At the outset a declaration for those who don’t know me:
Much to my own disappointment, I am restricted from commenting fully on these matters, as I was until one year ago Chief Actuary in Vhi and worked both on the recent European Court Case and the detail of regulating Vhi. In addition, I am now working for Aviva who is one of the competitors of Vhi. So apologies for this.
Notwithstanding this, I wanted to make the following general points which are only made for the purposes of our closed membership group (so please do not quote me!)
1. There are a range of alternate options beyond shareholder funding and internal generation of the capital through price hikes for capitalising Vhi. Reinsurance is one of these options but others exist also.
2. The quantum of capital required by Vhi that is reported in the media (€330m) is very old and probably does not reflect the here and now. Since this figure was previously reported, the market structure has significantly changed and therefore the quantum.
3. The judgement relates to issues of regulation beyond Vhi having to only meet the prudential capital requirements. For example, it additionally relates to the way in which Vhi conforms to the consumer protection code. In the context of a community rated market, as applies in Ireland, this is a particular issue as it can have an impact in how insurers can manage to engage in risk segmentation in relation to selecting different risk groups.
To answer Sarah's question about reinsurance being made in public systems the answer is yes, there are examples. Through work for a number of different governments I have been working on developing the use of reinsurance as a funding alternative to manage risk. None of the countries I have provided advice to have reached the implementation stage as of yet, but in each case this is for particular reasons not related to the reinsurance issue. So it is still very much can be used as a policy tool. (Vhi is not a classic case of a state insurer as it, in effect, operates as a not for profit insurer in the market)
For confidentiality reasons, I cannot name the countries but safe to say that there are ways to use reinsurance that can be used to manage risk in a traditional actuarial sense. Examples of application include in relation to micro health insurance entities or directly for state national health insurance organisation.
While I have not worked on this I also see the use of reinsurance as being something that may emerge under the current UK GP reforms to manage the risk for GP practices.
There was an article I published some years ago in the Geneva Papers on the use of reinsurance as an alternative source of capital for micro health insurance which may be of interest (see below). I had developed a more general working paper on the use of reinsurance around the same time but it never got complete. Perhaps, I should finish it now.
“Do Micro Health Insurance Units Need Capital or Reinsurance? A Simulated Exercise to Examine Different Alternatives* Dror, David M; Armstrong, John; The Geneva Papers, Volume 31, Number 4, October 2006 , pp. 739-761(23)
Regards,
John
From: The European Health Policy Group [mailto:[log in to unmask]] On Behalf Of Sarah Thomson
Sent: 01 October 2011 10:29
To: [log in to unmask]
Subject: Re: Reinsurance / Ireland
Freddy’s email prompts me to ask: does anyone know of any publicly financed systems that use reinsurance?
Thanks
Sarah
From: The European Health Policy Group [mailto:[log in to unmask]] On Behalf Of Friedhelm Schnitzler
Sent: 01 October 2011 00:01
To: [log in to unmask]
Subject: Re: Ireland is in breach of its EU obligations by exempting VHI Healthcare from being regulated by the Central Bank.
Good points Brian. Some comments:
Let me raise a forth option: Try to get reinsurance companies in, this can to a wide extend limit necessary capital injections as the solvency capital of the reinsurer can be used , plus reinsurer would have skills to come up with measures to stabilize the portfolio.
Greetings from South Korea
Freddy
Let me take opportunity to inform the group about my new assignment: This August I joined Samsung and am located in Seoul. I am heading a new set up R&D Center which has focus on further development of health insurance and long term care.
Hope to keep in touch
Cheers
Freddy
Von: "Turner, Brian" <[log in to unmask]>
Antworten an: "Turner, Brian" <[log in to unmask]>
Datum: Fri, 30 Sep 2011 12:27:19 +0100
An: <[log in to unmask]>
Betreff: Re: Ireland is in breach of its EU obligations by exempting VHI Healthcare from being regulated by the Central Bank.
The Minister is right in saying that this has been on the cards for a while. As far back as 1999, the then Government, in a White Paper on private health insurance, suggested a capital injection of IR£60m (ah yes, the good old days when the currency was the punt and debts were manageable!) to bring VHI's solvency reserves up to the level required by the Central Bank in Ireland (which is 40% of premium income). That was put on the back burner until 2008, when the European Commission directed Ireland to unwind VHI's derogation from these requirements. The Voluntary Health Insurance (Amendment) Act, 2008 made provisions for this to happen by the end of 2008, but that deadline was pushed back a number of times and the Government still hasn't complied - hence yesterday's judgment.
The biggest issue here is where this money will come from. The way I see it, there are three options - each with potential problems. The first is for the State to inject the money - in which case one of VHI's competitors could well make a complaint of State aid (notwithstanding the issue of where the Government would find this money, assuming that they got the okay from the EU/IMF/ECB 'troika'). The second is for VHI to raise premiums to bring the money in - but it is already losing customers to its rivals because its premiums are higher to reflect its higher-risk membership base, and it would take time for the money to be raised in this way. The third is to raise it from private investment - but I would imagine that most private investors would be wary of investing in an insurer with a higher-risk membership profile in the absence of a robust risk equalisation scheme (the third attempt at which is due in 2013).
The Minister is talking about splitting VHI into a number of smaller entities which, assuming some of those smaller entities would be sold off, would reduce the size of any capital injection that might be needed from the State. However, this too would not be without its problems. The first of these is that it would reduce the economies of scale currently enjoyed by VHI. Secondly, it could impinge consumer choice, particularly given that many of VHI's members choose to remain loyal due to long-standing relationships built up over many decades in some cases. The third is that splitting VHI would not necessarily bring the benefits of competition heralded by the Minister. As I noted in a previous e-mail to this group, premium inflation has been higher with three competitors than with two, which in turn was higher than when VHI was a monopoly provider. (That's not to say that competition hasn't brought other benefits such as an improvement in cover.) However, in the absence of proper regulation - including a standard plan (or a suite of such plans) and a robust risk equalisation scheme - simply increasing the number of insurers is unlikely to produce significant benefits for consumers.
Who'd be a Minister for Health?!
Kind regards,
Brian
From: The European Health Policy Group on behalf of David McDaid
Sent: Fri 30/09/2011 00:30
To: [log in to unmask]
Subject: Ireland is in breach of its EU obligations by exempting VHI Healthcare from being regulated by the Central Bank.
FYI – from RTE news
http://www.rte.ie/news/2011/0929/vhi-business.html
See also statement from the Health Minister James Reilly at http://www.dohc.ie/press/releases/2011/20110929.html
The European Court of Justice has found that Ireland is in breach of its EU obligations by exempting VHI Healthcare from being regulated by the Central Bank.
This means that around €300m may have to be found to ensure the VHI has minimum reserves, which other non-life insurers are required to have.
Under a change of regulation, VHI would have to show the Central Bank it has a robust three-year business plan and necessary levels of capital. It is not in a position to satisfy these requirements.
In response, Health Minister Dr James Reilly said it was known for some time any judgment from the court would have implications for the future of the VHI. Minister Reilly said he would bring proposals to Government to deal with the regulatory issues that arise. He said that the VHI can continue to trade and pay claims as normal.
VHI said the judgment was not unexpected, adding that it was a strategic imperative that it was regulated by the Central Bank in the interests of its customers.
The last government had planned to sell the VHI, but the current government wants to keep it in public ownership, although it may be broken up as part of the plans for universal health insurance.
Best wishes
David McDaid
LSE Health and Social Care and European Observatory on Health Systems and Policies,
London School of Economics and Political Science
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