I have been thinking more about yesterday’s post and something did occur to me.
Suppose the solvency regulations did change to this risk based capital thing the actuarians are going on about. What would be the likely outcome?
For a start schemes would have even more reasons to amalgamate. At the moment if two schemes amalgamate then the reserving requirement is just the sum of the reserving requirements of the individual schemes. No improvement (or synergy as people afflicted with business speak would say).
If, however, bigger schemes needed proportionally smaller reserves than smaller schemes then two schemes that fall slightly below the requirement may find that, by amalgamating, they can form a scheme that magically does meet the solvency requirements.
The other (somewhat scary) thought was this. Say the kabouter is right and Discovery Health Medical Scheme could actually manage with half the reserves currently mandated by regulation. No doubt they would look for ways to spend the billions of rands that would suddenly be freed up. One of the ways would be to adopt an aggressive pricing strategy which could lead to Cartman getting even bigger. By eating its competition alive.
The only sensible response for other open schemes would be to try and get gain scale as well and that won’t happen through organic growth. So that would be another reason why a change to risk based capital would drive further consolidation in the industry.
So the question that has been keeping me awake is this: is it better to change the solvency regulations and then watch what happens from a safe distance or do you try and stall (with the current solvency regulations, stupid as they are) for as long as possible while you try to engineer a Discovery sized competitor from spare parts (kinda like Dr Frankenstein)?
I have heard rumours that Gung-ho has taken it upon himself to police the competition issues in the medical scheme market (isn’t that someone else’s job?). Could it be possible that he has thought along these lines and decided on the second option?
Nah. Probably not.