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Four Medical schemes receive Stable rating by GCR

12 September 2016 GCR

he rating stability in the medical schemes sector continues to be underpinned by strong levels of reserves displayed by many participants that has given rise to sustained solvency strength. This has resulted in statutory solvency margins tracking comfortably above the 25% regulatory minimum. In terms of the latter, Medshield and Bankmed continued to evidence very high solvency metrics, registering respective statutory solvency margins of 53% and 43% in FY15. Margins for Fedhealth (36%) and Momentum Health (29%) again reflect healthy solvency buffers.

In 2015, there was a general trend of rising claims evident in the industry, which placed upward pressure on the claims ratio. In this respect, Fedhealth, Bankmed and Medshield continued to report comparatively elevated claims ratios in FY15 (>90%). Although Momentum Health’s claims ratio increased by two percent to 86% in FY15, it remains well contained relative to industry peers. Common factors contributing to the rise in claims included higher benefit utilisation by members, coupled with competitive annual average contribution increases resulting in decelerating net premium income growth rates. The claims ratio was also impacted by increased burden of disease leading to higher PMB costs, and increasing specialist costs.

In terms of the aforementioned annual average contribution increase, the trend observed across the industry has been similar, with schemes maintaining low contribution increases in 2015 (in the region of medical inflation + 3% to 4%), and carried through into the 2016 benefit cycle. The competitive contribution increases have been implemented as a means of alleviating affordability constraints and mitigating member losses (a trend which is likely to persist over the short term at least).

Nonetheless, buoyed by sound investment returns, all four schemes reported sound net results. In this regard, cognisance is taken of the strong reserve position of the schemes, where all four schemes continue to utilise excess reserves as a means of passing through some cost benefit to members (through the absorption of claims pressure). Accordingly, earnings capacity is viewed to be sound across the schemes in light of reserve management objectives that seek to optimise reserves in a sustainable manner.

Membership growth metrics have been somewhat mixed across the industry, with Momentum and Bankmed displaying high growth (11% and 8% respectively) in FY15, while there was an observed contraction in the membership bases of Fedhealth and Medshield (-4% and -2% respectively). In terms of the former, consistent membership growth has allowed Momentum Health to increase its market share throughout the review period, with the scheme accounting for approximately 5.5% of total open scheme principal members in FY15. On an industry wide basis, much of the membership growth evident among schemes can be attributed to existing insured individuals moving between schemes, while a small portion is facilitated through previously uninsured individuals. This highlights the industry wide challenge of attracting younger members to the scheme to offset the ageing profile of the existing risk pool.

In view of the above, Momentum Health’s member profile consistency and retention is aided by cover flexibility and voluntary membership on the Momentum Multiply wellness and rewards programme. Similarly, Bankmed’s large and stable membership base supports its member risk profile and provides a level of predictability for risk management. Furthermore, Bankmed’s membership base reflects a favourable age profile – averaging 41 years – with 60% of the scheme’s principal members falling below the 40 year old age bracket.

Affordability continues to be cited as the main factor contributing to members’ option buy-down behaviour, which manifested primarily on the schemes’ comprehensive options. As a result, the low- to mid-tier options continue to gain prominence within the option mix, further supported by new member gravitation towards value proposition options.

Liquidity metrics measured at adequate, albeit reduced, levels. Asset allocations towards financial assets have been undertaken, as schemes have sought to utilise balance sheet resources to enhance investment returns. While this resulted in an increased risk appetite for market instruments, investment allocations remain within prudent regulatory stipulations. Accordingly, two of the schemes, Bankmed and Medshield, registered lower net cash coverage ratios of 2 months in FY15 (FY14: 4 months and 3 months respectively). Medshield’s net cash coverage ratio also decreased to 1 month in FY15 from 4 months previously. Note is taken of these schemes’ fairly liquid equity and bond portfolios, which provide a high degree of liquidity support.

When considering all the factors above, the strength of these schemes is encompassed in the claims paying ability rating which GCR has accorded. All four schemes reflect ratings of AA-(ZA) or higher, with Bankmed’s rating of AA+(ZA) being the highest rating that a medical scheme in South Africa can achieve. Momentum Health’s current rating of AA(ZA) also attests to its financial soundness.

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