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? – What is the Outstanding Claims Liability? Wh t i th O t t di Cl i Li bilit ? – What are the key drivers of the OCL? – What insights can we get from the OCL? Wh t i i ht t f th 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 – Funded by New Zealanders F nded b Ne Ze l nde through five accounts
Cover is m anaged under five accounts Non- Non Motor Motor Treatm ent Treatm ent W W ork k E Earners’ ’ Earners’ Vehicle I njury Salary & Motor Employers/ Earners / Who Who Wage Earners/ Wage Earners/ Government Government Vehicle Vehicle Self-employed Non-Earners funds Self-employed Owners Injuries to Injuries Non-work & people not in sustained as a Work-related Road injuries / What non-road paid consequence injuries / injury injury injuries / injury employment / of treatment for prevention prevention prevention prevention injury injury /injury /injury prevention prevention
Claim s volum es 4.4m 1.7m CLAIMS PER YR 1 EVERY seconds d *Correct as at May 2013
I I m pact of ACC t f 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 W hat is the Outstanding Claim s Liability? di Cl i Li bilit ? Estimate of the funds required now to meet the Scheme’s future obligations. It includes: – all accidents up to the valuation date, including those not yet reported to ACC – th the possibility of ‘closed’ claims reopening ibilit f ‘ l d’ l i i – 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 $28.4b.
Th L The Long tail of the OCL t il f th OCL – Runoff of OCL at 30 June 2012 – Can take over 80+ years before last payment made. Projected claims costs for claims to 30 June 2012 1,800 1,600 1,400 1 400 ) ents ($m 1,200 1,000 ym Pay 800 laim 600 C 400 200 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 2091 Year Ending 30 June Year Ending 30 June To 2007 2007/08 2008/09 2009/10 2010/11 2011/12
Th L The Long tail of the OCL t il f th 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% 90% ion Paid 80% 70% 60% 50% 50% Proport 40% 30% 20% 10% 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 How is the OCL determ ined? i th OCL d t i d? 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 Funds held for a future obligation can be invested until d h ld f f t bli ti b i t d til 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% of 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 Discount Rates t R t – NZ IFRS 4 requires that we use risk-free rates (i.e. return from an i investment with no chance of default) t t ith h f d f lt) – 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 7.00% 6.00% 5.00% Discount Rate 4.00% 3.00% 2.00% 1.00% 0.00% 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 Risk Margins i – 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 9% 25400000000 Net Central 8% 25200000000 Estimate = lity 7% $25.154b 25000000000 25000000000 em ental Probabi 6% 24800000000 5% 4% 24600000000 3% Provision = $28.396 o s o $ 8 396 Incre 24400000000 24400000000 (75% Probability 2% Level) 24200000000 1% 0% 24000000000 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 Outstanding Claim Liability as at 30 June 2012 ($Billions)
Change in OCL over tim e Outstanding Claims Liability 2004 to 2012 30 25 20 OCL ($b) 15 10 5 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 Year to 30 June Social Rehab Social Rehab Weekly Comp Weekly Comp Medical Medical Hospital Hospital Other Other Claims Handling Claims Handling
Ch Change in OCL over tim e i OCL ti Claim Incurred by Accident Year Cost by accident year (Current value) Cost by accident year (Current value) $5.0bn outstanding payments to date $4.5bn Jun 09 estimate $4.0bn Jun 10 estimate June 11 estimate $3.5bn $3.0bn $2.5bn $2.0bn $1.5bn $1.0bn $0.5bn $0 5bn $0.0bn 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 June Accident Year
Change in OCL during financial year Change in OCL between 30 June 2011 and 30 June 2012 29,000 550 28,000 27 000 27,000 OCL ($m) 26,000 28,396 4,535 25,000 944 1,742 24,000 , 24,510 400 23,000 OCL as at 30 Expected Claims Inflation Rate Discount Rate Change in OCL as at 30 June 2011 June 2011 Increase Increase Experience Experience Assumption Assumption Assumption Assumption Discount Rate Discount Rate June 2012 June 2012 Methodology
Key assum ptions that im pact the OCL Provision as at Factor Scenario 30 June 2012 Provision $28,396m Discount rates Discount rates Increase of 1% Increase of 1% -$3,792m $3,792m Decrease of 1% $5,000m Inflation rates Increase of 1% $5,131m Decrease of 1% -$3,946m $ , Increase of 1% -$1,314m Long term gap between discount rates and inflation rates Decrease of 1% $1,643m Discounted mean term +1 year y -$855m -1 year $882m Increase of 1% after 2 years $2,554m Growth in care packages - social rehabilitation for serious injury Decrease of 1% after 2 years -$1,883m Increase of 1% $1,055m Superimposed inflation - excluding social rehabilitation for serious injury Decrease of 1% -$800m Increase of 1% $872m Long term continuance rates for non- g fatal weekly compensation Decrease of 1% -$724m
W hat are the key drivers? W hat are the key drivers?
Key drivers of claim experience w hich y p im pact the OCL Claim utilisation rates (new claim rates) Non-fatal weekly comp – number of new claims by accident quarter Claim frequency by age band for NE medical claims
K Key drivers of claim experience d i f l i i Payments per claim Payments per claim Cost per Claim of PMED for Total p 200 190 aim ($) 180 170 160 160 Cost per Cl 150 140 130 120 110 100 100 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)
Superimposed inflation – elective surgery Key drivers of claim experience i f l i d i K
K Key drivers of claim experience d i f l i i R h bilit ti Rehabilitation rates t – 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?
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