Health funds must exercise caution when calculating Covid relief for policyholders

Insurers have continued to return profits gained from a reduction in claims during the COVID‑19 pandemic to policyholders, but ongoing restrictions in some states delayed the full return of these profits in 2020-21, the latest ACCC annual report into the private health insurance industry has found.

In the 12 months to June 2021, government-imposed COVID-19 restrictions continued to limit policyholders’ access to non-urgent elective surgery and non-urgent ‘extras’ treatments (including most dental, optical and other health services).

This impact was particularly notable in Victoria, which experienced several local lockdowns during the reporting period, and was also evident to a lesser extent in NSW.

“The ACCC is aware that many insurers have been implementing their commitments to return profits from COVID-19 restrictions to policyholders, primarily through premium credits or direct payments to policyholders, and we support these efforts,” ACCC Deputy Chair Delia Rickard said.

However, the ACCC is concerned some of the statements made by insurers when announcing relief for policyholders may suggest that they are calculating their total profitability from COVID restrictions too conservatively, by reference only to the value of their ‘deferred claims liability’.

The deferred claims liability refers to money that financial regulators directed insurers to set aside to ensure they will have adequate capital to meet the cost of procedures that were deferred as a result of COVID-19 restrictions.

“The deferred claims liability is not a proxy for total profitability from COVID restrictions, and nor was this ever the intention when financial regulators directed insurers to create a deferred claims liability,” Ms Rickard said.

The ACCC notes that insurers can exclude the value of claims that were missed due to COVID restrictions and are not expected to materialise later (e.g. dental ‘clean and scale’ services) when calculating their deferred claims liability. However, for the purpose of fulfilling their broader commitments made in 2020 not to financially benefit from the pandemic, the ACCC expects insurers to include the value of these claims when calculating their policyholder relief.

“We expect insurers to return all benefits from procedures that were not performed and are not expected to be performed later. This may be particularly applicable to extras treatment and geographic areas that were subject to extended lockdowns.”

“We will continue to monitor the actions of insurers to return all profits made due to COVID‑19 to policy holders as they promised and report on it in our next annual report on the private health insurance industry,” Ms Rickard said.

The report also noted the proportion of Australians with health insurance has increased for the first time since 2015, which has been attributed to increased community focus on health due to COVID-19. In June 2021, nearly 14 million Australians or approximately 54.3 per cent of the population, had some form of private health insurance, an increase of 1.4 per cent since June 2020.

People holding hospital policies increased across most age groups, but the rate of increase was fastest among those aged 75 and older. In fact, 2020-21 is the first year in which people in their mid to late 70s holding hospital cover outnumbered people in their mid to late 20s with such cover.

This year’s private health insurance average premium increase was the lowest since 2001 at 2.74 per cent. Cumulative premium increases over the past five years to June 2021 continue to outpace wage growth, with average premium increases being more than double inflation (CPI) during the same period.

Background

Each year, the ACCC is required by the Senate to produce a report on key competition and consumer developments and trends impacting on people’s health cover.

This report covers the 2020-21 period and is the ACCC’s 23rd report to the Senate under this order.

The Minister for Health will have an opportunity to consider the matters raised in the ACCC’s report, alongside a wide range of factors, when assessing each health fund’s application to change premiums from April 2022.

Note

In 2020, following the outbreak of COVID-19, the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority directed insurers to set aside money to ensure they would have adequate capital to meet the cost of the procedures that did not occur if they were deferred rather than cancelled. This money is referred to as insurers’ ‘deferred claims liability’.

The primary objective of the deferred claims liability is to ensure that insurers have sufficient funds to satisfy future claims for deferred procedures, such as elective surgery and extras treatments. However, not all of these procedures will occur at a later date.

For example, a policyholder who did not utilise dental ‘clean and scale’ services at their normal frequency during lockdown is unlikely to compensate for missed appointments. Since these kinds of claims are not expected to materialise, insurers can exclude the value of these claims when calculating their deferred claims liability.