ANALYSIS: Reilly must find €300m to boost reserves and then decide what to do with the insurer
THE VHI’S 1.2 million subscribers will be largely unaffected by the European Court of Justice ruling yesterday.
However, the judgment, which centres on technical issues such as how the company is regulated and whether the Government is meeting its obligations under the EU directives, leaves Minister for Health James Reilly with a number of very serious decisions to make.
In the meantime, the company will continue to trade normally and claims made by subscribers will still be met.
The court effectively told the Government that it was in breach of EU directives by having different rules in place for the VHI from those applying for its rivals.
The issue goes back to a derogation from an EU directive on insurance which the State negotiated for the VHI in 1973. This meant VHI was not required to acquire an authorisation from the Central Bank as an insurer and therefore did not need to hold the same level of solvency capital in its reserves as an authorised insurer.
However, the EU’s internal market commissioner contended in recent years that VHI had evolved and had moved into ancillary operations such as dental cover, travel insurance and its Swiftcare clinics. The court effectively upheld the complaint.
For several years it has been official policy to put the private health insurance market on a level playing pitch and bring the VHI under the regulation of the Central Bank. The problem for the Government is that this will not come cheap.
Under current rules, VHI will need to bring up the ratio of its financial reserves to premium income from the current 22.8 per cent to 40 per cent.
The Department of Health’s original plan was for VHI to use risk equalisation payments – money that would be paid by other companies to compensate the VHI as it had larger number of older subscribers – to build up its solvency ratio levels.
However, the Government’s risk equalisation scheme was struck down by the Supreme Court in 2008. The company was therefore not able to accumulate the level of reserves required for authorisation.
Nor was it able to show the Central Bank that it had a robust three-year business plan that would allow it to retain the necessary levels of capital reserves.
Former minister for health Mary Harney suggested €338 million would be required to bring the VHI’s reserves up to the level of 40 per cent of premium income. The former government also said that it would invest up to €300 million in the VHI.
Harney had proposed selling the VHI – with presumably some of the funding going to the reserves. However, the new Government has said the company will remain in the State sector, but may be broken up.
Among key issues for the Minister now is how to find the €300 million or so that will be needed to boost the VHI’s reserves, and what to do with the company once that is achieved.
A new risk equalisation scheme will also have to be drawn up in a manner that will survive possible further legal challenges.
Perhaps above all, the Minister will have to spell out where the traditional private health insurance sector will fit in his vision of a new system of universal health insurance.
