Medical Aid Scheme Reserves in the Spotlight

With medical aid schemes in SA holding surplus reserve funds of up to R27bn, Alexander Forbes has questioned the way medical scheme reserving is calculated.
With medical aid schemes in South Africa holding surplus reserve funds of between R12-billion and R27-billion, Alexander Forbes Health has questioned the way medical scheme reserving is calculated. Alexander Forbes Head of Technical and Actuarial Consulting Solutions, Roshan Bhana, discusses a new possible formula for schemes developed by the Industry Technical Advisory Panel (ITAP) of the Council for Medical Schemes (CMS), as well as an Alexander Forbes Health measure to work out what reserves are required.

By law, medical aid schemes have to keep 25% of their annual turnover in reserve as a buffer to deal with unexpected claims or catastrophic events. Reserves held should reflect the level of risk faced by the scheme, and not all schemes are equally as risky.

In 2013, schemes had a total of R43,1-billion in reserve, when the statutory industry requirements dictated that only R32,3-billion was required. The industry is thus overfunded by R10,8-billion. Currently, nine schemes are underfunded (by R3,8-billion) while 77 are overfunded (by R14,6-billion).

Working on the ITAP formula, which takes into account operational, liability and asset risks, only three schemes of 19 in the top 20 would be underfunded, and 16 overfunded. Using this formula, industry reserves required in 2013 would have been R15,7-billion.

The Alexander Forbes Health measure took into account additional risk factors and was thus more conservative than the ITAP formula, but even this indicated that the industry had R12-billion more than was required.

It is obvious that medical aid schemes are overcapitalising and over-financed, and it’s members who are getting the raw end of the deal.

Shortcomings of the current requirements are that a fixed 25% is not reflective of the risks faced by each scheme. It will be too much for some, but too little for others. It also penalises growth which improves the stability of the scheme. Members ultimately bear the cost through additional contribution increases.

In the case of alternative solvency requirements, it is unlikely that the Regulator would allow excess reserves to be distributed to members, but there is potential for lower future contribution increases.

Certain schemes, especially the larger ones, would have an extreme advantage in the short-term so there is a need to consider regulation to prevent this. Going forward, schemes may be able to adopt alternate pricing philosophies.

On the question of transferring assets from over-funded schemes to those which are under-funded, it could be considered as a form of reserve equalisation and an alternative to risk equalisation.

There could also be an increase in access to medical aid in terms of Low Cost Benefit Options, where schemes with reserves in excess of risk based measures or alternate measures may actively pursue extended coverage for current uncovered members.

Another option would be to transfer the surplus to an industry fund, where it would still be used as a buffer for extreme events.

Rethinking medical scheme reserving would remove barriers to entry to the industry. At the moment, new entrants may be discouraged by the onerous solvency requirements.

However, schemes which are 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.

At the heart of this issue is that schemes could pursue a more aggressive investment strategy immediately given the current levels of overcapitalisation.

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