Discovery Health Medical Scheme retains AA+(ZA) rating
Discovery Health Medical Scheme’s (“DHMS”) national scale claims paying ability rating has been reaffirmed at AA+(ZA) (double A plus), with a Stable Outlook. The medical scheme industry’s rating ceiling has been capped at AA+(ZA) (double A plus), making this the highest rating that an open or closed medical scheme in South Africa can currently be accorded.
The rating reflects the fact that DHMS remains the market leader in the open medical schemes industry by a significant margin. This position has been achieved via robust organic growth and strong member retention, indicating DHMS’s perceived value proposition and favourable competitive stance in the market. Further, cognisance was taken of the fact that the rest of the open medical schemes industry as a whole has shown little or no growth over the last few years.
The strong growth achieved has positively assisted the scheme in maintaining a favourable age risk profile compared with industry norms. It has, however, placed some downward pressure on statutory solvency. Current action being taken by management is expected to see the small differential in statutory solvency (23.5% as at FYE11) progressively increase to meet the minimum regulatory requirement by FYE15. Cognisance is, however, taken of the fact that while the scheme makes every effort to continuously manage solvency in line with the regulatory target, given its size, slight discrepancies are inherent.
DHMS’s rating also reflects the consistently positive and substantial net surpluses achieved over the last decade (barring F05), the accumulation of which has resulted in a formidable reserve position of R7.4bn at FYE11. This has been aided by the scheme’s well integrated operating model and robust approach to risk management interventions, which has provided for efficient healthcare cost adjudication and management, assisting the scheme in maintaining a claims ratio consistently below the industry mean for several years.
In view of the industry risk characteristics embodied within the medical schemes operating environment, it is unlikely that the industry ceiling will be uplifted. Triggers that could lead to a rating downgrade include a significant weakening in DHMS’s financial performance over a prolonged period (and against expectations), thereby detrimentally eroding reserve levels and key credit protection measures. Additionally, government’s longer-term objective to introduce an NHI framework in South Africa, to which the associated effect on the medical schemes industry remains uncertain, could negatively impact the rating.
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