Mergers should be at least under active consideration by health insurers with low or negative member growth, and which only have small membership bases to begin with, Mr Geoff Summerhayes, APRA Executive Board Member, has said.
In a speech last month, he said: “Even boards with no such concerns about their fund’s viability should have discussed the issue of mergers as part of their normal strategic reviews. It is very much in their best interests to have thought about compatible future partners and how a merger might be structured well ahead of any need to put the plan into action – rather than being coerced into a marriage of inconvenience or forced to wind up.”
Smaller players are not necessarily less viable
He said that entities with superior governance, business planning and risk management processes are better placed to adapt to change and overcome threats.
“It is entirely possible for smaller funds with fewer resources to be among this group, but in APRA’s experience, it is often institutions with lower levels of scale, access to resources and technical sophistication that find this most challenging,” he said.
In private health insurance, the largest four funds own 66% of the assets. The other 33 funds divide up the remaining third. He said that it should not be assumed that smaller health insurers are less viable and less competently run than larger insurers. In fact, many of the industry’s smaller players are performing well, but the data also raises a few red flags for APRA.
From APRA’s perspective, these seemingly positive metrics for smaller health funds – growing membership and rising premium income – tell only a superficial story, he said.
Rapid growth in members can mean a rapid growth in risk depending on how it has been cultivated. If insurers have lured new customers with low premiums or expanded benefits, they may face pressure on capital or cash flow if hit by a related spike in claims. If the market is rushing to exploit a vulnerability in a product that the insurer has failed to identify, it risks potentially major payouts that may threaten sustainability.
Boards must monitor performance of all products
APRA expects boards to closely monitor the performance of all products, and seek to amend their business strategy if doubts emerge about their ability to cope with future claims. Boards must act promptly and decisively where they identify prudential risks.
Mr Summerhayes added that APRA has no desire to see health funds that have served their communities for decades lose their unique identities through mergers, or possibly forced to wind-up. However, as the inter-related challenges of affordability and adverse selection bite ever harder, APRA is looking closely for signs that insurers may breach prudential standards or become unsustainable.
“If necessary, we will act decisively to protect beneficiaries and the industry as a whole from the harm a failure would cause, including by enforcing wind-ups or mergers,” he warned. A