APRA Explains: APRA’s role in private health insurance premium increases

Every year, private health insurers apply to the Federal Government for approval to raise the premiums they charge policyholders. By law, private health insurers are unable to change their premiums without approval from the Health Minister.

The approval process, known as the private health insurance (PHI) premium round, attracts significant media attention due to the impact on policyholders and debate over whether the premium rises are appropriate. 

While no policyholder enjoys seeing their premiums rise, it's vital that private health insurers can continue to afford to pay claims and meet other obligations to their members.

That's where APRA comes in.

A trusted advisor
 

As Australia's prudential regulator for PHI, APRA is responsible for making sure that insurers have the ability to pay all policyholder obligations such as claims. As a result, the Federal Department of Health requests APRA’s view on the implications of each private health insurer’s application to change premiums. 

Specifically, APRA’s role is to advise the Department whether premium increase requests would result in an "adverse prudential outcome".

Adverse prudential outcomes include:

• an insurer being unable to pay claims or deliver other member services, and
• an insurer being unable to sustain its business over the long term.

It's important to note that APRA does not approve premium increases. Rather, APRA – as an important stakeholder in the PHI industry – is an advisor to the Department. 

The approval process
 

The PHI premium round usually occurs once a year and involves all insurers applying for premium changes at the same time. Typically, insurers’ applications are made in November for changes to apply from 1 April the following year. 

The process is conducted by the Department and any changes to PHI premiums must be approved by the Health Minister. This is a requirement under section 66(10) of the Private Health Insurance Act 2007, where the Minister must approve the proposed change unless it is contrary to the public interest.

The Department usually releases the application form in August or September. APRA collaborates with the Department to design the form and to decide what specific information should be gathered in relation to challenges facing the broader private health insurance industry.

APRA’s close supervision of the PHI industry means it already has a deep understanding of the issues and challenges each insurer is facing. This knowledge comes from regular engagement with the boards and senior management at each insurer, as well as analysis of the data that insurers must submit to APRA. 

In early October, around six weeks before applications are submitted to the Health Minister, APRA carries out a full financial analysis of each insurer. This includes analysis of the annual returns submitted to APRA, the Appointed Actuary’s assessment of the insurer in the annual "Financial Condition Report", among other things.  (The Appointed Actuary is the actuary required by law and selected by each APRA-regulated insurer to undertake certain functions.)

The premium round applications submitted by insurers provide an update on each insurer's approach to managing the risks it is facing.

Once APRA receives the insurers’ applications, its focus is on understanding each insurer’s approach to managing these risks via premium changes and assessing the effectiveness of that approach. This includes an assessment of:

• the insurer’s ability to maintain capital levels, 
• the insurer’s ability to cover the costs of claims,
• the level of uncertainty around issues including membership, claim costs, premium revenue, capital and adequacy of pricing, and 
• risks to sustainability.

Decision time

These conclusions inform APRA’s final advice to the Department, which is then incorporated into the Department's advice to the Minister. After considering each insurer’s application, the Minister notifies APRA and the insurer as to whether the application to change premiums has been approved.

If the Minister asks an insurer to request a lower premium rise, APRA updates its advice to the Department based on the insurer's resubmitted request. 

 

APRA's role in the PHI premium round