Competition in the Irish Private Health Insurance Market

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Recommendation 8 The Minister for Health and Children should consider amending the Risk Equalisation Scheme by extending the phase-in period for new entrants, for example, as follows; - no payments for the first three years - payments in the fourth year at 25% of the full amount, rising to 50% and 75% in subsequent years and reaching 100% in the seventh year. Action By Minister for Health and Children 5.21 This proposed change would probably assist competition in the market. A change of this nature can be carried out by means of Ministerial regulation. The impact of any change in phasing would be monitored by the Authority as part of its ongoing monitoring of the Scheme. 5.22 If an existing insurer exits the market by transferring their existing portfolio to a new insurer, the new insurer may be able to benefit from the moratorium in respect of the transferred business. The scheme should be kept under regular review to ensure that such a situation is in the best overall interests of health insurance consumers including the need to maintain the application of community rating across the market and to facilitate competition. Solvency Margins for Health Insurance Companies 69 5.23 The issue has been raised that solvency requirements should not be excessive or go beyond that required for prudential purposes. This issue was discussed in the Competition Authority Study of the non-life insurance sector. 70 In general, it was acknowledged that, in certain circumstances, the Financial Regulator imposes increased minimum solvency requirements on new entrants to the insurance market because there is a higher risk of failure in the start-up phase than when the insurer is more established. Irish insurance solvency standards are higher than the current minimum EU standards and this can create a market distortion given that insurance companies from other EU member states and regulated in those states are entitled to underwrite insurance business in Ireland, including health insurance. The Financial Regulator has stated that “most (insurance) companies maintain solvency levels well in excess of our requirements and we are not the only Member State to require companies to maintain solvency levels in excess of the required minimum”. 5.24 The Competition Authority insurance study commented on the solvency standards for new entrants as follows; “There may be a valid reason for imposing more stringent solvency standards on entrants than on existing suppliers. No standards imposed on new entrants, however, should be in excess of what is strictly required to compensate for increased risk of failure. Asymmetric solvency standards can place entrants at a disadvantage. Furthermore, requiring capital levels in excess of EU standards can also serve to deter entry, even if IFSRA's regulatory requirements are 69 Solvency margins do not constitute a barrier to entry since they are not sunk costs of entry. Solvency margins are retained funds which revert to a firm if it decides to exit the PHI market. 70 Available online at http://www.tca.ie/insurance.html 79
not binding on incumbents and no insurers have indicated that they have been deterred. Capital levels in the industry may change in the future, and insurers may re-evaluate their entry prospects, especially in the light of the recommendations in this Study. As such, solvency requirements for entrants should be as stringent as required for prudential purposes, but no higher. This is also true of ongoing solvency requirements for incumbents.” 71 5.25 A review of EU regulatory standards, Solvency 2, is now under way. 72 It will focus on capital requirements, supervisory practices and transparency through improved reporting by companies. This will introduce a more risk-based approach to capital requirements. In other words, companies that can demonstrate that they are managing and providing for risks in a prudent manner will benefit from lower capital requirements. Solvency 2, is, unlikely to be implemented for some considerable time. 5.26 The issue has been raised as to whether Irish-domiciled health insurers should be allowed a lower level of minimum solvency provision than other Irish-based non-life insurers on the basis of the particular risk profile of health insurance. At present, the Financial Regulator requires consistent solvency reserve provisions for all non-life insurance companies regulated by it. 73 This is a matter for the Financial Regulator. Investment and Set-up Costs 5.27 Set-up costs are only barriers to entry to a market in so far as they are fixed costs which are sunk and cannot be recouped should the entrant subsequently decide to exit the market. In the Irish PHI market, the key sunk cost of entry is developing and establishing a brand. However, this sunk cost is only incurred where a firm establishes itself ab initio rather than relying on an already well-known brand. Successfully establishing a brand is of critical importance in the PHI market, especially given that Vhi Healthcare may carry with it a perception of a state guarantee. 5.28 Other potential sunk costs could include the costs of regulatory authorisation, and the costs of investing in a complicated IT system. However, an IT system would only constitute a sunk cost if it could not be sold to another firm or used for billing or claims management purposes in another insurance market. Furthermore, there is a well developed market for third party administration services in insurance so that a new insurer would not necessarily need to incur the full cost of developing IT administration systems. With regard to the costs of gaining regulatory authorisation, these costs are unlikely to be significant enough to deter firms from entering the market. The issue of whether the Vhi brand constitutes a barrier to entry is discussed below in the context of the first mover advantage. 71 Ibid., p.89 72 For further information, please see http://ec.europa.eu/internal_market/insurance/solvency2/index_en.htm 73 New non-life insurance companies are required to have a solvency margin twice that of the EU minimum for their first three years of operation. 80
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A Report to the Minister for Health
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CONTENTS TABLE OF FIGURES _________
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CONSUMER ATTITUDES TO SWITCHING ___
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EXECUTIVE SUMMARY AND RECOMMENDATIO
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As a result it does not have to sat
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Recommendation 7 The Minister for H
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indicates that consumers of PHI hav
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Recommendation 13 The Minister for
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is quite unclear, so far as the Aut
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1.4 For the next number of months t
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other insurers were to enter the ma
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2.6 Private health insurance (PHI)
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2.17 Open enrolment and lifetime co
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• 2001: The Health Insurance Auth
Page 29 and 30: Figure 2: Annual Change in PHI memb
Page 31 and 32: of medical inflation and the higher
Page 33 and 34: VIVAS Health is rising steadily. In
Page 35 and 36: • Table 1 below shows the annual
Page 37 and 38: Figure 6: PHI Products BUPA Ireland
Page 39 and 40: • Work-based group schemes where
Page 41 and 42: from year to year and also during t
Page 43 and 44: 3. DEFINING THE PRIVATE HEALTH INSU
Page 45 and 46: Figure 7: Key features of Related H
Page 47 and 48: price increase unprofitable by a hy
Page 49 and 50: 4.6 Aspects of the exemption from i
Page 51 and 52: and quarterly management accounts t
Page 53 and 54: Table 4: Regulation of PHI Firms 48
Page 55 and 56: 4.31 This is a positive step. Just
Page 57 and 58: obliges Vhi Healthcare to seek appr
Page 59 and 60: 4.41 In the regulatory approval pro
Page 61 and 62: 4.50 However, the Authority is clea
Page 63 and 64: Unfunded Lifetime Community Rating
Page 65 and 66: President of the Society of Actuari
Page 67 and 68: − The main other deterrent at pre
Page 69 and 70: o The former members of the Advisor
Page 71 and 72: materially affected by any seasonal
Page 73 and 74: It may also be noted that the propo
Page 75 and 76: 4.94 There are 37 health insurers i
Page 77 and 78: Interviews with Possible New Entran
Page 79: have shown that new sales and switc
Page 83 and 84: 5.33 In this context Vhi Healthcare
Page 85 and 86: 5.44 As the former incumbent monopo
Page 87 and 88: 5.52 Vhi Healthcare’s first mover
Page 89 and 90: • Psychological costs 6.5 Transac
Page 91 and 92: 18-24 9% 13% 25-34 34% 19% 35-44 31
Page 93 and 94: 6.24 The provision of renewal notic
Page 95 and 96: The HIA publishes on its website a
Page 97 and 98: Recommendation 10 Following consult
Page 99 and 100: Recommendation 11 The insurance com
Page 101 and 102: Regulations were established to aff
Page 103 and 104: transferred and the amounts require
Page 105 and 106: Buyer Power and Concentrated Market
Page 107 and 108: The Supply of Private Medical Facil
Page 109 and 110: VIVAS Health claims that Vhi Health
Page 111 and 112: approval on coverage of facilities
Page 113 and 114: Supplier-Induced Demand 7.36 The Vh
Page 115 and 116: Questions Relevant evidence Irish P
Page 117 and 118: to restrict individual choice of pr
Page 119 and 120: 8. CONCENTRATION AND MARKET POWER I
Page 121 and 122: gives us some indication of the com
Page 123 and 124: wishes to retain the flexibility to
Page 125 and 126: largest price increase that is prof
Page 127 and 128: scheme. Employees may be under the
Page 129 and 130: elevant regulatory requirements, ex
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Table 7 Vhi Healthcare Financial Re
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• There is limited buyer power fr
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Breaking up Vhi Healthcare would di
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expertise and other staff resources
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APPENDIX 1 Other forms of health re
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APPENDIX 2 Report of UK Government
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Australia Ireland Public hospital U
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Australia Ireland Risk equalisation
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1.22 The Irish data is not split at
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Conclusion of normal claim payments
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APPENDIX 3 Consumer Attitudes to Sw
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Survey Respondent factors promoting
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APPENDIX 5 OECD Review of PHI The O
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not-for-profit insurers has posed c
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114. Private insurers have not impl
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APPENDIX 6 List of Submissions The
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Understanding and Comparing Private
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Benefits Outpatient Cover Cover for
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Dobson, P., M. Waterson and A. Chu,
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Vhi Healthcare (2005), Annual Repor
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Competition in the Irish Private Health Insurance Market

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