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Australia: Profit expectations pushing up premium rates

Source: Asia Insurance Review | Jul 2016

Private health insurance could be cheaper if insurers lowered their own expectations of returns from the business, according to Professor Graeme Samuel, the former Australian Competition and Consumer Commission chairman and adviser to the federal government’s private health insurance review.
 
   Returns on investment enjoyed by health insurers are well above the returns achieved by other insurers, reported the Australian Associated Press citing Prof Samuel. Private health insurers have enjoyed a return on capital employed of about 17.5%. The average for the general insurance sector was about 10%, he said.
 
   At the same time, rises in private health insurance premiums are outstripping inflation, prompting consumers to downgrade their policies.
 
   He suggested that if insurers reduced their capital employed, notionally, to that which is required by APRA to maintain capital adequacy standards, they could work out a premium increase “which reflects a return on capital employed of something more akin to that which the industry and share market might expect - around 12.5% or 13%”.
 
   “I suspect that the result of that will be that premium increases would fall back to close to 2-2.5% per annum,” Prof Samuel said. 
 
   He noted premiums had risen by about 6% each year over the past decade.
 
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