FUNDING RATIO TRENDS: CENTRALLY FUNDED SCHEMES

June 2012

June 2013

June 2014

June 2015

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Keeping you informed. APRIL 2016

[ self insurers ]

Funding and premium updateIn this edition we provide an update on current issues impacting self insurers and potential self insurers for all Australian jurisdictions.We also give an update on the funding ratio and the latest

premium rates for each centrally funded scheme.

Scheme funding and premium rates across all schemes

Scheme funding ratios

The graph below shows the funding ratio trend for each centrally funded scheme. Funding levels represent the healthiness of the schemes and often impact decisions regarding changes to premium rates and/or benefits.

In this edition>> Latest scheme funding

levels and premium rates

>> Scheme news from the

states and territories

>> Comcare developments.

160%

140%

120%

100%

80%

60%

40%

20%

0%

NSW Vic Qld SA Comcare

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All four state centrally funded schemes are now in surplus with only Comcare remaining in deficit.

In South Australia the significant reforms which commenced in 1 July 2015 have improved the Scheme’s solvency position dramatically from around 70% at June 2014 to 114% at June 2015.

NSW, Victoria and Queensland all have strong solvency ratios. However, given the recent unwind in previous benefit reforms in both NSW and Queensland, reported solvency may reduce at June 2016.

Comcare’s solvency improved in 2014/15 following several increases in premium rates. However, the Scheme continues to have a significant deficit.

Premium rates

Scheme premium rates are often a key factor in whether or not to self insure. The following graph shows the movement in headline premium rates from 2010/11 to 2015/16 (the most recent policy year for most jurisdictions).

Headline premium rates reduced, or remained stable, in all jurisdictions.

In NSW there have been no changes to WIC Rates from the 2014/15 Premium Order. This suggests that there has been no change to the overall target premium collection rate (however, we note there has been no official ministerial announcements in this regard).

The State Insurance Regulatory Authority (SIRA) has recently released a discussion paper on the proposed approach to setting premiums for 2016/17 including draft Market Practice and Premium Guidelines (MPPG). The draft MPPG requires that the Nominal Insurer (icare) will not vary the premium formula and appears to only allow minimal changes to tariff rates and premium parameters for 2016/17. This suggests that the 2016/17 premium rate will be similar to 2015/16 (save for variations in the experience premium component).

All schemes except Comcare are in surplus. Solvency has improved significantly in South Australia following the July 2015 benefit reforms.

Premium rates for 2015/16 are lower or stable across all jurisdictions.

HEADLINE PREMIUM RATES: CENTRALLY FUNDED SCHEMES

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16

% o

f W

ag

es

NSW Vic Qld SA Comcare

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Current issues – states and territories

New South Wales

Workers comp premium changes

The 2015/16 NSW Insurance Premiums Order has been in place for nearly a year. icare introduced significant changes to the premium formula for medium and large employers. At this stage, it is difficult to definitively say what impact the new premium formula has had on employer premiums. We have seen significant premium increases for some employers - noting that transitional capping of premium rates will provide some cap on premium increases for 2015/16 and 2016/17 - but these are likely to be specific to the employer industry. We observe that industries with a higher proportion of time lost injuries are more likely to see premium increases.

The following diagram summarises the current formula:

Current NSW Premium Formula

PREMIUM =

Claims Performance Adjustment (CPA) x

Basic Tariff Premium (BTP)

where:

>> CPA = a prescribed factor which varies according to an employers size and Claims Performance Rate (CPR)

>> CPR = Claims Performance Measure (CPM) / Scheme Performance Measure (SPM)

>> CPM = 3 yrs paid claim costs1 / 3 years BTP

>> SPM = Scheme Performance Measure as defined in the IPO2 (4.55% for 2015/16)

1 Paid claims cost in respect of weekly claims and lump sum payments2 SIRA is currently reviewing the Premium Guidelines for 2016/17

For Comcare, premium rates reduced from 2.12% to 2.04% of wages, following four successive increases and despite the scheme’s deficit position. Forecast premium rates included in the Comcare Budget forecasts assume a further rate reduction to 1.98% for 2016/17.

In South Australia the headline premium rate fell from 2.75% of wages to 1.95% following the reforms in July 2015, while the premium rates for Victoria and Queensland remained stable for 2015/16. At this stage, the headline premium rate for 2016/17 for these jurisdictions is still unclear, although significant rate changes are not expected.

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The draft MPPG issued by SIRA requires that the Nominal Insurer (icare) will not vary the premium formula and appears to only allow minimal changes to tariff rates and premium parameters for 2016/17. This suggests that the 2016/17 premium rate will be similar to 2015/16 (save for variations in the experience premium component).

Benefits – Workers Compensation Amendment Act 2015s

The 2012 reforms in NSW resulted in a significant improvement in funding position, and premium rate reductions for employers. The reforms were so successful that a government review was triggered and resulted in a partial wind back of the reforms in August 2015. The wind back included:

>> All injured workers to receive medical benefits for at least two years after weekly benefits cease, up from 12 months (<10% impairment). Benefits continue for up to five years for more serious injuries (11% to 20% impairment).

>> The term “worker with high needs” has been created to refer to workers who have a Whole Person Impairment (WPI) between 20% - 29%.

>> The threshold for injured workers with permanent impairment entitled to lifelong medical expenses has been lowered from 30% to 20% WPI.

>> Increases in weekly compensation for injured workers with at least 20% WPI.

>> Substantial increases in lump sum benefits and death benefits (average increase of around 60%).

>> Weekly benefits to continue while work capacity decisions are under review.

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The main changes were as follows:

Gone is the experience premium, replaced instead by a Claims Performance Adjustment (CPA) which rather than being industry based compares an employer’s Claims Performance Measure (CPM) with that of the whole scheme, Scheme Performance Measure (SPM).

Gone also is the use of case estimates to calculate claims performance. The only claim amounts included are actual payments for lost wages, permanent impairment, common law and death benefits (i.e. medical and rehab payments are excluded).

In the new formula, the previous sizing factor is replaced with a matrix with categories for different sized employer groups based on the BTP. Larger employers will have greater variability in their premium based on their Claims Performance Rate (CPR).

All experience rated employers now receive an Employer Safety Incentive (ESI) equal to 10% of tariff premium, which aligns with the ESI for small employers. The ESI is intended to be re-invested into improving workplace safety and support programs. Employers may also be entitled to further discounts, assessed at the end of the policy year, to reward good claims experience and return to work outcomes.

>> Under the changes, all people in need of prosthetics and hearing aids, who are currently denied benefits, will now get them for life.

The total cost of the package was around $1 billion which is around 25% of the surplus icare had as at 30 June 2015. For self insurers these changes have resulted in a requirement to provide higher benefits to injured workers, although the cost impact will depend on their profile of claimants.

For our self insurance clients we have estimated an immediate increase in the outstanding claims liability of between 3% and 6% and an increase in the annual cost of new claims (2015/16 accidents and later) of between 6% and 8% per annum.

Review of self insurance licensing framework

An issues paper on a review of self insurance licensing arrangements was released by the State Insurance Regulatory Authority (SIRA) in November 2015. The aim of the review was to incentivise self insurers to achieve better outcomes and to reduce unnecessary red tape.

The issues paper asked more than 30 questions relating to licensing of self insurers, including:

>> Is there an appropriate minimum number of employees or another entry level requirement that an applicant should have in order to be eligible and guarantee being able to perform as a self insurer?

>> What would be the benefits of greater transparency around the calculation and use of licence fees and levies?

>> What regulatory changes to claims management licence requirements should be made to incentivise better injury prevention and return to work outcomes?

>> What would be the impact of limiting claims management audits to those self insurers that exhibit lesser performance?

>> What regulatory action should be taken to improve claims management practices and return to work outcomes?

>> How should high WHS performance be defined?

>> The current retention amounts for reinsurance are $100,000 to $1,000,000 per event. Should the excess for reinsurance be increased?

>> Should the security amount continue to be determined as 150 per cent of the central estimate (or forward central estimate if greater) or should employers be allowed to adopt a prudential margin based upon a probability of adequacy?

SIRA is planning to finalise their review this year.

SIRA has also issued a discussion paper calling for industry feedback relating to draft Workers Compensation Market Practice and Premium Guidelines (MPPG) and Workers Compensation Licensed Insurer Business Guidelines (LIBPG). In particular, it is anticipated that SIRA will require the business plan requirements outlined in the LIBPGs to be met by self insurers from 2017/18.

APRIL 2016 d’finitive 5

Retro Paid Loss Scheme

icare have temporarily closed the NSW Retro Paid Loss (RPL) scheme to all new applicants for renewal dates post 28 February 2016 in order to review and design an enhanced product for large employers. This includes clients who have provided their expression of interest for a 30 June 2016 commencement.

It is not clear whether the redesigned RPL product will be open for the 30 June renewal cycle, especially as SIRA’s MPPG discussion paper appears to limit changes to rating structure and premium parameters for 2016/17.

Note that the existing RPL product remains open to employers who have a current RPL policy.

Queensland

Reversal of common law threshold

In October 2013, Queensland tightened coverage of mental injury, introduced a new degree of permanent impairment measure for determining lump sum compensation and required a 5% threshold for access to common law.

These changes were expected to reduce the number of common law and psychological injury claims for injuries with an accident date after 15 October 2013. However, for injuries suffered after 31 January 2015 a number of these restrictions, including the common law threshold, were removed with the passage on 17 September 2015 of the Workers Compensation and Rehabilitation and Other Legislation Amendment Act 2015.

For claims from the period 15 October 2013 to 31 January 2015 that remained unsettled at the date the legislation passed (17 September 2015), an additional lump sum payment is required on top of existing statutory lump sums where employer negligence can be proven.

South Australia

Minimum guarantee

The minimum guarantee amount required for self insured employers in South Australia has increased from $830,000 to $840,000 for all guarantees due on or after 1 January 2016.

Proposed changes to self insurer arrangements

RTWSA has updated a draft paper on its self insurance policy by:

>> Increasing the minimum level of bank guarantee from $840,000 to $1.1 million (it was proposed to increase to $4.5 million in the draft paper).

>> Removing a proposed requirement for self insurers to have a minimum number of between 500 and 1,000 employees or a base premium of $1 million.

A proposal to reduce the bank guarantee amount from 200% to 150% of the outstanding claims liability has been retained.

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Northern Territory

Amendments to the NT legislation commenced from 1 July 2015:

A secondary set of amendments came into effect on 1 October 2015 including tighter coverage for mental injuries and scrapping all journey claims.

Comcare

Proposed SRCC minimum provision change

In November 2015 the Safety, Rehabilitation and Compensation Commission (SRCC) issued version 5 of a list of SRCC Performance Indicators for consultation. These performance measures, if accepted, will apply to self insured licensees from 1 July 2016.

The proposed performance indicators include a suggested amendment that the minimum level of the licensee’s workers compensation provision in the licensee’s accounts be set at the 75th percentile. Currently, as part of Comcare’s Prudential Conditions of Licence, self insured licensees are required to hold an accounting provision which is at least equal to the 50th percentile of the net outstanding claim liabilities (i.e. the net central estimate).

The SRCC’s rationale for this higher target level is based on the fact that insurance industry standards, as regulated by the Australian Prudential Regulation Authority (APRA), set the sufficiency level at 75% for regulated insurance companies, and the SRCC should be consistent with those standards.

We believe the most compelling argument against this change is the fact that licensees are already required to hold a bank guarantee to secure the liabilities. The purpose of APRA requiring insurers to hold a risk margin is to increase the probability that the outstanding claims provisions will ultimately prove to be sufficient to meet the cost of future claims. The risk margin effectively acts to protect policy holders against an insurance company being unable to meet its obligations to pay claims. We note that APRA does not require insurers to hold a bank guarantee in respect of its liabilities and as a result, some level of protection around future claim payments is required.

Tighter coverage for strokes and heart attacks

Increased benefits for older workers

Benefits to retirement age for serious injuries (WPI of 15% or more)

Income maintenance limited to 5 years for less serious injuries (capped at 2.5x AWE), with medicals to continue for one year thereafter

75% step-down after 26 weeks of incapacity (not injury)

Higher death and funeral benefits

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For Comcare licensees the bank guarantee provides an unconditional undertaking that liabilities will be paid with a 95% level of sufficiency, ensuring the protection of claimants / employees. This would supersede any requirement to hold the balance sheet liability at the 75th percentile which, assuming expectations hold, would act to defer the release of profit in the coming years.

Exit Bill

The Federal Government’s Safety, Rehabilitation and Compensation Legislation Amendment (Exit Arrangements) Bill 2015 passed the senate in early February allowing Comcare to collect “exit fees” from employers that leave the scheme.

The catalyst for the Bill was the ACT Government’s announcement of their exit from Comcare.

The purpose of the exit fee (or contribution) is to cover claim liabilities incurred under Comcare which are not funded by premiums collected from the employer before their exit (see solvency ratio from Article 1).

Potential changes to benefits proposed

The SRC Amendment Bill (Improving the Comcare Scheme) 2015, introduced into the House of Representatives on 25 March 2015 is yet to be passed.

The Bill includes a myriad of changes to eligibility and benefits as shown below. Actuarial costing estimated the changes would reduce costs by around 12% to 21% per annum.

Exclusion of non-work related injuries and tighter eligibility requirements for some conditions, including exclusion of psychological injuries arising out of “reasonable management action”.

Changes to income replacement, including earlier step downs and consideration of an employees deemed ability to earn.

Provisional payment of up to $5,000 in medical expenses prior to a claim being determined.

More rigorous requirements in determining medical compensation.

Uncapped household and attendant care for catastrophically injured employees to align with NIIS requirements. Other employees will receive up to three years of capped household and attendant care.

Increase in the maximum lump sum to $350,000, and changes to the way the lump sum is calculated – including a new formula, combination of multiple injuries, discounting for pre-existing conditions and excluding access for secondary psych.

Provision of ongoing financial incentives to injured employees who choose to work in some capacity.

Changes designed to control and reduce costs associated with disputes in the Administrative Appeals Tribunal (AAT), including the ability for Comcare to prescribe a Schedule of Legal Costs.

Weeks Current Proposed

1-13 100% 100%

14-26 100% 90%

27-45 100% 80%

45-52 75% 80%

52+ 75% 70%

Changes to income replacement benefitsChanges to income replacement payments are a major component of the proposed amendments.

Payments will now continue to the age pension qualifying date rather than cutting off when the employee turns 65.

The Bill introduces earlier and steeper ‘step-down’ provisions. The proposed income replacement levels, as a proportion of normal earnings, are:

Income replacement will also be reduced at any stage if the employee has a deemed ability to earn that they are not utilising. Employees on the final two step-down levels who have partially returned to work will have their income replacement ‘topped up’ to 90 per cent.

The Bill also changes the way income replacement is calculated. Calculations will now consider ‘average weekly remuneration’ which includes fringe benefits, reportable superannuation contributions, bonuses and commissions. Overtime pay and some allowances will also be included in average weekly remuneration, but only for the first 104 weeks of compensation payments.

Comparison of benefits to other states

A broad comparison of Comcare benefits to other state schemes is shown below. The Comcare scheme is currently a pension style compensation scheme (with weak return to work provisions, relative to other jurisdictions).

Opinions on the proposed changes vary widely.

The Australian Council of Trade Unions say that “If the bill is passed it would make Comcare the most punitive, and the most disadvantageous to injured workers, of any workers compensation scheme in the country, and by a long way.” The Construction, Forestry, Mining and Energy Union’s say the proposal “will reduce protection to that of a Third World Country”.

Conversely, employers say that the changes are long overdue and the Bill should be accepted in its entirety. A Senate Education and Employment Legislation Committee said the Bill needed to be passed otherwise the Comcare scheme would likely become “financially unsustainable”.

The Bill is currently before the Senate, with opinion split down party lines after dissenting reports were received from the Labor Party and the Greens.

APRIL 2016 d’finitive 9

Benefit Type Current comparison to state schemes

Comparison if Bill passed

Weekly benefits Weekly benefits under Comcare are more generous

Step-downs introduced earlier and to reduced levels. Brings Comcare more in line with other jurisdictions.

Impairment and non-economic loss lump sums (LS)

Impairment and non-economic loss lump sums under Comcare are similar to, or lower, than the States

Separate conditions from one injury can be combined. LS payments for seriously injured will increase from $242k to $350k.

Common law Limited access to common law under Comcare – similar to other schemes (except Queensland and ACT)

No change.

Journey claims Journey claims not compensated - similar to all States (except Queensland, NT and ACT)

No change.

Stress claims Stress claims compensated in Comcare as in all states, although restricted in most States.

Stronger exclusions for ‘reasonable management actions’ and some minor psychological conditions. No LS payments for secondary psych injuries.

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for future editions please contact:

Renae Hoskins on 02 8252 3350 or

renae.hoskins@finity.com.au

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[ self insurers ]

finity.com.au

Finity’s Self Insurance TeamFinity is one of Australia and New Zealand’s leading actuarial and management consulting firms. Our expertise in the insurance industry is highly regarded and has been developed by working with the industry since the early 1980s. Specialising in general and health insurance, Finity works closely with large and niche insurers as well as government agencies to deliver world-class actuarial, pricing and strategic advice. We provide Appointed Actuary services to around 38 APRA and RBNZ-regulated general and health insurers.

Finity has a dedicated self insurance team which specialises in consulting to self insurers and corporates. The key contacts are listed below.

Contacts

Mark Hurst mark.hurst@finity.com.au 02 8252 3358

Adam Payne adam.payne@finity.com.au 02 8252 3371

David McNab david.mcnab@finity.com.au 03 8080 0903

This article does not constitute either actuarial or investment advice. While Finity has taken reasonable care in compiling the information presented, Finity does not warrant that the information is correct.

Copyright © 2016 Finity Consulting Pty Limited

Mark HurstTel + 61 2 8252 3358mark.hurst@finity.com.auSydney Office

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