APRA private health insurer governance proposals

The Australian Prudential Regulation Authority (APRA) has released a consultation package titled Governance, fit and proper, audit and disclosure requirements for private health insurers, which aims to introduce stronger prudential standards.

As part of the package APRA is seeking to:

  • replace prudential standard HPS 510 Governance with the cross-industry equivalent standard, CPS 510, to strengthen governance practices;
  • extend cross-industry prudential standard CPS 520 Fit and Proper to the private health insurance industry;
  • introduce HPS 310 Audit and Related Matters; and
  • revoke prudential standard HPS 350 Disclosure to APRA to streamline reporting and remove obsolete requirements.

The requirements around the composition of the Board are broadly similar between HPS 510 and CPS 510. Depending, however, on the size of the Board, CPS 510 may require a larger number of independent directors, as it requires all locally incorporated regulated institutions to have a majority of independent directors at all times.

In a recent speech by APRA’s Geoff Summerhayes he observed that APRA has no current prudential concerns about the state of Australia’s private health insurance industry.

He said cyber security, and trust and reputation have been on APRA’s radar for some time as significant risks facing the private health insurance industry. More recently, APRA has become increasingly concerned by the risks posed by two further issues: affordability and consumer behaviour; and policy and regulatory changes.

He said:

“APRA does not consider industry profits or capital levels to be the primary drivers of rising premiums. The underlying cost of Australia’s health system is the ailment; rising insurance premiums are just a symptom. Specifically, the fundamental forces pushing premiums up are higher claims costs experienced by insurers, through such factors as a greater uptake of medical services among policyholders and the rising cost of treatments and procedures. It is very much in the community’s interest that the current reform process continues, and private health insurers need to be an influential voice in that debate…

Those entities with superior governance, business planning and risk management processes are better placed to adapt to change and overcome threats. It is entirely possible for smaller funds with fewer resources to be among this group, but in APRA’s experience, it is often institutions with lower levels of scale, access to resources and technical sophistication that find this most challenging…

APRA believes mergers should be at least under active consideration by health insurers with low or negative member growth, and which only have small membership bases to begin with. Even boards with no such concerns about their fund’s viability should have discussed the issue of mergers as part of their normal strategic reviews. It is very much in their best interests to have thought about compatible future partners and how a merger might be structured well ahead of any need to put the plan into action – rather than being coerced into a marriage of inconvenience or forced to wind up.”

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