The $28.4b question: $ q What does the Outstanding Claims - - PowerPoint PPT Presentation

The $28.4b question: $ q What does the Outstanding Claims Liability mean for ACC? Liability mean for ACC?

Jonathan Nicholls Head of Actuarial Services ACC 30 September 2013

Chatham House Rules

Aung San Suu Kyi at Chatham House. Creative Commons Photo by Leoboudv

Contents

– What does ACC do? Wh t i th O t t di Cl i Li bilit ? – What is the Outstanding Claims Liability? – What are the key drivers of the OCL? Wh t i i ht t f th OCL? – What insights can we get from the OCL?

W hat does ACC do? W hat does ACC do?

About ACC

– Governed by the Accident Compensation Act 2001 Act 2001 – Comprehensive, no-fault personal injury cover for all New Zealand residents and cover for all New Zealand residents and visitors to New Zealand F nded b Ne Ze l nde – Funded by New Zealanders through five accounts

Cover is m anaged under five accounts

W k E ’ Non- Motor Treatm ent W ork Earners’ Non Earners’ Motor Vehicle Treatm ent I njury

Who Employers/ Salary & Wage Earners/ Government Motor Vehicle Earners / Who funds Self-employed Wage Earners/ Self-employed Government Vehicle Owners Non-Earners What for

Work-related injuries / injury prevention Non-work & non-road injuries / injury prevention Injuries to people not in paid employment / injury Road injuries / injury prevention Injuries sustained as a consequence

• f treatment

/injury prevention injury prevention /injury prevention

Claim s volum es

4.4m

1.7m

CLAIMS 1 EVERY PER YR d seconds

*Correct as at May 2013

I t f ACC I m pact of ACC

– Immediate treatment for injuries without worrying about treatment and legal costs. – “Can do” culture Can do culture

W hat is the Outstanding Claim s Liability?

W h t i th O t t di Cl i Li bilit ? W hat is the Outstanding Claim s Liability?

Estimate of the funds required now to meet the Scheme’s future

• bligations.

It includes: – all accidents up to the valuation date, including those not yet reported to ACC th ibilit f ‘ l d’ l i i – the possibility of ‘closed’ claims reopening – allowance for future price/ rate increases – allowance for the ‘time value of money’ allowance for the time value of money . The OCL does not allow for possible legislative changes. p g g At 30 June 2012, OCL was $28.4b.

Th L t il f th OCL The Long tail of the OCL

– Runoff of OCL at 30 June 2012 – Can take over 80+ years before last payment made.

Projected claims costs for claims to 30 June 2012

1 400 1,600 1,800 1,000 1,200 1,400

ym ents ($m )

400 600 800

C laim Pay

200 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 2057 2059 2061 2063 2065 2067 2069 2071 2073 2075 2077 2079 2081 2083 2085 2087 2089 2091

Year Ending 30 June Year Ending 30 June

To 2007 2007/08 2008/09 2009/10 2010/11 2011/12

Th L t il f th OCL The Long tail of the OCL

Run off rate depends on payment type. Proportion of claim costs paid for Proportion of claim costs paid for accidents occurring in 2011/12 year

100% 50% 60% 70% 80% 90%

ion Paid

10% 20% 30% 40% 50%

Proport

0%

2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 2057 2059 2061 2063 2065 2067 2069 2071 2073 2075 2077 2079 2081 2083 2085 2087 2089

Year Ending 30 June

GPs Weekly Comp SI Care

H i th OCL d t i d? How is the OCL determ ined?

Determined by examining past claims experience (trends) and projecting into the future. Allow for: – Known changes to this experience (e.g. legislative) – Development of claims (numbers and payments) = payment patterns – Claim frequencies – Seasonality – Wage, price and superimposed inflation Discount rates – Discount rates – Known changes to claims management – Actuarial judgement. Actuarial judgement.

Tim e Value of Money

F d h ld f f t bli ti b i t d til – Funds held for a future obligation can be invested until they are needed – For example, if we need $100 in a year’s time & earn 6% p.a. we only need to set aside $94.34 now – Much of the liability will not be paid for many years. 90%

• f the OCL will be outstanding in 2.5 years time. This has

a very large impact on the provision required y g p p q – The future cash flow for $28.4b liability at 30 June 2012 is $82 8b i e ACC needs to hold approximately $34 now for $82.8b, i.e. ACC needs to hold approximately $34 now for every $100 outstanding.

Di t R t Discount Rates

– NZ IFRS 4 requires that we use risk-free rates (i.e. return from an i t t ith h f d f lt) investment with no chance of default) – We use NZ Government Bonds as a starting point – We follow Treasury guidelines – We follow Treasury guidelines.

Application of the Yield Curve to the 30 June 2013 Liability by Year Application of the Yield Curve to the 30 June 2013 Liability by Year

6.00% 7.00% 3.00% 4.00% 5.00% Discount Rate 0.00% 1.00% 2.00% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Year Jun-11 Jun-12 Jun-13

Ri k M i Risk Margins

– Start with an unbiased central estimate (50% chance of being too low, 50% chance of being too high) – Required to add a buffer so that the OCL is expected to be q p sufficient in 75% of all scenarios.

Estimated Distribution of the Outstanding Claim Liability as at 30 June 2012

Net Central Estimate = $25.154b 7% 8% 9%

lity

25000000000 25200000000 25400000000 Provision = $28.396 3% 4% 5% 6%

em ental Probabi

24400000000 24600000000 24800000000 25000000000

• s o

$ 8 396 (75% Probability Level) 0% 1% 2% 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50

Incre

24000000000 24200000000 24400000000

Outstanding Claim Liability as at 30 June 2012 ($Billions)

Change in OCL over tim e

Outstanding Claims Liability 2004 to 2012

30 20 25 15

OCL ($b)

5 10 2004 2005 2006 2007 2008 2009 2010 2011 2012

Year to 30 June

Social Rehab Weekly Comp Medical Hospital Other Claims Handling Social Rehab Weekly Comp Medical Hospital Other Claims Handling

Ch i OCL ti Change in OCL over tim e

Claim Incurred by Accident Year

Cost by accident year (Current value)

$4.0bn $4.5bn $5.0bn

Cost by accident year (Current value)

• utstanding

payments to date Jun 09 estimate Jun 10 estimate $2.5bn $3.0bn $3.5bn June 11 estimate $0 5bn $1.0bn $1.5bn $2.0bn $0.0bn $0.5bn 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

June Accident Year

Change in OCL during financial year

Change in OCL between 30 June 2011 and 30 June 2012

29,000 550 27 000 28,000 28,396 4,535 26,000 27,000

OCL ($m)

944 1,742 24,000 25,000 24,510 400 23,000 , OCL as at 30 June 2011 Expected Increase Claims Experience Inflation Rate Assumption Discount Rate Assumption Change in Discount Rate OCL as at 30 June 2012 June 2011 Increase Experience Assumption Assumption Discount Rate Methodology June 2012

Key assum ptions that im pact the OCL

Factor Scenario Provision as at 30 June 2012 Provision $28,396m Discount rates Increase of 1%

• $3,792m

Discount rates Increase of 1% $3,792m Decrease of 1% $5,000m Inflation rates Increase of 1% $5,131m Decrease of 1%

• $3,946m

$ , Increase of 1%

• $1,314m

Decrease of 1% $1,643m Discounted mean term +1 year

• $855m

Long term gap between discount rates and inflation rates y

• 1 year

$882m Increase of 1% after 2 years $2,554m Decrease of 1% after 2 years

• $1,883m

Growth in care packages - social rehabilitation for serious injury Increase of 1% $1,055m Decrease of 1%

• $800m

Increase of 1% $872m Superimposed inflation - excluding social rehabilitation for serious injury Long term continuance rates for non- Decrease of 1%

• $724m

g fatal weekly compensation

W hat are the key drivers? W hat are the key drivers?

Key drivers of claim experience w hich y p im pact the OCL

Claim utilisation rates (new claim rates)

Non-fatal weekly comp – number of new claims by accident quarter Claim frequency by age band for NE medical claims

K d i f l i i Key drivers of claim experience

Payments per claim Payments per claim

Cost per Claim of PMED for Total p

160 170 180 190 200

aim ($)

100 110 120 130 140 150 160

Cost per Cl

100 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15

Payment Quarter

Actuals Valn (Jun11) Valn (Jun12)

K d i f l i i Key drivers of claim experience

Superimposed inflation – elective surgery

K d i f l i i Key drivers of claim experience

R h bilit ti t Rehabilitation rates – Rehabilitation rates generally increased between 2008 and 2012 – Impact will be a reduction in OCL.

W hat insights can w e get? W hat insights can w e get?

B i i i ht f th OCL Business insights from the OCL

Reporting (Annual Report)

Consolidated statement of financial position

As at 30 June 2012

Consolidated statement of comprehensive income

For the year ended 30 June 2012 Actual Budget Actual 2012 2012 2011 Notes $000 $000 $000

…….. …….. ……..

y Actual Budget Actual 2012 2012 2011 Notes $000 $000 $000

…….. …….. …….. …….. …….. …….. …….. …….. …….. Total assets 25,542,694 24,013,624 21,804,656 Less liabilities …….. …….. …….. …….. …….. …….. Total claims paid 2,603,009 2,811,219 2,588,220 Claims handling costs 8 315,260 322,946 307,343 Derivative financial instruments 15 37,324

• 8,662

Payables and accrued liabilities 21 1,972,031 851,219 1,516,595 Provisions 22 67,244

• 46,939

Unearned levy liability 23 2,183,444 2,597,750 2,428,524 Unexpired risk liability 24 68,592

• Outstanding claims liability

25 28 396 395 25 089 339 24 510 435 Increase in outstanding claims liability 25 3,885,960 834,091 80,577 Total claims incurred 7 6,804,229 3,968,256 2,976,140 Outstanding claims liability 25 28,396,395 25,089,339 24,510,435 Total liabilities 32,725,030 28,538,308 28,511,155 Net liabilities (7,182,336) (4,524,684) (6,706,499) …….. …….. …….. …….. …….. …….. …….. …….. ……..

B i i i ht f th OCL Business insights from the OCL

Pricing – OCL cash flows used to determine future claim costs and therefore levy rates

Indicated Earners' Account Levy

119% 122% 123% 123% 123% 123% 122% 121% 120% 119% 118% 116% 115% 2.50 140% 0.17 0.17 0.14 0.12 0.10 0.10 0.10 0.10 0.11 0.11 0.11 0.12 0.12 1.26 1.26 1.26 1.26 1.26 1.26 1.29 1.32 1.34 1.37 1.39 1.48 1.48 1 00 1.50 2.00 Levy $ 60% 80% 100% 120% rcent Funded 1.14 1.18 1.25 1.27 1.31 1.31 1.12 1.16 1.16 1.16 1.16 1.21 1.23 0 00 0.50 1.00 0% 20% 40% 60% Per 0.00 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Levy Year Ending 31 March

0%

Aggregate Levy Rate Treatment Injury Rate Only Funding Band Last year's consultation rates Risk Rate Earners' Funding Ratio Selected M idpoint

Business insights from the OCL Business insights from the OCL

A t/ li bilit t Asset/ liability management – Liability profile determines the nature of the assets being held – Need to consider asset liquidity, long term inflation hedging and t hi ( h fl d ti d/ i bilit ) matching (cash flows, duration and/ or variability).

Total Reserves Accounts ‐ Risk vs Return

1,600 50% Equity

This graph combines

1,200 1,400 1,600

• me ($m)

i i i k SAA

g p variability in OCL and investment assets to get net asset-liability variability

600 800 1,000 d Investment Inco Minimum Risk Position 100% Cash

This allows us to see how different asset allocations alter the net asset-liability risk

200 400 Expected Liabilities

risk.

500 1,000 1,500 2,000 2,500 3,000 Standard Deviation of Net Asset‐Liability Risk ($m)

B i i i ht f th OCL Business insights from the OCL

I j P ti St t M d l Injury Prevention Strategy Model: 1) Identify issue through risk and severity 2) Identify the causes 3) Implement IP initiative to target causes 4) Evaluate. OCL used to determine: – severity of claims – measure the effectiveness of the initiatives.

Vehicle class Current licence fee Licence fee based

• n past claims

experience Licence fee if only considering motorcycle claims that did not involve

• ther vehicles

Passenger vehicles $151 $90 N/A Motorcycles, 600cc or less $297 $2,066 $887 $ $ $ Motorcycles, over 600cc $397 $3,837 $1,671

B i i i ht f th OCL Business insights from the OCL

Investigations into trends (up/ down) can give insight into:

– Financial sustainability of the scheme – Whether clients are receiving appropriate g pp p levels of support – Impact of legislative and/ or claims g management practices – Identifying areas of focus.

B i i i ht f th OCL Business insights from the OCL

Monitoring – Comparing actual vs expected payments active claim numbers and

Number of Active Claims of wkly for Total

44 000 45,000 46,000

ims

payments, active claim numbers and cost per claim.

Payments of wkly for Total

35 000 36,000 37,000 38,000 39,000 40,000 41,000 42,000 43,000 44,000

mber of Active Cla

Payments of wkly for Total

220 230 240 250

($m)

33,000 34,000 35,000 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15

Payment Quarter Num

Actuals Valn (Jun11) Valn (Jun12)

170 180 190 200 210 220

Payments

Actuals Valn (Jun11) Valn (Jun12)

Cost per Claim of wkly for Total

170 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15

Payment Quarter

Actuals Valn (Jun11) Valn (Jun12) 5 800 6,000 6,200 6,400 6,600 6,800

per Claim ($)

5,200 5,400 5,600 5,800 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15

Cost p Payment Quarter

Actuals Valn (Jun11) Valn (Jun12)

B i i i ht f th OCL Business insights from the OCL

Superimposed inflation – Radiology

High Tech Imaging Claims as a Proportion of Radiology High‐Tech Imaging Claims as a Proportion of Radiology

10.0% 12.0% 14.0%

Breakdown of growth in payments (above LCI) between 2004 and 2010 due to changes in PPACs

4.0% 6.0% 8.0% Proportion

Impact of Annualised growth in payments Growth in LTI PPACs 3.6% Growth in HTI PPACs

• 0.8%

Change in case mix 4.5% Total PPAC growth 7 4%

0.0% 2.0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Total PPAC growth 7.4%

Questions? Questions?