Health insurers fulfil an important social role in the Dutch health care system, as everyone living or working in the Netherlands is obliged to take out basic health insurance with a health insurer. Taking out supplementary health insurance is optional.
Both basic and supplementary health insurance are provided by private health insurers competing in the market. These insurers must hold sufficient funds to cover the expected "care consumption" of their policyholders as well as unexpected adversities, so as to ensure to a reasonable degree that they can meet all their obligations.
Buffers should cushion the impact of adversities and fluctuations
Just like other institutions, health insurers may be confronted with unexpected adversities. They need capital buffers to cover for such events and other fluctuations. Health insurers' claims losses are not fully predictable, for example because of system changes and slow administrative processes and because care demand is not fully predictable. Moreover, health insurers are exposed to market risks such as declining returns on their investments, defaulters, and losses resulting from inadequate internal processes.
It is crucial that health insurers hold sufficient capital to cover all of these risks, so as to ensure their continuity and the rights of policyholders in the event of unexpected adversities. This provides policyholders with reasonable assurance that their care expenses will be covered.
Health insurers under Solvency II
Solvency II imposes risk-based capital requirements with which all European insurers must comply, to protect the interests of policyholders and other relevant stakeholders. Compared with the current supervisory framework, the Solvency II capital requirements will be much better tailored to the actual risks insurers are exposed to, such as disappointing returns on investments, failing internal processes and unexpected care cost fluctuations (which is in fact the main risk for health insurers, also known as the underwriting risk).
It has been agreed at the European level that all private insurers (life, non-life and health care) must hold sufficient capital to ensure that they face a capital shortfall no more than once every 200 years on average. This translates into an underwriting risk capital requirement that is three times the volatility of the claims ratios (note 1).Most insurers also maintain a margin on top of the required capital, in view of stable premiums development and a healthy financial position.
Settlement system mitigates risks
Dutch health insurers have an acceptance obligation for basic health insurance and may not charge different premiums: to safeguard the accessibility of basic care for all, they are obliged to accept anyone as a policyholder against the same premium, regardless of their health.
To compensate insurers for differences in policyholder populations, a settlement system for basic health insurance has been established. Health insurers catering for a relatively unhealthy policyholder population receive a larger contribution from the system than those serving a relatively healthy population.
The settlement system improves the balance between insurance premiums received and expected costs of care, thereby reducing the likelihood of insurers running into financial difficulties as a result of an unhealthy policyholder population. Solvency II takes the risk-mitigating effect of the settlement system explicitly into account in estimating future care cost fluctuations. This means that the capital requirement for basic health insurance providers will be about 40% lower on average compared to the situation in which the risk-mitigating effect of the settlement system is not taken into account.
See also the "New supervisory framework sheds more light on capital position of health insurers" DNBulletin of 2 July 2015.
Noot 1: Estimates of future fluctuations in the costs for basic health care are based on the claims ratios (realised care costs divided by premiums charged) of 25 health insurers over the period 2006-2012. The volatility (standard deviation) of the claims ratios provides an indication of the expected future fluctuations in health care costs. The underwriting risk capital requirement is based on three times this standard deviation, in line with the methodology prescribed under Solvency II.