In 2017, solvency and liquidity proved to be key issues within the financial services industry as regulators became more aware of the protective role that insurers play in the lives of their clients.
Bearing in mind the high cost of medical care in South Africa, the above issues are even more pronounced in the medical schemes industry. According to a report in the recent edition of the Council for Medical Schemes (CMS) News, medical schemes have been hard at work to address the liquidity issue.
Contributions going in
According to the report, the medical schemes industry experienced an increase of 8.1% in gross contributions as of the end of December 2016. In addition, gross contributions went up from R151,6 billion in December 2015 to R163,9 billion in December 2016.
Risk contributions (excluding medical savings accounts contributions) increased by 8,1% to R147,8 billion. The report points out that gross contributions per average life covered (per average beneficiary per month) increased by 7,2% to R1 543 at the end of 2016.
The building headache
One of the key issues when it comes to liquidity is balancing the flow of money into a business with the money being paid out by the business. According to the CMS report, increasing claims is becoming a major headache for medical schemes.
The report points out that gross relevant healthcare expenditure (claims incurred) increased by 8,9% to R151,2 billion in 2016. This figure was R138,9 billion at the end of 2015. The total gross relevant healthcare expenditure incurred per average life covered increased by 7,9% to R1 423,60 in 2016. This figure was R1 319 at the end of 2015.
This poses a very delicate problem for medical schemes as the rising cost of claims means that, as an average, schemes are left with a cushion of R119,40 when the gross contribution per life was subtracted by the gross relevant health expenditure incurred per average life.
The effects of this may be negated by the bigger schemes over time as they have a significant number of members. What effects does this have on small schemes who have fewer members?
The relationship between contributions and claims is referred to as the claims ratio. As of the end of 2016, the CMS reports that the industry average is 92,1%. In 2015, this was 91,4%. This means that for every one Rand spent on healthcare, 92 cents went towards paying claims.
According to the CMS report, non-healthcare expenditure is loosely defined as any expenditure that is not related to relevant healthcare services. It consists mainly of administration expenditure, commissions and service fees paid to brokers, other distribution costs and impaired receivables.
According to the report, the total expenditure on non-healthcare expenditure for all medical schemes at the end of 2016 was R14,1 billion. This constitutes an increase of 8,5% from the 2015 figure of R13 billion. If we look at the ratio of money spent on non-healthcare costs, expenditure came close to 10 cents to every Rand.
Impact on reserves
The fact that cross contributions are up is a good sign for medical schemes. However, this means very little if the cost of claims is increasing and there are further increases in non-healthcare expenditures. It only edges medical schemes closer to a dangerous precipice.
The report points out that after paying relevant healthcare services and operational expenses, medical schemes incurred a deficit of R2,4 billion before investment income. The report adds that the deterioration in this regard is mainly due to the worsening claims ratios experienced by all schemes from 91,4% in 2015 to 92,1% in 2016.
There is some good news though. After investment income and consolidation adjustments, a surplus of R2 billion was incurred. This is an indication of the reliance on investment and other income. This was classified as general reserves.
Regulation 29 of the Medical Schemes Act requires all medical schemes to maintain accumulated funds of at least 25% of gross annual contributions.
For 2016, the net assets of all medical schemes amounted to R54,1 billion. This is a R2 billion increase on 2015 figures.
The industry average solvency ration decreased from 32,6% in 2015 to 31,6% in 2016. The report points out that the solvency ratio of open schemes dropped from 29.2% in 2015 to 28.6% in 2016. Restricted schemes also experienced a decrease. Their solvency ratios were down from 37.5% in 2015 to 35.8% in 2016.
The bottom line
The whole issue around tariff pricing needs to be addressed, and as an industry, we must come up with a solution as the current situation cannot continue.
At the end of 2017, the Alexander Forbes Health Diagnoses pointed out that there will be a continuing trend of smaller schemes merging with bigger schemes. The diagnoses pointed out that this would be driven by a desire from government; however, if we consider the trends discussed above, will costs not also be a significant contributor to mergers and acquisitions?
In order to achieve greater economic growth, we need a healthy society. This cannot be achieved by a medical industry that is wrought with challenges. How do we overcome them? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts firstname.lastname@example.org.
This article published courtesy of FANews