Private Health Insurance & QIS Survey

Private Health Insurance & QIS Survey

With the APRA partial Quantitative Impact Study (QIS) now completed, insurers are starting to get their first look at the quantitative impact that the new capital standards, to be introduced in July 2023, might have on their prudential capital requirements.

At the recent Finity CFO Forum we discussed the findings of our APRA QIS benchmarking survey, and how insurers could prepare for the implementation of the new capital standards over the next two years.

QIS Benchmarking study

In May 2021, 27 Finity clients participated in a benchmarking survey on the partial QIS impact on their prescribed capital amount (PCA) for insurance and operational risk with the estimated impact ranging from -40% to over 200%.

Larger insurers (premium greater than $100m) and not-for-profits generally had a higher increase relative to their counterparts. This was largely due to the new Adverse Event Stress (AES) charge, which is intended to reflect potential insurance losses (assessed over a 12-month period) in the event of a significant industry-wide lapse of the working age population.

Across industry, we estimate that operational risk capital will increase from around $160 million to $500 million. Several insurers were surprised by the magnitude of the increase in the risk charges

As this was only a partial QIS, with APRA yet to determine the asset risk charge and the diversification benefits, it is not possible to draw conclusions as to the overall impact of the proposal capital standards on the PCA.

Getting prepared

In a poll conducted at the CFO Forum, 50% (of the 14 respondents) said their only preparation to date with respect to the new capital standards was completing the QIS. To help insurers get started in their preparation we provide some thoughts on the key activities to be done over the next two years to get ready for the standards going live on 1 July 2023 (see image below).

From now until July 2023, insurers should have an ongoing dialogue with APRA and their Board on the impact of the new standards, particularly as the standards and calculation of the PCA evolves over that time. Although still uncertain it is likely that the asset risk charge and the diversification benefits developed by APRA will be similar to the LAGIC standards currently in place. Estimating the total PCA impact and change in eligible capital early will help insurers identify potential risks and opportunities under the new standards.

After identifying any risks and opportunities, FY22 is the time to determine what responses (if any) are required, the actions to achieve that response, and in some cases to implement them. In FY22, levers that could be used to manage capital are the 2022 Premium Round, the deferred claims liability and any dividend policy. If the identified response is to reduce the risk charge, potential actions could be an asset restructure, change in investment policy, or use of the 2022 Premium Round to improve net margin (and reduce insurance risk charge).

In FY23 focus can shift to governance and risk appetite. This is an opportunity to re-evaluate the risk appetite of the Board towards capital and the internal capital target given the changes to the definition of eligible capital and the minimum capital requirement. The introduction of an Internal Capital Adequacy Assessment Process could be an opportunity to simplify and improve linkages between policies relating to capital management, which may have diluted over recent years as insurers developed their pricing philosophies and recovery plans alongside the capital management plan.

Winding up

With APRA’s response on the partial QIS results not anticipated until late 2021 and a likely final consultation with industry in Q1 2022, insurers should start to plan now for the transition to the new standards to enable active engagement with their Boards and APRA once these land.

Hopefully this post has given you some ideas about how to start that planning and/or your next step if you are already on your way. With AASB17 also starting in 2023, it is going to be a busy two years for private health insurers.

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