APRA proposes new capital framework for private health insurance

The Australian Prudential Regulation Authority (APRA) has commenced a consultation aimed at updating and strengthening the capital framework for private health insurance (PHI).



APRA’s capital standards play an essential role in ensuring that private health insurers have the financial resources available to meet their commitments to policyholders, even in the event of unexpected stress or losses.



APRA’s review of the PHI capital framework represents the third and final phase of the PHI Policy Roadmap. APRA released the Roadmap in 2016, after assuming regulatory responsibility for the industry, to outline its approach to a comprehensive review of PHI prudential standards. Phase 1 (risk management) and Phase 2 (governance) of the Roadmap are now complete.



In a discussion paper released today, APRA set out its proposed structure for the future PHI capital framework including:

• aligning the PHI capital framework with the framework applying to life and general insurers, unless characteristics of the industry warrant a different approach;
• integrating changes stemming from the Australian Accounting Standards Board’s new standard AASB 17 Insurance Contracts (AASB 17); and 
• applying the capital framework to the insurer’s entire business, rather than just the health benefits fund.

The changes are aimed at improving the sensitivity of prudential capital requirements to the risks private health insurers face, and improving the comparability of performance between insurers.



APRA Executive Board Member Geoff Summerhayes said the proposals were not expected to result in significant changes to minimum capital requirements or materially impact premiums.



“With the PHI industry under pressure from the twin dilemmas of worsening affordability and adverse selection, a strong capital base is vital to keep insurers resilient and able to pay all legitimate claims from policyholders,” Mr Summerhayes said.



“While it’s possible the revised framework may increase some insurers’ minimum capital requirements, we don’t expect this to be significant. Importantly, APRA’s capital requirements do not have a material impact on premiums so they will not contribute to the affordability problem that has pushed many policyholders to cancel or downgrade their cover.



“A strengthened capital framework will boost insurer resilience, however, it’s not enough in isolation to help the industry overcome with the challenges of a shrinking and ageing membership base. APRA continues to urge PHIs to develop robust, actionable strategies to address sustainability risks, and a recovery plan that outlines how they will respond if their strategy is not successful.



“While some insurers are evolving their business, innovating and looking at new models to provide services to their members, this is not the case with many. APRA has expressed concerns about the resilience of the sector and this has informed our approach to a comprehensive review of risk management, governance and now capital standards for PHIs.”



The consultation will close on 27 March 2020, with APRA expected to release draft updated prudential standards in the second half of next year for further consultation.



APRA’s intent is to implement the finalised PHI capital framework from 1 July 2023 to align with its proposed adoption of AASB 17 for prudential purposes.



The discussion paper is available on the APRA website at Discussion paper: Private Health Insurance Capital Standards Review.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $6.5 trillion in assets for Australian depositors, policyholders and superannuation fund members.