landscape, characterised by affordability issues and shifting consumer behaviour, evolving community expectations of insurer conduct, changing operational requirements and cyber risks. Private health insurers need the ability to respond to these challenges in strategic and innovative ways to remain sustainable.
Affordability is currently attracting a lot of media attention, as health insurance premiums continue to increase by more than inflation and average weekly earnings, while the private health insurance rebate is declining. The result is that many people are downgrading or not renewing their insurance cover. The percentage of the population covered by private health insurance has fallen from 47 per cent to 45 per cent over the last three years. A large proportion of this reduction has been among the younger, healthier cohort, who are vital to support a community-rated system. As the proportion of younger members declines, premiums will need to increase to make up for the shortfall – potentially exacerbating the issue.
Furthering APRA’s concern is that the data points to the trends around affordability worsening. Some industry stakeholders consider the industry is approaching a ‘tipping-point’, and the prospect of a shrinking, ageing and less healthy population of health insurance policyholders raises questions about the industry’s long-term sustainability. Some insurers have sought to provide leadership in addressing these challenges, but more needs to be done.
APRA’s role as the prudential regulator of private health insurance is to implement measures designed to keep the industry on a sustainable footing. APRA is working to build private health insurer resilience across three key dimensions - risk, governance and capital - and has been doing this in phases.
Phase 1 was completed in 2017 with the extension of APRA’s cross-industry risk management prudential standard to private health insurers.
The PHI Phase 2 governance review was launched in February 2018 to enhance governance, and business planning processes within the industry. The measures were outlined in APRA’s consultation package, titled Governance, fit and proper, audit and disclosure requirements for private health insurers. Submissions were broadly supportive of the package, but did raise four issues for further consideration: director tenure; frequency of audit reports; auditor experience and auditor rotation requirements.
After careful consideration of the submissions, and drawing on APRA’s experience in other sectors, APRA formed the view that the proposals made were appropriate and accordingly no substantive changes were made in the final versions. On the question of APRA’s guidance on director tenure in particular, APRA considers that an increased focus on board renewal and succession planning is critical to enable boards to remain open to new thinking and provide robust oversight.
APRA has now released the following prudential standards and guidance for private health insurers:
- Cross industry Prudential Standard CPS 510 Governance (CPS 510), which replaces the private health insurance-specific standard, HPS 510 Governance. CPS 510 aims to foster boards equipped to anticipate, understand and manage the changing environment and shifting consumer expectations;
- Prudential Standard CPS 520 Fit and Proper (CPS 520), is new to the sector. It requires boards to establish and apply a written policy to ensure the competence and integrity of anyone exercising material influence over the company;
- Prudential Standard HPS 310 Audit and Related Matters (HPS 310), recognises the important role external auditors can play in improving data integrity and prudential compliance;
- Prudential Standard HPS 001 Definitions (HPS 001) includes the new terminology in the standards; and
- Prudential Practice Guide HPG 510 Governance (HPG 510) and Prudential Practice Guide HPG 520 Fit and Proper set out APRA’s expectations of the requirements in the standards.
These changes are designed to equip private health insurers to respond to major challenges, such as affordability, by fostering boards that remain open to change and recognise the strategic context of their decision-making. The strengthened prudential framework will also require responsible persons to have the appropriate skills and knowledge to effectively implement those decisions.
As insurers implement the new requirements, APRA does not want to cause a disorderly transition. Some measures, such as director tenure and the auditor rotation requirements, may require additional transition arrangements in order to facilitate the desired change in an orderly way. This will be addressed through case-by-case discussions between private health insurers and supervisors, where insurers can make a strong case to APRA for different approaches. APRA encourages early engagement by insurers on these matters with their supervisor.
The next step
APRA’s attention will now turn to reviewing the private health insurance capital standards, under Phase 3 of the private health insurance policy roadmap. APRA does not start this process with a view that capital levels in the industry are too high, or that they should be reduced, but notes the crucial role that strong capital levels play in supporting insurer resilience. Through the review process, APRA will consider whether the private health insurance framework should be more closely aligned with the capital framework for the general and life insurance sectors. APRA will engage further with private health insurers later this year and will consult extensively with stakeholders to determine the extent of any industry-specific factors that warrant an alternative approach.
To remain fit for purpose in an increasingly challenging environment, private health insurers will need to lift the bar in their approaches to risk management and governance. The reforms to the prudential framework undertaken by APRA provide a sound starting point, but to realise the full benefits, insurers themselves will need to robustly implement the changes and embed them in their operations. APRA considers this fortification of the three areas of risk management, governance and capital to be a valuable investment in the long-term sustainability of the sector.