Reduced health care insurance premiums?
Like in previous years, the arrival of autumn has rekindled the public debate on next year’s basic health insurance premiums, which are currently being set. This year, the new premiums have come under even closer scrutiny than before, amid various tax increases and new Government austerity measures intended to put the State finances in order. In such a climate, lower health care premiums would, of course, bring welcome relief to many a household budget. The healthy profits and substantial buffers of health care insurers in 2012 have nourished the view that there is room to reduce those buffers. However, viewed in light of future developments in the sector and in insurance supervision, the financial position of health care insurers does not warrant such a conclusion – at least not for the sector as a whole.
Development of profits and capital buffers
The overall profit, in 2012, of the health care insurance sector, EUR 1.4 billion, might give the impression that health care insurers habitually make high profits. In reality, however, the performance of health insurers has seen substantial ups and downs over the years. In the case of individual firms, the fluctuation is even stronger, because expected health care spending and income figures depend on several factors and because the claim years and financial years of health insurers do not coincide exactly. Against this background, some health care insurers will draw different conclusions than others: each may have different expectations regarding the future of the health care system and different disposable resources to curb health care spending.
The capital buffers of health care insurers have increased in proportion to the higher regulatory capital requirements imposed by De Nederlandsche Bank (DNB). Even after the capital requirement in respect of basic health insurance was increased in 2010 and again in 2012, in response to increased risks, the ratio between firms’ capital buffers and the capital requirements remained fairly constant.
Next year, the capital requirement for primary health insurers is to remain unchanged at 11% of gross claims. It is up to individual health care insurers to decide what level of capital they will hold over and above this mandatory minimum. A safety margin is regarded as advisable, also from a supervisory perspective. Yet DNB does not impose generic rules regarding such margins. Thus health care insurers’ ‘internal targets’ differ, although they tend to be substantially above the regulatory minimum.
Capital requirement and buffers
To explain the existing margin, firms often refer to the supervisory requirements of DNB and the ongoing changes in the Dutch health care system. In the next few years, the hard minimum buffer requirement will be made more firm-specific as changes in insurance supervision are introduced. New European regulations will require insurers to take a different, more risk-oriented view of their business. As a result, the minimum capital requirement will reflect insurers’ risks more accurately, which in turn will lead to more straightforward relations between capital requirements and internal targets.
The immediate future will constitute an intermediate phase in which insurers will be making significant steps in anticipation of the new framework. In this context, DNB has asked insurers to prepare a comprehensive analysis of their risks, capital needs and strategies. The new regulations will enable health care insurers to better anticipate medium-term trends and the inherent risks. As a result, the nature and predictability of these trends will become more important.
Increasing risks in health care insurance
In particular, health care insurers will wish to prepare themselves for increasing risks and permanent uncertainties. For one thing, projected claims – the risk calculation base – will continue to increase. Systemic uncertainty will also increase: the system is in constant development, with the potential creation of new risks and concomitant instability of health care insurers data quality.
One of the reasons is the fact that the individual risk for primary health care insurance providers has been increasing. This is in line with the Government policy of phasing out the inter-firm system of mutual risk compensation. As a result, the risk of financial outliers for health care insurers is increasing, leading to a possible rise in the capital requirement as well.
These developments underline the need for all health care insurers to prepare their capital buffer calculation methods for the future. Improved risk analysis will help insurers to underpin the level of their buffer capital. Whether, from this perspective, the current level is deemed sufficient, is a consideration for every individual health care insurer to make.