Competition in the Irish Private Health Insurance Market

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