Introduction by Croakey: The latest annual applications by insurers to increase the premiums of their private health insurance policies are due this Wednesday 15 November.
In the article below, Charles Maskell-Knight says the latest figures from the Australian Prudential Regulation Authority (APRA) build the case for the Federal Government to reject any but the most exceptional application for increased premiums.
That would not only be an easy win for a government seeking to address the cost of living crisis, but an opportunity for the boards of the many mutual insurers sitting on excess reserves to really walk the talk on pledges to “put people before profits”, he argues.
His article follows up his analysis last week of the Australian Institute of Health and Welfare (AIHW) report Health Expenditure Australia 2021-22.
Charles Maskell-Knight writes:
The Australian Prudential Regulation Authority (APRA) has now released its report on the operations of private health insurers for 2022-23 – the first year since 2018-19 not affected by COVID-19 lockdowns.
It provides further confirmation that the private health insurance sector has emerged from the pandemic in an improved financial situation.
Compared with the pre-pandemic year of 2018-19, premium revenue in 2022-23 had increased by 11.1 percent, while benefits had increased by only 7.2 percent. Benefits in 2022-23 were only 2.4 percent higher than the previous year.
In the four years between 30 June 2019 and 30 June 2023 insurers added $2.7 billion dollars to their reserves – an increase of just over 20 percent.
Insurers could have increased their reserves even more if they had exercised more control over management expenses, which increased by $730 million or 32 percent over the four years.
Of course, insurers generally need reserves to cope with unforeseen circumstances. The events of recent years have shown the huge cost to general insurers of the increasing frequency and severity of cyclones, bushfires and floods.
However, even the worst global pandemic for a century has not increased pay-outs by Australian health insurers. And if a global pandemic has not pushed up claims, it is hard to think of any unforeseen event which would. An epidemic of dental caries, perhaps?
At the end of June this year, five of the 31 registered private health insurers had reserves greater than a year’s worth of premium income. They could not collect any premiums for 12 months, and still have net assets in reserve.
Another 15 had reserves equal to between six and 12 months of premium income.
Nine of the 11 insurers with less than six months premium income in reserve were for-profit, meaning surplus funds could be distributed to the owners, be they shareholders (Medibank or NIB) or parent companies (BUPA or Australian Unity). For-profit insurers can also obtain a capital injection from their owners if their reserves decline to the point that benefit payments could be jeopardised.
The level of reserves for virtually all insurers could easily cover substantial increases in benefit payments over the next year. For example, assume that for 2023-24 premium revenue does not increase over 2022-23, but benefits increase by 7.5 percent.
As the end of the year five insurers would still have reserves greater than 12 months of premium income (unchanged from 2022-23), and 14 would have reserves equal to between six and 12 months of premium income (a reduction of one from 2022-23). All but one insurer would still hold reserves of at least two months of premium income.
Last November I argued that:
“The Government should respond to the surge in reserves over the last two years [by] making clear its expectation that there is no need for insurers to increase premiums. And it should stand ready to reject any application from insurers in all but the most exceptional circumstances.”
Delete “two years”, insert “three years”, and the same argument can be made now. If the government is serious about addressing the cost of living, this is an easy win.
And if the boards of the many mutual insurers sitting on excess reserves really “put people before profits” (as their peak body claims), they would start drawing on their reserves rather than applying for unnecessary premium increases.
Charles Maskell-Knight PSM was a senior public servant in the Commonwealth Department of Health for over 25 years before retiring in 2021. He worked as a senior adviser to the Aged Care Royal Commission in 2019-20
Read more from Croakey’s archives on private health insurance
