As the solvency ratio at VHI continues to drop, could it face a similar fate to Quinn Insurance?

WHILE THE travails of Quinn Insurance may grab the headlines, it is not the only healthcare insurer facing solvency issues. VHI, the State’s largest provider of health insurance, may have gotten a reprieve as to when it must comply with solvency requirements, but as its solvency ratio continues to drop could it face a similar fate to Quinn?

Minister for Health Mary Harney revealed recently that she had secured the latest extension for the VHI when she adopted a statutory instrument that exempts it from meeting solvency requirements until January 1st, 2012.

This is the latest in a line of postponements – six in total since 1999 – which enables the VHI to continue to benefit from a derogation, first granted back in 1973, from the full rigours of regulation.

The solvency requirements are intended to protect policyholders, and are the minimum amount insurers must set aside to pay for claims. Unlike its competitors in the health insurance market, Quinn Insurance and Aviva, the VHI is exempt from the Financial Regulator’s solvency ratio of 40 per cent. In fact, the VHI has a solvency ratio of just 22 per cent, down from 28 per cent in 2008, although the VHI does have an implicit Government guarantee. It also has plans to boost its solvency level by purchasing reinsurance “in due course”.

Nonetheless, Tom Carney, a partner with Dillon Eustace, argues that the State’s repeated efforts to keep the VHI out of regulation, thereby avoiding the issue of addressing its solvency, is at odds with its approach to Quinn Insurance, which has been placed in administration to protect its policyholders due to concerns over its solvency.

“It emphasises the stark contrast between the State’s regulatory approach towards Quinn and that of the VHI. One company is completely and utterly exempted from solvency arrangements, while, on the other hand, another company is in permanent administration – and both companies are pursuing the same market.”

Seán Murphy, deputy chief executive with Chambers Ireland, agrees the situation “clearly isn’t fair”.

Another issue is that while both Quinn and Aviva have to pay a levy to the Health Insurance Authority (HIA) and also to the Financial Regulator; the VHI only makes a contribution to the HIA.

And they’re not the only ones to question the fairness of the State’s approach to the VHI.

On February 11th, the European Commission instituted proceedings in the European Court of Justice against the State over alleged unlawful exemption of the VHI from the solvency requirements of European regulations.

The main thrust of the commission’s argument is that from the moment the VHI operated in markets outside of health insurance, it should no longer have been eligible to benefit from the exemption granted under the first non-life Directive in 1973.

The insurer was first granted permission to operate in other markets under the VHI Amendment Act 1996, and since then has moved into the provision of services such as travel insurance and primary care through its Swiftcare clinics.

The commission is, therefore, arguing that since 1996 the VHI became fully subject to the requirements of the EU’s insurance legislation, including those relating to authorisation, financial supervision, establishment of technical provisions and of solvency margins.

According to Carney, the commission’s arguments are “quite persuasive”.

“Given the strength of the European Commission’s argument against the Irish State, it is likely that it will be successful in its action.”

The next step will be an opinion issued by the advocate general, but this may take 18 months – so the State may finally have brought the VHI into compliance before this comes to pass. But even if the VHI is compliant by the time the European court hears its case, the court may still rule that there was a fundamental breach of EU law since 1996. If this was to happen it could open up the possibility of further court cases.

“There could be a strong case for a VHI competitor to pursue the Irish State for damages on the grounds of unfair competition,” says Carney.

Moreover, given the VHI’s record to date, it is quite possible that by 2012 it will still not be compliant. “Look at the trend – six slippages to date! It’s disappointing that we’re in that situation,” says Murphy.

If the VHI is still not under the oversight of the Financial Regulator by the time of the court hearing, the State will have to take all the necessary steps to make it subject to regulation immediately if the European court rules against it. This would again raise the issue of solvency levels at the VHI, and whether or not it would have sufficient reserves to meet European solvency requirements.

Given that it has been estimated that the VHI’s shortfall is more than €200 million, could it face the same fate as Quinn?

“Supposing the VHI becomes subject to EU solvency requirements in the morning, would the same approach operate for the VHI? Would permanent administrators be appointed in the morning?” asks Carney.

In the meantime, the longer the VHI stays unregulated the more difficult the Government’s plans to introduce risk equalisation into the health insurance market, which would see the VHI compensated for having more older customers, will be.

Although the HIA is working on drafting a comprehensive risk equalisation/loss compensation system to replace the interim measures introduced in 2008, Carney says it will be difficult to achieve this when a level playing field in terms of regulation does not exist for the three main players in the market. “It will never be right until the VHI is regulated.”

Given that the Government’s first efforts to introduce such a scheme were thrown out in court, Prof Ray Kinsella, director of the centre for insurance studies at UCD, believes that “risk equalisation is going nowhere”.

“The Supreme Court judgment really knocked the chair from under the argument that community-rating needs risk equalisation,” he says, adding that “as a result, any other formula is by definition second best and will not solve the underlying problems. It will just give rise to ongoing litigation.”

The interim measures introduced to help subsidise the VHI for its older member base are also causing problems for consumers.

When the State’s first efforts at introducing risk equalisation were thrown out by the Supreme Court in 2008, the Government’s short-term solution was to introduce an age-related tax relief and health insurance levy, which is legislated to continue until the end of 2011. In 2010, this levy was increased to €185 for each adult and €55 for each child.

Vanessa Hartley, health marketing director with Aviva, says VHI’s failure to meet the requirements of regulation “is an unacceptable market distortion which forces prices to be unnecessarily high for consumers”.

Aviva has just announced that it is passing on the cost of this increase in full to its members from May 19th.

“If this levy was not forced upon the market Aviva would immediately be able to reduce the cost of health insurance by up to 30 per cent on typical plans,” says Hartley.