choosing-primary-care-insurance-and-gap-cover Choosing primary care insurance and gap cover

With the recent liquidation of Health Squared Medical Scheme, and shortly thereafter, a similar fate for gap cover insurer, Constantia, the importance of the correct advice from healthcare consultants is highlighted. Their knowledge of who the industry players are, and more importantly, who offers sustainable products that are well priced and deliver on service, add to why consultants are an important part of the decision when it comes to buying financial service products.

Medical schemes are highly regulated by the Medical Schemes Act (MSA) and overseen by the Council of Medical Schemes (CMS). One of the overarching objectives of the MSA is to protect members. Through regular reporting requirements, monitoring minimum reserve requirements, benefit guarantees, access guarantees and other protection relating to cost containment, the CMS ensures that medical schemes are run correctly. But these measures to protect medical scheme members also come at a cost. It is widely recognised that offering the benefit guarantees through Prescribed Minimum Benefits (PMB), costs a medical scheme approximately R1,000 per beneficiary per month according to the CMS report.

In the current difficult economic climate, primary care insurance products are becoming a popular solution for many who cannot afford medical scheme cover or opt for hospital plans only. The gap cover market has also seen a steady growth as these products are a cost-effective way of protecting members from unexpected co-payments and shortfalls.

As a result of growth in these products, the need to have some process to understand the factors influencing the sustainability of the offerings is becoming more and more important. Access to information like the medical scheme industry’s Council for Medical Schemes Annual Report, is not available. Healthcare consultants have to find innovative ways to provide clients with information regarding the sustainability of provider offerings.

Choosing the most appropriate primary care and gap cover provider should not merely be based on benefits or price. Any selection process should start with understanding the financial stability of the insurer and the administrator. In addition to the above considerations, there are also the regulatory aspects to consider. In the case of primary care insurance products, they are required in terms of the Short-term and Long-term Insurance Acts to carry an exemption which is granted by the CMS to operate. This is currently necessary while the authorities establish under which legislative framework these products should fall. The gap cover market sees new players joining on a regular basis as gap insurance has been clearly defined in terms of the Short-term Insurance Act.

In both primary care and gap cover insurance products, there is typically an agreement in place for the administrator to perform certain functions for/on behalf of the insurer. There can be risk-sharing arrangements. The administrator will take responsibility for managing the membership and underwriting and, as such, share some of the insurer’s risk. It, therefore, is important to understand the underlying sustainability factors at both entities.

Insurers have certain regulatory capital requirements in terms of the short- and long-term insurance regulatory framework. Like a medical scheme, insurers are required to have minimum Capital Adequacy Requirements. This is to protect the consumer and ensure that there are adequate funds to pay claims.

According to the Financial Sector Conduct Authority (FSCA), the regulator of the insurance industry, the following requirements are applicable:

• For short-term insurers, the capital calculation is specified as 25% of written premium net of approved reinsurance over the preceding 12 months, of which 10% of net written premium is held as a contingency reserve. The minimum capital requirement is R5 million.
• When calculating the Minimum Capital Requirement (MCR) of a life insurer, a linear formula is used with a floor of 25% and a cap of 45% of the solvency capital requirement (SCR) – whether calculated using the standard formula or an internal model.

Other factors, such as number of members and years in business, as well as size and availability of networks (in the case of primary care) should also be considered, together with the benefit comparisons. Ratings of insurers by reputable rating agencies are a further method to understand the underlying risk or absence thereof.

Summary of the mentioned aspects for four prominent primary care providers

Key factors which can be used to evaluate the sustainability of gap cover providers

Source: Product providers

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