Irish Health insurance market - Insurance swap shop

Last year, the health insurance cover of more than 400,000 individuals was transferred from Bupa Insurance to Quinn Direct Insurance. This transaction enabled Bupa to exit the Irish health insurance market cleanly, conversely, Quinn was able to make a rapid entry into the market. Furthermore, the insurance cover for policyholders continued uninterrupted. The transfer was achieved successfully through the UK High Court but what was the background to the transaction and how did it benefit all parties?

The health insurance market within the UK operates as a free, competitive sector. Insurers within this market are able to charge premiums for health insurance that vary according to an individual's age, sex and medical history. Medical conditions that already exist can be excluded from cover. But, this approach to health insurance is different to that in the Republic of Ireland.

Within the health insurance market in Ireland, there are several key principles with which all insurers must comply (see table). Of those principles, the one that arguably has the most significant impact on the Irish market is 'community rating'. By requiring insurers to charge the same premium rate for all individuals, regardless of their age, sex or medical history, there is clearly a benefit to be gained for insurers by targeting policyholders with lower risk profiles - for example, by looking to attract a greater proportion of younger policyholders.

In addition to implementing the key principles, the Irish government also put in place a risk equalisation scheme, the aim of which was to enable a competitive health insurance market to be maintained, while also operating community rating. The aim of the RES is to neutralise differences in health insurers' costs that arise from variations in the risk profiles of their customers. It operates by requiring cash payments to be made from insurers with lower than average risk profiles to those with less favourable risk profiles, such as older policyholders.

The implications of community rating are exacerbated by the existence of the state-owned VHI, the largest health insurer in Ireland, which because of historical reasons insures a significant proportion of older policyholders. As well as VHI, which insures around 75% of the market, there were two other major health insurers operating in the Irish market - Bupa Ireland and Vivas Health. Bupa entered the market around 10 years ago, while Vivas Health was established in 2004.

Following the activation of RES payments at the beginning of 2006, Bupa challenged their validity in the Irish courts. This challenge was unsuccessful and Bupa, therefore, decided to withdraw from the Irish health insurance market. As is typically the case, while some insurers look to exit a certain area of business, there are always others looking to enter the same business - and in this case, it was Quinn.

As a result, an insurance business transfer scheme was implemented between Bupa and Quinn. This transaction enabled the health insurance business previously underwritten by Bupa to be transferred to Quinn, with no contractual liability remaining with Bupa in respect of the transferring business. The process effectively substituted the original insurer with a new insurer.

In this case, all claims that occurred prior to the effective date of the transfer remained with Bupa, and all claims that occurred afterwards were passed to Quinn. All of Bupa's administration staff were transferred to Quinn to enable the administration of the transferred policies to continue seamlessly.

The insurance business transfer was processed through the UK courts, taking place in accordance with Part VII of the UK's Financial Services and Markets Act 2000. While all the transferring policies were sold in Ireland through Bupa's Irish branch, they were legally underwritten by Bupa, a UK insurance company. Hence, the case was heard in the UK courts rather than through the Irish judicial system.

The transfer process included two court hearings, the involvement of the Financial Services Authority, and appropriate policyholder notification, to ensure that customers were provided with sufficient information on the proposed transfer and its effects. In addition, a report from an independent expert was required.

The role of the independent expert is to express an opinion on the likely effects of the proposed transfer on all affected policyholders, with the court relying on the report produced. The report is also freely available to policyholders. In this case, Grant Thornton, the independent expert, backed the transfer as it was very unlikely that any of the three groups of policyholders privy to the transfer would be adversely affected.

Discussions regarding the insurance business transfer began in early 2007, with the transfer successfully sanctioned by the UK High Court on 30 July, thus enabling both Bupa and Quinn to swiftly implement a key business decision. The business transfer made it possible for Bupa to successfully exit the Irish health insurance market quickly, while safeguarding the interests of its staff and policyholders, whose cover continued uninterrupted after the transfer. This prompt exit also enabled Bupa to focus on new areas and not distract critical management resource on an old business.

At the same time, Quinn was able to make a rapid and credible entry into a new market, allowing it to continue its strategy of diversification of its non-life operations, while demonstrating its future commitment to the Irish health insurance market.

Notwithstanding the successful business transfer, Bupa continued to challenge RES in the courts due to its exposure to potential liabilities under the scheme during the period prior to the transfer. Its latest appeal to the European Court of First Instance was deemed unsuccessful on 12 February. However, there remain several appeals and judicial reviews pending in the Irish courts, on behalf of both Bupa and Quinn, so this state of play is still to be settled.

- Stuart Shepley is head of the finance, actuarial and risk team within Grant Thornton's financial services group.