Average premium increase
The 2016 premium round resulted in an industry weighted average premium increase of 5.59%. Premium increases take effect from 1 April yearly.
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 is measured according to the number of people covered.
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 a member may pay their premiums for 12 months in advance. If premiums increase on 1 April, and their insurer offers rate protection, the member will not have to pay the increased premium amount until 1 March the following year. Most insurers offer rate protection.
There are more than 50,000 private health insurance 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 each 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 yearly. 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 product(s) 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.
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.
At an industry level, the management expense ratio (MER) for private health insurers has decreased from 13.1% in 1999-00 to 8.3% as at 31 December 2015. 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 net margin as at 31 December 2015 was 5.1%.
In recent years, private health insurers have experienced significant growth in benefit outlays. In the 12 months to 31 December 2015, private health insurers paid $18.3 billion in benefits to members, an increase of 5.7% compared with the previous year ($17.3 billion). Benefits paid to members are around 85.5% 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. All insurers have an internal capital target that is well above their minimum prudential capital requirements. For-profit insurers usually make dividend payments or capital returns to their shareholders or owners, which reduces the level of their excess capital. The Australian Prudential Regulation Authority (APRA) sets capital and prudential requirements for private health insurers.
The Private Health Insurance Ombudsman (PHIO) State of the Health Funds Report compares different insurers each year and can be found at the PHIO Website
Assessment of premium applications 2016
All applications were considered by the Minister for Health after careful examination of each application by the Department of Health and the private health insurance regulator, APRA.
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 satisfied that a change would be contrary to the public interest. Each application is closely scrutinised to ensure the increases are fully justified.
Each insurer’s application is assessed on its own merits.
Key information considered as part of the premium approval process include the private health insurer’s application and appointed actuary opinion, and APRA data.
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
). 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.
Table of average increases
If you would like to find out the average 2016 premium increase for each insurer, see the 2016 Premium Round - Individual private health insure average premium increases
(Note: Statistics used are based on APRA Quarterly Statistics for December 2015