Risk-based Capital models: The key to healthcare scheme sustainability

Source: Supplied. Charlton Murove, head of research, Board of Healthcare Funders (BHF).

This approach enhances risk management by aligning investment strategies with the actual risk profile of the scheme, improving risk assessment and management - ensuring the long-term viability of essential services amid evolving challenges, writes Charlton Murove, head of research, Board of Healthcare Funders (BHF).

The private healthcare funding industry stands at a critical juncture, where the responsibility to ensure the sector's sustainability is more pressing than ever. As the BHF, our collective mission is to provide accessible, affordable and quality healthcare to beneficiaries. Yet, this mission can only be fulfilled if our members - healthcare funders, managed care organisations and administrators - remain financially sustainable.

To navigate the challenging economic landscape and the restrictive regulatory framework that currently governs our industry, it is crucial for our members to review their investment models regularly, understand the limitations within which we operate, and most importantly, innovate to circumvent these challenges.

One viable solution to the challenges facing healthcare schemes lies in embracing a risk-based capital (RBC) reserving model for internal management purposes.

For regulatory requirements a minimum reserve of 25% of annualised gross contributions will still be required.

The BHF has long observed that while many schemes lean towards a conservative investment approach, favouring traditional, low-risk strategies, there has been a growing recognition of the potential benefits of incorporating elements of risk-based capital investment. The regulatory environment does not encourage a proactive risk management approach by medical schemes.

Strengthening risk management

The capital requirements of a risk-based model are set on criteria to ensure sustainability of the medical scheme taking into account the unique risks and circumstances of the medical scheme. When implemented, a RBC model helps medical scheme managers pay more attention to emerging risk factors. This enhances risk management of the medical schemes which improves sustainability.

A RBC approach in most instances is able to detect potential challenges in the scheme well in advance. This is an early warning system. This provides both the medical scheme and the regulator sufficient time to remedy the situation in the scheme and if not possible to save the scheme there will be enough time to transition beneficiaries thereby providing much-needed continued access for beneficiaries.

The RBC model not only provides improved financial stability by aligning reserves with the scheme’s risk exposures but also optimises capital allocation by allowing for more efficient use of capital in a manner that reflects the scheme’s specific risk factors.

This approach allows schemes to strike a balance between safeguarding their financial health and pursuing growth opportunities. However, the current regulatory environment significantly restricts the proportion of assets that can be allocated to more aggressive strategies, even when these strategies align with the scheme's risk profile and long-term goals.

A risk-based capital-investment approach offers the flexibility needed to maintain necessary reserves while optimising the remainder of their assets for higher returns. This not only aids in maintaining solvency, but also alleviates the financial pressure on beneficiaries, making healthcare more affordable and accessible.

Proactive strategy

At the heart of this approach management of the medical schemes is based on each scheme's unique risk profile. This model encourages schemes to proactively manage risks, invest free assets with a focus on value creation, rather than simply conservatively preserving capital and a passive approach to risk management.

While current regulatory frameworks may be frustrating for many, these regulations are designed to ensure the financial stability of schemes and enhance their ability to adapt to changing market conditions and investment opportunities.

However, until these regulations are amended, a risk-based capital model provides schemes with a pathway to financial resilience and sustainability, allowing for greater reserve management while continuing to provide affordable, high-quality healthcare to members.

As we move forward, this approach not only safeguards the solvency of schemes, but empowers them to deliver on their core mission.

The time for strategic innovation is now. By rethinking our investment models and aligning them with the unique risks we face, we can ensure the long-term viability of our sector and the wellbeing of those we serve.