The Australian Prudential Regulation Authority (APRA) has released a package of proposed measures titled: Governance, fit and proper, audit and disclosure requirements for private health insurers for consultation. APRA writes that the package aims to introduce stronger prudential standards that have successfully lifted capabilities across other APRA regulated industries. The consultation is focused on assessing the 'appropriateness' of APRA's proposed revised, cross industry standards to the Private Health Insurance (PHI) context, more particularly on whether changes should be made to accommodate industry specific circumstances. APRA states that, as was the case when Prudential Standard CPS 220 Risk Management was introduced, applications for alternative arrangements will be considered once the standards are finalised.
Timeline: Stakeholders have until 2 May to review the consultation package. Subject to consultation outcomes, APRA intends to finalise the framework in 2018, to enable all new requirements to come into effect from 1 July 2019.
Executive Board Member Geoff Summerhayes commented that that the proposed reforms will: 'strengthen resilience by increasing the likelihood that boards, senior managers, auditors and actuaries will identify and take decisive action on emerging issues. We also expect policyholders to benefit through a reduction in the risk of failure arising from fraud, mismanagement, or other undesirable practices.'
Context: Part of APRA's review of the prudential framework for private health insurance
APRA writes that the consultation is part of Phase Two of APRA’s roadmap for comprehensively reviewing the prudential framework for private health insurance, launched in August 2016
Phase One, APRA notes, resulted in the adoption from 1 April this year of CPS 220 Risk Management (APRA’s cross-industry risk management prudential standard). APRA notes that other aspects of Phase One, including operational risk and the role of the actuary, remain ongoing.
APRA states that the Phase Three of the roadmap (examining the industry’s capital standards), is likely to commence later this year.
[Sources: APRA media release: 07/02/2018; Discussion Paper: Governance, Fit and Proper, Audit and Disclosure Requirements; Prudential Standard CPS 510 Governance (updates to include PHI); Prudential Standard CPS 520 Fit and Proper (updates to include PHI); Prudential Standard HPS 310 Audit; Prudential Standard HPS 001 Definitions (updates to include CPS 510, 520 and HPS 310)]
Speech by Geoff Summerhayes: 'Health Insurer, heal thyself: APRA's prescription for financial sustainability'
Separately, APRA has released a speech given by Executive Board Member Geoff Summerhayes to the Members Health Fund Alliance: 'Health Insurer, heal thyself: APRA's prescription for financial sustainability' in which he outlined 'APRA’s perspective on the strengths and weaknesses' as well as the emerging risks in the private health insurance (PHI) sector, outlined the actions (described above) APRA is taking to 'shore up the resilience' of the sector and provided 'guidance on the measures all funds, regardless of size and resourcing, should consider to ensure they are set up to remain viable for the long-term'.
Key points included the following.
APRA has no current prudential concerns about the PHI Industry : 'I’d like to state clearly that APRA has no current prudential concerns about the state of Australia’s private health insurance industry. That was true in 2015 and it’s true now in 2018, but I’m not sure how much longer APRA will hold that view.' He added that affordability and consumer behaviour are challenges for the industry, and increasingly areas of concern.
Mr Summerhayes also referenced the importance of strong governance structures in managing risk: 'Whether cyber-security, trust and reputation, affordability or policy and regulation, all financial institutions are exposed to risk – but not all are equally vulnerable. Those entities with superior governance, business planning and risk management processes are better placed to adapt to change and overcome threats'.
Fewer providers in future? Mr Summerhayes stated that 'in APRA’s experience, it is often institutions with lower levels of scale, access to resources and technical sophistication that find this most challenging…APRA believes 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. 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'.
Parallels with superannuation? Mr Summerhayes commented that the structure of the superannuation industry and the private health insurance industry while not identical share similarities, and noted that given these similarities APRA is 'undertaking a piece of work to consider whether similar issues are at play in health insurance. The review is examining a range of metrics to identify insurers that may have sustainability issues and should provide some answers when it’s completed' as to whether consolidation is necessary to protect policyholders' interests (as APRA found to be the case in superannuation).
[Note: In commenting on the parallels with the superannuation industry, Mr Summerhayes referenced a speech given by APRA Deputy Chair, Helen Rowell in November 2017: Enhancing Australia's superannuation system: a vision of a sustainable future. Among other things, the speech flagged the release of a consultation package which proposes to strengthen existing prudential standards and intensify pressure on underperforming superannuation funds. See: Governance News 4/11/2017. A consultation package was released by APRA in December 2017: December 2017 - Strengthening superannuation member outcomes. See: Governance News 18/12/2017]