The VHI warned yesterday that it could be insolvent in two years and said that it was set to lose up to €40 million this year.
Its 2005 results, published yesterday, show the VHI's health insurance business lost €12 million in the year to the end of February.
Chief executive Vincent Sheridan warned that it was likely to lose between €30 million and €40 million this year.
He said the VHI was funding these losses from its €281 million reserves, and predicted that if it was forced to continue doing this, it could be insolvent in two years and the company would be faced with closure.
"The board can see the rate at which the reserves are being depleted, and they will have to decide whether this business can continue," he said.
Mr Sheridan blamed the failure of Minister for Health Mary Harney to introduce risk equalisation to the health insurance market for the crisis.
This would have meant that VHI's biggest competitor, Bupa, would have had to pay it more than €30 million next year to compensate it for the fact that the State operator's customers are older and, therefore, less profitable than Bupa's.
The system is intended to support a community-rated scheme of health insurance, under which health insurers must offer everybody the same level of cover for the same price no matter what the risk.
Risk equalisation supports this by using the profits earned on policies sold to young and healthy people to offset the losses on older, loss-making clients. Health insurance companies begin to lose money on customers aged over 49.
The VHI has more than 90 per cent of people in this age group who have health insurance, and thus would be the biggest beneficiary of risk equalisation payments.
A Health Insurance Authority (HIA) review found that the high number of older customers cost the VHI €16 million in the second half of last year. As risk equalisation would not apply to the market's newest entrant, Vivas, for two years,
Bupa is the only company which would be immediately affected if it was introduced.The British player made profits of €23.4 million in the Republic last year. It has already threatened to close its operations in the State if risk equalisation is introduced.
The HIA recommended that Ms Harney introduce risk equalisation. However, late last month she announced that she would not do this until the process of transforming the VHI from a statutory body to a commercial State company was under way.
This could take up to two years. Mr Sheridan yesterday argued that this was a separate issue.
