The 2009-10 Federal Budget measure ‘Private health insurance – transparent premium setting’ aims to enhance the transparency of the premium-setting process by providing consumers with a better understanding of the Government’s role in assessing and approving proposed premium increases. This includes the release of average premium increases for individual private health insurers and providing reasons for the premium increases at an industry level.

Average premium increase

For the 2013 premium round, the industry weighted average premium increase is 5.6%. The premium increases will take effect from 1 April 2013.

The average premium increase for each insurer is calculated according to the following formula:

Percentage increase in forecast contribution income (FCI) resulting from the premium change(s) expressed to two decimal places, for the 12 month period following the implementation of the changes, calculated as follows:

(FCI with premium changes – FCI without premium changes) x 100
FCI without premium changes

(where FCI is the forecast contribution income for the insurer for the 12 month period following the implementation of the changes, excluding forecast changes in membership, and including rate protection)

A revenue based measure, such as the percentage increase in forecast contribution income is considered to be the most appropriate way of reflecting the increase in premiums that will be received by an insurer. This method is less biased by extremely low increases for particular products and/or distortions arising from wide fluctuations in the number of policies covered by a particular product, compared to other methods such as simply averaging out the premium increases for individual products.

The industry weighted average premium increase is calculated by weighting each insurer’s average increase by its market share. The market share has been derived from the PHIAC Operations of the Private Health Insurers Annual Report 2011-12 (‘People – Whole Fund’) published by the Private Health Insurance Administration Council. The market share is measured according to the number of people covered,

This report (and previous years) can be found at the PHIAC website.

Under rate protection, if a member has paid for their policy in advance they will not have to pay extra if the premium is increased during the period for which they have paid. For example, on 1 March 2013 a member may pay their premiums for 12 months in advance. If premiums increase on 1 April 2013, and their insurer offers rate protection, the member will not have to pay the increased premium amount until 1 March 2014. Most insurers offer rate protection. The maximum period for which a member may pay in advance is usually
12 months.

There are over 20,000 products in the market. It is not practical for the Government to release the premium increases for every product available. The Private Health Insurance Ombudsman website lists every health insurance product available from every health insurer, and allows consumers to search for, and compare, products. Consumers can find out the new prices of the products on this website from 1 April 2013. Insurers will also notify policyholders affected by the changes of the premium increases for their particular product.

When comparing the average premium increase for individual insurers, it is important to consider the type of benefits offered and the level of benefits paid. These factors also determine the value of the products offered and provide a context for the size of the premium increase. For example, although the average premium increase for one insurer may be higher compared to another insurer, the first insurer may offer more generous benefits or have a cheaper actual product price. Consumers should carefully assess the full value offered by their particular product and insurer.

Reasons for premium increases

As part of the measure to enhance the transparency of the premium setting process, the overarching reasons for the premium increases at industry level are published.

At an industry level, the main reasons for the level of the premium increases are current and forecast increases in benefit outlays. This includes the increasing costs of treatments and services (in particular increased costs due to technology and higher healthcare provider costs) and higher utilisation of treatments and services.

Other key reasons stated by insurers for premium increases were:

Maintaining long term viability, including adequate underwriting (net) margins, sufficient capital to meet prudential standards and benefit outlays;
Absorbing increased costs associated with an ageing membership profile;
The rising cost of payments to the risk equalisation pool;
Investment in chronic disease management programs and other broader health cover programs; and
Ensuring an adequate return on investment in the health insurance business.

Performance of private health insurers

Growth in benefits and increases in utilisation of privately insured services are forecast to be well above this year’s average premium increase.

For the purposes of this summary, larger insurers are classified as the five largest insurers by market share (BUPA, HBF, HCF, MPL and NIB), and all other insurers are classified as smaller insurers. Some historical information has been obtained from the PHIAC Operations of the Private Health Insurers Annual Report from various years.

At an industry level, the management expense ratio (MER) for private health insurers has decreased from 13.1% in 1999-00 to 9.3% in 2011-12. Management expenses are the operating expenses incurred in the course of normal insurer operations. The percentage relationship between management expenses and contribution income will be influenced by factors such as the business strategy of the insurer, the level of premium revenue, and establishment costs for new insurers.

Private health insurers in Australia generally operate with modest profit margins. Gross margin is the difference between total contribution income and total cost of benefits, which include state levies. Net margin is equal to the gross margin less management expenses. The net margin is sometimes referred to as the underwriting margin. The industry average net margin for the 12 months to 30 June 2012 was 4.9%.

In recent years, private health insurers have experienced significant growth in benefit outlays. In 2011-12, private health insurers paid more than $14 billion in benefits to members, an increase of 9.3% compared with the previous year ($13 billion). Benefits paid to members are around 86% of total premiums paid by members. A continued period of benefits growth is forecast.

Insurers must maintain a minimum level of capital above prudential requirements. This is to ensure they can meet benefit payments to members and operate their business on a continuing basis. The capital adequacy risk multiple (CARM) is the multiple by which an insurer has capital over and above the minimum capital adequacy requirements with the type of assets weighted according to risk. Some level of excess capital above minimum prudential requirements is appropriate to allow for volatility in benefits, adverse events, and investments in future activities for the benefits of members. For-profit insurers usually make dividend payments or capital returns to their shareholders or owners, which reduces the level of their excess capital.

Many insurers offer a range of chronic disease management programs and hospital-substitute treatments. These programs are aimed at improving the health and wellbeing of members. For further information on these programs, members should contact their insurer.
The Private Health Insurance Ombudsman State of the Health Funds Report compares different insurers each year and can be found at the PHIO website.

Premium approval process

The objectives for regulating private health insurance premiums include:

Ensuring an attractive private health insurance product for consumers;
Keeping downward pressure on private health insurance premiums;
Protecting the Government’s investment in private health insurance;
Transparency in the setting of private health insurance premiums;
Timeliness in the approval of private health insurance premiums; and
Consistency in the approval of private health insurance premiums.

Information submitted by private health insurers

Private health insurers must apply to the Minister for Health for approval of premium changes (section 66-10 of the Private Health Insurance Act 2007). Premium changes include both increases and decreases in premiums.

Private health insurers must provide an extensive amount of information to support their premium application. This information must be provided using an ‘approved form’ (section 66-10 of the Private Health Insurance Act 2007). For the 2013 premium round the Private Health Insurance Administration Council provided insurers with the ‘approved form’ and ‘Schedule’ that outlines the information that must be included in premium applications.

The key information required in an application includes:

The average premium increase (this is referred to as the increase in forecast contribution income including rate protection);
The date the premium increases are to take effect;
The components of the premium increase;
Membership;
Benefit outlays;
Management expenses;
Gross and net margins;
Investment returns;
Dividend payments;
Excess capital/reserves;
Current and proposed chronic disease management programs;
Any proposed rule changes;
A list of each product for which a premium increase/decrease will be sought;
Financial results and forecasts; and
An opinion from the insurer’s Appointed Actuary on the reasonableness of assumptions and modelling underpinning the insurer’s application.

The information contained in premium applications is considered commercial-in-confidence. Under the Private Health Insurance Act 2007, the premium application and advice to the Minister is considered ‘protected’ information. The provision of this information beyond a limited number of prescribed parties is not permitted. This information is also exempt from disclosure under the Freedom of Information Act 1982.

Assessment of premium applications

For the 2013 premium round, all applications were assessed by the Minister for Health, and the Private Health Insurance Administration Council (PHIAC).

Under section 66-10 of the Private Health Insurance Act 2007, private health insurers must apply to the Minister for Health for approval of premium changes. The Minister must approve the proposed changes unless she is satisfied that a change would be contrary to the public interest. The Minister considers whether the premium increases are the minimum necessary to maintain the affordability and value of private health insurance as a product whilst maintaining insurer solvency requirements, support benefit outlays and meet prudential standards.

Each insurer’s application is assessed on its own merits.

Key documents and/or information considered as part of the premium approval process include:

Private health insurer application;
Appointed Actuary report;
PHIAC Operations Reports;
PHIAC quarterly data; and
Standard Information Statements.

In the event that the Minister is not satisfied that the premium increase requested by an insurer is the minimum necessary, the insurer is asked to consider resubmitting their application by seeking a lower premium increase. Alternatively, the insurer can choose to provide further evidence as to why the increase requested is the minimum necessary. PHIAC has detailed discussions with the insurer about the reasons for a resubmission. The insurer is also provided with a copy of the PHIAC advice.

For example, in the 2013 premium round, all 34 private health insurers submitted applications for premium increases. The Minister wrote to three insurers and requested they consider resubmitting with a lower premium increase or provide further evidence for the increase sought. New applications for lower premium increases were submitted by three insurers.

If in the end the Minister is still not satisfied with any lower premium increase sought or the further evidence provided by the insurer, the insurer’s request for a premium increase may be refused. The insurer will be given a draft Statement of Reasons which includes reasons for the inclination not to approve the premium increases and copies of all documents considered by the Minister in making the decision. This is to ensure natural justice is served and the insurer has a chance to correct any factual errors and provide details of any other exceptional circumstances which would necessitate the proposed increase. A refusal by the Minister must be tabled in Parliament along with the reasons for refusal (section 66-10 of the Private Health Insurance Act 2007).

Notification to members following approval

Insurers must provide consumers with a reasonable period of notice prior to a premium increase taking effect (section 93-20 of the Private Health Insurance Act 2007). This reasonable period is generally interpreted to be 30 days. The industry developed Code of Conduct also provides information about the obligations of insurers in providing information to their members. This provides consumers with an opportunity to shop around for a different product or a different insurer if they are unhappy with the premium increase for their particular product.

The Private Health Insurance Ombudsman website lists every health insurance product available from every health insurer, and allows consumers to search for, and compare, products.

Timeline for the premium round

An annual premium round, together with consistency in the date of effect for premium increases, provides consumers with the knowledge of when, and by how much, their premiums will increase. It also allows for the applications of all private health insurers to be assessed at the same time to ensure consistency and timeliness.

An indicative timetable of key events in the premium approval process is provided using the 2013 premium round as an example.

Timetable of key events for 2013 premium round

Event	Date
Submission of applications from insurers	19 November 2012
Assessment of applications by PHIAC, Australian Government Actuary (where necessary) and Minister	20 November – 13 December 2012
Last Date for Resubmission request to insurers	14 December 2012
Resubmissions due	21 January 2013
Assessment of resubmissions	22 January – 5 February 2013
Insurers formally notified of approval	By 7 February 2013
Public announcement of Minister’s decision	8 February 2013
Insurers commence notification of members of premium changes	8 February 2013
Premium changes take effect	1 April 2013

Table of average increases

A table outlining the average increase for each insurer is at Attachment A .

Approved form

A copy of the Schedule for the Approved Form is at Attachment B.

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2013 Private Health Insurance Premium Round Outline of premium approval process

In this section:

2013 Premium Round Individual Insurer Average Premium Increases

Schedule for approval to change the Premiums charged Under a Complying Health Insurance Product

Table of Content

Transparent premium setting