Announcements Criteria Research

GCR Publishes the South African Medical Schemes Sector Risk Score

Summary

Johannesburg, 18 September 2019: GCR Ratings (“GCR”) has published the South African Medical Schemes Sector Risk Score.

The GCR South African Medical Schemes Sector Risk Assessment

The Medical Schemes sector risk score (ranging from 0 to 15) is a key factor in the operating environment component score. The core of the GCR Ratings Framework is based on GCR’s opinion that an entity’s operating environment largely frames its creditworthiness. As a result, the operating environment analysis anchors the underlying risk score for the GCR rating methodology. GCR combines elements of the country risk and sectoral risk analysis to anchor a medical scheme to its current operating conditions. For more details on any of the above, please read the related criteria and research listed below.

GCR will periodically publish an updated “South African Medical Schemes Sector Risk Score”, which will supersede previous publications.

South African Medical Scheme Sector Risk Score

South Africa Medical Schemes, Sector Risk Score 8.0. Country Risk Score 7.5*, Mapping Table 7.5 to 8.0

The South African Medical Schemes sector risk score of 8 blends healthy aggregate solvency, advanced market depth and maturity, low earnings risk and a regulatory regime that adequately caters for risk in the sector.

GCR views industry solvency to be prudent, benefitting from adequate reserve accumulation, inherently low product risk, and comparatively contained levels of market risk exposure. Regulatory oversight contributes towards continuing reserve sufficiency across the industry, while a high level of information transparency and availability supports a strong regulatory assessment. Active regulatory intervention has enforced key legislative measures such as corporate governance effectiveness, while also facilitating market consolidation in the interests of member protection.

GCR views the South African Medical Schemes industry’s penetration and density to be reflective of advanced market depth and maturity. The industry is viewed to have comparable characteristics to the South African Insurance sector, given overlaps in buying patterns. Average annual contribution rate increases continue to keep pace with medical inflation, supporting contribution stability in real terms. Furthermore, the fairly defensive nature of the product supports low earnings risk and sufficient reserve generation. Market stability further benefits from liquidity placements within the mature South African Banking sector, which reflects a GCR sector risk score of 8.

Industry composition and structure are viewed to benefit the industry’s risk profile, with established top and mid-tier players contributing positively to overall pricing dynamics, while maintaining high member retention rates. Consolidation of smaller schemes has contributed towards market stability. As a result, barriers to entry are deemed to be very high, and disruption risks emanating from market composition to be low.

The industry has adapted fairly well to ongoing regulatory uncertainty, although potential changes in this regard may have a longer term financial impact. National government continues to pursue the implementation of National Health Insurance (“NHI”), while findings from the Competition Commission may have some impact on the manner in which schemes operate. Ongoing developments may pose challenges to the industry in the periods leading up to the full implementation of the NHI and require constant monitoring from all stakeholders. Nonetheless, the impact is likely to filter through only over the long term, as continued stakeholder engagement progresses and legislative content is finalised and implemented.

*Country Risk score as at date of publication.

Analytical contacts

Primary analyst Vinay Nagar Senior Credit Analyst: Insurance
Johannesburg, South Africa Vinay@GCRratings.com +27 11 784 1771
Secondary analyst Susan Hawthorne Senior Credit Analyst: Insurance
Johannesburg, South Africa SusanH@GCRratings.com +27 11 784 1771

Related criteria and research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Insurance Companies, May 2019
GCR Country Risk Scores, June 2019
GCR Financial Institutions Risk Scores, July 2019


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