SOE virus hits medical aid industry

Jo-Maré Duddy – State-owned enterprises’ chronic non-payment of members’ contributions forced the medical aid fund industry in the country to hike its provision for bad debt in the second quarter of last year by more than 800% on an annual basis.
The about N$9.5 million provision for bad debt is an increase of some N$8.5 million compared to the second quarter of 2017 and is nearly N$7.8 million more than the last quarter of 2017. Compared to other second quarters, this is the highest provision for bad debt since 2013, when the amount was N$6.5 million.
In its latest quarterly report, the Namibia Financial Institutions Supervisory Authority (Namfisa) attributes the increase in provision for bad debt to a closed medical aid fund which made provision for the contributions receivable of an SOE that had been outstanding since the 2017 financial year. At 30 June 2018, this amount was considered unrecoverable.
This increased Namfisa’s concern about the recoverability of contributions receivable, the watchdog says.
Namfisa started singling out the public enterprises sector as the culprit for arrears in the second quarter of 2017. The watchdog didn’t name the guilty SOEs. The NBC in the middle of last year admitted that it failed to pay over employees’ medical aid contributions to Namibia Medical Care (NMC) after the fund suspended its services to the national broadcaster. At the time, the NBC was N$15 million in arrears.
Arrears
At the end of June last year, the industry’s contributions receivable amounted to N$30 million. Of this, nearly 58.7% or N$17.6 million was owed by public enterprises. Overall, the industry’s contributions receivable consisted of current contributions of N$16.4 million, while arrear contributions receivable – aged between 30 and 120+ days – stood at N$13.6 million.
Namfisa says public enterprises settled N$2.1 million – or 10.6% of their total contributions receivable – during the quarter under review. This was the result of the watchdog’s “engagement” with the sector.
“The authority remains concerned with public enterprises that are not adhering to their repayment agreements and will continue engaging these public enterprises in order to mitigate the industry’s liquidity risks borne from the non-payment of contributions,” Namfisa says.
Overall, the industry’s arrear contributions during the quarter under review represented 1.3% of total contributions received, an improvement on the 2.5% recorded during the previous quarter. The industry benchmark is 1.5%.
However, Namfisa points out that the decrease in contributions receivable was “influenced by private entities that paid more than they owed to the industry”.
The medical aid industry recorded a loss ratio of 100.7% during the second quarter of 2018, meaning that the industry’s net income of about N$982.4 million in contributions was not enough to cover total expenditure – claims of some N$921.4 million plus other expenses of nearly N$101.1 million.
Deficit
This left the industry with an operational deficit of about N$40 million. Net investment income of just below N$40 million helped secure a net surplus of around N$1.8 million for the quarter under review.
The industry’s cash coverage ratio also took a knock during the quarter, dropping from 0.8 in the first quarter to 0.6. This indicates that the industry had cash and cash equivalents to settle less than a month’s claims.
This is not considered a risk as the industry can replenish cash from monthly contributions collected, Namfisa says. It further points out that nearly 74% of the industry’s investments were held in “highly liquid instruments”. This about N$800 million would enable the industry to access cash from liquidating investments timely and without detrimental cost, Namfisa says.
Although the industry’s solvency ratio – its total assets to total liabilities – decreased from 4.5% in the first quarter to 4.4% the next one, Namfisa says the industry’s total assets of more than N$1.8 billion still amounted to more than four times its total liabilities. As such, the industry was liquid and solvent at the end of the second quarter of 2018, the authority says.
Reserves
Namfisa requires medical aid funds to maintain a minimum prudential reserves level or solvency margin of 25% of gross contributions. This is determined by dividing accumulated funds by the annualised gross contributions received.
At 30 June 2018, two of the ten medical aid funds under Namfisa’s supervision didn’t meet this requirement. These two open medical aid funds represent about 13 670 beneficiaries, the watchdog says.
“The authority continues to monitor the two open funds closely to ensure that remedial measures are taken to improve their reserve levels; and that their solvency risk is minimised as much as possible,” Namfisa says.
Overall, the industry’s accumulated reserves increased by 0.9% to N$1.4 billion at the end of the second quarter of 2018. Its reserves levels rose by 0.4% to 34.7%.
Namfisa uses five stages to measure the financial wellbeing of medical aid funds – Stage 1 indicating “no significant problems”. This category, the highest on Namfisa’s supervisory ladder, means that funds submit returns and annual financial statements, as well as pay levies.
At the end of June 2018, none of the ten medical aid funds in the country got a clean bill of health. At the end of 2017, two funds enjoyed Stage-1 status, while four funds fell in this category at the end of the March 2017.
Funds in Stage 2 grew from two in the first quarter of 2017 to four at the end of 2017, and six at the end of March and June 2018. Stage 2 is referred to as the “early warning” stage where the submission of returns are staggered and the resultant levies not paid.
Two funds fell in the Stage 5-category, meaning they are not viable or insolvency is imminent.