The Australian Prudential Regulation Authority (APRA) is working on ensuring that it has sufficiently developed processes and powers to facilitate – or force, if necessary – mergers between private health insurance (PHI) funds or transfers of insurance policies if it considers that policyholders’ interests are under threat.
APRA executive board member Geoff Summerhayes said this in a speech on 4 February in which he explained that because smaller PHIs are taking limited action to address affordability challenges, APRA is increasingly coming to the conclusion that industry consolidation is “probably inevitable”.
He conceded that APRA has observed positive signs from some PHIs that they are tackling the sustainability challenge head-on. But it is the larger PHIs that have been most active in these areas to date.
He said that while smaller PHIs have their own natural advantages: specialised knowledge of niche markets, deep connections to local communities and a not-for-profit ethos that appeals to many customers, they have less ability to absorb the cost pressures or invest in the types of innovative service and technological solutions that the top five PHIs are exploring.
Mr Summerhayes added, “This, however, will not be accepted by APRA as an excuse for inaction. Rather, it makes it all the more important that PHIs concentrate on those lower-cost factors they can better control, particularly in the areas of governance, business planning and risk management.”
He also suggested that smaller PHIs could very quickly increase scale and financial resourcing by pursuing a merger.
He said that APRA had made clear that ‘at risk’ insurers should consider potential merger partners, and start discussions early, to put them in a stronger position to act quickly if their position becomes unviable. This level of preparedness not only benefits the PHI, but more importantly, helps to protect policyholders.He said, “As I stated two years ago, APRA has no desire to see health funds that have served their communities for decades lose their unique identities through mergers, or possibly be forced to wind-up. But we will not allow sentimentality to get in the way of protecting policyholders’ interests.”
Mr Summerhayes indicated that APRA had begun to take action. The regulator had previously expressed disappointment with the industry’s response to the sustainability challenge, with too many PHIs seemingly waiting for the government to find a miracle cure.
Consequently, APRA asked all insurers to submit a robust, proactive recovery plan, including a “Plan B”, with “at risk” PHIs asked to sound out a potential merger partner in case their plan isn’t successful.
The first tranche of those recovery plans, from the insurers classified as “Highest risk”, were submitted in December, with the bigger PHIs’ plans due by 30 March and the remainder to submit their plans by end-of-June.