The Australian Prudential Regulation Authority (APRA) has released a response paper and draft prudential standards to seek further industry feedback on measures designed to strengthen the capital framework for private health insurance (PHI) in Australia.
A report released in October based on data collected by the Private Health Insurance Administration Council (PHIAC) and APRA found that the PHI industry's total revenue hit $26.4 billion, while total fund benefits reached $21.9 billion, total expenses landed at $2.5 billion, and surplus (deficit) after tax was $1.5 billion for the financial year 2020-21 (FY2020-21).
APRA's draft prudential standards released yesterday include proposed reforms to increase the PHI industry's financial resilience and confidence that private health insurers can continue to pay all legitimate claims from policyholders even under severe stress.
Commenting on the response paper and draft prudential standards, APRA Deputy Chair Helen Rowell said: “APRA's capital standards play an essential role in ensuring private health insurers have the financial resources to meet their commitments to policyholders, even in the event of unexpected loss or crisis.
“Although Australia's private health insurance industry remains well capitalised, the PHI capital framework is currently less robust than the framework for other APRA-regulated insurance industries. It's also not sufficiently sensitive to the specific risks health insurers face, especially at a time when industry profitability is being adversely impacted by an ageing membership profile and rising costs.”
Reforming the PHI industry's capital framework is the third and final phase of APRA's PHI Roadmap, following the earlier completion of Phase 1 (risk management) and Phase 2 (governance).
The new framework is based on the life and general insurance capital framework (LAGIC), but was adapted to suit the different features of PHI. As a result, this consultation is closely linked to the consultation released earlier during the same day that focused on aligning the life and general insurance capital and reporting frameworks with the new accounting standard AASB-17.
“These changes seek to address current weaknesses in the capital framework and bring it in line with the framework we use for other insurance industries,” Rowell said.
APRA will receive feedback on the new capital framework until March 31, 2022. It expects to release the final standards in the second half of the year.