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Contemporary Issues in Private Health InsurancePrivate Health Insurance

Nick Stolk

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A time to keep and a time to throw away (Eccl 3:6)

• Contemporary Issues in Private Health Insurance has been prepared biennially since 2001.

• The concept was developed to assist those outside the health insurance industry quickly p p y q ybring themselves up to speed with the key news, regulatory and environmental changes to Australia’s private health insurance industry.

• However, the number of health insurance ‘outsiders’ has decreased at recent conferences and so it is time to try something a bit different.

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The session will take this slide deck as read and there will be no formal presentationIf you are new to PHI...• You are especially welcome.

formal presentation..and if you are an old hand• We will use our time to discuss a number p y

• There will be an opportunity to ask questions during the session and to talk to health actuaries throughout the

of ‘contemporary issues’.• Contributors will have 4-5 minutes to

present to the audience. I have invited a gSummit.

• Feel free to send any questions you have after reading the slide deck to the

pnumber of ‘younger’ actuaries to contribute a prepared presentation.

• Following each presentation there will be gauthor (nstolk@kpmg.com.au) before or after the Actuaries Summit.

• Check out the resources listed in

g pan opportunity for discussion and questions from the floor.

• Appendix A includes some possible Appendix B. questions and topic areas as a stimulus

for the presentations and discussion.

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What’s in this slide deck?

• Private Health Insurance industry structure and statistics• Key stakeholders (incl legislative and regulatory developments)• Key stakeholders (incl. legislative and regulatory developments)• Actuarial interests in private health insurance• The April 2013 Premium Round• 2012 & 2013 news and events

• Appendix A: Topics for discussion• Appendix A: Topics for discussion• Appendix B: Suggested resources for further research

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Industry structure and statisticsy

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The Australian PHI industry is unique Australia’s private health insurance system is different from the health insurance systems of many

other countries. What is more, it has a number of unusual characteristics which make it different to other Australian insurance markets.

The next slides examine some of these unique characteristics, as well as, features of the market structure, distribution channels and recent performance. A number of the slides assume some level of familiarity with the industry If you are new to PHI I would recommend any of the resourceslevel of familiarity with the industry. If you are new to PHI I would recommend any of the resources in Appendix B.

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A few key things to understand if you are new to PHIAustralia’s private health insurance system is based on community rating.

Community rating is not defined other than in the PHI Act which says that insurers cannot “improperly discriminate” due to a range of factors (including age gender health status etc )improperly discriminate due to a range of factors (including age, gender, health status etc.).

In practice the community is assessed at the insurer/product/state level.

The industry has a range of products with restrictions and exclusions which have been deemed The industry has a range of products with restrictions and exclusions which have been deemed acceptable under the governing legislation. However, some have questioned whether this is discrimination based on health, or indirect avoidance of community rating.

The system lies somewhere between pure community rating and risk rating.

As you might expect of a voluntary community rated system, the industry continues to grapple with affordability issues, in this case, younger healthier persons are required to support older, y , , y g p q pp ,typically higher claiming persons.

Questions are starting to be asked as to the future of community rating in its current form.

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A few key things to understand if you are new to PHI Health insurance in Australia is voluntary, includes guaranteed acceptance (so an insurer cannot

refuse cover to an eligible customer) and portability provisions which allow insurers to transfer between insurers and retain their length of prior service when considering waiting periods.

The system is supported by a number of legislative sticks and carrots:

The private health insurance rebate – provides government support for premiums depending on a i f ipolicyholder’s age and, from 1 July 2012, income levels.

Lifetime Health Cover – penalises consumers who delay taking out health insurance until after age 30 by applying a loading to their premiums.

Medicare Levy Surcharge – tax legislation which imposes a tax on those earning incomes above a certain level if they do not hold a suitable level of health insurance.

The community rated system is supported by ‘risk equalisation’ which transfers quarterly payments between insurers based on varying shares of actual claim payments of claimants with certain characteristics. For further detail see PHIAC Annual Report (link in Appendix B).

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The Australian Private Health Insurance Industry• At 30 June 2012 there were 35 private health insurers (ahm deregistered 1 July

2012).• Nine insurers operate on a for-profit basis representing 67.8% of FY12 premium

revenuerevenue.• However the use of the term “for profit insurer” can be misleading:

• BUPA, Australian Unity, Grand United Corporate & Doctors Health are each part of a mutual organisation;each part of a mutual organisation;

• Medibank Private (incl. ahm) is government owned;• NHBA is owned by a charitable trust;• NIB and health.com.au are potentially the only “true” for profit insurers.p y y p

• Together the five largest insurer groups hold 83.2% market share (total policies).• The next five largest insurers hold a combined 10.2% market share.• The remaining insurers each have less than 1% market share (and in aggregate g ( gg g

hold 6.6% of the market).• Appendix B contains a useful summary of the market by insurer.

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The Commissioner’s ReportAccording to the PHIAC Commissioner (the PHIAC Chair)

• The industry retained its strong prudential position throughout 2011-12• A year of encouraging signs …

• Development of value-add services by some insurers (including chronic disease management programs and telephonic health services);

• Expansion into significant new commercial opportunities for the industry;E f titi ith th t f fi t t t f i• Emergence of new competition with the entry of first start up for six years;

• Continuing steady growth of the number of people covered supported by strong and measured capital management.

• but some growing areas for concern… but some growing areas for concern• Marked growth in number of policies sold with an excess or exclusion.

Increase in proportion with exclusions is cause for concern.• Full cover products have reached their price/value limit.p p• Issue is reputational risk for the industry. Insurers need to communicate

clearly and effectively.

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60%Hospital treatment participation by age cohortPHI participation

50%

60%

Jun-00 Jun-12While the industry has grown with overall population growth it has also

40%

growth it has also increased its penetration into a number of age

h t t30%

cohorts, most notably 20-29 and 55-89.

10%

20%Growth varies by insurer (see next slide).

0%0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95+ Total

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20.0%Net policyholder growth % p.a. (avg whole fund)

FY10

15.0%

FY10

FY11

FY12

10.0%

FY12 avge

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ACA

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The rise of d i h

100%

Percentage of policies with excess/copayment

products with an excess

70%

80%

90%

PHI is often discussed in the news on affordability grounds. Excesses are one

t l i50%

60%

70%

way to lower premiums.

It is interesting to note that the majority of policies

30%

40%

the majority of policies sold have an excess or co-payment and have done so since at least 2001.

0%

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Excess/Copay Insurer 1 Excess/Copay Insurer 2 Excess/Copay Insurer 4

Excess/Copay Insurer 5 Excess/Copay Small insurers Excess/Copay Australia

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The rise of products with

100%

Percentage of policies with exclusions and/or restrictions

products with exclusions and/or 70%

80%

90%

and/or restrictions

50%

60%

I i tt ti i

20%

30%

40%Increasing attention is also given to product ‘value’.There are a range of

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gconsumer views on policy exclusions. Some people don’t want to pay for things they

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Exclusion/Restriction Insurer 1 Exclusion/Restriction Insurer 2 Exclusion/Restriction Insurer 3Exclusion/Restriction Insurer 4 Exclusion/Restriction Insurer 5 Exclusion/Restriction Small insurersExclusion/Restriction Australia

pay for things they don’t need, others believe exclusions undermine their cover.

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Industry cost pressures/driversHealth costs have and are expected to continue increasing at levels higher than the general CPI

Health cost pressures Health insurance cost drivers

Health costs have and are expected to continue increasing at levels higher than the general CPI.Claims inflation in PHI is no different and hospital and medical costs typically increase at 6-8% p.a.

Health cost pressures Health insurance cost drivers

• Health spending is 9.4% of GDP (AIHW)Technological advances

• Private hospital contractingIncreasingly public hospitals looking to• Technological advances

• Less invasive, more expensive medical procedures/treatment techniques

• Increasingly public hospitals looking to PHI as funding source• Preferred provider networks

• Prostheses and other devices• Pharmaceuticals• An ageing population

• Success of broader health cover?• Customer expectations/awareness, media reporting leading to increased • An ageing population

• Community expectations

ed a epo g ead g o c easedutilisation

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Industry FY07 FY08 FY09 FY10 FY11 FY12

financial performance

HIB premium ($m) 11,127 12,189 13,078 14,170 15,421 16,721

Benefits 9,432 10,385 11,349 12,227 13,161 14,337Expenses (1,079) (1,290) (1,316) (1,328) (1,410) (1,572)Net margin 616 514 413 615 851 812

The net margin (or underwriting margin) is the most common measure of

Net margin 616 514 413 615 851 812

Investment & other revenue 672 49 (9) 560 605 457

Surplus 1,288 563 404 1,175 1,456 1,269Tax (66) (69) (81) (222) (296) (240)most common measure of

profitability in the industry.

While the industry results show relatively stable net

( ) ( ) ( ) ( ) ( ) ( )Surplus after tax 1,222 494 323 953 1,160 1,029

GMR 15.2% 14.8% 13.2% 13.7% 14.7% 14.3%MER 9.7% 10.6% 10.0% 9.2% 9.1% 9.4%Net margin % 5 5% 4 2% 3 2% 4 5% 5 5% 4 9%s o e a e y s ab e e

margin performance, the smaller insurers, can and do exhibit significant variability.

Net margin % 5.5% 4.2% 3.2% 4.5% 5.5% 4.9%Profit margin % 11.0% 4.1% 2.5% 6.7% 7.5% 6.2%

Net margin %Industry low (12.4%) (10.9%) (13.0%) (9.6%) 0.0% 0.0%y y ( ) ( ) ( ) ( )Industry high 18.4% 40.0% 11.3% 15.7% 14.0% 13.4%

GMR = gross margin ratio = (premium less benefits) / premiumMER = management expense ratio = expenses / premium

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FY12 financial performance ($m) by open status and by profit status

At an aggregate level there is little evidence to

IndustryBig 5 Restrict Open Profit NFP

HIB premium 13,716 1,308 1,697 16,721 11,333 5,387

Benefits 11,757 1,144 1,435 14,337 9,588 4,748

Profit statusOpen status

suggest an insurer’s open status impacts their profitability.

, , , , , ,Expenses 1,292 95 186 1,572 1,119 453Investment and other income 348 45 64 457 271 186

HBF profit 1,015 114 140 1,269 897 373Tax 226 0 17 243 243 0Based on FY12 net margin

performance, the not-for-profit insurers appear to target a lower level of

Tax 226 0 17 243 243 0HBF profit after tax 788 114 124 1,026 653 373

Non-HBF related profit 2 2 0 3 2 2Insurer profit after tax 790 116 124 1,029 655 374

underwriting profitability than their for profit counterparts.

GMR 14.3% 12.5% 15.4% 14.3% 15.4% 11.9%MER 9.4% 7.2% 10.9% 9.4% 9.9% 8.4%Net margin % 4.9% 5.3% 4.5% 4.9% 5.5% 3.5%Profit margin % (after tax) 5.8% 8.8% 7.3% 6.2% 5.8% 6.9%g ( )

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The increase in for-profit funds has allowed for significantly higher dividends to be paid inhigher dividends to be paid in recent times.

Medibank’s dividend to the Federal Government hasFederal Government has drawn particular scrutiny. See later section on News & Events.

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Industry financial FY12 financial position ($m)

IndustryBig 5 Restrict Open Profit NFP

Open status Profit status

positionThe capital adequacy risk multiple is

Health benefits fundAssets

Cash & interest bearing assets 5,597 935 1,157 7,689 4,200 3,488Equities and property 1,123 136 151 1,410 714 696Other assets 1,724 106 185 2,015 1,362 653

Total assets 8 444 1 177 1 493 11 114 6 276 4 838 The capital adequacy risk multiple is the preferred measure of financial strength in the industry, however, it is not published publicly at the insurer level As a result I have shown the

Total assets 8,444 1,177 1,493 11,114 6,276 4,838

Liabilities Unearned premium liabilities 2,452 210 333 2,995 1,960 1,035 Outstanding claims 1,157 117 122 1,396 970 426

Other liabilities 691 61 117 868 599 269 level. As a result I have shown the solvency risk multiple.

The respective risk multiples suggest that the for-profit insurers operate a

Total liabilities 4,300 388 572 5,260 3,529 1,731

Net assets 4,144 789 921 5,854 2,748 3,107

Non - health benefits fundNet assets 314 6 0 320 314 6 that the for profit insurers operate a

leaner capital structure.

This is also shown in the return on equity – both groups made a similar

Private Health Insurer Equity Contributed equity 2,563 43 19 2,625 2,582 43 Reserves (2,259) 9 13 (2,237) (2,315) 78 Retained profits 4,153 743 890 5,786 2,794 2,992Total equity at 30 June 2012 4,458 795 922 6,174 3,061 3,113 equity both groups made a similar

profit margin in FY12 but on very different capital bases.

Total equity at 30 June 2012 4,458 795 922 6,174 3,061 3,113

Return on equity 17.7% 14.3% 13.4% 16.6% 21.3% 12.0%

Solvency reserve 1,628 103 178 1,908 1,224 684Solvency risk multiple 2.55 7.67 5.19 3.07 2.25 4.54

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A new entrant• Health.com.au Pty Ltd commenced trading on 16 April 2012.• They are the first new entrant to the PHI industry since 2006/07.

H lth H it l SEU• Their CEO has stated that they “would

focus on providing a highly transparent

0.20%

0.25%

16,000

20,000

Health.com.au Hospital SEUsfocus on providing a highly transparent product that solved people's health insurance needs.”

• Health.com.au Pty Ltd utilizes iSelect as its primary distribution channel

0.10%

0.15%

8,000

12,000

primary distribution channel.• PHIAC made their registration as a health

insurer subject to a number of conditions for their first three years of operation i i

0.00%

0.05%

0

4,000

March June September December March

including:• Monthly PHIAC 2 reporting;• Actuarial sign-off on quarterly

PHIAC 2 returns; and2012 2012

p2012 2012 2013

Hospital SEUs Approx hospital market share

PHIAC 2 returns; and• Not applying for a transfer of assets.

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Stakeholders

The following slides briefly discuss:• The key stakeholders in the PHI industry• The rise of aggregators in the market• The PHI regulatorsg• IFRS developments• A brief look ahead at upcoming regulatory developments

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PHI stakeholders

DoHA PHIAC

PHIO ACCC

Doctors/ Specialists

Private hospitals

Actuaries Institute

Brokers & Public Prosthesis

Investment managers

Technology

Privacy Commissioner Rating

agencies

aggregators

Insurers

hospitalssuppliers

Allied health sector

Consumer represent’n

ATOproviders

Customers/policyholders/members

Regulators/Government Providers Others Media

Customers/policyholders/members

The industry associations are Private Healthcare Australia (21 insurers covering 95.3% of the industry) and HIRMAA (18 insurers, 9.0%).The five largest organisations conduct their contract negotiations directly with private hospitals and g g g y p pmedical practitioners; the rest of the industry is served either by the Australian Health Service Alliance (25 insurers) or the Australian Regional Health Group (4).All but the largest insurers use one of 3 health insurance software suppliers: Civica, HAMBS and Paragon21.

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Aggregators A quick web survey reveals at least 11 comparison sites now featuring health insurance…

Brokers ‘driving up costs’SMH, 15 April 2013

This article represents a lot of the recent industry debate…

Medibank claims:Medibank claims:• Growth of comparison sites have led to higher premiums• Industry-wide surge in advertising costs• “Haven’t changed the dynamics of affordability”

iSelect claims:• Increases the size of the PHI market• Helped match people to appropriate insurance• Is explicit about commissions• Is explicit about commissions• “Funds wouldn’t use us if we weren’t an efficient form of distribution for their products.”

iSelect, the largest of the aggregators in PHI, has been mooted for ASX listing for some time –expected listing in 2013.

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PHI regulationThe Private Health Insurance Branch of the Department of Health and Ageing maintains the regulatory framework in relation to policy matters affecting PHI (see PHI-circulars).

The Private Health Insurance Administration Council regulates statistical and prudential mattersThe Private Health Insurance Administration Council regulates statistical and prudential matters (PHIAC-circulars).

The primary legislation governing private health insurance in Australia is the Private Health e p a y eg s a o go e g p a e ea su a ce us a a s e a e eaInsurance Act 2007, which operates with a number of Rules. The Act sets out the role of PHIAC:

“To achieve an appropriate balance between three objectives:• Fostering an efficient and competitive PHI industry;

P t ti th i t t f d• Protecting the interests of consumers; and• Ensuring the prudential safety of individual private health insurers.”

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Events at PHIAC (since we last met)During 2011 PHIAC issued one Standard Operating Procedure (Information Acquisition Powers) and amended The Private Health Insurance (Insurer Obligation) Rules 2009 (amendment) to include provision for the new professional standard for Appointed Actuaries on FCRs.

During 2012 PHIAC’s Outsourcing Standard became law and PHIAC issued its fourth SOP, Appointing an Inspector to a Private Health Insurer.

PHIAC initiated consultation on proposed changes to the capital standards applicable to the PHI industry; paper, tech-note. At the time of writing the industry was still waiting for the second round of consultation although PHIAC has indicated that implementation will be pushed back to 2014.

PHIAC became the primary source of advice to the Minister for Health on premium applications from the April 2013 premium round.

The tenure of three PHIAC directors including the Commissioner, expires November 2013.

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PaCU The 2012 Budget provided funding for the creation of a PHI Premium and Competition Unit (PaCU) within

PHIAC. Funding is from the industry not the government.

“PaCU will enhance PHIAC’s capacity to: PaCU will enhance PHIAC s capacity to:

o Engage with the industry around products, pricing strategies, premium applications, administrative costs and competition issues;

o Assist the Government with understanding cost drivers, opportunities for savings under the rebate and competitive pressures; and

Support the interests of consumers by fostering increased competition in the industry and increasingo Support the interests of consumers by fostering increased competition in the industry and increasing the sophistication of the scrutiny of premium increases.”

Initial discussion paper on competition released late 2012 resulted in 27 submissions from stakeholders.

PaCU has identified four priority projects for research and consultation in 2013 – portability, risk equalisation, barriers to entry and exclusions & excesses.

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PHIOThe Private Health Insurance Ombudsman provides health insurance policyholders with an independent resolution service for health insurance complaints and enquiries. The Ombudsman can deal with complaints from policyholders, health insurers, private hospitals or medical practitioners.

PHIO publishes an annual State of the Health Funds Report, quarterly bulletins and manages the ‘privatehealth.gov.au’ website which provides standard information statements including premiums for the products of all private health insurers.

From PHIO media release, 28 March 2013:“Private health insurance was very much ‘front of mind’ for consumers during the reporting period, due to the introduction of income testing of the Australian Government Rebate on private healthdue to the introduction of income testing of the Australian Government Rebate on private health insurance from 1 July 2012 and the associated publicity campaign to inform members about the changes. This in turn increased the demand for PHIO’s information and advice services, with the consumer website www.privatehealth.gov.au receiving its highest number of unique visits in July 2012 since it went live in April 2007.”

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IFRS developments• In 2011 when we last met…

PHI was facing an issue with the Contract Boundary – the 2010 ED considered PHI to be a long-term contract and would require insurers to project until expected contract/policy expiry.

• Since that time there has been a (non-binding) Board decision to update the proposal:

“An additional point would affect contracts whose pricing of premiums does not include risks related to future periods. The contract would not confer any substantive rights on the p y gpolicyholder when the insurer has the right or practical ability to reassess the risk of the portfolio that the contract belongs to and, as a result, can set a price that fully reflects the risks of that portfolio.”This revision is intended to address, amongst others, the concerns affecting PHI.

• Under the current timetable the new standard will not be fully implemented until 1 January 2018.

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Coming and potential regulatory changesTiming Changes

May 2013 budget

Potential for further changes to the PHI rebate to be announced. Some lobby groups have proposed the removal of the rebate for general treatment cover. Any amendment is likely to face challenges in being legislated given the September election.

July 2013 & beyond

The effects, if any, of income testing the PHI rebate on lapses and product downgrades should start to be seen as pre-payments are fully earned and people complete their FY13 tax returns.

1 Jan 2014 Chief Medical Officer to pro ide his re ie of nat ral therapies Those nat ral therapies fo nd not to be1 Jan 2014 Chief Medical Officer to provide his review of natural therapies. Those natural therapies found not to be clinically effective will not be eligible for the PHI rebate. Some uncertainty as to how insurers will respond to any changes – for example, some have suggested creating new products at negligible cost.

2014 Implementation of new PHIAC Capital Standards. While the detail of the draft standards is not yet available the l i f h d d b f h i l di h d f i d l C i lconsultation paper foreshadowed a number of changes including the need for insurers to develop a Capital

Management Policy which included integration of risk appetite, pricing philosophy, investment plans linked to capital levels and greater Board engagement.

? If legislation is passed, the effects of removing the PHI rebate from LHC loadings.

? If legislation is passed, the effects of indexing the PHI rebate to CPI rather than premium increases.

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Actuarial interests in PHI

The following slides briefly discuss:• Some of the work that actuaries perform in PHI• Which insurers employ actuaries• The recent work of the Health Practice Committee, an Institute committee

designed to support the development of actuarial practice and promote opportunities for members working in health (including PHI).

• The PHI newsletter

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The Appointed Actuary role• The Appointed Actuary (AA) role in health insurance was created in 2004. Enhancements to

the role and its powers were included in the Private Health Insurance Act 2007. • PHIAC has supported the AA role to the industry, both in writing and verbally, and has

i t d it t ti f th l t th f i ticommunicated its expectations of the role to the profession over time. • Under the PHI Act 2007, the AA is required to draw to the attention of the insurer, or of the

directors of the insurer, any matter that comes to the attention of the actuary and that the actuary thinks requires action to be taken by the company or its directors to avoid aactuary thinks requires action to be taken by the company or its directors to avoid a contravention of this Act.

• Health insurers are required to notify their Appointed Actuary (AA) of “notifiable circumstances”. These include but are not limited to changes in premiums, changes incircumstances . These include but are not limited to changes in premiums, changes in benefits, changes to the business plan, changes to the risk profile, development and changes of the capital management plan and significant business diversification activity.

• The role of the AA includes certification of methodology and assumptions supporting premium increases; advice on new products, preparation of an annual financial condition report and advice on risk margins, insurance liabilities, investments, and mergers and acquisitions.

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Where do actuaries work in PHI?• At the time of writing, there were 13 unique Appointed Actuaries – three internal, ten external

consultants.• Institute members were employed on the staff of 13 health insurers (as per below), as well as, a

number of consultancies and PHIACnumber of consultancies and PHIAC.

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The Health Practice Committee

• In June 2011, the Actuaries Institute issued a Professional Standard (PS600) covering financial condition reports for private health insurers and in August 2011 issued an information note on the proposed means testing of the private health insurance rebatethe proposed means testing of the private health insurance rebate.

• In 2012, the Actuaries Institute issued Practice Guidelines for Pricing and Financial Projections (PG699.01) and Valuation of Health Insurance Liabilities (PG699.02).

• In conjunction with the Actuaries Institute the committee has been developing relevant publicIn conjunction with the Actuaries Institute the committee has been developing relevant public policy and working on ways to promote the work of actuaries working in health. This work has resulted in an increase in the number of Actuaries magazine articles on health related topics, as well as, two radio interviews and a TV appearance.

• The Health Practice Committee put forward to Council two ‘health’ focused Part III Pathways to Fellowship. Now approved, the UK ST1 course and the South African Health Insurance course (from 2014) when combined with the Australian PHI CPD course provide an alternative Module 1 of the Institute’s Part III program We know of at least two students who have completed this1 of the Institute’s Part III program. We know of at least two students who have completed this module.

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The Health Practice Committee

• The HPC has made submissions to PHIAC’s consultation package on risk management, PaCU’sconsultation on competition and the Senate’s inquiry on extreme weather events.

• The HPC has organised a number of networking events including a presentation from Peter• The HPC has organised a number of networking events, including a presentation from Peter Broadhead from DoHA on his experience working with actuaries, and is looking at the best way of reaching the increasing membership base in Melbourne.

• The Committee has been refreshed with some new members over the past year and now alsoThe Committee has been refreshed with some new members over the past year and now also includes representation from PHIAC. Thanks to Ben Ooi, Andrew Gale and Kirsten Armstrong for their contribution to the committee.

• The HPC continues to support, update and mark the Institute’s online PHI education course. The course has been offered since 2007 and is open to all those with an interest in learning more about PHI.

• The Institute congratulated John Walsh on his appointment as a Member of the Order of A t li f i t th it i th f di bilit d h lth liAustralia for service to the community in the areas of disability and health policy.

• The HPC congratulated Andrew Gale on being awarded the A M Parker prize for his paper “Growing Pains: Selection Effects in Private Health Insurance.”

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The PHI newsletter

• At the Summit the Health Practice Committee’s PHI newsletter will celebrate the publication of its 250th edition.

• The newsletter exists to promote the role of actuaries to the private health insurance sector by• The newsletter exists to promote the role of actuaries to the private health insurance sector by providing a newsletter that is relevant, factual, timely and non-subjective.

• The PHI newsletter has a circulation of 1,800; more than half of whom are from outside of the Institute, while 20% of readers are from overseas.Institute, while 20% of readers are from overseas.

• The newsletter includes sections on Department of Health and PHIAC circulars, Institute health interests, topical news items, forthcoming health events; and reports, publications and technical hints.

• The newsletter undergoes peer review prior to its publication to ensure that accuracy, quality and probity issues are appropriately addressed. The review panel consists of members of the Health Practice Committee, a PHIAC representative and a Department of Health and Ageing

t tirepresentative.

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The April 2013 premium roundp p

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The April 2013 premium round• The annual premium round, where all insurers submit their proposed premiums for the following

April at the same time for Ministerial approval, has become convention. There is no legislation requiring the process happen in this manner.

• The premium round and approval process has been the subject of significant discussion in the industry in recent times. Medibank released a paper, “The future of private health insurance premium-setting: Seeking integrative solutions”, in November 2012.

• Findings from that paper of interest to the author• Findings from that paper of interest to the author…• “Funds have an incentive to ‘game’ the current approach in order to maximise profit by

‘pricing up’ to an expected regulatory threshold.”• “There is also a reduced incentive for funds to minimise management expense since cost• There is also a reduced incentive for funds to minimise management expense since cost

savings simply induce the regulator to grant lower premium increases.”• “Denied an incentive to compete on price, funds have responded by competing on their

product offerings ”product offerings.• Under proposed next steps, “Horizon 4: Move to price monitoring regulation [not

approval].”

38

Historical premium increases

9.00%

Average Premium Rate Increase

6.00%

7.00%

8.00%

3.00%

4.00%

5.00%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130.00%

1.00%

2.00%

Industry 6.90% 7.40% 7.58% 7.96% 5.68% 4.52% 4.99% 6.02% 5.78% 5.57% 5.06% 5.60%

39

30%

35%

25%

30%

This chart20%

This chart demonstrates the historical variability in the

10%

15%variability in the premium rate increases over the past twelve

5%

the past twelve years.

0%2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

. . 5th percentile IQR (25th - 75th) 95th percentile Min Industry average (published) Max

40

8.00%Premium increases by insurer April 2013

Industry average = 5.60%

6.00%

7.00%For profit average = 5.99%

NFP average = 4.79%

4.00%

5.00%

2.00%

3.00%

1.00%

2.00%

0.00%

41

7.0%7.0%

April 2013 premium rate increase by insurer category

5.0%

6.0%

5.0%

6.0%

3.0%

4.0%

3.0%

4.0%

1 0%

2.0%

1 0%

2.0%

3.0%

0.0%

1.0%

0.0%

1.0%

MPL

BUPA

HCF

HBF

guar

dN

IB

AU

HL

GU

CM

HBA

tfun

dtr

obe

tner

sH

IFec

are

CUA

uke'

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ura

NH

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om CDH

TFH

fenc

eCB

HS

QTU

H RTPo

lice

Nav

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nix

ACA

spor

tH

CIRB

HS

Shaded bars represent for profitB

Hea

lthg A

GM

Wes

tLa

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'Par

t

Peop

le

St Lu Mil N

Hea

lth Def C Q P

Pho

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Big 5 Open Mid Tier Restricted Access Big 5 avg Open Mid Tier avg Restricted avg Industry average

for profit insurers.

42

2,5009.00%

M)

Premium rate increase % vs industry surplus before tax and abnormals ($m)

2,000

6 00%

7.00%

8.00%

bnor

mal

s ($

M

e %

1 000

1,500

4.00%

5.00%

6.00%

ore

tax

and

ab

m ra

te in

crea

s

500

1,000

%

2.00%

3.00%

ry su

rplu

s be

f

Prem

ium

00.00%

1.00%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Indu

str

Industry surplus before tax and abnormals excluding investment and other income (FY)

Investment and other income (FY)

Rate increase (April)

43

The author’s understanding of the 2013 premium round process (PHIAC’s approach)

APRIL 2013 PREMIUM APPLICATION PROCESS INSURER CREDIBILITY MATERIALITY PHIAC TESTING CLOSER LOOKMARKET CONDITIONS

NO

NOIs the requested i t i ll

Is the projected net margin close to or less than PHIAC's estimated

bl ?

REQUEST FURTHER INFORMATION

NO YES YES

YES

Is the insurer i i

Close to their target net margin in PHIAC's view (based on high level checks)

increase materially lower than historical gross margin inflation?

sustainable net margin?ACCEPT

(PHIAC HAPPY TO DISCUSS DIFFERENCES

WITH INSURERS)

PRUDENTAL SAFETY CHECK

YES YES

NO

operating in a competitive market

PHIAC forms a view on acceptable net margin *

ACCEPT(PHIAC HAPPY TO

DISCUSS DIFFERENCES WITH INSURERS)

PRUDENTAL SAFETY CHECK

YES YES

* PHIAC did not provide information in our meeting on the process they followed if the insurer was considered to not be operating in a competitive market.

ACCEPTPRUDENTAL SAFETY CHECK

44

News & events of 2012 and 2013

The following slides briefly discuss:• Some highlights of the PHI newsletter from the past two years. All articles can be

found in past editions of the PHI newsletter from the Institute website or forwarded from the author.

• Key news items in respect of the five largest health insurers, as well as, brief excerpts from their most recent annual reports.

• The ‘One Big Switch’ campaign supported by News Limited.

45

News highlights• The premium round – results and process – continues to attract the most media attention.

Media reporting tended to focus on affordability, coverage (and the rise of exclusionary products) and product complexity.

• On 16 March 2012 legislation was passed to income test the private health insurance rebate and to increase the MLS for high income earners from 1 July 2012. This resulted in more than 140,000 PHI policyholders pre-paying their premiums in the lead up to June 30; article.

• There was and continues to be significant debate between the industry and Treasury as to the• There was and continues to be significant debate between the industry and Treasury as to the impact that these changes will have on the industry; Industry report, Minister’s release.

• Discussion of the privatisation and potential listing of Medibank has occupied significant column space over the past year In summary the Coalition have said they will but have notcolumn space over the past year. In summary, the Coalition have said they will but have not indicated timing for a sale, the Greens say they will support if the proceeds go to the public health sector and the Labor Government has no plans to sell.

46

News highlights• M&A activity appears to have slowed in recent years:

• The Doctor’s Health Fund was acquired for $30m by Avant, the largest provider of medical indemnity insurance in Australia, on 30 March 2012.

• The Board of Southern Cross (NZ) rejected an offer from Medibank in May 2011; article.• BUPA commenced legal action against iSelect over what it asserted were misleading claims in

its TV advertising; article, iSelect. iSelect agreed to temper its advertising claims; article.• Westfund announced, in an Australian first, they will return $4m to long-term members; release.• The internet’s use as a PHI distribution channel has increased by 50%, but still only accounts for

10.3% of all policies; release.• A recent interview with iSelect’s CEO discusses the origins and potential listing of iSelect; article.• HPC members shared their opinions on raising PHI premiums for smokers; opinion.• BUPA and Healthscope announced the details of their private healthcare partnership; release.• The Gov’t introduced the National Disability Insurance Scheme Bill 2012; legislation, release.

47

News from the major playersj p y

48

July 2011 – won sole provider rights for the Commonwealth Govt’s after hours GP helpline

May 2012 – launched Mi Health, a range of on demand health support services

June 2012 – won contract to provide all health services to serving ADF personnel; release.

Appear to be lobbying for changes to PHI

“Stand for better health and we want to build a better health system.”1

“ our progress in becoming a unique Appear to be lobbying for changes to PHI

o Commissioned Deloitte Access Economics paper on premium setting.

… our progress in becoming a unique healthcare insurance company, offering both health insurance and health solutions: we call it health assurance ”1

o Submissions and media interviews have proposed indexing of excesses allowed under MLS, raised challenges with restricted

health assurance.

“... moved significantly towards becoming an integrated healthcare services provider.”2

, gproducts

Potential for privatisation

1. Annual Report 2012 Page 12. Annual Report Chairman’s Report

49

Acquisition of Innovative Care’s aged care business for $250m (1,114 beds on thebusiness for $250m (1,114 beds on the eastern seaboard). Now the largest age care provider in Australia (5,600 beds).

i iti f t l C ti f $2 0 Acquisition of Dental Corporation for $270m – 190 clinics, 560 dentists.

Has expressed an interest in managing the p g goperations of public hospitals; article.

Part of ‘BUPA 2020’ global strategy to become an integrated healthcarebecome an integrated healthcare organisation.

We believe “in being a healthcare partner and treating people as individuals”.

50

My Health Guardian – online health support program.p og a .

My Home Doctor – GP service providing in-home consultations after hours. Provided at

h t b ith h it lno charge to members with hospital cover, delivered through Family Care Medical Services. Not for profit.

My Global Specialist – provides eligible members with access to a network of medical experts who review medical records

Member focussed “More for members” –returned as benefits 91 cents in every $ in FY12. p

and proposed treatment plans.

More for Eyes, More for Teeth, More for Muscles various programs designed toMuscles – various programs designed to make it easier for members to proactively look after their health.

51

“ … in the future HBF aspires to do more than deliver financial protection from the increasing costs offinancial protection from the increasing costs of health care. We are embarking on an ambitious plan to transform HBF from a health insurer alone into a valued health partner for our members ”valued health partner for our members.

Determined to remain WA’s leading health insurer –very simple communication strategy. Drawn attention

“From health insurer to health partner. This strategy redefines both HBF’s

to a set of irrefutable facts that confirm that HBF’s health insurance offering to members is superior to major competitors in WA where it matters: % of

This strategy redefines both HBF s Purpose and Vision: our Purpose is now to both “protect” and “support” our members in leading healthier lives, while

members’ premiums returned as total fund benefits; % hospital related charges covered; % of fully covered in-patient medical services.

members in leading healthier lives, while our Vision is “to create a unique community where members are renowned for being healthier and

Capitalising on recently acquired pharmacy network to provide GP type services.

renowned for being healthier and happier people.”

52

Share price has outperformed the market since we last met.

Purchased Tower’s NZ health insurance business for A$81m – second largest health insurer in NZ.

Still looking for acquisitions.

Continue to lobby for changes to the risk equalisation system due to increasing paymentsequalisation system due to increasing payments over the past few years, reflecting growth in younger membership.

NIB announced a strategic alliance with US insurer United Healthcare; announcement, article

Exploring finance/administration of medical tourism; article.

53

Media campaignsp g

54

The Big Health Insurance Switch was a campaign to form a group of ordinary consumers who also wanted access to these types of discounts.

The campaign set out to obtain a discount of 10%.

After a substantial media campaign in partnership After a substantial media campaign, in partnership with News Limited, registrations for One Big Switch reached 114,476.

One Big Switch is a “next generation consumer network” that turned its sights on health insurance in2013 ahm (Medibank) agreed to provide One Big Switch

registered consumers with a 10% discount; article, terms & conditions.

2013.

PHI legislation allows health insurance funds to offer discounts to any “contribution group” they define in

Under the terms of the deal One Big Switch earned a commission of up to 15% of the first year’s premium for each ‘switch’ to ahm.

their fund rules. In the past contribution groups have included, for example, specific employers, government departments, members of specific industry super funds etc

The conditions suggest that One Big Switch may later publish statistics on overall take-up rates.

industry super funds etc.

55

Appendix A

Questions for Summit Discussion

56

Rules for the Summit discussion• Presenters will have a maximum of 5 minutes to make their presentation.• Presenters will have access to any of the slides in this deck and may, in advance, provide a

small number of additional slides to the presenter (nstolk@kpmg.com.au).• No ‘walk-ups’ – please do not bring a USB or presentation on the day.• Following each presentation there will be an opportunity for questions from the audience.• Given time limitations, the convenors request that question time be limited to questions or brief

remarks only. If a presentation inspires you to a longer response we ask that you continue it in afternoon tea or after the Summit.

• A brief agenda of the session will be made available at the Summit. At the time of writing t ti t dpresentations are expected on:

• Actuarial involvement in broader health cover initiatives;• First impressions of the industry from a new Appointed Actuary;• The development of principles for actuarial involvement in PHI reform; and• A brief ‘mythbusters’ session on PHI.

57

Suggestions & stimulus for Summit discussion1. PHIAC Capital Standards

2. The premium round

3. Current policyholder & distribution issues in PHI

4. The future for actuaries working in PHI

Stimulus questions are provided for each of these topics on the following slides.q p p g

58

PHIAC Capital Standards1. Should approaches to the capital stress test be varied from QIS 1? How should actuaries

balance practicality, ease of communication and delivering a robust but appropriately dynamic model?

2. How can actuaries best engage with Boards over the coming months to ensure the stress test and the Board’s obligations are well understood?

3. How will the stress test work on an ongoing basis? How frequently will it be reviewed? How and when should it be documented? Should timing be standardised across the industry?

4. Are there risks to the profession from adopting a more technical approach to the stress test?

59

The premium round process1. What have actuaries contributed to the premium setting process in the PHI industry? Are

actuaries adding rigour to the analysis/process/thinking?

2 From your experience is the current actuarial role in premium setting adequate? What2. From your experience, is the current actuarial role in premium setting adequate? What could be improved?

3. Taking the 2013 process as given, what should actuaries be going back to PHIAC with as opportunities for process improvement? Data collection/timing/communication etc.

4. Do you believe there needs to be a different process or a different way of thinking from the pricing regulator to deal with premium applications from not-for-profit insurersthe pricing regulator to deal with premium applications from not-for-profit insurers compared with for-profit insurers?

5. Now the industry is subject to 8 different rebate levels what considerations should insurers be making when pricing excess variants of the same product? Can price still be used to manage customer behaviour?

60

Current policyholder and distribution issues1. One of the features of PHI has been its direct sale to policyholders (which has reduced

costs) and policyholder stability. Is this feature valuable and should it be maintained?

2 There is considerable debate in the industry as to the value of brokers and aggregators2. There is considerable debate in the industry as to the value of brokers and aggregators brings. What effect do you think this is having (good, bad, otherwise) and what will PHI distribution look like in 5-10 years?

3. What changes can be made within a community rated structure to encourage increased responsibility for a person’s health status? Is individual responsibility fundamentally inconsistent with community rating?

61

The future for actuaries working in PHI1. What have actuaries achieved in the time they have worked with health insurers?

2. Are there lessons we can learn from the evolution of the AA role in life and general insurance? What lessons should be passed on to non health AAs?insurance? What lessons should be passed on to non-health AAs?

3. Do we need to attract more young actuaries to health insurance practice? Is there a ‘next generation’ of Appointed Actuaries being trained? “Have we built a career path?” – Stuart Rodger’s 2011 paper “Seven Up”.

4. What and where are the main opportunities for actuaries working in PHI? What are the most significant threats?most significant threats?

5. What do you think the Institute’s Health Practice Committee should be focusing on now to ensure we remain ‘sought after’ in the future?

62

Appendix B

Further information for those new to PHInew to PHI

63

What can the Health Practice Committee offer?• The Institute’s online PHI education course

http://www.actuaries.asn.au/EducationandProfessional/CPD/EducationCourse.aspx

• The PHI CPD page• The PHI CPD page http://www.actuaries.asn.au/EducationandProfessional/CPD/HealthPractice.aspx

• The PHI newsletter circulated via the Institute. Non-Institute members subscribe at: http://www.actuaries.asn.au/Library/HTMLEmail/Images/2012/Health%20Practice%20Newsletter%20Subscription%20Form%20for%20Non-members.pdf

• Links to a number of other useful PHI papers (next page)• Links to a number of other useful PHI papers (next page)

• A useful one page summary of the industry by insurer and their FY12 performance

64

Further reading• The Operations of Private Health Insurers Annual Report 2011-2012, November 2012, PHIAC

• Medibank - The Future of Private Health Insurance Premium Setting: Seeking Integrative Solutions, November 2012, Deloitte Access Economics.,

• Should private health insurers be more competitive?, May 2012, Finity.

• Growing Pains – Selection Effects in Private Health Insurance, Andrew Gale (2011).

• When too much is not enough: capital in a mutual health fund, Peter Carroll (2011)

• Adventures in Health Risk: a History of Australian Health Insurance, Andrew Gale, David Watson (2003).

Industry snapshot - FY2012 - All Figures $'000

Private Health Insurer Open Restrictaccess For-Profit NFP Industry Ass'n HPPA

AllianceGross margin MER Net margin Total assets

% assets in equities & property

Total equitySolvency

capital/risk multiple

Whole fund Contributors

Market Share

Market Share (cons.)

Rank

Industry 14.3% 9.3% 4.9% 11,114,211 17% 6,174,480 3.10 5,936,660

Big 5MPL Medibank Private Ltd PHA 13.3% 10.2% 3.1% 2,772,861 33% 1,649,810 1.97 1,610,147 27.1% 30.1% 1 AHM Australian Health Management Group Ltd PHA 18.1% 10.5% 7.6% 328,756 7% 217,940 4.18 174,965 2.9% 7

BUPA BUPA Australia Health Pty Ltd PHA 16.7% 9.5% 7.3% 2,122,665 0% 767,505 2.61 1,584,162 26.7% 26.7% 2

HCF The Hospitals Contributions Fund of Australia Ltd PHA 9.3% 7.3% 2.0% 1,423,861 25% 785,381 2.52 636,351 10.7% 10.7% 3

HBF HBF Health Funds Inc PHA 13.8% 9.0% 4.7% 1,127,567 15% 712,850 4.77 453,380 7.6% 8.2% 4 HG Healthguard Health Benefits Fund Ltd PHA AHSA 16.8% 11.6% 5.2% 111,646 9% 82,860 8.29 30,726 0.5% 16

NIB NIB Health Funds Ltd PHA 14.6% 8.6% 6.0% 556,391 16% 241,186 2.41 451,647 7.6% 7.6% 5

OpenAUHL Australian Unity Health Ltd PHA AHSA 17.6% 10.7% 6.9% 312,411 15% 112,606 2.62 190,097 3.2% 3.6% 6 GUC Grand United Corporate Health Ltd PHA AHSA 23.3% 16.3% 7.0% 106,361 10% 35,996 1.90 25,344 0.4% 20

GMHBA GMHBA Ltd PHA AHSA 11.8% 10.8% 1.0% 210,362 3% 122,570 5.18 106,650 1.80% 9 Westfund Westfund Ltd HIRMAA AHSA 13.5% 9.2% 4.2% 137,988 4% 95,575 7.75 44,804 0.75% 12 Latrobe Latrobe Health Services Inc PHA ARHG 9.7% 9.5% 0.2% 151,078 8% 120,747 9.18 42,571 0.72% 13 HP Health Partners Ltd PHA & HIRMAA AHSA 13.8% 8.9% 4.9% 99,914 28% 77,413 8.32 37,684 0.63% 14 HIF Health Insurance Fund of W.A. PHA AHSA 16.3% 11.7% 4.6% 87,126 14% 63,841 7.04 35,748 0.60% 15 PeoplecareLysaght Peoplecare Ltd HIRMAA AHSA 11.8% 8.8% 3.0% 67,181 12% 42,673 5.49 28,249 0.48% 17 CUA CUA Health Limited AHSA 15.8% 10.9% 4.8% 57,240 0% 46,495 8.19 26,402 0.44% 18 St Luke's St Luke's Medical and Hospital Benefits Association Ltd PHA ARHG 19.1% 12.3% 6.7% 85,017 11% 66,777 8.39 22,621 0.38% 21 QCH Queensland Country Health Ltd HIRMAA AHSA 18.5% 11.1% 7.4% 73,599 10% 55,890 10.69 15,961 0.27% 24 Mildura Mildura District Hospital Fund Ltd PHA & HIRMAA ARHG 12.7% 7.2% 5.5% 72,894 7% 62,313 9.87 14,347 0.24% 26 NHBA National Health Benefits Australia Pty Ltd AHSA 22.5% 9.1% 13.4% 13,749 0% 7,432 3.85 5,094 0.09% 29 HPL Health.com.au Pty Ltd AHSA -13.7% 80.3% -93.9% 9,291 0% 4,469 1.98 3,456 0.06% 33 CDH Cessnock District Health Benefits Fund Ltd PHA ARHG 11.1% 10.8% 0.4% 9,190 5% 6,849 4.25 2,734 0.05% 34

Restricted AccessTFH Teachers Federation Health Ltd PHA & HIRMAA AHSA 11.3% 6.9% 4.4% 299,035 6% 204,645 8.03 107,963 1.82% 8 Defence Defence Health Ltd PHA & HIRMAA AHSA 10.8% 5.6% 5.2% 277,018 10% 195,518 11.82 95,937 1.62% 10 CBHS CBHS Health Fund Ltd PHA & HIRMAA AHSA 10.6% 5.7% 4.8% 187,722 12% 118,023 7.77 77,122 1.30% 11 QTUH Queensland Teachers' Union Health Fund Ltd PHA & HIRMAA AHSA 14.6% 8.7% 5.9% 100,118 30% 74,554 7.60 25,612 0.43% 19 RT Railway & Transport Health Fund Ltd PHA & HIRMAA AHSA 18.9% 11.1% 7.8% 60,212 28% 37,322 3.31 22,546 0.38% 22 Police South Australian Police Employees' Health Fund Inc HIRMAA AHSA 16.6% 6.3% 10.4% 46,735 12% 30,840 7.74 17,880 0.30% 23 Navy Navy Health Ltd HIRMAA AHSA 14.0% 10.4% 3.6% 72,008 21% 50,900 8.28 15,066 0.25% 25 DHF The Doctors' Health Fund Ltd HIRMAA AHSA 20.9% 12.1% 8.8% 53,840 0% 24,448 5.24 9,722 0.16% 27 Phoenix Phoenix Health Fund Ltd HIRMAA AHSA 8.9% 8.8% 0.0% 21,589 0% 14,856 5.96 6,584 0.11% 28 ACA ACA Health Benefits Fund Limited HIRMAA AHSA 8.6% 8.3% 0.2% 19,685 0% 15,001 7.98 4,657 0.08% 30 Transport Transport Health Pty Ltd PHA & HIRMAA AHSA 11.3% 9.0% 2.3% 13,030 0% 8,886 4.34 4,414 0.07% 31 HCI Health Care Insurance Ltd HIRMAA AHSA 20.8% 12.8% 8.0% 14,987 5% 11,673 5.61 3,911 0.07% 32 RBHS Reserve Bank Health Society Ltd HIRMAA AHSA 18.0% 13.5% 4.4% 11,082 0% 8,637 4.79 2,106 0.04% 35

22 13 9 26

Big 5 14.3% 9.4% 4.9% 18.5% 2.55 4,941,378 83.2%Mid tier/Regionals 15.4% 10.9% 4.5% 10.2% 5.19 601,762 10.1%Closed 12.5% 7.2% 5.3% 11.6% 7.67 393,520 6.6%

PHA 14 96.9%HIRMAA 10 9.0%PHA & HIRMAA 8 6.5%

AHSA 25 15.9%ARHG 4 1.4%

For profit 68.3%