IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v51y2023ics1544612322005803.html
   My bibliography  Save this article

Financial Health of Medical Schemes in South Africa

Author

Listed:
  • Alhassan, Abdul Latif

Abstract

This paper undertakes a comprehensive examination of the financial health of medical schemes in South Africa using annual financial data on 82 schemes from 2011 to 2018. The paper constructs a financial health index from return on assets, return on equity, medical loss and administrative loss ratios using the principal component analysis. The results indicate an average of 92% and 10% of members contribution are expended on healthcare and administrative costs respectively and average returns of 5.7% and 6.9% on assets and equity respectively. The paper also documents evidence that open schemes are characterized by higher administrative costs while restricted schemes are associated with higher healthcare expenditure. Overall, restricted schemes generate higher returns on assets and equity, culminating in a healthier financial state compared with open schemes. Using a battery of panel data estimation techniques, the paper finds evidence of a diminishing effect of medical scheme size and market concentration on financial health while liquidity and technical reserves are found to improve financial health of medical schemes in South Africa. The findings lend support to regulatory actions that seek to reduce market concentration and improve competitive pressures to enhance financial health of the market.

Suggested Citation

  • Alhassan, Abdul Latif, 2023. "Financial Health of Medical Schemes in South Africa," Finance Research Letters, Elsevier, vol. 51(C).
    • Handle: RePEc:eee:finlet:v:51:y:2023:i:c:s1544612322005803
    DOI: 10.1016/j.frl.2022.103403
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612322005803
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2022.103403?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Abdul Latif Alhassan, 2018. "Loss reserving behaviour in insurance markets: Evidence from Mauritius," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 39(7), pages 805-813, October.
    2. Adams, Mike & Jiang, Wei, 2016. "Do outside directors influence the financial performance of risk-trading firms? Evidence from the United Kingdom (UK) insurance industry," Journal of Banking & Finance, Elsevier, vol. 64(C), pages 36-51.
    3. Bryce, Herrington J., 1994. "Profitability of HMOs: does non-profit status make a difference?," Health Policy, Elsevier, vol. 28(3), pages 197-210, June.
    4. Joe S. Bain, 1951. "Relation of Profit Rate to Industry Concentration: American Manufacturing, 1936–1940," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 65(3), pages 293-324.
    5. Abdul Latif Alhassan & Nicholas Biekpe, 2017. "Liberalization Outcomes and Competitive Behaviour in an Emerging Insurance Market," African Development Review, African Development Bank, vol. 29(2), pages 122-138, June.
    6. Mandira Sarma, 2008. "Index of Financial Inclusion," Working Papers id:1575, eSocialSciences.
    7. Segundo Camino-Mogro & Natalia Bermúdez-Barrezueta, 2019. "Determinants of profitability of life and non-life insurance companies: evidence from Ecuador," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 14(5), pages 831-872, August.
    8. Killins, Robert N., 2020. "Firm-specific, industry-specific and macroeconomic factors of life insurers’ profitability: Evidence from Canada," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    9. Abdul Latif Alhassan & Nicholas Biekpe, 2015. "Efficiency, Productivity and Returns to Scale Economies in the Non-Life Insurance Market in South Africa," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 40(3), pages 493-515, July.
    10. repec:eme:jrfpps:v:14:y:2013:i:2:p:286-302 is not listed on IDEAS
    11. Gaganis, Chrysovalantis & Liu, Liuling & Pasiouras, Fotios, 2015. "Regulations, profitability, and risk-adjusted returns of European insurers: An empirical investigation," Journal of Financial Stability, Elsevier, vol. 18(C), pages 55-77.
    12. Martin F. Grace & J. Tyler Leverty, 2012. "Property–Liability Insurer Reserve Error: Motive, Manipulation, or Mistake," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(2), pages 351-380, June.
    13. Joseph Oscar Akotey & Frank G. Sackey & Lordina Amoah & Richard Frimpong Manso, 2013. "The financial performance of life insurance companies in Ghana," Journal of Risk Finance, Emerald Group Publishing, vol. 14(3), pages 286-302, May.
    14. Shinichi Kamiya & Andreas Milidonis, 2018. "Actuarial Independence and Managerial Discretion," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 85(4), pages 1055-1082, December.
    15. Renbao Chen & Kie Ann Wong, 2004. "The Determinants of Financial Health of Asian Insurance Companies," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(3), pages 469-499, September.
    16. Gaganis, Chrysovalantis & Hasan, Iftekhar & Pasiouras, Fotios, 2016. "Regulations, institutions and income smoothing by managing technical reserves: International evidence from the insurance industry," Omega, Elsevier, vol. 59(PA), pages 113-129.
    17. Joseph Oscar Akotey & Frank G. Sackey & Lordina Amoah & Richard Frimpong Manso, 2013. "The financial performance of life insurance companies in Ghana," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 14(3), pages 286-302, May.
    18. Pillay, Timesh D. & Skordis-Worrall, Jolene, 2013. "South African health financing reform 2000–2010: Understanding the agenda-setting process," Health Policy, Elsevier, vol. 109(3), pages 321-331.
    19. Mandira Sarma, 2008. "Index of Financial Inclusion," Finance Working Papers 22259, East Asian Bureau of Economic Research.
    20. Beaver, William H. & McNichols, Maureen F. & Nelson, Karen K., 2003. "Management of the loss reserve accrual and the distribution of earnings in the property-casualty insurance industry," Journal of Accounting and Economics, Elsevier, vol. 35(3), pages 347-376, August.
    21. Barber, Sarah L. & Kumar, Ankit & Roubal, Tomas & Colombo, Francesca & Lorenzoni, Luca, 2018. "Harnessing the private health sector by using prices as a policy instrument: Lessons learned from South Africa," Health Policy, Elsevier, vol. 122(5), pages 558-564.
    22. Abdul Latif Alhassan & Nicholas Biekpe, 2016. "Competition and efficiency in the non-life insurance market in South Africa," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 43(6), pages 882-909, November.
    23. repec:eme:par000:par-06-2019-0066 is not listed on IDEAS
    24. Lucas Manoel Marques Clemente & Alexandre Pereira Salgado Junior & Eduardo Falsarella Júnior & Marco Antonio Alves de Souza Junior & Juliana Chiaretti Novi & Alexandre de Castro Moura Duarte, 2018. "Management towards financial sustainability for private health companies," Management Research Review, Emerald Group Publishing Limited, vol. 41(3), pages 379-394, March.
    25. Abdul Latif Alhassan & George Kojo Addisson & Michael E. Asamoah, 2015. "Market structure, efficiency and profitability of insurance companies in Ghana," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 10(4), pages 648-669, September.
    26. Eling, Martin & Jia, Ruo, 2019. "Efficiency and profitability in the global insurance industry," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    27. Lucas Manoel Marques Clemente & Alexandre Pereira Salgado Junior & Eduardo Falsarella Júnior & Marco Antonio Alves de Souza Junior & Juliana Chiaretti Novi & Alexandre de Castro Moura Duarte, 2018. "Management towards financial sustainability for private health companies," Management Research Review, Emerald Group Publishing Limited, vol. 41(3), pages 379-394, March.
    28. Abdul Latif Alhassan & Mary-Ann Afua Boakye, 2020. "Board characteristics and life insurance efficiency in South Africa," Pacific Accounting Review, Emerald Group Publishing Limited, vol. 32(2), pages 217-237, March.
    29. Victor Ngobeni & Marthinus C. Breitenbach & Goodness C. Aye, 2020. "Technical Efficiency of Provincial Public Healthcare in South Africa," Working Papers 202013, University of Pretoria, Department of Economics.
    30. Thabang Ndlovu, 2021. "Efficiency, productivity and returns to scale economies in South Africa’s healthcare insurance market," Studies in Economics and Econometrics, Taylor & Francis Journals, vol. 45(3), pages 164-183, July.
    31. Bojan Srbinoski & Klime Poposki & Gorazd Čibej, 2021. "An empirical investigation of determinants of life insurers’ performance: Evidence from selected countries in Central, Eastern, and Southeastern Europe (CESEE)," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 24(3), pages 293-310, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Daniel Ofori-Sasu & John Kuwornu & Gloria Clarissa Dzeha & Baah Aye Kusi, 2022. "Risk behaviour and insurance efficiency: the role of ownership and regulations from an emerging economies," SN Business & Economics, Springer, vol. 2(7), pages 1-30, July.
    2. Abdul Latif Alhassan & Nicholas Biekpe, 2018. "Competition and Risk-Taking Behaviour in the Non-Life Insurance Market in South Africa," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 43(3), pages 492-519, July.
    3. Killins, Robert N., 2020. "Firm-specific, industry-specific and macroeconomic factors of life insurers’ profitability: Evidence from Canada," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    4. Jassem Alokla & Arief Daynes & Paraskevas Pagas & Panagiotis Tzouvanas, 2023. "Solvency determinants: evidence from the Takaful insurance industry," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 48(4), pages 847-871, October.
    5. Veronika Varga & Zoltán Madari, 2023. "The Hungarian insurance market structure: an empirical analysis," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 31(3), pages 927-940, September.
    6. Subrato Banerjee & Basri Savitha, 2021. "Competition reduces profitability: the case of the Indian life microinsurance industry," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 46(3), pages 383-398, July.
    7. Bojan Srbinoski & Klime Poposki & Gorazd Čibej, 2021. "An empirical investigation of determinants of life insurers’ performance: Evidence from selected countries in Central, Eastern, and Southeastern Europe (CESEE)," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 24(3), pages 293-310, September.
    8. Kanitsorn Terdpaopong & Robert C. Rickards, 2021. "Thai Non-Life Insurance Companies’ Resilience and the Historic 2011 Floods: Some Recommendations for Greater Sustainability," Sustainability, MDPI, vol. 13(16), pages 1-19, August.
    9. Jan Hájek, 2020. "Effect of tax deductibility on technical reserves recognized by Czech and Slovak insurance companies [Vliv daňové uznatelnosti na výši technických rezerv tvořených českými a slovenskými pojišťovnam," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2020(3-4), pages 25-37.
    10. Suárez-Fernández, Sara & Quiroga-Garcia, Raquel & Manzano-Perez, Isabel, 2021. "A Comparison of DEA and SFA Approaches: Application to the US Non-Life Insurance Market," Asian Journal of Applied Economics, Kasetsart University, Center for Applied Economics Research, vol. 28(2).
    11. Jan Hájek, 2020. "Effect of tax deductibility on technical reserves recognized by Czech and Slovak insurance companies [Vliv daňové uznatelnosti na výši technických rezerv tvořených českými a slovenskými pojišťovnam," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2020(3-4).
    12. Jill Bisco & Kathleen McCullough & Hugo Moises Montesinos Yufa & Eleanor Tice Sirmans, 2023. "The impact of monitor choice on insurer loss reserves," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 26(1), pages 83-105, March.
    13. Ngasuko, Tri Achya, 2018. "Peningkatan Keuangan Inklusif di Indonesia melalui Fintech Syariah [Increasing Financial Inclusion Through Syaria Fintech]," MPRA Paper 99180, University Library of Munich, Germany, revised 01 Aug 2018.
    14. Eling, Martin & Jia, Ruo, 2018. "Business failure, efficiency, and volatility: Evidence from the European insurance industry," International Review of Financial Analysis, Elsevier, vol. 59(C), pages 58-76.
    15. Daniel Attah-Kyei & Charles Andoh & Saint Kuttu, 2023. "Risk, technical efficiency and capital requirements of Ghanaian insurers," Risk Management, Palgrave Macmillan, vol. 25(4), pages 1-27, December.
    16. M. Martin Boyer & Elijah Brewer & Willie Reddic, 2019. "The Association between Complexity and Managerial Discretion in the Property and Casualty Insurance Industry," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 9(03), pages 1-33, September.
    17. Oscar Chiwira, 2021. "The Co-Integrating Relationship between Financial Inclusion and Economic Growth in the Southern African Development Community," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 9(3), pages 170-188.
    18. David Mhlanga, 2022. "An analysis of the influence of socioeconomic and demographic factors on financial inclusion in underdeveloped regions," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 11(6), pages 341-349, September.
    19. Rajat Deb, 2016. "Determinants of Savings in Sukanya Samriddhi Account: Evidence from Tripura," IIM Kozhikode Society & Management Review, , vol. 5(2), pages 120-140, July.
    20. Kwaku Ohene-Asare & Jones Kofi Anyimadu Asare & Charles Turkson, 2019. "Dynamic cost productivity and economies of scale of Ghanaian insurers," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 44(1), pages 148-177, January.

    More about this item

    Keywords

    Financial Performance; Private Health Insurance; Medical Schemes; South Africa;
    All these keywords.

    JEL classification:

    • I10 - Health, Education, and Welfare - - Health - - - General
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:51:y:2023:i:c:s1544612322005803. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.