Australia's insurers are at risk of declining profitability as squeezed margins undermine their ability to pay claims in the long term, and consumers are being turned off by climbing premium costs, according to "Affordability Ails Australia's Health Insurers", a report published by S&P Global Ratings.
To combat higher claims, Australia's private health insurers have lifted rates yearly over the past decade and premiums are now over 70% higher than in 2010.
Average wages, however, have only grown 32% in the same period.
Affordability issue is expected to continue to worsen over the next five years and has resulted in declines in participation or level of cover sought, the report said.
"Without structural change, we expect participation rates to continue to fall, likely led by younger members," said Craig Bennett, a credit analyst at S&P Global Ratings.
"A decline in younger premium holders will contribute to diminishing cross-subsidy benefits between older and younger members, further hitting the industry's long-term viability. With fewer new and younger policyholders, we expect health insurers to experience further profit and capital pressures, potentially leading to voluntary industry consolidation or funds forced to merge at the brink of failure," he said.
The Australian health industry is saturated with over 30 players - but with the top five taking in nearly 80% of insurance premiums and about 85% of profits.
While the top five insurers dominate the market, many smaller health insurers are member-owned mutual organizations with very limited access to capital.
In recent years, the underwriting profit of mutual health insurers has been declining compared with their corporate counterparts.
In the year to June 30, 2020, mutual health insurers recorded an underwriting loss - the first in over seven years.
Corporate health insurers, on the other hand, saw a sharper decline in underwriting profit with claims growth 2.6% above premium growth, compared with the prior year.
If future premiums and claims growth remain at the average rate of the past two years, underwriting profit is expected to continue to decline over the next three years.
The large insurers will threaten to squeeze smaller insurers, particularly the small mutual health insurers, out of the market.
Absent further operational efficiencies and product innovation, the ongoing trends are unsustainable and will weigh significantly on the financial resources of smaller mutual health insurers and weaken their capital positions.
Smaller insurers will need to consolidate to survive
Greater economies of scale support negotiating power with hospitals and service providers and provides greater scope to invest in operational efficiencies. This will enable better control over claims experience and operating expenses, with a flow on effect on pricing and affordability.
Health insurance premiums have been on the rise, leading to potentially unsustainable premium rates and a decline in participation rates.
Over the past 10 years, health insurance premiums have increased by 5% a year on average, whereas wages have increased by only 3%.
This disparity has exacerbated the affordability of health insurance premiums and accelerated the decline in participation year on year since 2015. The improved participation rate back in early 2000 reflected the introduction of a lifetime health cover penalty tax loading, which penalizes members who did not obtain private health insurance.
However, as premium rates continue to increase and the perceived value of the product diminishes for younger members, people are choosing to cut health insurance as a discretionary expense.
Participation is expected to continue to decline as premium rates remain unaffordable and unattractive to younger members, in particular, and the public health sector provides a viable alternative for many.
Ongoing COVID-19 pandemic
Current economic conditions and the ongoing COVID-19 pandemic are also likely to increase policy lapses and deter new members as people manage their discretionary spending, offset to a small degree by the heightened awareness of health-related issues.
Several insurers have deferred the April 2020 premium increases, however this will not be permanent or improve premium affordability, some insurers have passed on rate increases in October 2020.
Wage growth is expected to be minimal over the next three years as companies manage expenses and job seeker numbers remain high.
Health insurance premiums will continue to rise due to rising claims costs, which in turn, will accelerate the shifting demographics to an older member age, and further pressure product affordability.
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