The EU, as expected, has ruled against Ireland for continuing to allow VHI an exemption from regulation by the Central Bank. As a result of this the VHI will now have to find over €300 Million to reach the solvency requirements that would allow it to meet the regulatory solvency requirements and be fully regulated.

The European Court of Justice this morning ruled that Ireland had failed to meet its obligations under EU directives pertaining to the health insurance market. The exemptions were originally granted back in 1973 but the commission took the view (correctly) that the activities of the VHI have changed considerably since then. It said when it was set up originally in 1957 the VHI was mandated to “‘make and carry out a scheme of voluntary health insurance for defraying . . . the cost to [insured persons in respect of] medical, surgical, hospital and other health services'”.

However, it said under subsequent legislation introduced in 1996, the company was given the right to provide other health-related services which was later extended further in 1998 to allow it to act “as agent for an insurer in respect of the provision of insurance cover pursuant to an international healthcare plan”.

It said under legislation introduced by the Irish government in 2001, the VHI obtained the right to carry out, inter alia, “activities of an advisory or consultative nature”.

Ireland did not dispute the existence of those successive amendments to the VHI statutes, but defended that they were still related to the original basic activity. The court stated “that, at the very least, the power of the VHI to act as an agent on behalf of another insurer under an international healthcare plan or the right to carry out advisory activities go beyond the basic activities that it was authorised to carry out on the basis of the 1957 Act, it must be held that Ireland’s line of argument cannot be accepted, irrespective of the financial significance of those new activities with regard to the entire revenue of that body, as no provision is made for this criterion in the First Directive.”

The state will now have to pay the full legal costs of the case as well as having to pump a €300 million lifeline into the VHI so as to increase its reserves from its current level of 20% of premium income to the 40% required by regulation.

So what does this mean for consumers? The Minister for Finance was quick to make a statement that this would have no immediate effect on consumers. The truest part of that statement in the word ‘immediate’, for it is my belief that this will have a profound effect for the consumer and for the market overall.

If the State does provide the necessary funding and if VHI does remain in its current form for the foreseeable future, one welcome outcome of regulation is that the VHI will be legally obliged to comply with the Consumer Protection Code of 2006.

While the VHI currently states that it voluntarily complies with the code there are many practices that have gone on within VHI which might bring that into question. Indeed many of the changes that have taken place in the last 12 months may come into question.

One example is the practice of charging clients a full year’s premium for switching insurer mid-year with no rule or mechanism in their Terms and Conditions to allow it.

Another is not allowing any mid-term alterations or plan changes to your cover. These last two points are akin to penalising a customer for cancelling his life insurance or serious illness policy or not allowing them to change their level of cover in accordance with their needs.

Then there is the issue of cherry picking which customers get this treatment, with anecdotal evidence suggesting that older members looking to switch are having no such penalties levied upon them.

Indeed this year again saw VHI accused of sharp practice by the National Consumer Agency in relation to their policy around travel insurance. It had been the practice of VHI to cancel travel insurance policies effective immediately with no refund on foot of the customer switching their health insurance to another provider. A practice they were later forced to abandon.

To put another way, simply Google “VHI accused” and you won’t be short of reading material!!

It remains to be seen what view the Central Bank would take on these practices but as an integral part of the Consumer Protection Code is to do with the spirit of the code and coupled with the fact that VHI are the only insurer to be both unregulated and engaged in these practices, I suspect the writing is on the wall. This of course will be good news for the consumer.

If however this spurs the government on to fast-track the proposal to break up the VHI, (which is a real possibility), it remains to be seen whether or not this will be good news for the consumer or indeed the market in general. With VHI holding the oldest membership of any insurer and paying out the highest claims, there will no doubt be difficulties in deciding how to break up that book and how to distribute this book of business. Will the State force all existing insurers and any new entrants to carry an equal weight of this demographic and what of the more profitable book of business?

How this is handled could have major consequences for the overall competitiveness of the market place and indeed the very future of risk equalisation. Again corporate entities need to think very carefully when renewing and ask themselves where they want to be when all this begins to unravel.

Patrick Brennan
Director of Corporate Business
Irish Health Insurance

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