Barry O'Hallorananswers questions about BUPA departure

What is community rating?

Community rating means that everybody pays the same amount for the same level of insurance cover, irrespective of the risk of their actually getting sick.

So, for example, a young healthy person in their twenties, with a low risk of getting sick, and a person in their sixties, who is more likely to get sick, both pay the same sum for the same level of health insurance cover to the same company.

This is contrary to the normal practice in insurance, where the person who is most at risk pays a far higher premium than the one who is at least risk.

In health insurance terms, once people hit 50, they begin to become "less profitable".

Community rating is designed to ensure that the maximum number of people can afford health insurance, no matter what their age and level of risk.

What is risk equalisation?

It is literally a way of "equalising" the risk between health insurers in order to support a community-rated market. The theory is that the profits from the young, healthy insured people are used to subsidise the losses from older, less healthy insured people.

The risk equalisation system adopted by the Government allowed for money to be transferred from one company to another, where one group had a large number of young, profitable customers and the other had a large number of older loss-making customers.

What does this mean in practice for the companies here?

Because VHI has been operating for more than 50 years, it has a greater proportion of older people on its books. One in three of its 1.6 million customers is over 50.

Thus, under our system, it was entitled to compensation from its biggest competitor, Bupa, which has a high proportion of young people on its books.

Only 15 per cent of Bupa's 475,000 clients are aged over 50.

How much money is involved?

Bupa would be expected to hand over €161 million to the VHI over three years - 2006, 2007 and 2008 - beginning with about €60 million for this year. It expected to make €64 million in profits over the same period of time.

At the same time, VHI says that the absence of risk equalisation meant it lost €30 million last year.

What does this mean for people who want health insurance?

Most experts agree that it will lead to less competition and prices will eventually go up.

But if everybody is paying the same for cover, no matter what, is there a need for competition?

Yes. Companies can still compete with each other on price and cover, once they charge all their own customers the same amount for the same level of cover.