The Australian Prudential Regulatory Authority (APRA) has sent a letter to private health insurers setting out its expectations for private health insurers (PHIs) to improve their resilience to sustainability challenges following its review of 15 of PHIs.

APRA has reminded PHIs of the risks posed by declining affordability for policyholders, and the impact on PHIs of government policy changes in response to cost pressure across the wider health system.

APRA’s review of PHI resilience has raised concerns about insurers’ lack of preparedness to deal with growing risks, including a shrinking and ageing membership base.

The letter provides examples of better industry practice that can enhance sustainability, including by providing greater value for younger and healthier policyholders, putting more focus on preventative treatments and facilitating alternative models of care.

APRA recommends that PHIs formalise the process that will be used to keep them informed of changes in the environment, including considering the timeliness of reporting to the board on how these could impact the PHI and whether the PHI’s strategy remains appropriate to manage within the new environment.

APRA also expects PHIs to develop a “Plan B”, including consideration of potential mergers or restructures, should their primary strategy prove ineffective.

While APRA has no immediate concerns for the financial viability of any PHI, it says the coming challenges are likely to significantly threaten the business models of a number of insurers. On that basis, APRA expects every insurer to develop a recovery plan for how it would respond if its sustainability came under acute threat.

APRA is currently reviewing the capital framework for private health insurers.