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GCR affirms Discovery Health medical Schemes rating of AA+(ZA); outlook stable

15 May 2014 Benjamin Schmidt, GCR

Global Credit Ratings (GCR) has affirmed the national scale claims paying ability rating assigned to Discovery Health Medical Scheme (DHMS) of AA+(ZA); with the outlook accorded as Stable.

This is according to Benjamin Schmidt, Senior Credit Analyst at GCR, who says DHMS has established itself as the largest open medical scheme in the South African Healthcare industry, covering in excess of 2.5m beneficiaries as at year-end 2013, since its inception nine years ago.
 
"Significant rating support is derived from DHMS’s position as the unrivalled market leader in the South African open medical schemes industry, with 52% of total principal members covered by the scheme as at 3Q F13. This is aided by the scheme’s strong brand value, comprehensive option portfolio and the effective leveraging of the voluntary Vitality wellness programme,” explains Schmidt.

Although the statutory solvency margin continued to slightly trail the Council for Medical Schemes’ (CMS) regulatory minimum of 25% as at FYE13, Schmidt says a notable improvement was evidenced year-on-year.
 
"In context of the relative conservatism of forecasts submitted, this suggests statutory compliance by the FYE15 deadline committed to in the CMS business plan. Further, driven by a sustained refinement of claims management protocols, the scheme’s claims ratio has persistently trended below the industry average,” explains Schmidt.

Coupled with increased cost efficiencies, he says this has seen DHMS increase its net healthcare surplus more than fourfold in F13 (with positive net healthcare results reported in three of the last five years under review), with a further sound net healthcare surplus forecast for F14. Further note is taken of the consistent high degree of contribution predictability and operational budget attainment displayed.

Schmidt says the conservative investment stance applied continues to support key liquidity metrics at sound levels. "Over the short to medium term, management does not foresee the current investment strategy changing materially.”

In consideration of prevailing characteristics in the South African medical schemes arena, Schmidt says the industry rating ceiling remains capped at AA+(ZA). In the absence of a revision thereof, an upward adjustment of the scheme’s rating (which constitutes the highest rating an open or closed medical scheme currently can be awarded by GCR) is considered unlikely over the short to medium term.”
 
Conversely, downward rating pressure may arise from a combination of any of the following factors including; "a severe and sustained loss of membership (accompanied by a notable deterioration in the average member age profile); a marked decline in the members’ surplus and subsequent weakening of the statutory solvency margin to a level notably below historic norms and the adoption a more aggressive investment strategy (thereby unduly compromising key liquidity metrics),” concludes Schmidt.

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