The VHI has reported an improved financial performance for the year to end

February, with a £1.7 million surplus, up from £1 million the previous year. But acting chief executive, Mr Aidan Walsh, warned yesterday that the healthcare insurer had "a significant job" to contain the cost of claims.

Premium income rose faster than the cost of settling claims which was 8.3 per cent higher at £276.5 million. The cost of claims fell to 98.4 per cent of premium income from 99 per cent the previous year. Premium income exceeded the cost of claims by £4.6 million, up from £2 million.

With costs rising this year, because of new competition in the market, higher charges at public hospitals and pay awards on the public sector, VHI had decided to increase annual premiums by 9 per cent from September 1st.

VHI's operating loss fell to £10.5 million last year, from £

10.9 million. But investment income of £12.2 million, up marginally from

£11.9 million, allowed the company to report a surplus for the year of

£1.7 million.

At the end of February, VHI had reserves of £69 million boosted by the annual surplus and net investment appreciation of £2.9 million.

The company generated premium income of £281.1 million for the year, an increase of 9 per cent. Membership of the state owned insurer rose by 1.8 per cent to 1,423,968 people, or 40 per cent of the population. There was a 2.3 per cent rise in the number of group schemes, at 6,234.

Premium income rose faster than the cost of settling claims which was 8.3 per cent higher at £276.5 million. The cost of claims fell to 98.4 per cent of premium income from 99 per cent the previous year. Premium income exceeded the cost of claims by £4.6 million, up from £2 million.

But operating costs jumped by 12 per cent to £15.1 million, mainly because of an increase in sales and marketing reflecting the arrival of a competitor, BUPA, in the Irish healthcare insurance market.

When operating costs are included the company had a deficit of £10.5

million for the year, down from £10.9 million. Investment income covered the deficit and provided a surplus of £1.7 million for the year.

During the year VHI paid out 300,000 claims and the company expects to pay out 330,000 claims this year, Mr Walsh said. Improving the company's financial position, through containing the cost of claims and increasing income, is now a major challenge, he said.

VHI pays for medical treatment and does not interfere in the doctor patient relationship, according to Mr Walsh. But because of the need to contain costs

VHI was "developing protocols with doctors for some treatments and diagnostic procedures. . . setting out the circumstances in which we will pay", he said.

Other measures to control costs include, pay agreements with doctors and full-cover agreements with hospitals, through which 80 per cent of private beds are now fully covered by the VHI.

"There is a significant job to be done to agree appropriate structures for payments going forward but we plan to do this through agreement rather than disagreement," he said.

VHI lost 3,000 to 4,000 members to BUPA, which launched its service on the

Irish market in November 1996. But Mr Walsh said VHI was targeting 50,000 new members this year. One focus for growth this year is group schemes.