Top health insurer plans big moves

By Richard Braddell

Between the lines

With $230 million in reserves, a declining membership and ambitions that could strain its capacity to fund them, New Zealand's leading health insurer looks an ideal candidate for demutualisation.

In addition to bringing Southern Cross' 900,000 members a windfall, demutualisation would also help the society to gain access to equity capital for use in expansion.

But Southern Cross has rejected demutualisation. Its conservative financial structure leaves it with little immediate need for capital and it believes it could, if needed, raise money through instruments such as subordinated perpetual capital notes.

Instead, it believes that a mutual structure is the way to bridge the growing gap between receding state funding and private health provision.

The society needs to change, since the declining share of state health funding is boosting surgery claims met by Southern Cross, forcing up premiums and making the healthy think twice about membership.

Southern Cross' solution involves rationalising funding provided by state, private insurance and the likes of ACC into total health community schemes operated in joint ventures under the good auspices of outfits like itself.

One such scheme is set to go in Marlborough, but needs Health Funding Authority and Government clearance before it can be activated.

But such an ambition is a radical departure for an organisation best known as NZ's largest health insurer.

It is also the kind of notion that will need considerable selling, not least to the Government, which has accorded Southern Cross little importance in the health debate, and to citizens suspicious that any shift in health responsibilities will preface further Government withdrawal.

In the meantime, Southern Cross has moved closer to its integrated healthcare objectives through a workers' compensation joint venture with insurer Royal & SunAlliance and GMV, an injury prevention and rehabilitation specialist.

Operating under the Fusion brand, the venture should bring economies of scale and yield a bonanza of market information which will help Southern Cross to get more out of its hospital network, if nothing else.

The venture is also structured in a way that contains risk. The under-writing risk will be shouldered by Royal & SunAlliance. While Southern Cross will have to outlay meaningful money setting up the database, its information technology costs are expected to be considerably less than $10 million.

Southern Cross' management recognises that the society cannot stand still. But it has a tough challenge explaining what it is up to.

The society's ideas will call on a lot of trust to be accepted by the wider community. And that is one area where being a mutual will help.