EXPLANATORY STATEMENT
Issued by the authority of the Chief Executive Officer of the Private Health Insurance Administration Council
National Health Act 1953
SOLVENCY STANDARD AND CAPITAL ADEQUACY STANDARD
The Private Health Insurance Administration Council is established under the National Health Act, 1953 to regulate registered health benefits organizations. In carrying out its purposes, Council is required to take all reasonable steps to achieve an appropriate balance between the following objectives:-
(a) the objective of fostering an efficient and competitive health insurance industry;
(b) the objective of protecting the interests of contributors;
(c) the objective of minimising the level of health insurance premiums;
(d) the objective of ensuring the prudential safety of individual registered organizations.
Section 73BCB of the National Health Act, 1953 requires that the Private Health Insurance Administration Council must establish a solvency standard.
Section 73BCG of the National Health Act, 1953 requires that the Private Health Insurance Administration Council must establish a capital adequacy standard.
DEVELOPMENT OF THE STANDARDS
Solvency and Capital Adequacy Standards applicable to the private health insurance industry first came into effect on 1 January 2001. Minor revisions to the Standards designed to ensure their ongoing appropriateness were implemented in 2003.
These Standards contain further revisions necessary to ensure their continued ability to operate in the face of changing Australian Accounting Standards. These changes have arisen from the Australian Accounting Standards Board’s implementation of the Financial Reporting Council’s decision to adopt the Standards of the International Accounting Standards Board.
The standards have been developed in consultation with the industry and other stakeholders, including consultation with the Australian Government Actuary in accordance with the National Health Act, 1953.
SOLVENCY STANDARD
The solvency standard is intended to ensure the basic solvency of the health benefits fund.
Section 73BCC sets out the purpose of the solvency standard as:
“To ensure, as far as practicable, that at any time the financial position of the health benefits fund conducted by a registered organization is such that the organization will be able, out of the assets of the fund, to meet all liabilities referable to the health insurance business of the organization as those liabilities become due”
The following table shows the main components of the solvency standard:-
Solvency Liability – The restatement of fund liabilities plus a margin for those liabilities subject to estimation (10%).
Expense Reserve – A reserve for additional administration costs where an organization is closed to new members and in run-off. (eg: rent commitments under contract, cost of run off administration
Inadmissable Assets Reserve – a reserve in respect of: -
- an asset which has a value which is dependent upon the continuation of the business;
- holdings in an associated entity which is subject to minimum capital requirements; and
- risks arising from asset concentration.
Resilience Reserve – the reserve against adverse financial shocks to the economic environment, resulting in adverse movements in the value of the assets relative to liabilities.
Management Capital Amount – The minimum solvency requirement based on the fact that many management risks are not simply proportional to the size of the fund and some minimum level of capital is required.
A five-year transitional period was set in 2001 to enable all registered organizations to be able to meet the then new prudential standards. That period will expire on 1 January 2006.
CAPITAL ADEQUACY STANDARD
The capital adequacy standard is intended to secure the financial soundness of the health benefits fund in a going concern sense. It is expected that in most circumstances the capital adequacy standard will provide an additional buffer of capital above the minimum solvency requirement.
Section 73BCH sets out the purpose of the capital adequacy standard as:
“To ensure, as far as practicable, that there are sufficient assets in the health benefits fund conducted by a registered organization to provide adequate capital for the conduct of the health insurance business in accordance with this Act and in the interests of the contributors to the fund.”
The following table shows the main components of the solvency standard:-
Capital Adequacy Liability - The restatement of fund liabilities plus a margin for those liabilities subject to estimation (12.5% to 25%).
Renewal Option Reserve – To the extent that current contribution rates may prove inadequate to cover future benefits and related fund expenses, some prospective membership renewal reserve is needed.
Business Funding Reserve – A provision for planned growth or other relevant business development that are likely to absorb capital resources with the intention of securing the continued solvency of the fund over a prescribed period of three years.
Inadmissable Assets Reserve – a reserve in respect of::-
- holdings in an associated entity which is subject to minimum capital requirements; and
- risks arising from asset concentration.
Resilience Reserve – the reserve against adverse financial shocks to the economic environment, resulting in adverse movements in the value of the assets relative to liabilities.
Management Capital Amount – The minimum capital adequacy requirement based on the fact that many management risks are not simply proportional to the size of the fund and some minimum level of capital is required. The minimum level for capital adequacy is greater than the minimum solvency amount to provide a margin to enable PHIAC to take appropriate action once the fund falls below capital adequacy but before it reaches the solvency level.
A five-year transitional period was set in 2001 to enable all registered organizations to be able to meet the then new prudential standards. That period will expire on 1 January 2006.
INTERPRETATION STANDARD
The interpretation standard sets out the requirements for determining the various components of the Solvency Requirement and the Capital Adequacy Requirement.
FINANCIAL IMPACT STATEMENT
The solvency and capital adequacy standards are regulatory instruments for the private health insurance industry. The will be no impact on the finances of the Commonwealth.
CONSULTATION
Consultation took the form of a discussion paper inviting comment, sent to the industry, the appointed actuaries of the registered health benefits organizations, and other interested parties. Their views have been considered when drafting these Standards.
The Office of Regulation Review (ORR) was also consulted. The ORR advised that a Regulation Impact Statement was not required as the changes to the Standards are minor and machinery in nature.