nib’s financial result demonstrates the health insurance death spiral in Australia

The so called “death spiral” of Australia’s private health insurance sector has been dramatically demonstrated by the financial results from leading insurer nib (ASX: NHF).

Many critics, including the Grattan Institute, have concluded that as young people leave private health insurance in droves and claim costs from older members continue to rise, the entire industry will be locked in a death spiral.

That is despite many government subsidies and efforts to promote private health insurance.

nib’s revenue up but earnings down

Those trends were certainly evident in nib’s half-year profit result – even if the results also showed that it is one of the best performing funds in the sector.

Net profit after tax fell 23% to $57.3 million, as rising hospital claims offset higher revenue from its growing membership base.

Revenue increased by $100 million, or 6.4%, to $1.3 billion in the six months to 31 December, and memberships were up 1.4% in the half, compared to 0.3% growth across the industry.

However, nib said its group claims expenses grew by $91 million, to $1 billion, with that result being made worse by an over-reserving in its claims pool in the prior period and an under-reserving in the most recent half.

“We’re not accustomed to seeing our earnings decline and it’s especially frustrating when our revenue is actually growing right across the group,” said nib managing director Mark Fitzgibbon.

“Nevertheless and although insurance margins have been higher in recent years, they remain strong and represent a very good return on invested capital.”

Equalisation take money from successful funds

nib said another “frustration” was a 10% hike in its “risk equalisation” payments, a subsidy to funds with higher claim rates, which contributed to a profit downgrade last month.

“We’re effectively being penalised for our success in growing the market and especially in attracting younger people who mainly foot the risk equalisation bill,” Mr Fitzgibbon said.

nib declared an interim dividend of $0.10 per share – flat on the same period last year.

The company also reaffirmed its full-year guidance, downgraded last month to at least $150 million at a statutory level.

Grattan Institute claims industry in death spiral

Health program director for the Grattan Institute, Stephen Duckett, has claimed that the ageing pool of people with health insurance is a major concern for the industry.

As young people pull out or simply don’t take out private health insurances, the overall risk pool shrinks.

Because young people use health care less than older people, the price of insurance therefore goes up to cover higher claims, which leads to even more young people dropping out.

According to Mr Duckett, the death spiral occurs as the average age of health fund members continues to rise, pushing up claim costs.

The latest data December quarter of 2019 data shows that over the past year 44,000 fewer young people (aged 25 to 34) have private health insurance.

The percentage of the population with some form of private hospital insurance is down 0.7 percentage points compared to the December quarter in 2018 and now stands at 44.0%.