Medical aid fund industry in ER

Three open medical aid funds in Namibia, representing more than half of the industry’s total beneficiaries at the end of last year, were unable to maintain the required reserve level of 25% of gross contributions at the end of last year.

According to the latest Quarterly Statistical Bulletin from the Namibia Financial Institutions Supervisory Authority (Namfisa), non-compliance with the prudential requirement affected 54.9% of the industry's beneficiaries, which is nearly 126 000 people out of a total of 229 487 at the end of 2023.

At the end of 2022, only one open medical aid fund failed to meet the reserve requirement, and only about 2 000 beneficiaries were affected.

According to the latest Namfisa report, only four out of the eight medical aid funds in the country displayed “no significant problems” at the end of last year.

One showed “early warning” signs, while another indicated a “risk to viability or solvency”.

Two of the funds were described as an “entity not viable or insolvency imminent”.

“These entities are required to submit to the Registrar [of medical aid funds] strategies to meet the minimum prudential reserves requirement, and to report on their performance in respect of these strategies,” Namfisa said.

In addition, these funds are closely monitored, i.e. they are required to submit monthly management accounts, the authority added.



Contributions

The medical aid fund industry received nearly N$1.4 billion in total contributions in the last quarter of last year, about 11% more than the same three months in 2022.

Principal members totalled 100 334, an increase of 14% over the same period. The number of dependents rose by 6% year-on-year to 115 432. The number of pensioners increased by 3.5% to 13 721.

Towards the end of last year, some medical aid funds announced double-digit contribution rate increases for 2024. Namfisa intervened in December and placed a temporary cap on some funds’ annual contribution increases, limiting it to a maximum increase of 9.99%.

Funds were given until 20 March this year to submit additional contribution increase applications “along with realistic medium-term strategies to address the sustainability of the funds,” Namfisa said.

The watchdog said the decision followed significant differences between actual and predicted solvency figures over the past three to four years. According to Namfisa, the latter is often absorbed by members' contribution rates and changes to benefit limits.

The authority also expressed concern about the lack of realistic and measurable medium-term strategic plans, which raises questions about the credibility of certain medical funds' solvency forecasts.



Viability

“The compounding effect of annual contribution increases, and benefit reductions raise concerns about the affordability of medical aid. If unmonitored, this trend could render medical aid highly unaffordable over the long term, exacerbating challenges faced by the industry,” Namfisa said at the time.

Cirrus Capital, in its economic outlook for 2024, expressed concerns about the health of medical aid funds.

“The cross-subsidisation model for medical aid is struggling, as unemployment remains high among young individuals while the members in the fund are aging,” the analysts said.

“In addition, increases in claims have been a major drag on medical aid funds, with claims rising excessively over the last few years at an average of 14% (excluding the outlier from Covid-19) compared to the average annual inflation over the last few years of 5%,” Cirrus added.

According to the analysts, medical aid funds have therefore, to varying degrees, relied on investment income and reserves to settle claims.

“This imbalance is unsustainable, and if there are no material remedies and overhauls within the year, there will be industry consolidation,” Cirrus said.



Performance

The medical aid industry’s liquidity gap - the difference between current assets and current liabilities - was positive in the last quarter of last year: the current assets exceeded the current liabilities by N$1.2 billion as of 31 December 2023.

The industry reported a net surplus of nearly N$157.1 million, compared to net losses suffered in the first three quarters of the year. In the fourth quarter of 2022, the industry’s net surplus was nearly N$51.5 million.

Net claims incurred in the quarter under review totalled nearly N$1.15 billion, compared to about N$1.3 billion the previous quarter and nearly N$1.1 billion the last quarter of 2022.

The industry’s total assets at the end of last year were about N$2.097 billion compared to just more than N$2 billion at the end of 2022.



Cash coverage ratio

The cash coverage ratio shows how many months an industry can pay claims using its current cash and equivalents.

In the quarter reviewed, paid claims decreased while contributions received were slightly higher compared to the previous quarter.

Consequently, as of 31 December 2023, the cash coverage ratio stood at 0.7. This marks an improvement from 0.3 reported on 30 September 2023, and the same quarter in 2022.

However, this ratio indicates that the industry’s cash and cash equivalents were not sufficient to settle one month’s worth of claims as of 31 December 2023.

“The industry held sufficient liquid investments to disinvest to settle claims where cash resources were insufficient,” Namfisa said.



Liquidity ratio

In the quarter under review, the industry saw a growth of 8.7% in current assets, driven by increases in investments and cash equivalents.

However, this growth was overshadowed by a 10.9% increase in current liabilities.

As a result, the liquidity ratio declined from 3.0:1 on 30 September 2023, to 2.9:1 on 31 December 2023. This ratio was lower than the 3.0:1 reported on 30 September 2023, and also lower than the 3.4:1 reported on 31 December 2022.

Typically, an ideal liquidity ratio ranges between 1.5:1 and 3:1, indicating that the industry's current ratio remains favourable despite the slight decrease.



Solvency ratio

The solvency ratio, which measures total assets against total liabilities, held steady at 3.3:1 as of 31 December 2023.

However, this ratio was lower than the 3.7:1 reported on 30 September 2022.

A solvency ratio above 1 signifies that the industry's total assets surpass its total liabilities, meeting regulatory standards.

The industry maintained a significant portion of its assets in liquid investments during the reviewed quarter, bolstering both liquidity and solvency.



Reserves

As of 31 December 2023, the industry's accumulated funds, calculated as total assets minus total liabilities, rose by 12.1% for the quarter, but showed a slight annual decrease of 0.3%, amounting to N$1.5 billion.

This increase was driven by a net surplus reported during the reviewed quarter, Namfisa said.

Medical aid funds are mandated to maintain a minimum prudential reserves level or solvency margin of 25.0 percent of gross contributions.

As of 31 December 2023, the industry's reserves level grew by 2.9% to reach 26.7%, indicating compliance with regulatory requirements.

Within the industry, open funds saw their reserves level increase by 2.4% to 24.3%, while closed funds experienced a substantial rise of 19.5%, reaching 64%.