Average premium increase
For the 2015 premium round, the industry weighted average premium increase is 6.18%. The premium increases will take effect from 1 April 2015.
The average premium increase for each insurer is calculated according to the following formula:
Percentage increase in forecast contribution income (FCI) resulting from the premium change(s) expressed to two decimal places, for the 12 month period following the implementation of the changes, calculated as follows:
(FCI with premium changes – FCI without premium changes) x 100
FCI without premium changes
(where FCI is the forecast contribution income for the insurer for the 12 month period following the implementation of the changes, excluding forecast changes in membership, and including rate protection)
A revenue based measure, such as the percentage increase in forecast contribution income is considered to be the most appropriate way of reflecting the increase in premiums that will be received by an insurer. This method is less biased by extremely low increases for particular products and/or distortions arising from wide fluctuations in the number of policies covered by a particular product, compared to other methods such as simply averaging out the premium increases for individual products.
The industry weighted average premium increase is calculated by weighting each insurer’s average increase by its market share. The market share is measured according to the number of people covered.
Under rate protection, if a member has paid for their policy in advance they will not have to pay extra if the premium is increased during the period for which they have paid. For example, on 1 March 2015 a member may pay their premiums for 12 months in advance. If premiums increase on 1 April 2015, and their insurer offers rate protection, the member will not have to pay the increased premium amount until 1 March 2016. Most insurers offer rate protection.
There are over 34,000 products in the market. It is not practical for the Government to release the premium increases for every product available. The Private Health Insurance Ombudsman website
lists every health insurance product available from every health insurer, and allows consumers to search for, and compare, products. Consumers can find out the new prices of the products on this website from 1 April 2015. Insurers will also notify policyholders affected by the changes of the premium increases for their particular product.
When comparing the average premium increase for individual insurers, it is important to consider the type of benefits offered and the level of benefits paid. These factors also determine the value of the products offered and provide a context for the size of the premium increase. For example, although the average premium increase for one insurer may be higher compared to another insurer, the first insurer may offer more generous benefits or have a cheaper actual product price. Consumers should carefully assess the full value offered by their particular product and insurer.
Performance of private health insurers
Growth in benefits and increases in utilisation of privately insured services are forecast to be well above this year’s average premium increase.
At an industry level, the management expense ratio (MER) for private health insurers has decreased from 13.1% in 1999-00 to 8.8% in 2012-13. Management expenses are the operating expenses incurred in the course of normal insurer operations. The percentage relationship between management expenses and contribution income will be influenced by factors such as the business strategy of the insurer, the level of premium revenue, and establishment costs for new insurers.
Private health insurers in Australia generally operate with modest profit margins. Gross margin is the difference between total contribution income and total cost of benefits, which include state levies. Net margin is equal to the gross margin less management expenses. The net margin is sometimes referred to as the underwriting margin. The industry average net margin for the 12 months to 30 June 2013 was 4.2%.
In recent years, private health insurers have experienced significant growth in benefit outlays. In 2012-13, private health insurers paid more than $15.6 billion in benefits to members, an increase of 9.1% compared with the previous year ($14.3 billion). Benefits paid to members are around 87% of total premiums paid by members. A continued period of benefits growth is forecast.
Insurers must maintain a minimum level of capital above prudential requirements. This is to ensure they can meet benefit payments to members and operate their business on a continuing basis. All insurers have an internal capital target that is well above their minimum prudential capital requirements. For-profit insurers usually make dividend payments or capital returns to their shareholders or owners, which reduces the level of their excess capital.
The Private Health Insurance Ombudsman State of the Health Funds Report compares different insurers each year and can be found at the PHIO Website
Premium approval process
The objectives for regulating private health insurance premiums include:
- Ensuring an attractive private health insurance product for consumers;
- Keeping downward pressure on private health insurance premiums;
- Protecting the Government’s investment in private health insurance;
- Transparency in the setting of private health insurance premiums;
- Timeliness in the approval of private health insurance premiums; and
- Consistency in the approval of private health insurance premiums.
Information submitted by private health insurers
Private health insurers must apply to the Minister for Health for approval of premium changes (section 66-10 of the Private Health Insurance Act 2007
). Premium changes include both increases and decreases in premiums.
Private health insurers must provide an extensive amount of information to support their premium application. This information must be provided using an ‘approved form’ (section 66-10 of the Private Health Insurance Act 2007
). The Private Health Insurance Administration Council (PHIAC) provides insurers with the ‘approved form’ that outlines the information that must be included in premium applications.
The key information required in an application includes:
- The average premium increase (this is referred to as the increase in forecast contribution income including rate protection);
- The date the premium increases are to take effect;
- The components of the premium increase;
- Benefit outlays;
- Management expenses;
- Gross and net margins;
- Investment returns;
- Dividend payments;
- Excess capital/reserves;
- Current and proposed chronic disease management programs;
- Any proposed rule changes;
- A list of each product for which a premium increase/decrease will be sought;
- Financial results and forecasts; and
- An opinion from the insurer’s Appointed Actuary on the reasonableness of assumptions and modelling underpinning the insurer’s application.
The information contained in premium applications is considered commercial-in-confidence. Under the Private Health Insurance Act 2007
, the premium application and advice to the Minister is considered ‘protected’ information. The provision of this information beyond a limited number of prescribed parties is not permitted. This information is also exempt from disclosure under the Freedom of Information Act 1982
Assessment of premium applications
All applications were considered by the Minister for Health after careful examination of each application by the private health insurance regulator, PHIAC.
Under section 66-10 of the Private Health Insurance Act 2007
, private health insurers must apply to the Minister for Health for approval of premium changes. The Minister must approve the proposed changes unless they are satisfied that a change would be contrary to the public interest. Each application is closely scrutinised to ensure the increases are fully justified.
Each insurer’s application is assessed on its own merits.
Key information considered as part of the premium approval process include the private health insurer’s application and appointed actuary opinion, and PHIAC data.
Notification to members following approval
Insurers must provide consumers with a reasonable period of notice prior to a premium increase taking effect (section 93-20 of the Private Health Insurance Act 2007
). The industry developed Code of Conduct also provides information about the obligations of insurers in providing information to their members. This provides consumers with an opportunity to shop around for a different product or a different insurer if they are unhappy with the premium increase for their particular product.
Table of average increases
A table outlining the average increase for each insurer is at Attachment A
(Note: Statistics used are based on PHIAC quarterly data for June 2013.)