End-of-year target for VHI authorisation set to be missed

The Government seems set to miss the deadline at the end of the year agreed with the European Commission for the State- owned health insurer VHI to secure authorisation from the Central Bank.

The official Government position had been that it was aiming for the company to reach the point of authorisation, subject to a final Government decision regarding capitalisation of VHI, by the end of the year.

However, the VHI yesterday confirmed it had not yet made an application to the Central Bank, while the Department of Health declined to answer a specific query regarding whether it still had a target date of the end of December for the VHI to secure authorisation.

A spokesman for the Department of Health said that Minister for Health James Reilly was in discussions with the VHI regarding authorisation, adding: "He will discuss the matter shortly with his Cabinet colleagues and the commission."

Sustainable business plan
Asked whether it had made an application for Central Bank authorisation, the VHI said: "Prior to the submission of an application to the Central Bank, the board of Vhi Healthcare needs to satisfy itself and demonstrate that it has a sustainable business plan. This is a prerequisite to authorisation.

“Sustainability cannot be demonstrated until there is clarity on the future regulatory framework. This will allow Vhi Healthcare to complete business plans, including securing capital to present to the Central Bank.”

In essence, authorisation would put the VHI on an equal footing with insurers Aviva, Laya and Glo in terms of capital and solvency requirements.

The European Court of Justice found in September 2011 that VHI’s exemption from Central Bank authorisation and regulation was in breach of EU directives. Its private competitors in the Irish market must have substantial financial reserves.

Dr Reilly told the Cabinet in 2011 that up to €220 million could be needed to bring the VHI’s financial reserves up to a level to secure authorisation.

However, earlier this year the VHI entered into a deal with Berkshire Hathaway – the company run by billionaire investor Warren Buffett – to reinsure about €700 million of the company's claims, about 50 per cent of the total. The company said the reinsurance deal with Berkshire Hathaway would minimise the amount of capital required from Government.

A second key element of the Central Bank authorisation process is that the company must show it has a sustainable business model. A important aspect of this area is the risk equalisation scheme that will apply.

Risk equalisation
Risk equalisation is in effect an arrangement that compensates insurers such as VHI with high levels of older subscribers who tend to claim more frequently, by transferring funds from competitors with more younger subscribers who claim less frequently.

It is understood that VHI has argued that the current risk equalisation does not provide it with sufficient compensation for the number of older subscribers on its books.

The company has urged that “significant changes” should be introduced.

However, other health insurers have argued that the existing scheme goes too far and it leading to higher costs for subscribers.