Unhealthy competition

Platform:As we gently nudge into 2008, we all know what kind of health service we have got. We also know the cost of private health insurance. But what about community rating, where everyone is supposed to pay the same amount of health insurance regardless of age?

Even many of those opposed to the imposition of risk equalisation, where insurers with lower cost-claims ratios - a younger age profile - compensate those with higher cost-claims ratios - an older age profile - are in favour of community rating. Yet this was being eroded by the proliferation of company-type packages in 2007 - a trend that is likely to intensify this year.

Those offering these packages can claim, rightly, that anyone, regardless of age, can participate, but in reality this does not happen. For example, the Life Stage plan being offered by VHI doesn't include cardiac in the Mater Private and Blackrock hospitals, which may not suit the older member. And Mercer, in a recent bulletin, noted that Quinn Healthcare had launched two new suites for the corporate market (where most of the big returns are). "These plans," it said, "are modified versions of the existing consumer plans and are priced more competitively to retain and win corporate business."

Overall, it is understood that there are some 120 plans in the market, more than 40 of which have been launched in the past six months.

The effect is that the older insurers end up paying a disproportionate amount and this will continue, thereby eroding the very foundation of community rating.

The cynics may well ask those who are offering these packages why they don't have packages for the over-65s, the pensioners, or indeed a package directed at, say, convents?

The answer, of course, is that these are expensive to service and any commercial organisation worth its salt will aim at the younger-aged, lower-cost areas.

Those who believe that this trend will be erased if risk equalisation is introduced would be living in cloud-cuckoo land. The impact would, of course, be eased but this would depend on the eventual extent of such payments.

The future of risk equalisation is dependent on the outcome of a number of court challenges. The more immediate include a Bupa challenge to the European courts on a decision that risk equalisation did not constitute state aid; a decision is expected on February 12th.

A Supreme Court ruling on Bupa's challenge of the High Court decision in December on the constitutionality of the scheme is also imminent.

Only when these, and other, actions are resolved can the future of VHI finally be determined. It will not be surprising if the Supreme Court waits for the EU decision before revealing its ruling.

Bupa, and now Quinn and Vivas, have complained that VHI operates at an advantage, as it does not come under the rigorous authority of the Irish Financial Services Regulatory Authority, but this is about to change shortly.

In order to gain a licence to operate from the financial regulator, VHI needs to bring its solvency ratio up to 40 per cent - it was 27.1 per cent last year - and has to produce three sets of forecasts: optimistic, central and pessimistic.

The issue of optimistic and central forecasts should not be problematic. Optimistic would include full payments under risk-equalisation; central would incorporate a moderate view of the payments.

VHI's year-end is February 28th, shortly after the EU judgment, and if this and the Supreme Court judgments are favourable, it could write back some of its risk-equalisation reserves - technical reserves amounted to €65 million last year - which would bring the solvency rate up to 35 per cent.

It could be argued that the 40 per cent target is too high for health insurance - it would require an injection of some €50 million into the VHI.

However, a new EU solvency directive is not expected before 2010 and a spokesman for the financial regulator said the solvency rate (of 40 per cent) "will apply to all firms" within the industry. So there does not appear to be any softening there.

VHI has until the end of 2008 to satisfy the 40 per cent requirement, which it could meet from its own resources with a little financial manipulation using unsubordinated loans and/or reinsurance.

However, in the absence of a positive determination of the risk-equalisation issues, the production of a pessimistic forecast, over three years, could prove to be problematic. These forecasts are likely to show breaches of the solvency rules. While the financial regulator could argue that these would be subject to discussions, it could hardly agree to VHI having more favourable solvency rules.

But what about Quinn and Vivas having to pay a full whack of risk equalisation? Would they then not have equal problems of meeting their solvency requirements?

Not likely. The Quinn insurance group is a very substantial, rapidly growing, financially rich firm. It had premium income of €779 million and pre-tax profit of €323 million in 2006.

And according to documents filed with the Companies Office, Vivas gave a letter of undertaking from all shareholders to invest further capital "if required for the purpose of maintaining the necessary Ifsra solvency standard, pro rata to their respective shareholding in the company".

With AIB and financier Dermot Desmond as major shareholders, maintaining the standard should not prove to be a problem.

While Minister for Health, Mary Harney, has said the ownership issue of VHI will not be addressed this year, it is clear that the next few months will be crucial for the future of VHI.

However, whatever the outcome, it will not stop the continued erosion of community rating.