Health insurers may be forced out of business

The court last week overturned a Commerce Commission decision that said Southern Cross could acquire Aetna on the condition it sold all of Aetna's existing policies.

However, Southern Cross appealed those decisions in the court and got them overturned. The result is that the number one player has bought its closest rival and now has more than 80% of the health insurance market.

Justice Hugh Williams and lay associate professor Ralph Lattimore, disagreed with the commission's finding that Southern Cross would dominate the market if it held onto Aetna's policies.

In the decision they said that the barriers to entry were low and a number of new players had come into the health insurance market since 1992.

The head of the new number two player, Tower Health (which has about 11% of the market), is amazed by the decision as are others in the industry.

Tower's Jim Minto describes the decision as "amazing", while Unimed's general manager Dermot Martin struggles to understand how "80% market share and a strong brand" is not a dominant position.

Minto disagrees with the Commerce Commission's view that health insurance is just one market. He says health insurance is actually two markets, individual and group.

Statistics confirm Southern Cross has about 80% of the combined market. However, the story is different under the two market scenario. In group, which is the most profitable of the two, Southern Cross virtually has a monopoly.

Minto says Tower is keen to get into the group market, but struggles because of Southern Cross's strong position.

There is a view, offered by many, which suggests that some players will exit from the industry. This is heightened by rumours that one company is already in the process of shutting up shop.

Minto, Martin, Sovereign risk manager Michael Hewes and Health Funds Association chief executive Andrea Pettett says that it is likely some companies will shut up shop.

Justice Anderson said the barriers to entry are low and majority of players have entered the market between 1992 and 1999.

Pettett says the barriers to entry may be low but "the barriers to expansion are difficult". She says although new players have entered the market, there haven't been "significant changes in market share."

Minto puts it this way: "I don't think there are people smashing the door down to gain market share."

He says a lack of profitability is the main reason companies will stop writing health policies.

Margins in the business are thin and Minto reckons the net bottom line position of all the players who have been in the business since 1992 would be a loss. (Aetna with 18% of the market is rumoured to have made losses).

The companies which are likely to leave the business are those which have health insurance as a standalone product. Tower and Sovereign say they will continue to offer the contracts as they are part of a suite of products, and Unimed, which specialises in the group market, says "it's definitely here to stay".

AA Financial Services, which has about 5,500 health policies on its books generating annual premium income of about $2.5 million is one company which is rumored to be pulling out.

Michael Willemse says AA is still writing business and anything is a possibility.

AA Financial Services is halved owned each by AA and AMP subsidiary GIO. AMP said at its recent results briefing that it was considering options to outsource manufacture of insurance products to other companies.

Pettett says the good news about the Southern Cross decision is that it has been resolved and there is now some certainty for Aetna policyholders.

However, the Commerce Commission may yet appeal the decision, plus some firms, such as Sovereign, now see Aetna customers as a new pool of prospects.

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