Mr. Liam Sloyan:

I thank the Chairman and members of the committee for inviting us to the meeting. In this presentation I will briefly outline the role of the authority and discuss the reasons for having a strong risk equalisation, RE, system and a community-rated market. I will discuss the main amendments to the Bill and in doing so I will describe the impact of risk equalisation on the health insurance products for individuals and insurers in the market.

Our main function involves regulating compliance with legislation, providing consumer information, monitoring the market and advising the Minister. With respect to risk equalisation, we advise on credits and levies, administer the payment system and the risk equalisation fund and ensure the system does not overcompensate any insurer.

Ireland has a community-rated market and the need for a strong risk equalisation system in a community-rated market is well understood. Older people have a much higher rate of claim than younger people. For example, the average claim cost for a male over 80 is projected to be approximately €5,000 per annum, which is four times the average for all consumers. In a market where everybody with a certain product must be charged the same premium therefore the incentive is for insurers to insure younger healthier consumers, avoid older less healthy consumers and to segment the risk profile so that older and less healthy consumers can be charged more. Without RE, there are incentives to adopt behaviours that undermine community rating. It also means competition is distorted and insurers with a worse risk profile are at a disadvantage.

Risk equalisation support community rating and competition by reducing the incentives for behaviours that undermine community rating and by reducing distortions between insurers with different age and health profiles. Specifically, community rating is supported by reducing the net claims costs of insuring older and less healthy people. It also increases the net cost of insuring more younger and healthy people. It is also important to note that risk equalisation is neutral with regard to market costs. It supports community rating by redistributing funds in the market to support older and less healthy people. It does not take funds out of the market.

In Ireland, risk equalisation is provided for in the Health Insurance Acts. The risk equalisation fund is managed and administered by the Health Insurance Authority. Credits are paid out of the fund to support older and less healthy people. The credits are funded by a levy on all insurers in respect of the people they insure. The main amendments to the Health Insurance (Amendment) Bill 2013 provide for changes to the credits and stamp duties provided for in the Bill; the date from which new credits and stamp duties apply is also changed; and there are some clarifications on the process for assessing whether overcompensation has occurred.

The process for determining the risk equalisation credits and the levy is also set out in legislation. The authority analyses data and advises the Minister, based on support for community rating, market sustainability, competition, and the avoidance of overcompensation. The authority recommends a levy it considers would be necessary to meet the cost of the credits. The Minister for Health and the Minister for Finance decide what credits and levy to propose to the Oireachtas. The credits and levy are as enacted by the Oireachtas.

The credits and stamp duties proposed in the Bill are set out in the table shown on slide No. 8. The committee will note that credits for advanced products are higher than those for non-advanced products and the credits for males are higher than credits for females. The amount of credits increase rapidly with age. All of that reflects the different claims experience of the various groups in the market.

The stamp duties proposed are also set out. They vary between adults and children and by level of cover. The chart on slide No. 9 shows the impact the credits and stamp duties are projected to have on claims costs for individuals by age. The blue line represents the gross claims costs and it can be seen that increases rapidly with age. The red line represents the market average claims cost while the green line represents the claims costs net of risk equalisation payments. It can be seen that risk equalisation significantly reduces the net claims costs arising in respect of people over the age of 60 and it increases the net claims costs for people under the age of 60.

When examining the impact of risk equalisation it is also important to look at the combined impact of stamp duty and the credits rather than looking at either one of those in isolation. When that is done it can be seen that increasing the strength of risk equalisation reduces the net claims costs of products covering more older people while also increasing the net claim costs of products covering more younger people.

Accordingly, it is worth noting that risk equalisation reduces the net claims costs of some products with all three of the more established insurers. That is a reduction in net claims costs from risk equalisation. For one significant product in the market the net claims costs are reduced by approximately €700 from risk equalisation. For products covering a few older people the net claims costs increase, although not by the full cost of the levy because all products will cover some older people and some people who are in hospital. In terms of the net claims costs, the VHI was the net beneficiary of risk equalisation and the net payers.

We project that the impact of the Bill would be to increase the impact of risk equalisation and reduce the net claims costs for insured person in VHI Healthcare by approximately €15 versus the impact of risk equalisation in 2013. On the net payers, we project the impact will be to increase the net claims costs on average across the insurers by €10 per insured person. The members should note that these changes are approximately 1% of the market average premium. They should note also that the precise impact for each insurer and product will depend on the proportion of older and less healthy people insured in that product.

On the quantum involved in risk equalisation, it is projected that approximately €570 million of credits will be paid out of the risk equalisation fund in respect of policies commencing or renewing in 2014. This is funded by stamp duty payments of approximately the same amount in respect of the same policies. In this way an amount approximately equal to 25% of health insurance premiums is redistributed through the risk equalisation fund to support the higher claims costs of older and less healthy people.