Opinion: Legislation to change the corporate structure of health insurer VHI is expected to be put in train next month. About time.

Back in 1999, the Government approved plans to invest up to £60 million (€76 million) in VHI as part of a restructuring programme designed to transform it from its existing statutory body status into a commercial semi-State company. Nothing was done. It has to be asked; is this going to join the queue of many talking projects?

There is no doubt that VHI should have the same solvency requirements as those of its main competitor, Bupa Ireland. As a statutory body, it doesn't. As a company, it would be a requirement as part of the process of gaining an insurance licence from Ifsra, the financial regulator.

But is that the best route to go down? As a statutory body, it has no shareholding but comes under the arm of the Department of Health. As a semi-State company, it would have greater independence to operate, but it would still be controlled by the State. And the State should hold its head in shame as it has not provided any funding and at one stage it raided its meagre coffers by insisting on a dividend payment. How can it be equitable for the State to impose ownership, particularly as VHI has been funded by its 1.6 million subscribers?

Perhaps a fairer route would be to turn it into a mutual society; incidentally, Bupa in the UK is a mutual body. After all, VHI is supposed to be there for its members. Going mutual would ensure that the State gets nothing and if there were any future surpluses, these could be retained for the benefit of healthcare.

Whatever happens, it will need to be funded so as to comply with solvency margins imposed by the regulator. VHI last year had a solvency margin of 32.5 per cent, well short of the regulator's minimum of 40 per cent. It would have needed an extra €65 million to reach that target in its latest results.

However, it has projected substantial losses for this year and this could bring up the requirement to more than €100 million. Without funding from an external source, and the absence of funds from risk equalisation, that is not attainable.

Another requirement for an Ifsra licence is the necessity to furnish "robust financial projections", according to VHI, which claims it is not possible with the absence of risk equalisation (this would have required Bupa Ireland to transfer €35 million to VHI on last year's figures), as recommended by the Health Insurance Authority but turned down by Minister for Health Mary Harney.

A crucial question is how unprofitable is VHI and how profitable is Bupa Ireland? An analysis of the latest figures from both companies confirms a vast disparity. Bupa Ireland, as highlighted in this column earlier this year, did not disclose figures, but subsequently they were reported in this newspaper.

The latest figures, which I have seen in the latest British FSA return, mostly confirm the figures, except the FSA appears to show higher profit figures for both 2002 and 2003 (the 2004 figures are almost identical), due to the treatment of accruals and other factors. This means that in 2002 and 2003, Bupa Ireland was even more profitable.

The reported underwriting profit before expenses in 2002, for example, was €26.9 million; the FSA return indicates €29.5 million. The reported figure for 2003 was €32.6 million, the FSA return indicates €37.3 million.

That may seem a little academic, particularly as the 2004 figures appear to correlate, but when it comes to analysing the figures, there is quite a difference. For example, the underwriting profit per member in 2002 seemed to indicate €46.4, whereas the FSA return indicates €55.5, and in 2003, the reported figures showed €50.7 per member, but in reality, an analysis of the figures indicates €65.8.

Of course, the latest figures are more important and more relevant. So how does Bupa Ireland stack up? The most important comparisons have to be with VHI's latest figures, released last month, and with those of Bupa's daddy, Bupa Insurance UK.

Compare Bupa Ireland with Bupa Insurance UK. The Irish operation is becoming more important. Its premium is 7.1 per cent of the UK's, two years ago it was 4.5 per cent.

Operating profit as a percentage of premiums, at 4.7 per cent, is well below the Irish operations, which manages a whopping 16.9 per cent. Is it any wonder that Bupa UK is firmly behind the Irish operation in its quest to resist risk equalisation?

Of relevance for the Irish market is the performance of Bupa Ireland compared with VHI. Bupa Ireland's underwriting profit, before expenses, as a percentage of earned premiums at 30.3 per cent in 2004, is well ahead of VHI's 7.2 per cent, while Bupa Ireland's operating profit, as a percentage of earned premiums, amounting to 16.9 per cent, is well ahead of VHI's minus 1.4 per cent.

It could be argued that VHI's figures are excessively understated because of its decision to introduce a new reserve, called "unexpired risks reserve". This was introduced for the first time in 2002 and has been increasing substantially - €15.3 million to €53.4 million in four years.

These have been taken before the line, thereby depressing profit. It is probably a very prudent approach but its actuaries, Watson Wyatt LLP, insist they are a reasonable estimate of expected losses on contracts. And a rise in claims as a percentage of earned premiums at 92.2 per cent, up from 84.6 per cent, indicates an unsustainable trend.

Ms Harney justified her rejection of risk equalisation on the need to further encourage competition in the health insurance market. That should lead to low profit margins for all in the business. Not so. It is a distorted market, with Bupa Ireland generating high margins and that will remain until, or unless, there is risk equalisation. Is that the type of competition we need?