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Operations Of The Private Health Insurers Annual Report 2006-07

Commissioner's Overview

This is my first report as Commissioner and covers the financial year to 30 June 2007.

It is pleasing to report that the private health insurance industry continues to be strong. This result is a combination of lower than expected claims and the buoyant economy which has contributed significantly to investment income. The industry recorded a surplus for the year of $1,288 million before tax and extraordinary items. Of this surplus, some $616 million was derived from core health insurance operations. Investment returns and health related business accounted for $672 million. Benefit outlays grew by $679 million or 7.8%, continuing the trend whereby health expenditure has continued to rise by more than the consumer price index.

Fund review program

PHIAC has effectively completed the first round fund review program with only two reviews outstanding at the end of the financial year. We are now looking towards the second round program which will be more specifically targeted on potential areas of risk for the funds and for PHIAC.

PHIAC appreciates the assistance from the Australian Prudential Regulation Authority (APRA) in undertaking the reviews of the larger funds. This is of benefit to both organisations as a number of the larger health funds have insurance subsidiaries regulated by APRA.

Corporate governance

PHIAC is generally satisfied with the standard of governance throughout the industry but will continue to expect funds to maintain and improve on high standards. The introduction in the last year of the Private Health Insurance Act 2007 underscores PHIAC’s responsibility for prudential standards for the industry. PHIAC has established a prudential standard for information requirements for appointed actuaries and is looking at a number of other standards including corporate governance and risk management. These will be developed through strong consultation with the industry. Good governance is vital to ensuring that policy holders can be confident that the funds with which they insure are well-managed and financially sound.

PHIAC has continued to provide specific training for non-executive directors of health benefit funds over the last year. The broader program is focused on specific health insurance issues such as risk equalisation, prudential standards, products, pricing and governance. However, we also presented a program updating directors on the changes that arose from the implementation of the new Private Health Insurance Act. PHIAC will continue to review and update this program based on the needs of, and feedback from, the industry.

New legislation

On 1 April 2007, the Private Health Insurance Act came into effect, superseding parts of the National Health Act 1953. Broader health cover under the new Act allows new types of funding by insurers in settings outside of hospital and recognises that there are alternative methods of service delivery. Insurers will probably focus initially on chronic conditions and encouraging healthy lifestyles.

The Private Health Insurance Act also provided a number of challenges for PHIAC. The major requirement is that all insurers must re-register before 1 July 2008 or they will be unable to offer private health insurance. PHIAC has established a project team to manage the re-registration process and we are working with the Department of Health and Ageing and the industry to ensure that insurers are re-registered appropriately and within the legislated timeframe.

PHIAC will move to complete the review of capital standards intended for last year but delayed while insurers implemented the new legislation. Our intention is to finalise the standards for implementation in January 2009. This process will involve extensive industry consultation. PHIAC has commenced the first phase of the review.

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Industry change

The new legislation provided the opportunity for insurers to demutualise and change their status from not-for-profit to for-profit, provided that PHIAC is comfortable that certain accountability requirements were met. One health fund, NIB, changed its status after the completion of the financial year. That fund enjoyed a buoyant reception when it listed on the Australian Stock Exchange in November 2007.

Subject to the PHIAC overview, the Board of MBF has announced its intention to proceed to a listing in February 2008. BUPA Australia has also announced interest in merging with MBF. The Medibank Private sale legislation passed through the Parliament although it not clear whether the sale will proceed.

PHIAC in its supervisory role would recommend that the boards of all health insurers familiarise themselves with the Stock Exchange market for their industry. They should also keep a close watch on the changing landscape to ensure that they continue to protect the interests of policy holders at this time of change. The arrival of the health insurance industry on the Stock Exchange will present both challenges and opportunities.

Previous Commissioner

I would also like to note the service of the previous Commissioner Mr Garry Richardson who retired in July 2007 after nine years of service to the industry. I would like to thank him and wish him well.

This annual report will be available online from PHIAC’s website after it is tabled. The information will be in readily accessible formats to encourage widespread access. PHIAC values comments from readers of the report. Please do not hesitate to convey your views via our email address at phiac@phiac.gov.au

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James Dominguez CBE AM
Commissioner

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