Opinion:Apart from the Bupa/Quinn fallout, VHI faces important challenges on a number of fronts.
The next few months will be crucial for the survival of VHI, the incumbent health insurer with some 78 per cent of the market. The out-of-the-blue deal between Bupa Ireland and the Quinn Group has been loudly praised. Certainly the retention of the 300 jobs in Fermoy and the orderly continuation of the bulk of Bupa's contracts have to be good for the market. And given Quinn's record, the move could rejuvenate the market.
However, the freezing of prices by Quinn for 2007 will hit VHI hard (and Vivas). More importantly, the contention that Quinn will have a derogation from risk equalisation (where those with younger subscribers compensate those with older, and more expensive, subscribers) for three years raises crucial questions about community rating (where everyone pays the same insurance regardless of age).
If the contention is indeed legal, the device used - the handing over of the business to a new company - needs to be made illegal now rather than wait for a ruling from the Health Insurance Authority, as suggested by Minister for Health, Mary Harney. Clearly circumventing the spirit of what was intended should not be tolerated.
If this derogation is allowed, what is to stop Vivas from putting its business up for sale in October when its three-year derogation period expires? As it is, Bupa has profited substantially from its presence here: €100 million in accumulated profits, plus more than €150 million from the sale of its business and no redundancy costs.
And if Quinn does not have to pay risk equalisation it is likely to be heading for a bonanza. If it maintains earned premiums at around €200 million - which should be possible with the substantial price differential that should attract the more profitable corporates and younger subscribers - Quinn should be able to generate an operating return of some 15 per cent, which would give it almost €100 million during the so-called derogation period.
Apart from the Bupa/Quinn fallout, VHI faces three important developments. First, recommendations from the Competition Authority are expected to suggest sweeping changes, such as the break-up of VHI and perhaps its privatisation. Having a number of different VHIs would hardly be the way forward, as their combined running costs are likely to exceed that of one unit.
But privatisation, particularly if it was mutualised, would make a lot of sense.
Second, it will be affected by the findings of the new health insurance review group, which should be known by the end of March.
And third, there will be the impact of the Bill setting up VHI on a more commercial basis, which is expected before May. The publication of these last two items will be all the more relevant because of the EU Commission's initiation of legal proceeding against the Government over exemptions to solvency requirements provided to VHI.
The terms of reference for the review group envisage a risk-equalisation environment, and are thankfully brief and to the point. The crucial question that will need to be addressed by the trio (Colm Barrington, Séamus Creedon and Dorothea Dowling) is what return on capital would be considered "adequate" in the insurance industry?
The returns earned in the non-life (excluding health insurance) sector have been bouncing ahead for the past four years, whereas health insurance has been bumpy.
Clearly what might be an adequate return for one type of insurer might not be sufficient for another. However, the activation of risk equalisation implies that health insurers should generate a sufficient return to grow their capital and reserves in line with the growth in premium income; say around 5 per cent for VHI (its earned premiums grew by 6 per cent last year). This, however, would not be sufficient to entice a company into the market. Indeed, Vivas says it would probably be looking for about 15 per cent.
The use of the term "adequate", in the terms of reference, seems to imply that the health insurance industry should move away from any concept of "not for profit" to one of "for profit". That, of course, would be fine for the groups operating the system, but those paying the price, yet again, will be the subscribers.
In the move to any new structure for VHI, one sticking point that will have to be resolved sooner rather than later is the thorny question of solvency requirements. This has rightly been a bone of contention with Vivas and Bupa Ireland.
The Government has received a "letter of formal notice" from the EU on VHI's solvency requirements and has to respond not later than the end of this month to clarify if the exemptions to solvency requirements granted to the health insurer are still valid. Mary Harney told the VHI last year that it would have to bring its reserves up to normal commercial levels by 2012.
The solvency requirement at the moment is a ratio of 40 per cent, a level that had been sustained by Bupa, while Vivas told The Irish Times its required solvency level is 50 per cent. VHI's, at about 23 per cent, is much lower.
The requirement in the UK is around 25 per cent. Considering that the EU is pushing for a uniform rate, wouldn't it be worth considering a lower level here? In this scenario, VHI could reach the target earlier and those in the market, or considering entering it, would have less onerous financial requirements.
