The Commonwealth Treasury


Review of competitive neutrality in the medical indemnity insurance industry Report - March 2005

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Current state of the medical indemnity industry

In March 2005, it is clear that the sum total of all the initiatives introduced by both state and federal governments, the oversight of the regulators, APRA and the Australian Competition and Consumer Commission (ACCC) and, most importantly, by the medical indemnity industry itself, has brought the industry back to a state of health surprisingly quickly. All the insurers have reached — or are well on the way to reaching — the capital APRA requires. Tort law reform seems to have had a significant effect in reining in the previous trends to ever escalating claims. There is a strong spirit of both cooperation and healthy competition in the industry.

Medical indemnity is a long-term business. The insurers operate by making promises that they will not need to meet for many years. Pricing and reserving, no matter how professionally handled, rely on making estimates of an unknown future. The new tort law arrangements will take some years to settle down. It would therefore be unwise to assume too early that all the problems are resolved.

Traditionally, the medical defence organisations that offered medical indemnity cover were not-for-profit mutuals. After 1 July 2003, regulatory arrangements allowed only authorised general insurers to offer medical indemnity insurance. To comply with the new arrangements the organisations established medical indemnity insurers, or captive insurers, to meet their members’ ongoing needs. There are currently five insurers (see Appendix C), which are fully owned by their respective organisations.

The industry has increased its financial stability through a range of measures. These include:

The liabilities of the medical indemnity industry have grown significantly in the last six years (see Chart 1). In 2002, the industry reported the same amount of assets as liabilities. Recently, insurers have been aiming to make profits in order to build capital reserves. This has led to an improved financial position in 2003 and 2004. Table 1 shows that the medical indemnity industry increased net assets from $11 million at 30 June 2002 to $280 million at 30 June 2004.

Chart 2 shows the change in the net assets of the medical indemnity groups from 30 June 1998 to 30 June 2004. United reported a large drop in net assets at 30 June 2002, following the spike in claims made in New South Wales with the commencement of tort law reform. Since 2002, United has considerably improved its financial position. The MDA National group (MDAN group) and the Medical Indemnity Protection Society (MIPS) have gradually improved their net assets from 1999. When IBNR liabilities are considered the Medical Insurance Australia group (MIA group) reported negative net assets at 30 June 2002, but has improved its financial position in the subsequent years. The Medical Defence Association of Victoria group (MDAV group) had negative net assets in 2001, due to the loss of reinsurance recoveries following the collapse of HIH, and zero net assets at 30 June 2002. Its position has also since improved.

Chart 1: Liabilities and assets of the medical indemnity industry

Chart 1: Liabilities and assets of the medical indemnity industry

Chart 2: Medical indemnity industry groups’ net asset position1
(showing the IBNR liabilities when the insurer first reported on them)

Chart 2: Medical indemnity industry groups’ net asset position

Table 1: Net assets of medical indemnity industry groups (including IBNR liabilities)2

($million)

30 June 2002

30 June 2003

30 June 2004

United

–1.2

78.9

175.1

MIPS MDO (MIPS group)3

9.7 (n/a)

14.0 (n/a)

23.6 (38.0)

MDAV group

0.0

4.1

22.8

MDAN group

10.7

21.4

44.5

MIA group

–7.8

0.9

14.7

Industry total

11.4

119.3

280.7

United group

United is Australia’s largest medical indemnity insurer with around 34 per cent of the market and most of the market in New South Wales and Queensland. The medical defence organisation UMP provides customer services to its members as well as holding liabilities for old claims and AMIL, the captive insurer, issues new insurance policies.

On 3 May 2002, a provisional liquidator was appointed to United, after it was clear that United could not meet the full cost of its claims. United reported a large drop in net assets due to the New South Wales claims spike and at 30 June 2002 had negative net assets of $1.2 million (see Chart 2). It only recovered from this position due to the Government’s IBNR indemnity scheme. United was released from provisional liquidation on 14 November 2003. Now United has improved its capital position, with net assets of $175 million at 30 June 2004. Part of that capital growth was an effect of significant capital losses.

United drastically reduced its reinsurance costs from 2001-02 to 2002-03, partly due to the Government’s guarantee and the IBNR scheme, but also through the renegotiation of its reinsurance arrangements (see Chart 5). The same pattern of results is apparent for reinsurance costs as a proportion of premium income (see Chart 6).

Medical Indemnity Protection Society group

The Medical Indemnity Protection Society group (MIPS group) has a large number of members in New South Wales, Victoria, Queensland and Tasmania, making a national market share of 23 per cent. MIPS fully owns its captive insurer, Health Professional Insurance Australia (HPIA). HPIA also writes policies for doctors who are MIPS members and who were members of the Medical Protection Society of Tasmania (MPST) or the Queensland Doctors’ Mutual (QDM).

MIPS, MPST and QDM have other arrangements for run-off claims. Professional Insurance Australia (PIA) deals with run-off claims from these three organisations that were reported prior to 30 June 2003. The Medical Defence Association of Victoria (MDAV) also holds a large share of PIA.

HPIA was the only medical insurer not to use a provisional period to gain capital adequacy. Chart 2 shows that the medical defence organisation, MIPS, has increased its net assets consistently from 1999. The whole group had net assets of $38 million at 30 June 2004.

Medical Defence Association of Victoria group

The largest Victorian medical indemnity insurer is the MDAV group, with a national market share of 18 per cent. MDAV reinstated its insurer, Professional Indemnity Insurance Company Australia (PIICA) in July 2003, to issue insurance policies as a general insurer. As with MIPS, PIA deals with some of MDAV’s run-off claims. At 30 June 2002, MDAV reported zero net assets. The group’s balance sheet has improved over the last two years and at 30 June 2004 it had $22.8 million in net assets.

MDA National group

The MDAN group formed in Western Australia, but has recently increased its business in the eastern states and holds 16 per cent of the national market. MDA National (formerly called the Medical Defence Association of Western Australia) is the medical defence organisation and MDA National Insurance is the captive insurer. MDAN group was the first medical indemnity provider to move to claims made cover, in 1997, and the first to report IBNR liabilities. At 30 June 2004, MDAN group reported $175.6 million in assets and $131.1 million in liabilities, equating to $44.5 million in net assets (up from $21.4 million in 2003).

Medical Insurance Australia group

The MIA group dominates South Australia and has a nationwide market share of 9 per cent. The Medical Defence Association of South Australia (MDASA) owns the insurer Medical Insurance Australia (MIA).

At 30 June 2002, MDASA reported an unfunded IBNR liability. The group’s financial position has since improved. At 30 June 2003, MIA group reported $75 million in assets, $74 million in liabilities and net assets of around $1 million. By 30 June 2004 it was reporting $108 million in assets, $93 million in liabilities and net assets of $15 million.

Looking forward

The industry aims to continue to be prudent. Funding plans submitted to APRA report the aim for industry-wide net capital coverage of 200 per cent of the minimum capital requirement. This is well above APRA’s statutory minimum capital requirements for the whole insurance industry of 120 per cent, as well as the minimum capital requirements that APRA has designated as appropriate for the medical indemnity industry of 150 per cent (see Chart 3).

Chart 3: Insurers’ capital base and minimum capital
requirement coverage
(2003 and 2004 actual, 2005 and onwards projected)

Chart 3: Insurers’ capital base and minimum capital requirement coverage

1 United’s net asset position reflects the guarantee of its IBNR liability.

2 Source: Medical indemnity insurers’ annual reports. Note that inconsistencies in accounting treatment across insurers mean the net assets are not directly comparable. For example, net assets for some years may not reflect prudential margins for the insurer’s outstanding claims liability. Also, United’s net asset position reflects the guarantee of its IBNR liability.

3 A consistent consolidated figure for the MIPS group is only available for 30 June 2004.

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