Mr. Liam Sloyan:

I will begin by outlining the authority's key functions. We regulate compliance with the health insurance legislation that sets out the rules and supports for the community rated market. We provide consumer information on rights and options in the market and the range of available products. We also have a role in monitoring the market and advising the Minister for Health. Our key functions in the area of risk equalisation include advising on the levels of credit and levies, administering payment system on the risk equalisation fund and avoiding overcompensation, which is a key element of EU rules and domestic legislation.

Credits are payable in respect of people from the age of 60 upwards and they increase rather rapidly with age. A credit of €425 is payable in respect of a male aged 64 years, whereas the credits of more than €3,300 is payable in respect of a male aged over 80 years. Recent legislation provides for a new development with the hospital bed utilisation payment, which is equivalent to €75 per night in a hospital. These credits are funded by four levels of stamp duty, for adult, child, advanced cover and non-advanced cover, respectively. The stamp duty for non-advanced plans is approximately 85% of the level for advanced credits and levies.

Other speakers have emphasised the necessity of risk equalisation in a community rated market. Every community rated market operates a risk equalisation system because, while insurers are required to charge everybody the same premiums, their costs vary significantly. The average claim cost for a male over the age of 30, based on the product with the most popular level of cover in the market in 2013, is projected to be €5,000. That compares to the average claim cost of €1,100 for such a product. Without risk equalisation the incentive for the insurer is to insure younger and healthier people while avoiding older and less healthy people. Where insurers have older and less healthy people on their books the incentive is to sell them a different product in order to charge more. The risk equalisation system protects the right of older people to purchase health insurance at a reasonable rate. Risk equalisation also supports competition. Without it competition is distorted in a community rated market because insurers with the worst risk profile are at a significant disadvantage.

The structure of the risk equalisation system is set out in the Health Insurance Acts, as recently amended. The system provides for a risk equalisation fund paid for by stamp duty payable by all insurers and credits are paid out in respect of insured people, particularly older people and those who spend time in hospital. The credits also vary by gender and level of cover and the levy is calculated so that the credits distributed equal the levy collected. In this way the system is neutral to the market as a whole. Under the legislation the determination of credits and levies starts with the HIA analysing the market and advising the Minister. In addition to its analysis, the authority's advice on credits is based on the criteria of supporting community rating, avoiding over compensation, market sustainability and the need to support competition. The levy is calculated based on the amount necessary to fund the credits. The Minister then proposes credits and levies to the Oireachtas for enactment. Credits are provided for in health insurance legislation while the levy is included in the Finance Bill.

The market impacts of risk equalisation are beneficial for consumers. It supports competition by reducing the disadvantage faced by insurers with older and less healthy profiles. Without risk equalisation the main way an insurer would make money is by managing its risk profile. Risk equalisation forces insurers to find ways of making money that bring greater benefits to consumers, such as cost control.

It also supports community rating, first, by reducing the net claims costs for products that insure older and less healthy people and also, it must be acknowledged, by increasing the net costs for products to insure younger and healthier people. While the impact of different products and different insurers varies, the overall impact on the market is neutral.

The next slide might be useful in the discussion about effectiveness and top slicing. This chart sets out the claims costs for the most popular level of cover in the market. These are the products on which the credits and the levy for the advanced contracts are based. They are not based on what might be considered the luxury level of cover; they are based on the level of cover that approximately 75% of the market has. The green line on this chart reflects the market average cost for that level of cover, the blue line is the raw claims data and the red line is the claims adjusted for the risk equalisation system. For those aged under 60, the risk equalisation system lifts the cost from the blue to the red line and, for ages above 60, it reduces the cost from the blue to the red line. A single figure for the percentage of effectiveness is difficult to talk about here because the reduction is much greater for a male in his 80s with the gap between the green and blue lines reducing by 87%. It reduces by smaller percentages for other ages. It also affects different products sold by different insurers by different percentages.

We have mentioned more than once in the presentation that all the levy taken from the market is paid back into the market and, therefore, the effect on the overall market cost is neutral. That gives rise to the question of what is driving premium increases. I thought it would be useful to set out in the final table what has happened to average premia and average claims paid in the market over the past five years. These are averages and, therefore, obviously the cost of some products has increased by much more and others by less, but the average claims cost has increased by 67% while the average premium paid has increased by 56%. The full increase in average premium over the past five years is explained by the increase in the average claims cost. Something that should not go unnoted is the analysis of how claims have been increasing over that period. In 2008 and, particularly, in 2009, there was a high level of inflation. Some control was exerted on that in 2010 and 2011 but, in those years, ageing alone accounted for approximately a 3% impact. However, 2012 gives rise to further concern in this area. We are back up to a high level of claims cost inflation there.