I thank the Chairman and the committee members for their invitation. My colleagues are Mr. Declan Moran, director of marketing and business development and Dr. Bernadette Carr, our medical director.
VHI was established in 1957 by an Act of the Oireachtas. VHI Healthcare is medically led and believes that it is in the health care business rather than the insurance business. It is also clear to VHI that it will have to devote far greater financial and medical resources in the critical areas of prevention, non-hospital based chronic condition management services and additional community-based services in the years ahead. We have made progress in this respect in the past year.
VHI Healthcare is continuing to change the way health care will be delivered to its customers to meet their growing health care needs in the years ahead. Our customer base is aging and today we have 280,000 customers over the age of 60, compared to 180,000 ten years ago. We anticipate that we will have between 360,000 and 370,000 by 2019.
We have forwarded a presentation to the members of the committee. I will start with a financial overview, followed by an analysis of our health care expenditure and where it is focused compared to our competitors. We will discuss the current regulatory environment, which is based on a levy and age-related tax relief system. As members will be aware, the goal of a community rating system is that younger members of society support the health care costs of older members of society and this objective was established by the Oireachtas in 1957. We will also compare our operating efficiency to our competitors and discuss our financial position.
In 2009 VHI will generate underwriting losses of more than €80 million in meeting the health care needs of our customers. At the end of the year we will have lost almost 120,000 customers and yet we will have more customers over the age of 60 than we had at the start of the year. In 2009 we will lose €170 million in meeting the health care needs of our older customers. This level of losses is unsustainable in a highly competitive marketplace. Our younger customers have to fund the health care costs of our older members if they remain with VHI Healthcare but they do not have to fund these costs if they move to Quinn or Hibernian.
The presentation contains a number of statistics on health care expenditure in 2008 and an analysis of the health care funding gap between VHI Healthcare and its competitors, which will widen in the years ahead. Health care costs are primarily a function of age and health status. In 2009 our average health care costs per customer will be €900, which is almost double that of our competitors. There is common ground in the sense that we spend more than our competitors.
Our two largest areas of health care expenditure are cancer and cardiac care and demand for these services will continue to increase in the years ahead due to a combination of demographic and technology factors. We spend more on Herceptin, a late-stage breast cancer treatment, than Hibernian spends on cancer care and we believe we spend more on implantable defibrillators than Hibernian spends on cardiac care. Our competitors will want the committee to believe that their lower average health care costs are due to their superior management rather than VHI Healthcare's customer health care needs and that they are tougher on hospitals and consultants. This assertion has no basis and an independent party, preferably the Health Insurance Authority, HIA, should review the actual cost, frequency and complexity of health care for each insurer. Care pathways for health insurance customers requiring care are the same irrespective of who their insurer is. A person who needs treatment for breast cancer is treated by a consultant depending on the stage to which the condition has developed.
In our opinion the current levy and age-related tax relief system is only 38%-40% effective, which means that we do not recover 60%-62% of the additional health care costs of our members. For a community-rated system to be maintained, it will need to be at least 80% effective. Countries such as Switzerland, Germany, South Africa and Holland have support schemes which are 80%-90% effective. They are dynamic, are constantly updated and encourage insurers to move towards prevention strategies.
The market consequences of a scheme which is only 38% to 40% effective are as I will outline. All health insurance companies focus on families, younger lives and proxies for younger lives such as company-paid schemes. This results in competition for these profitable customers and in lower prices for these groups. Historically it was possible to generate margins of between 40% and 50% on younger adults and these margins were used to fund the health care needs of our older customers. This potential profit margin has resulted in new products and special promotions being developed for younger customers, families and companies, which have reduced margins. This loss of margins is ending community rating and a risk-rated market is beginning to emerge. Today, as the HIA has advertised in recent weeks, there are large price gaps between broadly similar products. This reflects a market which is becoming risk rated and is unstable.
Our competitors will describe us as scaremongering when we say that older members will pay more for health insurance and this will not happen as community rating is enshrined in law. The market share in different age groups proves that our competitors act rationally and with the goal of profit. They have, on a combined basis, almost a 40% share of the under-50s market yet have less than 10% of 70-79-year olds and less than 4% of customers over the age of 80. This is how you would expect a rational competitor to behave. Markets are rational.
With regard to operating efficiencies VHI Healthcare had a cost to income ratio of 8% in 2008 compared to 14% for Quinn Insurance, the parent company of Quinn Health — for which I do not have audited accounts — and 28% for Hibernian Insurance, we believe. Those numbers are to be found in the presentation. Our competitors also believe that VHI Healthcare derives an advantage by not being regulated by the Financial Regulator. We view it as an enormous disadvantage that we are not regulated, but we have to be realistic. We have a solvency level of 22% at year end compared to a requirement of 40%. While some of this may be bridged through reinsurance, we require capital in order to be regulated. Notwithstanding the 22%, at the end of 2008 VHI Healthcare's liquid assets exceeded its insurance short-term liabilities by €347 million, and therefore we have a highly liquid balance sheet that can meet the healthcare needs of our customers and ultimately believe VHI Healthcare has greater liquidity than our competitors. Our competitors will argue that VHI's alleged dominance is the real problem and that the small number of health insurance companies in Ireland is evidence that the market is not working. If the committee carefully examines overseas markets, be they community rated or risk rated, this argument is not supported by trends.
For instance there are currently five health insurance companies in Holland accounting for 90% of the health insurance market with the two largest having more than 5 million customers each. The UK has 5 million insured with four insurers of scale and Australia has over 10 million insured with two insurers of scale.
Our competitors also argue that the levy-TRS system is inflationary, notwithstanding that the levy equals the tax relief, is financially neutral and therefore has no inflationary impact across the market. It clearly increases costs for younger customers but reduces them by the same amount for older members. They will argue that the levy age-related TRS system is a transfer from the poor to the rich, notwithstanding that our plans D and E are currently significant net contributors to the healthcare needs of older plan B members and account for 70% of our customer base. I have heard people assert that it is 25% or 30%, but plans D and E account for 70% of our customer base.
As the levy system is only 38% effective we are actively engaged with the Government to try to persuade it that a significantly more robust mechanism is required if we wish to sustain community rating. I was very disappointed that we failed to make progress in the budget, and VHI and its customers hope that there will be significant progress over the next few weeks and months. If no progress is made then the social goal of community rating will not be met and market forces will overwhelm it. This will undoubtedly result in lower prices for younger members of society and in turn must lead to higher prices for older members. That is how markets operate. They are rational and unforgiving. VHI does not want to be undone after 53 years but markets and competition will ensure it happens.