When considering whether to approve increases in private health insurance premiums, the Government should prioritise the interests of policy holders rather than the industry’s shareholders, suggests one health policy analyst.
“William Foggin” writes:
It is that time of year. The cricket season is over, and the AFL is getting under way. And private health insurance premiums are increasing.
When announcing the premium increase two days before Christmas last year, Minister Dutton gave the ritual reassurance that “each application [for a premium increase] has been closely scrutinised to ensure the increases sought are fully justified”.
The person in the street could believe that “fully justified” means the increases are the minimum necessary to ensure that claims are met and the insurer remains solvent.
Far from it.
The increase of 6.2% announced by Mr Dutton will bring in around $1.1 billion additional revenue in the next twelve months. In the 2012-13 financial year private health insurers took dividends and other capital payments of $1.0 billion from their reserves (See PHIAC 2012-13 report on the operations of private health insurers at page 30). Were it not for these payments, premiums need not have increased.
In fact, over the last four years insurers have withdrawn $4.1 billion from their health insurance funds. They have also paid just over $1 billion in company tax. The average post-tax surplus as a percentage of funds invested has been just under 20%.
Over the last four years the Commonwealth has paid a little over $19 billion in premium rebates. It has received a billion back in company tax, but almost a quarter of the rest has gone to private health insurance shareholders in dividends or capital contributions.
Despite the handsome returns on investment, the insurers have been able to maintain very high levels of reserves. Over the four years they have maintained reserves of at least three times the minimum requirement of around $1.75 billion, and on 30 June 2013 had excess reserves of almost $4 billion.
Due to steady increases in membership, actual premium income growth over the last four years has averaged several percentage points over the announced average increase in premium rates. However, every announced percentage point rise in premiums raises between $150 and $200 million. On this basis premiums could stay unchanged for at least three years and the insurers would still be able to meet solvency requirements by running down their $4 billion in excess reserves.
Why aren’t governments tougher on insurers?
One reason is the very risk-averse approach taken by the industry regulator, the Private Health Insurance Administration Council, which has a policy position that insurers should always make an underwriting profit – or conversely, should never make an underwriting loss. This advice means premiums are set without taking into account the substantial investment earnings insurers make, which averaged almost half a billion dollars a year over the last four years.
Although investment returns can be unstable – the industry earned virtually nothing over the two financial years including the GFC – an insistence on always budgeting for an underwriting profit only makes sense if insurers are sailing close to the wind with their reserves. They clearly aren’t.
(There is also an argument about the level of the minimum reserve requirements. Private health insurance is a short-tail business – indeed, it has many characteristics of a Ponzi scheme – and in the 1990s one large insurer operated successfully for many years with reserves well under the statutory minimum.)
Governments may also be sensitive to arguments that the regulatory power over premiums should not be used to prevent owners from making a reasonable return on their investment.
However, all for-profit insurers entered the market, or converted from not-for-profit status, in a regulatory environment in which the government had the power to set premiums. This was a known sovereign risk that proponents of for-profit status accepted.
The government should not be squeamish about crystallising that risk if it wants to protect the interests of people paying premiums, rather than people holding shares.
• “William Foggin” is the pen-name of a health policy analyst who wishes to remain anonymous.