Risk Equalisation – Time to think

differently?

Jamie Reid, Ellen Adamson,

Matthew Crane, Kris McCullough

© 2017 Finity Consulting Pty Ltd

This presentation has been prepared for the Actuaries Institute 2017 Actuaries Summit.

The Institute Council wishes it to be understood that opinions put forward herein are not necessarily those of the

Institute and the Council is not responsible for those opinions.

Contents

• Risk Equalisation – why, how and what’s wrong

• Projection of risk equalisation to 2030

• Future options: Is it time to think differently?

Risk Equalisation – Why, how and what’s wrong?

• Risk equalisation is required to ensure affordability of PHI

• Risk equalisationdistributes costs from older to younger policyholders.

• Current system is challenged by affordability and efficiency

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Under54

55-59 60-64 65-69 70-74 75-79 80-84 85+

Avera

ge a

nnual cla

im c

ost ($

)

Before Risk Equalisation After risk equalisation

Average all

Source: Finity analysis of APRA statistics, year ending 31 December 2016Amounts are for hospital claims only. Risk equalisation amounts do not include the high cost claims pool. We have reallocated children’s claim costs to their parents’ policies.

Impact on Insurers

Insurer (and market

share)

Gross deficit (receivable

from risk equalisation)

Calculated deficit

(payable to risk

equalisation)

Net receipt from /

(transfer to) other

insurers

BUPA (28%) 1,844 1,697 147

Medibank (27%) 1,720 1,651 69

HCF (11%) 673 698 (25)

nib (8%) 318 495 (177)

Industry total (100%) 6,140 6,140 0

Insurers with younger than average policyholders tend to be net

contributors to the risk equalisation pool, which transfers funds to insurers

with older than average policyholders.

Affordability - Participation

• Participation rates for 20-40 year olds are consistently the

lowest and have recently been decreasing

35%

40%

45%

50%

55%

60%

2010 2011 2012 2013 2014 2015 2016

Part

icip

ation (

% o

f people

with P

HI)

<20 20-40 40-55 55-75s 75+

Affordability – Flagfall Premium

Around 70% of the total

premium subsidises older

policyholders

(for a basic hospital policy costing $1,100

and assuming a calculated deficit of $750

per SEU)

0

100

200

300

400

500

600

700

800

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Calc

ula

ted

defi

cit

per

SE

U (

$)

Year ending 30 June

Average annual increase: 7.5%

Flagfall costs has grown faster than premium rates suggesting

younger people on basic products are bearing an increasing

share of PHI costs, despite their low claim rates.

Efficiency

• As the proportion of shared costs increases, the incentive for

an individual insurer to control claim costs reduces.

34%

36%

38%

40%

42%

44%

46%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

% o

f hospital

benefit

s s

hare

d

Year ending 30 June

Projection to 2030

ABP rules

HCCP

projections

ABS population

projection by age

band

PHI participation

rate assumptions by

age band

Insured population

projection by age band

APRA claims and utilisation data

+ inflation and utilisation assumptions

(all by age band)

Projected utilisation per

insured person by age

band

Projected service cost per

episode by age band

Projected total claims ($)

by age band

Projected risk

equalisation pool ($)

Projection – Participation Rates

• We have assumed current participation characteristics will

continue

35%

40%

45%

50%

55%

60%20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

20

26

20

27

20

28

20

29

20

30

<20 20-40 40-55 55-75 75+

Results

• Flagfall cost are projected to increases from around 65% of

Average Weekly Earnings to nearly 100% in 2030

• Over half of all hospital benefits are projected to be shared

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

% o

f A

WE

Calc

ula

ted d

eficit p

er

SE

U (

$)

Year ending 30 June

Flagfall cost ($ per year) Flagfall cost (% of AWE)

Projected annual increase: 9.2%

34%

36%

38%

40%

42%

44%

46%

48%

50%

52%

% o

f hospital

benefit

s s

hare

d

Year ending 30 June

Scenarios

Scenario Description Proportion of benefits

shared (2030)

Flagfall PHI premium ($ and % of AWE, 2030)

Base Participation continues to increase for 75+ age group, but remains around the current level for other age groups

51% $1,850, 98%

A Small reductions in participation rate for under 55s

- Participation rate for 20-40 year olds reduces to 35% in 2030 (currently 41%)

- Participation rate for 40-55 year olds reduces to 48% in 2030 (currently 51%)

53% $2,050, 109%

B Participation rates for all ages converge to 50% 50% $1,650, 94%

C Participation rates for all ages remain at June 2016 levels 50% $1,750, 94%

D Increase participation for under 55s to 80% (which is the level required to keep the flagfall at the around current proportion of AwE)

42% $1,150, 62%

E Claims inflation rate reduces from 4.55% to 4% 51% $1,700, 91%

F Claims inflation rate increases from 4.55% to 6% 51% $2,200, 118%

Time to think differently?

Policy Change Option Considerations

Keep current system

unchanged

• Participation of young people unlikely to increase. • Affordability concerns will not be alleviated.

Maintain a similar system but

pool a lower portion of claims

• Lower flagfall and slower growth. ✓• Increase participation of young people and improve the

affordability of basic policies. ✓• Increased complexity. • Would need to demonstrate that any changes are

equitable.

Move to a Prospective Risk

Equalisation System

• Incentivises insurers to control claim costs which should improve affordability. ✓

• Increased complexity.

Time to think differently?

Policy Change Option Considerations

Government IncentivesIncludes increasing the Medicare Levy Surcharge or extending the LHC scheme

to provide discounts

• Incentives will improve PHI participation . ✓• May be challenging for government to consistently

provide support.

Changes to Government Regulations to allow insurers to manage claims costs more efficiently

• Changes could enable insurers to provide more affordable basic policies. ✓

Time to think differently?

Policy Change Option Considerations

Changes to Community Rating Rules, including allowing higher premiums to be charged to individuals

with higher than average expected claim costs (or discounts to people with lower claim costs)

• Improve affordability for individuals with low claims costs. ✓• Encourages participation. ✓• Increased complexity. • Would need to be able to demonstrate fairness of

changes to longstanding members.

Introducing Young Adult

Policies

• Provide better value for money for young people. ✓• Encourages greater participation. ✓• Increased complexity. • Would need to be able to demonstrate fairness of

changes to longstanding members.

Conclusion

• A discount for young people is effectively a penalty for

everyone else

• New measures are necessary to ensure continued high

participation rates

• Is it time to stop debating and start acting?

Appendix A – Historical Risk Equalisation

Arrangements

0%

10%

20%

30%

40%

50%

60%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

% o

f B

en

efi

ts E

qu

alised

Be

ne

fit A

mo

un

ts $

m

Year Ending JuneTotal Hospital Benefits Paid

Benefits subject to risk equalisation

Risk equalisation %

Reduction in % of benefits

Lifetime health cover introduced

New RE arrangements