THE SOLVENCY ratio at the state's largest health insurer, VHI, fell by 20% last year due to investment losses and rising medical costs, despite direct government instructions to increase it significantly.

The fall in the ratio, a key measure of the insurer's reserves, has significantly dented VHI chief executive Jimmy Tolan's hopes of obtaining official authorisation from the Financial Regulator to operate as a non-life insurer. Such a move would dramatically broaden the range of products it could market.

It will also heap pressure on the government from the European Commission, which is concerned that VHI's unregulated status is giving it an unfair advantage over private competitors.

VHI needs to achieve a solvency ratio of at least 40% to secure authorisation from the regulator. But by the end of 2008, its ratio stood at 28%, down from 35.3% at the end of February 2008.

A VHI spokeswoman said the insurer remained committed to meeting its solvency targets and said the decline in the ratio was caused by unforeseen events.

"[These include] the absence of risk equalisation payments and the impact of the current economic climate on our investment portfolio," she said. "In addition, last year we paid out more in meeting the medical needs of our customers than we received in premium income."

The insurer had been ordered by the government to seek authorisation by 31 December but this target was soon extended to 31 March. However, this deadline was also missed, forcing health minister Mary Harney to sign an order shifting the date to 1 September.

Both of VHI's competitors, Quinn Healthcare and Hibernian Aviva Health, told this newspaper they doubt the state insurer's commitment to seeking authorisation.

"It allows an unfair competitive advantage for the VHI which has not been subject to the minimum solvency re­- quirements or the same scrutiny as we have been. This has allowed for the further entrenchment of their dominant status in the market," said a Quinn spokesman.

Meanwhile, Hibernian Aviva told the Sunday Tribune it was concerned the VHI was currently not covered by the industry's consumer protection code.

The Department of Health said it was confident the VHI would meet its solvency targets, particularly after the introduction of a levy on health insurance companies to support community rating.