C ontemporary Is s ues in P rivate Health Ins uranc e

Health Practice Committee:Andrew Gale

Ben OoiDavid Watson

Outline• Membership trends, price increases• FY10 State of the Industry• Mergers and acquisitions activity• Cost pressures on health and health insurance• Political influences• PHI stakeholders• PHIAC activities & other developments• HPC activities

Members hip T rends

Source: PHIAC Membership trends

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

Hospital Treatment Coverage (insured persons as % of population)

Introduction of Life Time Health Cover from 1 July 2000

Commonwealth medical benefits at 30% flat rate restricted to those with at least basic medical cover from September 1981

Introduction of Medicare from 1 February 1984

Medibank began on 1 July 1975. A program of universal, non contributory, health insurance it replaced a system of government subsidised voluntary health insurance. Introduction of 30% Rebate

from 1 January 1999

Higher rebates for older persons from 1 April 2005

1 July 1997. A Medicare Levy Surcharge (MLS) of 1% of taxable income is introduced for higher income earners who do not take out private health insurance.

31 October 2008. Increase in MLS income thresholds, subject to annual adjustment.

Members hip T rends• MLS impact• GFC impact• Slowing/stablising

growth rate

Hospital persons growth (quarter on previous year quarter)

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Members hip growth by fundsHospital policies - Aust

Jun-08 Jun-09 Jun-10FY09 growth

FY10 growth 2 year growth

NHBA 2,055 3,036 3,881 47.7% 27.8% 88.9%RT 16,754 20,230 22,441 20.7% 10.9% 33.9%Latrobe 28,772 32,262 36,168 12.1% 12.1% 25.7%DHF 5,118 5,707 6,368 11.5% 11.6% 24.4%GMHBA 65,407 73,814 79,294 12.9% 7.4% 21.2%GUC 14,811 15,824 17,723 6.8% 12.0% 19.7%Police 12,231 13,561 14,530 10.9% 7.1% 18.8%CDH 2,107 2,360 2,476 12.0% 4.9% 17.5%

MPL 1,314,331 1,340,856 1,359,949 2.0% 1.4% 3.5% large open insurersAHM 143,355 147,601 147,551 3.0% 0.0% 2.9%

BUPAAH 461,944 469,372 474,936 1.6% 1.2% 2.8%BUPAAPL 719,946 735,802 754,061 2.2% 2.5% 4.7%MBF Alli 79,154 76,415 73,325 -3.5% -4.0% -7.4%

HCF 414,507 428,016 446,803 3.3% 4.4% 7.8%MU 75,951 71,540 66,543 -5.8% -7.0% -12.4%

HBF 304,887 316,599 321,970 3.8% 1.7% 5.6%H'guard 24,735 24,377 24,345 -1.4% -0.1% -1.6%

NIB 332,360 348,918 368,768 5.0% 5.7% 11.0%

Industry 4,585,293 4,702,669 4,822,120 2.6% 2.5% 5.2%

Market S hare

* Based on whole fund policies

Jun-10 Jun-09MPL 28.4% 28.7%AHM 2.9% 3.0%

BUPAAPL 15.7% 15.7%BUPAAH 9.7% 9.8%MBF Alli 1.7% 2.0%

NIB 7.3% 7.0%

MU 1.2% 1.5%

AUHL 3.0% 3.2%GUC 0.3% 0.3%

NHBA 0.1% 0.0%

For profit 70.4% 71.3%

Non-for-profit 29.6% 28.7%

Members hip T rendsChange in hospital persons covered by age

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

0-24 25-39 40-59 60+ Total

2001200220032004200520062007200820092010

Members hip T rends 2

Hospital Coverage by Age Group

30%

35%

40%

45%

50%

55%

60%

Jun 01 Jun 02 Jun 03 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10

% o

f pop

ulat

ion

30%

35%

40%

45%

50%

55%

60%

25-3435-4445-5455-6465-8485+All

Impact of Ageing

Data Source: PHIAC Membership and Benefit trends are based on December quarter end data.

Hospital Insurance Risk Profile change

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Hosp

ital In

suran

ce R

isk P

rofile

chan

ge

Average age (hospital persons - Australia)

36.50

37.00

37.50

38.00

38.50

39.00

39.50

40.00

40.50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

P rice Increas esAverage Contribution Rate Increase

7.0% 6.8%

4.9%

1.8%

0.0%

6.9%7.4% 7.6%

8.0%

5.7%

4.5%5.0%

6.0% 5.8% 5.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

P rice Increas e – 2011 vs 2010Rate increases

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

0.0% 0.1% 1.0% 10.0% 100.0%

Market share (number of whole fund policies) (log scale)

% in

crea

se (F

CI)

Apr-10 Apr-11

P rice Increas e vs Net MarginRate Increase vs Net Margin by fund

R2 = 0.61320%

3%

6%

9%

12%

15%

-10% -5% 0% 5% 10% 15%

2009/10 Net Margin

Apr 1

1 Ra

te In

crea

se

P rice Increas e vs S olvency MultipleRate Increase vs Solvency Multiple by fund

y = -0.0015x + 0.0646R2 = 0.0532

0%

3%

6%

9%

12%

15%

0 2 4 6 8 10 12 14 16

June 2010 Solvency Multiple

Apr 1

1 Ra

te In

crea

se

F Y 10 S tate of the Indus tryFY10 FY09 FY08 FY07

Number of players 37* 37 38 38Revenue $14.2b $13.1b $12.2b $11.8bGross margin (%) 13.7% 13.2% 14.8% 15.2%MER 9.2% 10.0% 10.5% 9.6%Net margin (%) 4.5% 3.2% 4.3% 5.6%Net margin ($) $669m $413m $513m $616mProfit before tax $1.17b $405m $562m $1.29bCapital Adequacy Capital Risk Multiple 2.67 2.37 2.73 NA* 35 at Oct 2010

• 10 open and for-profit, including 1 listed• 13 restricted• 14 open and not-for-profit

More recently.. . .Financial Performance ($b)

12 months to Dec 2010

12 months to Dec 2009

Revenue 14.78 13.63Benefits (including levies) (12.72) (11.84)Gross margin 2.05 1.79

Expenses (1.35) (1.27)Investment income 0.50 0.54HBF Profit 1.20 1.07Tax and Extras (0.25) (0.15)

Insurer Profit after tax 0.95 0.92Gross margin 13.9% 13.1%MER 9.0% 9.2%Net margin 4.9% 3.9%Capital adequacy risk multiple 2.66 2.53

F inancial performancePrivate Health Insurance Industry Profitability

-10%

-5%

0%

5%

10%

15%

20%

25%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Financial year

% o

f con

trib

utio

n in

com

e

Gross Margin Ratio

Net Margin Ratio (Gross margin ratio less MER)

Profit Margin Ratio (Net Margin Ratio + investment and other income, before abnormal, extraordinary and tax)

Management expens esManagement expenses - FY10

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0.01% 0.10% 1.00% 10.00% 100.00%

Market share (% of total whole fund policies) (log scale)

ME

R (%

of c

ontr

ibut

ions

)

R is k equalis ation

Year Gross deficit ($m)

Hospital and medical

benefits ($m)

% of hospital and medical

benefitsSEU (m)

Gross deficit per

SEU

Increase in gross deficit

per SEU

CY04 2,053 5,570 36.9% 6.24 329CY05 2,173 5,869 37.0% 6.31 345 4.7%CY06 2,366 6,348 37.3% 6.43 368 6.8%CY07 2,737 7,110 38.5% 6.61 414 12.5%CY08 3,081 7,805 39.5% 6.87 449 8.3%CY09 3,430 8,600 39.9% 7.04 487 8.6%CY10 3,765 9,306 40.5% 7.21 522 7.2%

R is k equalis ation• New arrangement commenced June 2007 quarter• Pool continues to grow, with HCCP relatively immaterial

Gross deficit

400

500

600

700

800

900

1,000

1,100

Jun-0

5Se

p-05

Dec-0

5Ma

r-06

Jun-0

6Se

p-06

Dec-0

6Ma

r-07

Jun-0

7Se

p-07

Dec-0

7Ma

r-08

Jun-0

8Se

p-08

Dec-0

8Ma

r-09

Jun-0

9Se

p-09

Dec-0

9Ma

r-10

Jun-1

0Se

p-10

Dec-1

0

Quarter

$m

old new

P rivate Health Ins urance Act 2007• 4 years since commencement•Supporting rules have been amended.•RETF review?•New Capital Standard?

Merger & Acquis ition ActivityJune 2008 MBF Group purchased by BUPA UK (owner of BUPA Aust)

Oct 2008 NIB rejected takeover offer

Oct 2008 Druids VIC merged into GMHBA

Dec 2008 Manchester Unity acquired by HCF

Jan 2009 AHM acquired by MPL

Nov 2010 GMHBA rejected takeover offer

C os t pres s ures on health and health ins uranc e

Health insurance cost pressures Health cost pressures

•Benefits for medical services•Growth in utilisation•Expansion in no-gap benefits•Growth in use of contracts•Private hospital contracting•Consumer education & expectation•Table drift

•Health spending is 9.5% of GDP (AIHW excl residential aged care)•Technology advances•Prostheses and other devices•Pharmaceuticals•Medical procedures and treatment techniques•Ageing population

P olitical influences - 1• Government Support

–Rebate - 30% rebate for under 65s, 35% for 65-69, 40% for 70+, continues

–Medicare levy surcharge - threshold changed from $50k/$100k to $70k/$140k for single/families subject to indexation – (now $77k/$154k)

–Lifetime Health Cover • PHIO

–State of Health Funds report (2010: 7th edition) released in March 2011

• Updates

– Revised privatehealth.gov.au website

– First LHC “graduates” no longer to pay the loading from July 2010– National Health Hospitals Reform Commission Report

• Medicare Select

• Denticare

• Medical Local• Public hospital governance

– Means testing of MLS and rebate (rebate tiers) still proposed for 1 July 2011?

P olitical Influences - 2

P HI S takeholders

Customers/ policyholders/ members

DoHA PHIAC

PHIO ACCC

Privacy Commissioner

Regulators/ Government Providers

Doctors, other

providers

Private Hospitals

Institute of Actuaries of

Australia

Rating agencies (eg S&P, Choice,

Global Reviews)

Others

Brokers (eg iSelect,

moneytime, etc)

Private Health Insurers

P HIAC Activities• 3 New Commissioners including a new Chair. • A number of Standard Operating Procedures (SOPs)• Continued attention on Risk Management and Corporate

Governance• Capital standards review?• Employed its first FIAA – Hadyn Bernau (total 5 members

of the Institute)• New standards for governance and disclosure

P HIAC and P HI AAs• PHIAC and PHI AAs met in 2010 to discuss the

PHI AA role.• PHIAC is supportive of PS600 development• PHIAC have also had discussions with individual

AAs regarding PHI FCRs

G overnance S tandard• Commenced from 1 Jan 2010• Key changes:

–Board composition and independence–Every Board must have a Board Charter–Boards should be constantly examining their own performance–Every insurer must have a Board Audit Committee–Boards must ensure that PHIAC has access to senior management

IF R S Developments• Boundary of contract issue – considered long-

tailed contract and requires projections• Submissions made in Nov 2010

Health P ractice C ommittee• Professional standards PS600 - draft• Reviewing Guidance Notes

– GN 650 Liabilities– GN 660 Projections– GN 670 FCR

• Updated Private Health Insurance Online CPD course• PHI Newsletter (has achieved 223 editions)• Held 6 meetings per year• AA lunches• 2011: Increased focus on wider health

Vale T ig Melville (1926-2010)• Significant contribution to health

insurance• Long term and strong support of health

actuaries• Tig Melville Health Prize

Dis cus s ion / Ques tions