Roshan Bhana
RETHINKING MEDICAL SCHEME RESERVING
Why do schemes need to hold reserves?
•
Reserves buffer against adverse experience
– Absorb unexpected claims volatility
– Used to fund unexpected claims
– Catastrophic events
•
Reserves should reflect the level of risk faced by the scheme
– Not all schemes are equally risky
– Consider all sources of risk
•
•
•
•
Claims
Credit
Operational
Investment
What events do schemes need protection against?
• High cost claims
– Single events with low frequency but significant cost
• Variability of claims
• High volume, low cost claims
• Failure of scheme service providers
– If service providers could not continue doing business, would the scheme be
able to continue to operate?
• Asset risks
– Risk of investments losing value
Current reserving requirements
•
Regulation 29 to the Medical Schemes Act 131 of 1998
– Accumulated funds may not be less than 25% of gross contributions for
the accounting period under review
•
Shortcomings of current requirements
– Fixed 25% is not reflective of the risks faced by each scheme
• 25% will be too much for some schemes, but too little for others
– Penalises growth which improves the stability of the scheme
– Members ultimately bear the cost through additional contribution
increases
– Requires reserves to be held for MSA
•
2013 reserves held: R 43.194 billion
Possible measures of solvency
•
Status quo: 25%
•
ITAP formula:
LR2  OR 2  AR2
– LR: Liability Risk, dependent on scheme size and pricing strategy
– OR: Operational Risk, dependent on impairment losses and level of NHE
– AR: Asset Risk, dependent on investment strategy
•
Stochastic modelling approach – Risk of Ruin:
– Each scheme should hold reserves sufficient to prevent failure with reasonable levels of
certainty
•
Liability measures – not considered for this presentation
25% Solvency
• Industry reserves required (2013): R 32.382 billion
• 9 schemes underfunded
– R 3.851 billion underfunded
• 77 schemes overfunded
– R 14.662 billion overfunded
• Industry overfunded by R 10.812 billion
ITAP Formula:
• Industry Reserves required (2013): R 15.797 billion
• Top 9 Open and 10 Restricted Schemes:
– 3 schemes underfunded
– 16 schemes overfunded
• Industry overfunded by R 27.397 billion
ITAP Reserving Requirements
70%
Reserve Requirement (% of GCI)
60%
50%
40%
Required Solvency
Actual Solvency
30%
20%
10%
0%
Regulatory Solvency
Stochastic Modelling Approach:
• Stochastically simulate one year’s claims for each scheme
• Calculate the probability of failure in the next year
Probability of failure of 0.5% - risk of failure once in the next 200 years
• Reserves calculation:
– Worst-case claims in the next year minus 85% of risk contributions
– High level of conservatism built into calculation
– Prevent a 1 in 200 year event - 99.5% chance of continued sustainability
Stochastic Modelling Approach:
• Claims reserves required (2014): R 31.151 billion
• 17 schemes underfunded
– R 6.896 billion underfunded
• 69 schemes overfunded
– R 18.939 billion overfunded
• Industry overfunded by R 12.043 billion
Stochastically Simulated Reserve Requirements
80%
70%
Reserve Requirement (% of GCI)
60%
50%
Required Solvency
40%
Actual Solvency
Regulatory Solvency
30%
20%
10%
0%
Implications of an alternative statutory solvency
requirement
•
Distribute excess reserves to members
– Unlikely given that members cannot be called upon in cases of under-capitalisation
– Won’t be allowed by Regulator in current environment
•
Potential for lower future contribution increases
– Certain schemes would have an extreme advantage in the short-term, especially
larger schemes
– Need to consider regulation to prevent advantage
– Schemes may be able to adopt alternate pricing philosophies
– Current practice for some schemes above the 25% statutory solvency requirement
– Regulation may be required to remove artificial advantages
Implications of an alternative statutory solvency
requirement
•
Transfer of assets from over-funded schemes to under-funded
– Form of reserve equalisation
– Alterative to risk equalisation
•
Increase medical aid access (LCBOs) – Schemes with reserves in excess of RBC
measures or alternate measures may actively pursue extended coverage for
current uncovered members
– May be easier to implement for sector or industry funds
•
Transferred to industry fund
– Would still be used as a buffer for extreme events
– May be met with high level of resistance
– Likely to be extremely unpopular
Implications of an alternative statutory solvency
requirement
• Removal of barriers to entry and exit
– Current potential new entrants may be discouraged from entering environment
due to onerous solvency requirements
– Current schemes over the 25% statutory requirement may be lulled into a false
sense of security when considering the current requirements in the absence of
a purely risk based measure
• Schemes could pursue a more aggressive Investment Strategy – the very
basis of the source of this discussion.
Acknowledgements
•
•
•
•
Alison Counihan
Stefan Bekker
Cecilia Augustine
Roshan Bhana
THANK YOU