Financial Condition Report 2012Accident Compensation Corporation

ACC BOARD

Cover Note

PAPER TITLE: 2012 Financial Condition Report

Dear ACC Board Members:

The Accident Compensation Act 2001 (AC Act), under section 278A, requires ACC’s Appointed Actuary to prepare annually a Financial Condition Report (FCR) in accordance with generally accepted practice within the insurance sector in New Zealand. The purpose of the FCR is for the Appointed Actuary to provide advice to the Board in relation to ACC’s operations, financial condition, liabilities, and funding requirements and to discuss the implications of any known material risks that may affect the long term financial health of the organisation. ACC must provide the report to the Minister for ACC. The Minister for ACC must provide a copy of the report to the Minister of Finance and present the report to the House of Representatives within five days of receiving the report. This is ACC’s third FCR that has been prepared in consideration of the AC Act’s requirements. It has been prepared in line with general insurance industry practice taking into consideration the risks inherent in ACC’s business model. The term “Financial Condition”, in the case of an entity such as ACC that has the statutory right to raise levies, needs to be considered in a different light from that of a commercial operation, which is exposed to insolvency risk. For the purposes of this report, I have considered “Financial Condition” in relation to the Board’s established funding policy, and the ability of ACC to achieve the goals of this funding policy within the constraint of levy stability. A number of recommendations are made in the report. These are listed as part of the executive summary. I have assigned each to a business group that will be responsible for responding to the recommendation. The executive has seen this list and supported both the recommendations and the business group allocation. Yours sincerely, Herwig Raubal BEC FIAA FNZSA General Manager – Actuarial and Risk

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ACC 2012 Financial Condition Report

Executive Summary

Purpose of this Report 3

Key Conclusions 3

Key Risks and Areas of Uncertainty 6

Key Recommendations 7

2012 Financial Condition Report

1 Nature of the Business 10

2 Obligations Under the AC Act 20

3 Major Processes 28

4 Investment Policy 33

5 Insurance Experience 36

6 Non-insurance Experience 51

7 Liability Valuation 55

8 Income Statement 64

9 Balance Sheet 71

10 Solvency 74

11 Levies 77

12 Forecasts 82

13 Risk Management 86

14 Other matters 90

Appendices

Appendix A – Earners’ Account 93

Appendix B – Work Account 96

Appendix C – Motor Vehicle Account 99

Appendix D – Non-Earners’ Account 102

Appendix E – Treatment Injury Account 105

Appendix F – Cumulative Revenue Statement to 30 June 2012 109

Appendix G – Schedule of Use and Funding 116

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Executive Summary Purpose of this Report

1 Section 278A of the Accident Compensation Act 2001 (AC Act) requires that ACC’s Appointed Actuary prepare a Financial Condition Report (FCR) for the Board. The purpose of this report is to review ACC’s operations, financial condition, liabilities, and funding requirements and to discuss the implications of any known material risks that may affect the long term financial health of the organisation.

2 This report has been prepared by Herwig Raubal FIAA, FNZSA and is in respect of the financial year ended 30 June 2012. The previous report, in respect of the financial year ended 30 June 2011, was prepared by Wayne Anderson FIA, FNZSA and Swee Chang FIA, FNZSA.

3 In preparing this report I have generally complied with the provisions of the current (at time of writing) exposure draft of Professional Standard No. 12 – “Non-Life Insurers – Financial Condition Report” issued by the New Zealand Society of Actuaries. Technically the standard does not cover ACC or this report; I have chosen to use it, however, to the extent that its requirements are applicable to ACC’s circumstances. The primary areas of departure relate to solvency, as the standard is written with a private insurer in mind, rather than a statutory monopoly.

4 As prescribed in the AC Act, ACC’s financial objective is to reach and maintain full funding of all Accounts, with the exception of non-earners’ injuries incurred prior to 1 July 2001 which are funded on a pay-as-you-go basis, whilst maintaining levy stability. Full funding is defined as maintaining sufficient assets on an ongoing basis to meet future obligations whilst having regard to uncertainties in these forecasts. Full funding assumes that the funding to pay current obligations comes from the current assets and future investment income earned on these assets. In that respect, ACC’s financial condition is assessed based on eliminating the transference of current financial responsibilities on to future generations.

Key Conclusions

It has been a difficult year for ACC. Following the revelation of a major privacy breach in March 2012, unprecedented public scrutiny has followed into many aspects of its operation. Public trust and confidence in ACC have fallen dramatically in recent months and there have been high profile changes at Board and executive level, even a Ministerial resignation.

Against this backdrop the subject matter of this report may seem mundane. Nonetheless, ACC plays an important part in New Zealand society with approximately one third of New Zealanders claiming every year. It is also a large financial institution. ACC interacts with most New Zealanders as levy payers, claimants and health professionals. It is important that appropriate attention be given to the Scheme’s finances. It is also important that these finances be considered in the context of ACC’s obligations under the AC Act.

The key conclusions of this report include:

1 Financial Performance

a. ACC recorded a $0.5b deficit for the year ended 30 June 2012. This followed surpluses of $3.6b and $2.5b for the years ended 30 June 2011 and 2010 respectively.

b. The underwriting result was a surplus of $3.6b, being $1.8b ahead of budget. This indicates that underlying insurance performance has continued to improve.

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New claim numbers decreased for the third year running whilst rehabilitation rates have stabilised at satisfactory levels; both of these had deteriorated significantly in the years leading up to 2009.

c. Investment performance again contributed strongly with a return of 9.5%. Strong investment performance has been a consistent feature of ACC’s performance for an extended period.

d. Management expenses were in line with budget, although 4% higher than the prior year. Half this increase is due to higher investment expenses as funds have grown.

e. Unfortunately, decreases in the discount rate used to value the Outstanding Claims Liability resulted in a one-off cost to the Scheme of $5.1b, offsetting the otherwise strong financial performance.

f. Overall ACC’s net assets have decreased from -$6.7b to -$7.2b.

2 Progress Against Funding Policy

a. The Board has established a funding policy for the Earners’, Work and Motor Vehicle Accounts. Cabinet sets the funding policy for the Non-Earners’ Account.

b. The Earners’ Account is now within the funding band established by the Board’s policy and as such can be considered to be “fully funded”. It remains short of its ultimate target, however.

c. The Work and Motor Vehicle Accounts remain underfunded. Progress toward full funding has been satisfactory in the Work Account; Motor Vehicle remains significantly underfunded.

d. The Non-Earners’ Account’s funding position is consistent with Cabinet’s policy.

e. Overall, the Scheme is on a satisfactory path to meet its full funding obligations. When considered against recent years’ economic turmoil, with large declines in equity prices accompanied by falling interest rates, the Scheme’s current financial position is commendable.

3 Claims Performance

a. Claims performance deteriorated significantly in the period from 2005 to 2009, during which claim frequencies increased and rehabilitation rates fell, both substantially.

b. Since then a focus on basic insurance disciplines has returned the experience to more sustainable levels. This included ensuring that cover is provided consistent with the contract (the AC Act), focus on rehabilitation and early management of claims, and improved management of health procurement.

c. Claims performance in 2012 was good in virtually all areas. Section 5 of this report examines this in some detail.

d. Many ACC funded benefits are subject to health sector inflation in excess of basic economic inflation. This is a key issue for the financial management of the Scheme. Little improvement has occurred in this area.

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4 Obligations Under the AC Act

a. In Section 2 of this report I examine various aspects of ACC’s performance against its obligations under the AC Act. This is from time to time a matter of contention, and particularly so in recent months. It is important that this is reviewed objectively.

b. The conclusion I have formed is that whilst ACC has in most cases met its obligations, there are nonetheless some areas where improvements can be made. These relate primarily to elective surgery and long term weekly compensation claims. The issues include consistency of decision making, early resolution of disputes and the quality of vocational rehabilitation.

c. ACC’s expenditure on injury prevention activity has reduced in recent years. Activities undertaken of themselves appear to have been successful, but are generally of too small a scale to have a material impact on New Zealand injury rates. The injury prevention strategy is currently being reviewed; this is an important matter. Injury prevention is one of ACC’s core obligations. It is also an important part of limiting the financial costs of ACC and the broader social costs to society that arise from injuries.

d. Meeting the obligations of the AC Act is not only a matter for ACC. The health sector plays an important role in setting expectations of what is covered by the Act.

5 Levy Rates

a. The Board has consulted on proposed levy rates for 2013/14. The proposed levies are:

i. Earners’ Account – 1.3% (down from 1.48%)

ii. Work Account – 1.0% (down from 1.15%)

iii. Motor Vehicle Account - $334.52 (unchanged)

b. I have concluded that these levies are adequate to meet the Board’s funding policy based on current claims experience and investment market expectations.

c. Cabinet approved $1.128b to fund the Non-Earners’ Account. This amount is consistent with Cabinet’s funding policy for this Account.

6 Financial Forecasts

a. The forecasts included in Section 12 indicate that ACC remains on target to achieve full funding in the Earners’, Work and Motor Vehicle Accounts by 2019.

b. A small levy reduction is forecast for the Work Account whilst large decreases are forecast for the Motor Vehicle Account as it approaches full funding. These are of course dependent upon the ultimate claims and investment experience.

c. The appropriations approved by Cabinet for the Non-Earners’ Account are shown to be less than required under the projections. Cabinet reviews the appropriations every year so will have the opportunity to adjust these should experience emerge as forecast.

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7 Risk Management

a. ACC’s risk management office was established in 2010. Since then steady progress has been made in establishing a “three lines of defence” model.

b. Progress to date has been satisfactory. More work is required to embed the framework and risk culture fully throughout the business.

8 Privacy

a. ACC has launched a major transformational project in response to recommendations made following the independent investigation into its privacy culture and processes. This is likely to be the largest piece of work ACC has ever undertaken. Maintaining operational service standards and financial performance will be no small challenge. Management focus and project disciplines will need to be vigilant.

Key Risks and Areas of Uncertainty

The following summarises the key risks and areas of uncertainty that affect ACC’s financial condition.

1 Significant volatility in the use of the Scheme - in the past decade, the rate of injury increased significantly each year until 2008, before reducing significantly during 2009 to 2012. In addition, recovery times similarly lengthened each year until 2008 before reducing again. These changes in insurance experience primarily resulted from changes in political and management direction. Greater consensus regarding the long term purpose of the Scheme would help reduce the financial volatility as well as allow public expectations to be set more consistently.

2 Sustainability of the recent improvements in Scheme performance – since 2009 there have been significant improvements in the Scheme due to fewer claims and better claims management. Additionally, existing long term claims have been reviewed to ensure they are still receiving the appropriate levels of entitlement. The speed with which the Scheme’s finances have improved highlights the speed at which this experience could also reverse.

3 Economic conditions – ACC’s liabilities are long term and highly inflationary. There are no assets available that can match this profile. As a result, ACC is exposed to changes in economic conditions, particularly interest and inflation rates, but also other market variables such as equity prices. Levy rates are also affected by expected investment returns, so any deterioration in the long term economic outlook carries risk to levy payers.

4 Stakeholder incentives – there is a variety of incentives that exist within the Scheme. New Zealand operates different systems for injury and sickness, which provides an incentive for conditions to be assessed as arising from an accident. The generally comprehensive cover removes cost control incentives, and in some cases provides economic incentives to providers. Even the existence of a comprehensive no-fault scheme reduces the incentive to avoid harm to others. These incentives do impact ACC’s finances, and on some occasions at the expense of quality outcomes. A programme to better align the incentives of various stakeholders would improve outcomes for all.

5 High impact court rulings – ACC operates within a complex legislative framework that is open to different interpretations. ACC’s decisions and interpretations may be challenged before the courts. ACC needs to be pro-actively involved in legislation / policy setting and consider policy responses and/or legislative amendments as issues develop.

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Key Recommendations

I have made various recommendations throughout this report. These are detailed below. It is acknowledged that not all of these are within the Board’s control. Nonetheless, I consider that the Board should, to the extent possible, undertake actions to support their resolution. I have noted the group responsible for each action. Governance 1 ACC’s governance and monitoring structure is complicated with a range of parties

involved whose roles are not clearly defined in all cases. The announced transfer of the Ministry of Business Innovation and Employment’s monitoring role to Treasury’s Crown Ownership Monitoring Unit has the potential to provide further complication should roles not be clarified. I recommend that the Board seek to establish a Memorandum of Understanding in which all roles are clearly laid out.

Area Responsible: Chief Executive

Levies 2 The levy collection mechanism for the Treatment Injury Account is cumbersome and

does not align levy burden with risk exposure. Past efforts to improve this have not been successful. Nonetheless I believe ACC should continue to search for a more satisfactory solution.

Area Responsible: Product

3 Review the application of the residual levy to participants in the Accredited Employer

Programme.

Area Responsible: Product Product 4 Review the possibility of introducing abatement on partial return to work to the

CoverPlus Extra product.

Area Responsible: Product ACC’s Obligations Under the AC Act 5 I have made a number of recommendations in Section 2 dealing with ACC’s delivery on

its obligations:

a. Develop a set of objective measures that can be used to monitor ACC’s adherence to its obligations. These will most sensibly focus on client satisfaction with their medical treatment, quality of clinical outcomes, return to work / independence and service experience.

Area Responsible: Claims

b. Consider assigning accountability for ensuring obligations are met to a direct

report of the Chief Executive.

Area Responsible: Chief Executive

c. Investigate reasons for high rates of decline and client cancellation of elective surgery requests and undertake actions in response.

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Area Responsible: Claims

d. Investigate reasons for high rates of decline of gradual process claims.

Area Responsible: Claims

e. Investigate reasons for low rates of claiming for gradual process conditions.

Area Responsible: Claims f. With regards the long term claims pool, review the quality of vocational

rehabilitation, consistency of claim decision making and options for early resolution of disputes.

Area Responsible: Claims

g. Educate the health sector with regards to ACC provided cover to improve

expectation setting.

Area Responsible: Claims

h. Review reasons for current 28- and 70-day rehabilitation rates being below those of the early 2000s.

Area Responsible: Claims

i. Undertake actions to improve early resolution of disputes.

Area Responsible: Legal

Claims Experience 6 Review the application of controls within the claims management process, particularly

with respect to claims not receiving weekly compensation.

Area Responsible: Claims 7 Develop a strategy to reduce the level of health cost inflation on ACC funded benefits.

This will require an approach that better aligns client and health provider incentives with those of the levy payer along with a range of appropriate control points in the claim management process. The Board has separately received advice on this matter during the year.

Area Responsible: Claims

8 Investigate the causes of the high cost of new treatment injury claims during the year.

Area Responsible: Actuarial Risk Management 9 I have made a number of recommendations in relation to the risk management

framework:

a. Develop increased formalisation of risk identification, analysis and management. b. Clarify risk management roles.

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c. Improve the monitoring and breadth of treatment plans. d. Review the Corporation’s risk appetite and tolerance. e. Improve risk management governance, including the establishment of an

executive level risk management committee. f. Improve staff training and engagement with regards to risk management.

Area Responsible: Risk Management Office

Scheme Issues 10 Undertake work to define more clearly the boundary of ACC provided cover. This will

help public understanding and allow greater clarity and accountability of ACC’s claims decisions.

Area Responsible: Policy

11 Consider how ACC should take account of the fact that New Zealand’s population is

ageing. This needs to encompass such matters as the intent of the AC Act, the cover boundary definition, longer term operational and financial planning, and how to secure the best outcomes for the public.

Area Responsible: Policy

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2012 Financial Condition Report 1 Nature of the Business

1.1 ACC manages New Zealand’s comprehensive, no-fault personal injury insurance Scheme, which is available to all New Zealanders and visitors to New Zealand. ACC’s core functional services include claim and rehabilitation management, injury prevention, levy/product management and financial management.

1.2 There is debate from time to time as to whether the ACC Scheme is an insurance-type entity or something more akin to a welfare provider. For the purposes of this report the Scheme is considered to provide insurance cover. This is not to say that the Scheme should not be run within the confines of the obligations of the Accident Compensation Act 2001 (AC Act).

Governance Structure and Key Stakeholders

1.3 ACC is a Crown Entity of the New Zealand Government. As a Crown Entity, ACC’s corporate governance structure is prescribed under the Crown Entities’ Act 2004 (CE Act). Per this CE Act, the Government appoints a Minister for ACC. The Minister retains the authority to appoint a Board responsible for financial management and operational direction.

1.4 The governing legislation of ACC’s operational requirements is the AC Act. Each year the Minister and the Board agree the terms of a service contract that sets out performance targets, the achievement of which will demonstrate that ACC has fulfilled its obligations under the Act.

1.5 The Ministry of Business, Innovation and Employment (MBIE), formerly the Department of Labour, provides monitoring and policy advice to the Government regarding ACC’s legislation, regulations and operational performance.

1.6 Treasury is the gatekeeper of all Crown accounts and provides an overall awareness within the Government of ACC’s financial condition.

1.7 It has recently been announced that the monitoring function of MBIE will be transferred to Treasury’s Crown Ownership Monitoring Unit (COMU). The specific details of this have yet to be confirmed.

1.8 Health providers assist ACC to administer the Scheme by acting as the first point of contact when an injury has occurred. Health and rehabilitation providers manage the use of Scheme funds through their professional recommendations for support services. They also play an important role in setting public expectations of ACC coverage.

1.9 The New Zealand public, both individuals and employers, is the party insured by the Scheme. It funds and uses the Scheme and is the Scheme’s ultimate stakeholder. By managing and controlling 1) public exposure to injury, and, 2) public use of Scheme support services after an injury, the public ultimately governs the funding requirements.

1.10 In summary, the governance and monitoring of ACC are complex, with a range of parties involved. In order for such a construct to be successful, roles need to be clearly defined. Unfortunately this is not currently the case, with the roles and responsibilities of the Board, MBIE and Treasury being blurred. This can and does lead to difficulties in managing the Scheme, with the opinions of differing parties not

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being able, in all cases, to be readily resolved. This is an area that requires review, particularly given the transfer of certain of MBIE’s functions to COMU, which runs the risk of simply introducing another party into an already complicated model if roles are not more clearly articulated than is currently the case.

Insurance Coverage

1.11 The ACC Scheme provides no-fault personal injury insurance coverage as outlined in the AC Act and accompanying regulations. The Act and regulations serve as the insurance agreement. Insured events are generally death, physical injury and/or mental injury (to a lesser degree). The AC Act is written in a “coverage exclusion” style of insurance agreement, whereby insured events are broadly described accompanied by a small number of exclusions. The general tenor of the legislation is best described as “permissive”.

1.12 The AC Act is broadly written, which has the benefit of allowing ACC considerable scope in providing support services to clients. It does, however, afford considerable scope for the limits of cover to be extended, generally through court cases. It also affords scope for differing interpretations of cover, which can, and does, lead to disputes and dissatisfaction.

1.13 The insurance coverage provided is “no fault”. With very few exceptions, the no-fault coverage removes the right for an injured party to sue another party who may have contributed to the cause of an injury.

1.14 Unlike in private insurance, ACC claims never officially close. At any time, claims that had previously exited the Scheme may request further financial support. One of the difficulties with older claims that re-activate is that other factors such as normal ageing may influence the need for medical treatment beyond what was required due to the original injury. These co-morbidities can be difficult to isolate and blur the line between the support provided by the Scheme and that which should be provided by the health system. This is particularly an issue with elective surgery where the procedure and/or implants may have a limited lifespan.

1.15 The services provided following the occurrence of an insured event are financial support for medical treatment and rehabilitation services. In addition, compensation support is provided to wage earners during their recovery or to their dependants in case of death. Loss of potential earnings is provided to an injured child who is still incapacitated upon turning 18 and in other specific circumstances. Table 1.15 provides a summary of the main services provided by the Scheme in the event of a covered personal injury.

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Table 1.15 – Schedule of Services

MedicalPublic Health Acute Services (PHAS) Accidental injury costs arising from acute inpatient care, emergency

department, outpatient, complex burns, pharmaceuticals, and laboratories

General Practitioners Payments to general practitioners and Accident and Medical clinicsRadiology Payments for radiology services- low tech (e.g. X-Ray) and high tech (e.g. MRI)Physiotherapy Payments to physiotherapistsAmbulance Emergency transportation to a medical facility, by road and/or airOther Medical All medical costs except elective surgery and those categorised above

CompensationWeekly Compensation - Non-Fatal Loss of earnings, and loss of potential earnings for minorsDeath Benefits Funeral grants and support for spouse and/or dependants

RehabilitationElective Surgery Predominantly orthopaedic-related surgeryLump Sum Additional support to compensate for permanent impairment due to injuryVocational Programmes to support claimants in their return to independenceSocial Rehabilitation

Serious InjuryCapital Predominantly housing and motor vehicle modifications for those with serious

injuries

Non-Capital Care costs (such as attendant care and assessments) and other costs related to serious injury

Non-Serious InjuryCapital Predominantly equipment, orthotics for splints, medical consumables and

residential modification costs for those with non-serious injuries

Non-Capital Provision of care, assessments and other support-related social rehabilitation for those with non-serious injuries

1.16 Accidents resulting in injuries fall within a considerable spectrum of severity

requiring vastly different levels of support. However, claims can be summarised into four main categories:

a. Medical only – the majority of claims are minor, requiring medical treatment only. Recovery generally occurs within a short period of time.

b. Serious injuries – a few hundred injuries occur each year resulting in extreme and permanent impairment to individuals. These claims usually require social rehabilitation support in the form of home or nursing care at various levels throughout the individuals’ lives.

c. Fatalities – for an injury resulting in death the Scheme provides a funeral allowance. In cases where the person was a wage earner with dependants, compensation support and child care may be provided to the dependants for a number of years. Death caused by injury is not always immediate and these claims may also require other services such as medical treatment.

d. Recovery support – these are all other injuries that require some form of compensation or rehabilitation support in addition to medical treatment while the people are recovering.

1.17 Recovery support claims include two specific types of claim that are worth mentioning:

• Gradual process - claims arising from prolonged exposure to an element (e.g. toxin, loud noise), the damage of which may not manifest as injuries until many years later. Currently only work related gradual process claims are covered.

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• Sensitive claims – claims resulting from sexual abuse or assault. These are different in nature from ACC’s other claims as the support required usually extends beyond physical injuries to psychological harm.

1.18 Approximately one third of New Zealanders experience injuries that result in claims

being lodged with ACC every year. Approximately 90% of these claims are medical only. In addition, around $400m per annum is provided to the public health system to fund minor injuries where often no further support is required from ACC. This includes inpatient, outpatient and emergency department services. The number of injuries treated under these bulk-billed arrangements is unknown.

1.19 Table 1.19 provides a range of the average annual number of injuries and estimated nominal severities (undiscounted average lifetime costs excluding the cost to service) by claim type exclusive of bulk-billed injuries. These averages are based on recent trends in claim rates, claim durations and the impact of long term inflationary pressures on the services provided.

Table 1.19 – Average Annual Claim Statistics (exclusive of bulk billed injuries) Claim Type Estimated Annual

Number of InjuriesEstimated Average

Nominal Claim SeverityFatal 1,200 - 2,000 $65,000 - $85,000Serious Injury 250 - 400 $6.5M - $9.5MRecovery Support 90,000 - 120,000 $20,000 - $30,000Medical Only 1.4M - 1.6M $350 - $450Total Claims 1.5M - 1.7M $2,500 - $4,500

Account Structure

1.20 ACC is financially managed under five Accounts, each designed to align levy collection to the risk exposure to injury. Table 1.20 summarises each of the Accounts.

Table 1.20 – Account Description Account Environment where exposure to

injury occurs Levy collection

Work At work or work related Charged to employers as a percentage of payroll and self-employed as a percentage of taxable earnings

Motor Vehicle

Involving a motor vehicle on public roads

Vehicle licensing charge plus levy on petrol (not diesel)

Treatment Injury

When receiving medical treatment in the healthcare system

Levy paid from Non-Earners’ and Earners’ Accounts

Non-Earners’

Government appropriation

Earners’

All other locations and activities

Percentage of salary collected as part of PAYE tax

1.21 Whilst not technically the case, each Account can be thought of as a mutual insurer

that is in effect owned by those who pay the levies. It is these levy payers who bear the risks and rewards of each Account’s performance. Viewing each Account in this way allows one to consider better the various stakeholders’ interests, in particular those of the levy payers which are often lost in public debate on the Scheme.

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1.22 The Work, Earners’ and Motor Vehicle Accounts are collectively referred to as “the Levied Accounts”. Levies for these Accounts comprise three elements:

• The expected cost of claims in the current year. • A funding adjustment, designed to bring each of the Accounts to a fully funded

position. • A residual amount set down in legislation specifically to fund accidents that

occurred prior to 1999. 1.23 In practice, the funding adjustment and the residual amount act in a similar manner.

In this report these are referred to as the “funding adjustment” unless stated otherwise.

1.24 Given changes in the Scheme structure over time, the Accounts are not in all cases

as neatly defined as described in Table 1.20. In particular, the Work Account includes all injuries to earners, whether at work or otherwise, that occurred prior to 1992.

1.25 The levy collection mechanism for the Treatment Injury Account is cumbersome, in

that it is collected via the Earners’ and Non-Earners’ Accounts, rather than directly levying those with whom the risk exposure lies. This mechanism provides no incentive for the health sector to reduce the incidence of treatment injuries. ACC has considered a number of proposals in the past, including directly levying medical providers. This latter proposal failed to receive the requisite support at political level. Despite the difficulties, this remains an area worth investigating, although it is acknowledged that a solution consistent with the “no fault” construct of the Scheme is not easily found.

Products

1.26 The Work Account provides a small range of products that allow varying degrees of risk sharing by employers.

Employers 1.27 Most employers are insured through the WorkPlace Cover product, which provides

full insurance cover in respect of accidents in the workplace. 1.28 Large employers may choose to enter the Accredited Employer Programme (AEP).

This allows employers to self-insure some of the risk in return for significantly lower levies. The goal of the AEP is to improve workplace safety and rehabilitation performance by providing employers with appropriate financial incentives. Entry is subject to satisfactory workplace safety standards, claims management ability and the financial substance to carry the self-insurance risk.

1.29 Within the AEP there are two product options:

• Full Self Cover – employers take the full financial risk associated with all claims.

The employer generally manages the claim for up to five years, at which time management is handed back to ACC, although serious and sensitive claims are managed by ACC from commencement. At hand-back the employer pays ACC the estimated remaining lifetime cost of open claims and remains liable for unreported and re-opened claims.

• Partnership Discount Plan – employers self-insure claim payments for either two

or three years. Claims payments beyond the chosen self-insured period are covered by ACC.

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1.30 Full Self Cover employers are required to take out Stop Loss Cover, which limits the total claims costs to an employer in any one year. Stop Loss Cover is optional for Partnership Discount Plan employers. Stop Loss limits are set having regard to the financial security of the employer and the proportion of claims risk it wishes to self-insure.

1.31 High Cost Claims Cover provides a limit to the employer’s liability in respect of any

one claim or event causing multiple claims, noting that in the case of serious injuries individual claims generally run into the many millions of dollars. High Cost Claims Cover is only available to Full Self Cover employers.

1.32 The AEP involves a level of credit risk to the Work Account, in that should an

employer fail, the claims costs revert back to the Work Account. To date the only instance of this was the failure of Feltex, which cost the Account $1.7m. It is not obvious why non-AEP employers should accept this credit risk. That having been said, the exposure is small. The total levies of the Work Account are approximately $800m; Feltex’s failure represented a cost of approximately 0.2% of one year’s levies.

1.33 Credit risk exposure is mitigated by undertaking annual credit risk assessments.

These are designed to allow only those employers that are financially strong to be accredited. Further, ACC is able to ensure that accredited employers have the appropriate risk mitigation options in place, including limiting the amount of self-insurance and/or imposing Stop Loss and High Cost Claims Cover requirements.

1.34 20%-25% of the exposure to work related injuries is self-insured to some extent by

accredited employers. Self-Employed 1.35 Most self-employed people are insured under the CoverPlus product. This provides

insurance against both work and non-work injuries, so includes the risks that would otherwise arise in the Earners’ Account.

1.36 CoverPlus Extra provides agreed value weekly compensation cover for self-

employed and non-PAYE shareholder employees. In most cases this is not abated on partial return to work. It is targeted at those self-employed people who have volatile incomes from year to year so as to allow them some certainty in their cover in the event they require weekly compensation support. The non-abatement carries risk as it allows people to earn more than their pre-injury income; this would not normally be offered by private insurers. This is an area worthy of investigation (i.e. the possibility of introducing abatement on partial return to work).

Incentive Programmes 1.37 ACC offers two incentive programmes designed to encourage safety in the

workplace. Both offer discounts on levies in return for meeting certain health and safety standards.

1.38 The Workplace Safety Management Programme is available to all employers.

Three levels of accreditation are available, providing levy discounts of 10%, 15% or 20%. Inclusion in the programme is dependent upon meeting safety audit requirements. Whilst it is available universally, it tends to attract only larger employers that are able to meet the required standards. There are currently 3,200 enrolled employers, representing 30% of those deemed to be of sufficient size to be able to meet the requirements.

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1.39 The Workplace Safety Discounts Programme is targeted at small businesses (including self-employed) in high risk industries (agriculture, construction, fishing, forestry, motor trades, motor transport and waste management). The programme is administered by industry bodies and provides a 10% discount to participants. There are 2,300 enrolled employers, representing only 2% of industries targeted.

1.40 The efficacy of the programmes is unclear. The claims experience of enrolled

employers is lower than that of non-enrolled employers. However, this appears to be largely a result of self selection, noting that employers with better safety practices will more naturally join the programmes. Nonetheless, the behaviours the programmes encourage can be expected to reduce injury rates in the workplace. The programmes’ longer term success, therefore, largely rests on greater penetration of employers that do not currently have the requisite safety systems in place.

Experience Rating 1.41 Experience rating was introduced on 1 April 2011 as a system for modifying an

employer’s work levy based on its claims history. Both injury and return-to-work rates are considered in assessing the modification. Levies can be increased or decreased by up to 50%.

1.42 For smaller employers (levies less than $10,000 per annum), a no-claims discount scheme applies under which levy adjustments of -10%, 0% or 10% apply.

1.43 Subject to a few exceptions, participation in experience rating or no-claims discounts is mandatory.

1.44 Experience rating is in its infancy and as such it is too early to judge how well it is performing. Employers with loadings greater than 15% have been identified for injury prevention programmes, so at the least the system is helping identify areas for action.

Proposed Product Changes 1.45 As part of levy consultation for the 2013/14 years (discussed in Section 11), a

number of product changes are being considered. Most are relatively minor. The major changes proposed are: • Introduction of a Fleet Safety Incentive Programme to the Motor Vehicle Account,

modelled on the Workplace Safety Management Programme, designed to improve the safety performance of commercial vehicle fleets

• Extending the Workplace Safety Discounts Programme to a wider set of industries.

Reinsurance

1.46 Given the large number of claims and the size of ACC’s balance sheet, even very long term claims are not of a sufficient size to affect ACC’s net assets to a material degree. Hence there is no need for ACC to acquire reinsurance in respect of individual claim risks.

1.47 The Board regularly considers the need for reinsurance against a large number of claims arising from a catastrophic event (primarily earthquakes, but also tsunamis and volcanic eruptions). At its 22 February 2012 meeting the Board received the following advice:

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• The greatest financial risk is represented by a major earthquake (7.5 magnitude or more) in Wellington, particularly if this occurs during business hours.

• Based on simulated data provided by GNS, the average cost to the Scheme of such an event (during business hours) is estimated to be $186m.

• The same simulations indicate that 90% of the possible major earthquakes are

expected to cost the Scheme less than $279m. 1.48 The Board concluded that these amounts were not sufficient to warrant the purchase

of catastrophe reinsurance, particularly noting ACC’s ability to post fund these costs and the high cost of securing reinsurance cover.

1.49 It is worth noting that the total cost of claims arising from the February 2011

Christchurch earthquake was less than $130m. 1.50 In my opinion ACC does not require reinsurance against either individual risks or

catastrophic events. In neither case is the expected cost significant in terms of ACC’s total balance sheet. Further, I consider it unlikely that ACC could acquire reinsurance at a commercially acceptable price. I therefore agree with the Board’s decision not to acquire reinsurance.

Changes in Scheme Coverage 1.51 ACC’s coverage changes over time, primarily as a result of two processes. Court

cases can provide changing views of the AC Act and its interpretation, and ACC or the Government may initiate changes to the Act and/or its regulations.

1.52 Table 1.52 summarises recent and upcoming court cases.

Table 1.52 – Recent and Upcoming Court Cases Court Case Discussion

Allenby v H

Supreme Court decision that pregnancy is a personal injury when it is the result of rape, medical misadventure or treatment injury

The Supreme Court found in favour of Allenby but did not appear to envisage that ACC would be responsible for the costs of raising a child. As a result, entitlements will be limited to the mother and may include short term weekly compensation, home help and some medical costs.

The costs resulting from this decision are not expected to be material.

Changes to the legislation are being proposed to clarify that the injury is to the mother and not the child.

Even with the proposed legislative change, a possibility remains that this case will lead to challenges to the scope of personal injury (e.g. cover for pregnancy in situations where it is arguable whether consent to sexual activity has truly been given).

C v ACC

Awaiting Court of Appeal decision as to whether the mother has suffered a personal injury

The High Court considered that it was at least arguable that the continuation or worsening of the spina bifida lesion was a personal injury that attracted cover. However, the High Court went on to find that it was not a personal injury suffered by the mother, so the claim before the High Court failed.

Ms C has obtained leave to appeal the case to the Court of Appeal to determine “has the mother suffered a personal injury

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Court Case Discussion where prenatal screening failed to identify spina bifida in the baby

under the Accident Compensation Act 2001?”.

If the Court of Appeal finds in Ms C’s favour, this could potentially extend the scope of cover, so that mothers are covered for a failure of prenatal screening to identify conditions in their babies. Potential costs are not expected to be material.

Monk v ACC

Awaiting Court of Appeal decision regarding cover for a mental injury as a treatment injury, even if there was no covered physical injury

The High Court concluded that cover for a mental injury caused by a physical treatment injury does not rely on whether the physical treatment injury itself is covered by ACC.

ACC has appealed to the Court of Appeal against the decision. The hearing is set down for November 2012.

If the Court of Appeal finds in favour of Monk, the scope of this would appear to be limited to situations where the physical injury in question was not caused by accident (i.e. treatment injury). However, there is a risk of extension past this. The extent of the risk is unknown until the Court of Appeal issues its decision.

Miller v ACC Awaiting Court of Appeal decision regarding entitlement to interest on backdated weekly compensation

A High Court judgment of 16 December 2011 had the effect that Miller was entitled to interest backdated to 1 July 1992.

ACC has received leave to appeal that decision to the Court of Appeal.

Miller v ACC raises the possibility (if ACC is unsuccessful) that the Corporation is liable for interest in all instances where ACC ceases weekly compensation and is required later to reinstate it (i.e. not just when ACC’s decision was unlawful). For example, in situations where new medical evidence is presented years after the decision to cease weekly compensation was made, ACC could be liable to pay a considerable sum in interest when ACC’s initial decision was correct based on the medical information held at the time.

If ACC is unsuccessful in challenging Miller, there will be significant cost implications. The immediate cash cost estimates indicate as much as $30m may be payable.

1.53 The above cases show the general push towards the expansion of ACC provided

cover through the courts. The motivation for this is not difficult to understand: ACC provides significantly higher benefits than other forms of support available, so it is in individuals’ interests to have the AC Act interpreted to cover their conditions.

1.54 Table 1.54 summarises recent and proposed future changes to the AC Act and

regulations: Table 1.54 – Recent and Proposed Future Changes to the AC Act and regulations Policy change/Initiative

Discussion

Removal of entitlement to weekly

This has been passed into law. The effect was to reduce ACC’s liabilities by $72m.

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Policy change/Initiative

Discussion

compensation for suicide claims (other than for a few exceptions)

Funding for under six year olds

The Minister for ACC has agreed to a $5 funding increase per visit for children aged under six (for GP and GP/nurse visits paid under the Cost of Treatment Regulations, and contracted Accident and Medical clinics and rural GPs). The estimated cost is between $600k and $2m pa to the Non-Earners’ Account. This is planned to be implemented on 19 December 2012.

Greater “choice” in workplace compensation

The Government has yet to make final decisions regarding the introduction of choice into workplace compensation.

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2 Obligations Under the AC Act

2.1 The majority of this report focuses on aspects of ACC’s financial performance and risks thereto. It is important, of course, that in delivering financial results ACC meets its obligations under the AC Act. This section explores this aspect.

2.2 The AC Act is in essence a social contract with the public. Without wishing to enter

into the public debate regarding various comments on the Scheme’s management, it is fair to say that, privacy matters aside, much of the debate has centred on whether the Corporation is delivering on its obligations under the Act. It is important that this be reviewed objectively.

2.3 Accountability for ensuring that ACC meets its obligations naturally rests with the

Chief Executive. Consideration should be given to assigning this accountability to one of the Chief Executive’s direct reports so as to ensure that an appropriate level of management attention is given to this aspect of ACC’s operations. This is not to say that such attention is currently missing, but direct accountability to an individual can be expected to strengthen management disciplines.

2.4 ACC’s obligations under the Act can broadly be expressed as:

• Meet the costs of covered injuries • As much as possible, ensure quality clinical outcomes • Rehabilitate injured people back to work capacity / independence, as far as

possible • Undertake injury prevention activities.

2.5 Objective measures of these matters are not easily found. For the purposes of this

report I have relied on data I have available and drawn conclusions based on this and other observations. This is an area that is worthy of investigation (i.e. the search for and development of a wider set of objective measures). These measures should be focused on client satisfaction with their medical treatment, quality of clinical outcomes, return to work / independence and service experience. It is also important for ACC to demonstrate the impact it is having on New Zealand injury rates.

Meet the Costs of Covered Injuries 2.6 ACC’s claims process is designed to attend to minor injuries, which comprise the

bulk of claims, with little scrutiny. Given this approach, it seems unlikely that there would be any concerns regarding this aspect of the Scheme’s management. Seriously injured clients are managed, generally, for the entirety of their lives. Again the provision of cover is not often in dispute. Where disputes can arise is in relation to elective surgery and weekly compensation.

2.7 ACC receives approximately 55,000 elective surgery requests a year, of which

around 80% are accepted. Whilst most are accepted, just over 10,000 New Zealanders are denied elective surgery requests every year. At the very least this suggests a misalignment of expectations between ACC and the public / health sector.

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2.8 Table 2.8 shows statistics related to elective surgery requests since 2006. Table 2.8 – Elective Surgery Requests

Number of Applications

% Proceeded

% Declined

% Cancelled

% AwaitingDecision

2006 45,854 87% 9% 4% 0% 2007 48,677 87% 10% 3% 0% 2008 51,726 86% 10% 4% 0% 2009 56,873 72% 17% 11% 0% 2010 54,066 73% 21% 6% 0% 2011 56,243 69% 18% 13% 0% 2012 57,864 65% 18% 16% 1%

2.9 Cancelled claims are usually accepted claims that have been cancelled by the

clients. 2.10 The rate of declined claims increased in 2009 from 10% to 17%, following which it

has been fairly stable. Some level of increase is perhaps not surprising; as is noted in Section 5 of this report there is evidence that in the years from 2005 to 2009 there was insufficient attention paid to whether or not claims were accident related. However, a decline rate of close to one in five seems high.

2.11 The other key point in Table 2.8 is the rate of cancelled claims, which has increased

dramatically in 2011 and 2012, noting that these claims have been approved but not proceeded with. In 2012, 20% of approved claims were cancelled (approved claims equals ‘proceeded’ plus ‘cancelled' claims in Table 2.8). Whilst there may be many causes of this outcome, the majority were presumably because the clients recovered prior to the surgery being undertaken. If this was so, one can only conclude that many surgeries are undertaken that are not necessary. It seems that this option, which is highly invasive and carries significant risk, is being over prescribed.

2.12 I make some comments below on the apparent efficacy of elective surgery in many

cases. This is an area requiring a wider range of work; we have a treatment approach that appears to be over prescribed and in many cases produces questionable client outcomes, yet generates a significant amount of dissatisfaction due to its high rate of decline. An unsatisfactory outcome for all parties.

2.13 Weekly compensation has become a matter of some attention, in particular with

respect to long term claimants. Long term claims are defined as those that have been in existence for more than one year.

2.14 The number of long term claimants has reduced significantly in the past three years,

from around 14,000 to 10,500. 2.15 In Section 5 I describe experience in the long term weekly compensation claims

pool. Overall, the analysis indicates that there are three reasons for the fall in long term claim numbers:

• Lower number of new claims. • Higher rehabilitation rates in the year following claims, such that people are

returning to work before entering the long term claims pool. • Management attention to those in the long term claims pool.

2.16 The first two points are positive outcomes. The last point is where contention lies.

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2.17 The analysis in Section 5 notes that there was a significant increase in clients entering the long term claims weekly compensation pool in the years leading up to 2009, basically due to deteriorating claim frequencies and poor rehabilitation performance. The evidence does suggest that the management focus on long term claims post 2009 was appropriate; these clients had not received appropriate rehabilitation support and a response was necessary.

2.18 Further, of those who have exited the long term claims pool in the past three years,

more than half had a primary diagnosis of a minor nature (sprains and other soft tissue injuries where recovery would have been expected within a relatively short time frame). Again, a management response to this seems to have been in order.

2.19 Despite these comments, anecdotal evidence suggests that there are some areas

where there is opportunity for improvement: • The quality of vocational rehabilitation. • Ensuring consistency of claims decision making.

2.20 The proportion of complaints upheld at review seems high (around 50% in the past

year), albeit that the number of reviews related to long term claims was small (93 based on data supplied by Dispute Resolution Services Limited). Opportunities to improve the early resolution of these disputes should be explored.

2.21 In summary, a dispassionate review of gross level statistics does not provide great

cause for concern regarding the fall in the long term weekly compensation claims pool. However, there is anecdotal evidence to suggest that there is room for improvement in the areas of vocational rehabilitation, consistency of claim decision making, and the early resolution of disputes.

2.22 Work related gradual process injuries also require consideration, with a large

proportion of applications being declined. This does not necessarily mean the decisions were incorrect, but it is an area warranting review. Further, there is evidence that only a small proportion of gradual process injuries that occur in New Zealand are claimed for. This also warrants investigation.

2.23 The high rate of declined claims for elective surgery is not only a problem for ACC.

Health providers are the gatekeepers to the Scheme and play a role in setting expectations. There is room for improvement here. ACC may need to undertake education of the health sector with regards to the limit of the Scheme’s coverage. This may also be an area where contracting arrangements for medical services could be used to incentivise better outcomes.

Ensure Quality Clinical Outcomes 2.24 ACC is in the process of developing measures to assess the quality of clinical

outcomes. My comments here are limited to two areas where I have been able to find existing measures.

2.25 Rehabilitation outcomes are a good proxy measure for quality. I comment on these

separately below. Overall, outcomes appear to be satisfactory, but are not as good as they were in the early 2000s.

2.26 Elective surgery is a widely used form of treatment for a range of injuries. Whilst

there is little doubt that in many cases elective surgery is necessary for recovery, there are a number of concerns with its current use. As noted above, 20% of surgery requests approved by ACC in 2012 were not proceeded with. This suggests that surgery is often prescribed when it is not necessary.

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2.27 Independently conducted research suggests that elective surgery has very little impact on a client’s ultimate return to work, whilst in many cases clients require further, sometimes multiple, surgeries. This is not to say that elective surgery is an invalid form of treatment, but it does appear that it is being over prescribed whilst the benefits are in some cases doubtful, particularly for soft tissue injuries where there is evidence to suggest that more conservative treatment approaches provide as good outcomes with significantly lower risks for clients. The elective surgery framework requires review.

Rehabilitation 2.28 Rehabilitation for employed people is relatively easily measured by return-to-work

rates. 2.29 ACC benchmarks itself against Australian schemes. Graph 2.29 shows durable

return-to-work rates for ACC and Australian schemes. Durable return-to-work means that the client returned to work and was still working at least seven months later.

Graph 2.29 – Durable Return-to-Work Rates

2.30 ACC’s durable return-to-work rate has been consistently higher than Australia’s, and has been increasing since 2009, although it has not yet reached the levels of the early 2000s. Overall, this is a satisfactory outcome.

2.31 Graph 2.31 shows rehabilitation rates in the past 10 years. Each of the lines shows

the proportion of people who were rehabilitated within the respective time period (so, for example, the bottom line shows how many people were rehabilitated within 28 days of going on weekly compensation).

79 81 8075 77 78 80

74 75 77 75

87858483 79

73 72757780767673

0%

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2000-01

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New Zealand Australia

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Graph 2.31 – Rehabilitation Rates

Rehabilitation Rates for different durations of Weekly Compensation

40%

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912 days 547 days 365 days 273 days182 days 70 days 28 days

2.32 Rehabilitation rates fell consistently during the period from 2005 to 2009, following which performance generally improved for the next 18 months. Since then the experience has stabilised.

2.33 The 28- and 70-day measures, whilst indicating an improvement from the low point

of 2009, have not reached the levels of 2005 to 2007. Investigation is warranted as to whether those levels are again attainable.

2.34 Longer duration rehabilitation rates have stabilised at historically satisfactory levels. 2.35 Seriously injured clients will generally require support from ACC for the rest of their

lives. Measures of success here must centre on the levels of independence clients are able to achieve.

2.36 Seriously injured clients set self directed independence goals every six months.

Goal achievement is measured on a four point scale (not achieved, partially achieved, achieved, achieved beyond expectations). The figures in Table 2.36 show that goal achievement has trended steadily upward in the past three years, starting at 60% in 2010 and rising to 66% in 2012.

Table 2.36 - Trends in Client Goal Achievement since 2010

Year ending 30 June Clients with serious injuries managed by Support Coordinators  2010  2011  2012 

Achieved beyond expectations

6% 5% 5%

Achieved 54% 56% 61%

Partially achieved 28% 27% 20%

Not achieved 13% 13% 13%

2.37 Whilst the trend is positive, the level of “not achieved” has been steady at 13%. This is currently being investigated to determine whether there are any actions ACC can take to improve performance in this area for the benefit of clients.

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2.38 Where possible, ACC seeks to help seriously injured clients to partial returns to

work. For this purpose participation is measured in terms of clients who are able to make any return to work, no matter how few the number of hours.

2.39 Table 2.39 shows trends in employment participation in the last three years.

Table 2.39 - Trends in Employment Participation Since 2010

Year ending 30 June 18‐59 year old clients with a serious injury  2010  2011  2012 

Spinal cord injury 23.0% 27.8% 26.6%

Traumatic brain injury 12.8% 15.2% 18.2%

Other injury 26.6% 30.2% 31.1%

Total 17.9% 21.1% 22.5%

2.40 Employment participation has increased by 25% in a two year period, which is an excellent outcome. This is an important area on which to continue to focus; participation in the workforce, at whatever level is possible, is highly empowering and vital to the quality of life of seriously injured clients.

Review Cases

2.41 An ACC client, if unsatisfied with a decision made by ACC, may refer their case to

Dispute Resolution Services Limited, an independent body charged with reviewing such complaints. There is no charge for this service, although in many cases clients engage solicitors to help them present their cases.

2.42 Table 2.42 shows statistics regarding the outcomes of these reviews.

Table 2.42 – Review Outcomes

2011 2012Number of Reviews

7,146 6,608

% in favour of ACC

71% 73%

% against ACC 29% 27%

2.43 The rate of ACC decisions being overturned at review appears to be high. In some respects this may not be surprising; the medical and legal matters involved in such decisions are complex and hence differing views can be held. Nonetheless, there is opportunity for greater effort to be put into early resolution of disputes. The ultimate goal should be to reduce the number of reviews and, to the extent that cases proceed to review, reduce the percentage overturned.

Injury Prevention 2.44 The AC Act requires that ACC undertake activities designed to reduce the

prevalence of injury in New Zealand. 2.45 ACC’s injury prevention activities have largely been focused on the workplace

through incentive schemes such as the Workplace Safety Management Programme. Other incentives include experience rating and risk sharing options. These were all discussed in Section 1. This section discusses specific programmes of expenditure targeted at injury prevention. The AC Act requires that such expenditure only be

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undertaken if the expected saving in the cost of injury is at least as great as the expenditure.

2.46 Activity over the past year was primarily directed in three areas:

• Roads - focus has been on young drivers (aged 15-19), motorcycles and

commercial fleets. Motorcycles and commercial vehicles make up 6% of the vehicles on New Zealand roads but represent around one third of the claim costs to the Motor Vehicle Account.

• Workplace – the focus has been on five high risk industries (manufacturing,

fishing, forestry, construction and agriculture). • General public – Idea Nation was designed to encourage the public to develop

ideas to reduce falls in the home. There was also activity directed towards reducing alcohol related injuries. The established programmes of vitamin D supplements and high claim sports were continued.

2.47 High risk workplaces (those with experience rating loadings of 15% or more) were

targeted for injury prevention programmes. ACC aimed to have 40% of such employers engaged; the result was 53%. For these employers, ACC helped to identify specific action plans related to their injury experience.

Results 2.48 ACC periodically measures the return on investment from injury prevention

activities. Three of the programmes have been assessed. The Young Driver programme achieved a return of $11 for every $1 invested; the combined priority sport programmes returned $2; and the vitamin D programme returned $7.

2.49 The specific workplace activities will be measured over time as employers’ claims

experience develops. Other programmes will be assessed when sufficient data is available.

2.50 Overall, the results appear satisfactory. However, ACC’s investment in injury

prevention has decreased in recent years. Whilst the programmes of themselves may make a reasonable return, they are of too small a scale to have any real impact on injury rates in New Zealand.

2.51 Part of the problem here is that ACC is required to treat injury prevention activity as

part of its administration budget, rather than in the nature of an investment. This has the natural consequence that activity is constrained in order to meet administration expense budgets.

2.52 ACC does work with other agencies in the area of injury prevention, some of which

have significantly greater budgets available for this activity. 2.53 For ACC to have a significant impact in injury prevention, it is my opinion that one of

two things needs to occur: either ACC needs to increase dramatically the scope and scale of its activities or it needs to take a thought leadership role through its intelligence on New Zealand injuries. Neither of these is an easy proposition – the former implies a significant financial investment that can only be made by levy payers; the latter implies ACC directing the expenditure of other government agencies.

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2.54 The injury prevention strategy is currently under review. This needs to include a review of the approach to funding activity so that it is treated as an investment, not an administration expense.

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3 Major Processes

Claims Management

3.1 Claims management at ACC has a number of goals. There is the clear need to achieve high quality outcomes for injured people by rehabilitating them back to work and/or independent living. ACC aims to provide these services at an efficient cost to the New Zealand economy.

Front End Claims Management 3.2 Claims are lodged directly with ACC by GPs and certain other treatment providers

such as physiotherapists and chiropractors. Only specified health practitioners can certify that clients are unfit for work.

3.3 Under ACC’s legislation there is a low threshold required to meet the criteria for

cover. However, the great majority of claims require only one or two treatments. For these claims ACC has no involvement other than making payments for the medical services rendered.

3.4 The approach is characterised by high claim volumes, easy entry and quick

recovery and is highly efficient from an administrative viewpoint. It does, however, expose the Scheme to risks that claims are paid that are not injury related and some claims may be over serviced. These risks are balanced against claim escalation and trigger points that allow management of claims as they are identified as being complex or potentially long term, or treatments go beyond identified norms given the particular injuries.

Claim Screening 3.5 All claims that continue beyond the initial treatment phase are screened for long

term risk and/or complexity. In comparison with other injury compensation schemes, ACC has established robust standard screening processes. Screening determines:

• The level of risk of extended duration, based on psycho-social screening.

• The potential for the client to recover at work, if temporary adjustments to the work environment can be made.

3.6 Claims determined to be complex and/or at significant risk of being long term claims are assigned case managers. For those not assigned case managers, support is able to be accessed should the clients deem, and ACC agree, that this is necessary. In this instance the claims are transferred to ACC’s “short term claim centres”.

3.7 Once a client is supported by a case manager, there is an expectation that at all times an action plan will be in place. Most clients referred to case management recover quickly - around 50% of workers who are approved for weekly compensation return to work within four weeks.

Low Complexity Claims 3.8 Claims are managed within the short term claim centres if full recovery is expected

within 10 weeks. The primary concern for these claims is to ensure a rapid return to work. Once someone is out of work for a long period they tend to develop psychological and other conditions that can have damaging long term health impacts. The management focus is on medical treatment, early intervention,

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vocational support, rehabilitation progress against injury norms, and the monitoring of any developing psycho-social issues.

High Complexity Claims 3.9 Typically claims are case managed if it is expected that the clients will need support

for an extended duration (usually 10 weeks or more), or a range of support services will be needed.

3.10 For case managed claims, the focus is on ensuring recovery within an optimum

period given the specific injuries. Case managers will prepare rehabilitation plans based on medical advice and established best practice, seek employer support for return to full or partial duties once the clients are ready, and organise vocational rehabilitation. Where required, case managers may arrange alternative employment advice for clients.

3.11 Long term claims are managed within certain legislative parameters:

• Rehabilitation - needs assessments must consider only the levels of need that

are a consequence of the original covered injuries.

• Incapacity - legislation allows for expert medical opinion as to whether a client continues to be incapacitated, and if so, whether this is still due to the covered injury.

• Vocational independence assessment - once a client has received rehabilitation support, as agreed in a formal rehabilitation plan, legislation makes provision for an assessment of vocational independence. The assessment considers whether the client has the capacity for full-time employment in work to which they are suited by experience or training. If so, entitlement to weekly compensation can end three months after this decision has been made.

Long term Weekly Compensation Claims 3.12 Clients who receive weekly compensation for 52 weeks have a high likelihood of

continuing to claim for extended periods, as by this stage they have often lost contact with their employers and may also have developed psychological and other health issues. Once clients have reached this point they are reviewed more actively for their rehabilitation prospects.

3.13 Should weekly compensation continue to 2.5 years, the clients are assigned to the

Recover Independence Service (RIS) which comprises case managers with the particular skills required to manage the usually difficult issues involved with these very long term claims.

Serious Injury Clients – Lifelong Disability 3.14 There are currently approximately 5,000 clients with serious injuries. In many of

these cases ACC will provide lifelong support. All of these claims are managed by the National Serious Injury Service (NSIS), which comprises specialised case managers.

3.15 The primary goal of case management for these seriously injured clients is to, as far

as possible, help the clients to achieve independence goals within the allowances of their injuries (in some cases, partial employment options are able to be achieved), and otherwise to ensure the appropriate levels of support services are available.

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Risks in the Claims Process 3.16 As noted, the claims process is designed to process efficiently the very large

number of low complexity claims received every year. Whilst this does expose the Scheme to some risks of covering non-injury related conditions and over servicing, these risks are offset by the administrative efficiency gained through the approach.

3.17 ACC is working on developing a tighter set of expected pathways for standard injury

types requiring more than basic treatment. This will allow closer benchmarking of recovery outcomes, in terms of both time and quality.

Recent and Proposed Changes to Claims Management Claims Management by Third Party Administrators 3.18 ACC has contracted with four third party administrators (TPAs) to partner with ACC

to case manage long term weekly compensation clients to independence. The contracts are based on partnering principles and have allowed ACC to build strategic relationships with these organisations whilst benchmarking performance internally. Results to date have been satisfactory with regards return-to-work outcomes, although in two cases return-to-work outcomes have been less than ideal; the causes of this are being investigated.

3.19 Since the contracts have been in place there has been some consolidation in the

marketplace. Relationships between ACC and the individual TPAs are positive and ACC is currently exploring further options for relationship development.

Strategic Procurement of Health and Rehabilitation Services 3.20 ACC is currently changing the way it procures treatment and rehabilitation services

with the introduction of a limited supplier model in three markets: vocational rehabilitation, home and community support services, and community nursing.

3.21 It is expected that the new procurement arrangements will enable closer relationships

with key suppliers. The new contract includes packaged pricing designed to incentivise suppliers to deliver quality outcomes rather than simply deliver more services.

Support for Appropriate Certification Practice 3.22 A strategic change programme is currently being rolled out to support good

certification practice by medical practitioners. It is believed that in many cases clients are certified to be off work when it is in their interests to be at work, noting international evidence of the importance of work in the rehabilitation process. This programme includes improvements to certificates, a channel for GPs to request return-to-work support for their patients, and feedback to certifiers through Primary Health Organisations.

Conclusion 3.23 The claims process is efficiently designed with regards to the majority of claims. For

more complex claims, a series of escalations exists to balance the requirements of the claim against administration costs. Whilst it is a judgement as to where these escalation points are established, there is some evidence that the intervention points are a little late in the process, particularly for claims not involving weekly compensation. This is worthy of investigation.

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Investment Management

3.24 Investment management is governed by the Investment Committee, a sub-committee of the Board. The Investment Committee sets risk tolerances, approves asset allocation benchmarks and major transactions, reviews investment performance and compliance, and provides delegations to the investment manager and the investment team more generally.

3.25 ACC’s investment portfolios are actively managed, with the majority of funds being managed internally. External fund management companies are employed for certain asset classes (primarily global bond and global equity portfolios, but also specialised areas such as private equity).

3.26 Portfolio asset allocations are reviewed annually by the Investment Committee based on recommendations from management.

3.27 The investment team is able to act within various discretions as delegated by the Investment Committee. The discretions are set to allow the team to add value through tactical selections within the tolerances set by the Investment Committee. Movements outside these discretions require the approval of the Investment Committee.

3.28 Governance of the investment function is robust. In particular, there is adequate separation of duties between the investment managers and the compliance and reporting functions.

3.29 The Board has been notified that the underlying systems are not of sufficient quality, particularly given the size of ACC’s portfolio. ACC is in the process of updating these systems, with delivery expected in early 2013. This is an important project.

Operating Systems 3.30 This section briefly discusses ACC’s major operating systems. 3.31 EOS is ACC’s claim management system. It supports all aspects of claim

management from lodgement through to rehabilitation, including workflow, task management and data capture and storage. EOS is a packaged off-the-shelf application developed by Dublin based software company FINEOS. The system is stable and meets performance requirements. The application change profile is high, with regular releases for business improvement being required. Technical risk is considered low given the system’s up to date hardware platform, vendor supported component versions, and on-site support. An upgrade to the system is currently in the start-up phase.

3.32 ACC’s financial application is Oracle eBusiness Suite (eBS). eBS is a packaged,

off-the-shelf solution supported by Wellington based Apsarona. The solution is stable and meets performance expectations. The application change profile is low given the nature of the business capability it supports. Technical risk is low as the application infrastructure has undergone significant enhancements during 2012. Two additional modules will be implemented in 2013/14 to support end-to-end purchase-to-pay processes.

3.33 Health invoice management is supported by the Medical Fees Payment (MFP)

system. MFP is a bespoke developed application supported by Wellington based Solnet. The system has historically suffered from performance problems. However, recent migration of the application and database components to modern platforms has stabilised performance. The operating system has been upgraded to supported

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levels but does not fit ACC’s longer term technology strategy. Further, the application server component remains unsupported. The change profile is medium. The application supports high value business capabilities but the underlying architecture is constrained and requires transformation or migration to meet future requirements.

3.34 Levy calculation and billing is supported by the Integrated Premium System 2

(IPS2), a bespoke developed application supported by Wellington based Solnet. IPS2 is stable and performs to business expectations. However, the application has received little investment for many years. The recent migration of database and application components to new hardware platforms has reduced technical risk but the application server remains unsupported and requires work. The change profile is currently low, however upcoming initiatives are likely to push this to medium.

3.35 Pathway manages payments made to clients. It is a bespoke application developed

and supported by Wellington based Unisys. Pathway is stable and meets business needs. Its change profile is low. Application support is a concern due to the scarce availability of knowledgeable resources in ACC and Unisys. The application constrains ACC’s ability to make changes easily and requires upgrade or replacement to meet future needs.

3.36 Virtual Claimant Folder (VCF) provides the repository for all claim related

documents. VCF is a mix of a package off-the-shelf solution, customisation and bespoke development. The solution is mostly stable but does have some performance issues from time to time. Support is provided by Wellington based Solnet. A project is currently in start-up phase to migrate the solution to the latest generation of the software.

3.37 EMGr and eForm – EMGr supports the electronic and manual capture of claim

forms from health providers. eForm supports the electronic and manual capture of invoices and schedules from health providers. Both solutions are complex and have stability issues. EMGr and eForm services are being transitioned to ACC’s new eChannel. The project is nearing completion of the delivery phase.

3.38 Overall, ACC’s systems appear to be operating at an acceptable level, although

there are some stability issues and a number are in need of maintenance / upgrade. This is noted as a high risk on the risk register.

3.39 Events of the past six months have shown that there are functionality gaps with

regards to data security / privacy matters. This requires attention as part of the wider body of work that is being undertaken in response to the recommendations of the independent review into ACC’s privacy processes.

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4 Investment Policy

4.1 ACC’s approach to investment management has been developed over a number of years. The fundamental driver of investment decisions is a consideration of the long term risk / reward trade off. ACC is a long term investor and is able to make decisions with this perspective. In this respect risk is considered in relation to both the net asset position and levy stability.

Liability Profile

4.2 Most of ACC’s claims are short term in nature. These do not pose any significant investment issues.

4.3 A small number of claims are for very long term injuries. In the extreme, a serious birth injury can result in a claimant being on the Scheme for his or her entire lifetime. The liability profile for these serious injuries involves a very long duration, with payments being subject to both basic economic and additional health sector inflation.

4.4 Weekly compensation claims tend to be of medium duration (around five years) and are subject to standard economic inflation.

4.5 Elective surgery claims are long term and highly inflationary.

4.6 Overall, ACC’s liabilities are of long average duration (around 15 years) and are generally subject to both standard inflation and additional health sector inflation.

Investment Risks

4.7 The main economic and financial scenarios that could have an impact on net assets and, consequently, levy rates are:

• A sustained decline in equity markets

• Widespread credit defaults

• Significantly lower interest rates, which increase the value of the liabilities more than the value of the assets

• A significant deterioration in the inflation outlook.

4.8 ACC aims to allocate and manage its investment portfolios in a way that limits the deterioration in the funding position if these circumstances occur. In particular, the claims liability is highly sensitive to the assumed real discount rate, and this is ultimately linked to market yields available on long duration bonds.

4.9 As the Scheme continues to mature, more serious injury claims are being added, which extend the average duration of the claim cash flows. This lengthening in the average duration increases exposure to the risks of a decline in bond yields or a deterioration in the inflation outlook.

4.10 By holding long term assets that tend to appreciate in value when real interest rates decline, the risk of deterioration in net assets is reduced.

4.11 The average duration of the insurance liabilities is significantly longer than the duration of the domestic bonds that are available. This difference, coupled with the fact that ACC is not yet fully funded, means it is not practical for investment policy to offset fully the exposure to long term bond yields that is inherent in the insurance liabilities. There is no match available for the inflation risks inherent in the Scheme.

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4.12 ACC’s asset portfolio has grown significantly in size in recent years as the Scheme has been moving towards full funding. As this process continues for the next few years, this growth is expected to continue, albeit at a reduced rate. Currently approximately 75% of ACC’s assets are invested in New Zealand markets. Domestic investment opportunities are limited in size. As the asset base grows, the weighting toward overseas markets will need to increase.

Asset Allocation 4.13 Benchmark allocations to various asset classes are reviewed annually.

4.14 As noted, it is not possible to find assets that match, or even closely match, ACC’s very long and highly inflationary liability profile. As a result, asset allocation decisions are made within the constraint that there will always be a significant amount of mismatch risk on the balance sheet.

4.15 Given this constraint, the investment approach starts from an assessment of a “minimum risk portfolio”. This minimum risk portfolio is established through a simulation exercise whereby a range of possible economic conditions is reviewed and the impacts of these on net assets and levies are considered. This minimum risk portfolio is typically dominated by Government bonds, but tends to include relatively small allocations to equity and other asset classes, noting that bonds provide no protection against the inflation risks inherent in the Scheme.

4.16 From this minimum risk portfolio, consideration is given to the marginal expected returns against the marginal additional risks from alternative asset allocations. It is through this process that ACC attempts to find an optimal asset allocation that balances risk and reward considerations.

4.17 Asset allocations are set separately for each of the five Accounts, reflecting their differing liability profiles and funding positions.

4.18 Table 4.18 sets out the strategic asset allocations for each Account as at 30 June 2012. These represent the “benchmark” holdings; actual allocations at any point in time may differ depending on the professional judgement of the investment team.

Table 4.18 – Strategic Asset Allocations by Account

Strategic Asset Allocations2012 by Account 2012 2011

Asset Class

Motor Vehicle Account

Work Account

Earners' Account

Treatment Injury

Account

Non Earners' Account Total Total

Income Assets:Reserves Cash 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%Total NZ Bonds 54.5% 53.5% 53.5% 48.5% 49.5% 52.9% 56.2%Overseas Bonds + Hedging 3.0% 7.0% 7.0% 3.0% 3.0% 5.1% 3.7%Total Income Assets 59.5% 62.5% 62.5% 53.5% 54.5% 60.0% 61.9%

Growth Assets:Total NZ Equities 12.0% 9.5% 8.0% 14.0% 14.0% 10.7% 12.0%Total NZ Real Assets 3.0% 4.0% 4.0% 3.5% 3.5% 3.6% 3.6%Australian Equities + Hedging 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 5.0%Global Equities + Hedging 21.5% 20.0% 21.5% 25.0% 24.0% 21.7% 17.5%Total Growth Assets 40.5% 37.5% 37.5% 46.5% 45.5% 40.0% 38.1%

4.19 The New Zealand bond portfolio is primarily invested in long dated securities.

Further, ACC invests in derivatives designed to increase the duration of the bond portfolio so as to better match the liability exposure. Despite this, the average duration of the portfolio is only 8.4 years, well short of the average liability duration of approximately 15 years.

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4.20 ACC has generally moved its portfolio towards growth and away from income

investments during the year. Primarily this is in response to assessed greater relative value in equities following both the large decline in world interest rates (net of sovereign risks) and falls in world stock markets (meaning that equity investments are relatively “cheap”). Both these impacts make equity investments relatively attractive compared with bonds.

4.21 Offsetting this is the improved funding position of the Accounts. As ACC moves

closer to full funding, the relative impact of a large decline in asset values on levy rates increases, making equity investments less attractive.

4.22 The net effect of these two impacts has been a modest increase in the allocation

towards growth investments. 4.23 The increased allocation to growth assets has been directed to overseas destinations,

rather than New Zealand. This is, at least in part, due to the fact that ACC now has such a large New Zealand equity holding that further allocations expose it to the risk that it cannot trade in the market without affecting prices.

4.24 Looking at the Accounts individually, the largest allocations to growth assets are in

the Non-Earners’ and Treatment Injury Accounts. In both cases this is due to the low funding position of the Accounts (noting that the Government has determined that it will fund pre-2001 claims on a pay-as-you-go basis), which allows ACC to take a larger equity position without materially affecting the overall risk levels of the Accounts.

Conclusion 4.25 The investment approach recognises that there is no match, or even a close match,

to the nature of ACC’s liabilities. As a result there will always be a significant level of mismatch risk on the balance sheet. Within this constraint, the investment philosophy is directed towards a detailed assessment of the marginal reward available for marginal risk assumed. In the long term it is to be expected that this approach will provide the best outcomes for levy payers.

4.26 Section 6 discusses ACC’s historical investment performance. This shows that the

long term approach has reaped significant rewards and reduced the levies that would otherwise have been payable in the past 10 years.

4.27 Overall, I am satisfied that the investment policy is appropriate to the liabilities within

the constraints discussed.

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5 Insurance Experience

Overall Insurance Experience of the Scheme 5.1 Graph 5.1 compares the undiscounted projected total cost of all claims, by accident

year, for the current valuation with the estimates for each of the past three valuations, excluding bulk billed, claim handling expenses and risk margins.

Graph 5.1 – Cost by Accident Year Cost by accident year (Current value)

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5.2 Following a period of significantly increasing costs, experience over the last three

years has been favourable, as evidenced by the generally decreasing bars. The reductions in the lines show how this has been reflected in future assumed claim payments in Outstanding Claims Liability (OCL) assessments since 2010.

5.3 There are four key drivers that affect how the insurance experience moves compared with expectations. These drivers are:

• Numbers of new claims • Amounts paid for new claims • The rate at which existing claimants are rehabilitated to work / independence • Increases in costs in excess of inflation (super-imposed inflation).

5.4 Graph 5.4 shows claim frequencies for the Scheme as a whole. This clearly shows the higher rates of claiming that occurred in the years leading up to 2008, following which they have reduced sharply to levels that are not historically unusual.

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Graph 5.4 – Claim Frequency Rates

Indicated Claim Frequency Rates by Coverage YearEstimated Ultimate Reported Injuries per 1,000 People

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5.5 Claim frequencies by Account are shown in the appendices. Generally they show the same pattern, with only minor variations. The Work Account, however, has had consistently improving claim frequencies. The reasons for this are not certain, but can be postulated as greater employer awareness, the tighter regulation of safety in the workplace and a changing industry mix. The other exception is Treatment Injury, where claim rates have steadily increased following the expansion of cover in 2005.

5.6 In Section 2 I discussed rehabilitation rates across the Scheme. Similar to claim

frequencies, these deteriorated in the years leading up to 2009, following which they have improved.

5.7 The Scheme’s financial performance needs to be considered in the context of a

significant deterioration in claims experience up to 2008 followed by improvements in recent years. These improvements have been the result of a range of factors, but essentially come down to basic insurance management disciplines: ensuring that cover is provided consistently with the contract (in this case the AC Act), a greater focus on rehabilitation and the early management of claims, and an improved management of health procurement.

5.8 This pattern of relatively long periods of poor performance followed by similar periods

of improving performance is not unusual for the Scheme. ACC’s volatility is serial in nature, rather than purely random. This causes levy instability and changes in public expectations. I comment on this further in Section 14.

5.9 The following paragraphs outline the insurance experience for the four largest

payment types. For each payment type, the experience is considered and related to its impact on the Outstanding Claims Liability (OCL). A reduction in the OCL merely means that the experience has been better than that assumed. The determination of the OCL is discussed in Section 7.

Page 38 of 122

Non-fatal Weekly Compensation

5.10 The experience for non-fatal weekly compensation has improved in each of the past three years. In total this has resulted in a reduction in liability of $1.8b. The two main drivers have been the number of new claims and rehabilitation rates for existing active claims.

Non-fatal Weekly Compensation - New Claims Experience 5.11 Graph 5.11 shows the number of new claims by accident quarter.

Graph 5.11 – New Claims for Non-Fatal Weekly Compensation Non-fatal Weekly Compensation new claims by accident quarter

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5.12 The number of new claims was relatively stable up to March 2009, averaging more than 11,000 claims per quarter. Since then this has decreased to around 8,500 claims per quarter. This decrease is largely driven by two factors:

• Changes in claim management and rehabilitation services, with more emphasis on helping claimants to stay at work following accidents. It is now widely accepted internationally that being at work, when possible, is highly beneficial to the rehabilitation process.

• An economic downturn in the past few years, which has resulted in a higher unemployment rate. Higher unemployment is usually associated with lower claim rates, presumably because people are less likely to take time off work in response to minor accidents due to concerns regarding job security.

Non-fatal Weekly Compensation – Rehabilitation Rates

5.13 Graph 5.13 shows rehabilitation rates for the first four years following an accident. I have only shown these rates from six months after an accident, as prior to this rehabilitation rates are distorted by delays in claims being reported.

Page 39 of 122

Graph 5.13 – Rehabilitation Rates for Non-Fatal Weekly Compensation

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5.14 Rehabilitation rates in the early durations following an accident have been higher in the past three years than was the case in earlier years. This improved performance was a result of changes made to claim management and rehabilitation services in 2009. These changes placed more emphasis on helping clients to return to work as soon as possible following an accident.

5.15 Graph 5.15 shows the rehabilitation rates for claims that are still receiving weekly

compensation five or more years after accidents.

Graph 5.15 – Rehabilitation Rates for Non-Fatal Weekly Compensation

Non-fatal weekly compensation actual rehabilitation rates by year

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5.16 For longer term claims, the experience has also improved since 2010, the main reason being the establishment of the RIS team in July 2009, which focuses on these long term claims, of which many had not been adequately managed for a number of years.

5.17 The impact of the high rehabilitation rates for both short term and long term claims is that the number of active longer term claims has reduced. This is discussed in more detail later in this section.

Page 40 of 122

Social Rehabilitation - Serious Injury

5.18 The insurance experience for social rehabilitation - serious injury has been favourable for each of the past three years. In total this favourable experience has resulted in a reduction in liability of $1.6b. The two main drivers have been the growth in the number of care packages and the number of new claims.

Social Rehabilitation – Serious Injury – Growth in Care Packages 5.19 Graph 5.19 shows the payment experience for accidents that occurred prior to 2004.

Clients injured since 2004 have not in all cases had sufficient time for their care needs to stabilise and so have been excluded from the chart.

Graph 5.19 – Care Package Payments for Seriously Injured Clients

Past and projected care payments for 2004 and earlier accidents

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5.20 Payments per quarter have decreased by around 20% since the year to 31 March 2009.

Page 41 of 122

5.21 Graph 5.21 converts Graph 5.19 into annualised growth rates in care packages.

Graph 5.21 – Annualised Growth Rates in Care Packages

Past and projected annualised growth rates in care packages

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5.22 Since 2010 care packages have been decreasing. NSIS was introduced in 2009. NSIS has, amongst other things, reviewed all care packages against benchmarks for specific injuries. This has led to the large reductions shown above; in essence, ACC was providing more support than necessary. Whilst it can seem counter intuitive, it is nonetheless the case that the provision of too much support can be harmful, in that it can lead to a feeling of loss of independence and an ultimate lack of motivation in the client.

5.23 Graph 5.21 shows the volatility present in many of the benefits provided by ACC, which highlights the challenges in forecasting long term outcomes.

5.24 It is to be expected that hours of care will increase as clients age. Given that care

packages have generally been reduced in the last few years, the likelihood is that future growth will be at a higher rate than has been observed to date. The OCL assessment has incorporated this by increasing the assumed rate of care package growth such that hours of care provided in the long term are not substantially altered from the levels previously assumed. Nonetheless, it is important that expectations are set early with clients so that care packages are sustained within benchmarks.

Page 42 of 122

Social Rehabilitation – Serious Injury – Number of New Serious Injury Claims Reported 5.25 Graph 5.25 shows the number of new serious injury claims reported since 2006.

Graph 5.25 – New Serious Injury Claims

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5.26 The number of claims reported climbed between 2006 and 2009, but has been

decreasing since. The primary cause of the decrease in recent years has been a better triaging of traumatic brain injuries.

5.27 It is worth noting that the chart does not include claims that have been incurred and reported but not yet classified as serious injury. Therefore the most recent years of experience are likely to be understated to some extent. This has been allowed for in the assessment of the OCL.

Elective Surgery 5.28 The insurance experience for elective surgery has been favourable in each of the

past three years. In total this favourable experience has resulted in a reduction in liability of approximately $300m.

5.29 Unlike other payment types, elective surgery is not directly affected by rehabilitation rates. Elective surgery is of itself a one-off event, although in many cases further surgery is required, which may be many years later.

5.30 The main driver of the experience in the past three years has been the number of elective surgeries being undertaken, which has been lower than expected. This experience has applied to both new claims and older claims.

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Elective Surgery - Experience for Surgeries Within One Year of Accident

5.31 Graph 5.31 shows the number of surgeries undertaken within one year of an accident occurring, by accident quarter.

Graph 5.31 – New Elective Surgery Claims Within One Year of Accident Elective surgery claims within a year of accident by quarter

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5.32 The number of new claims per accident quarter decreased by approximately 1,000 during the 2009 year and has remained steady since. This reduction in claim numbers has been predominantly due to a focus on ensuring that elective surgery requests are only accepted when the injuries are wholly or substantially accident related.

Elective Surgery - Experience for Surgeries More than One Year after Accident 5.33 Graph 5.33 shows the number of surgeries undertaken for claimants more than one

year after the accidents that caused the injuries. This shows the insurance experience in relation to existing claims, as opposed to new claims.

Page 44 of 122

Graph 5.33 – New Elective Surgery Claims More Than One Year after Accident Elective surgery claims for existing accidents by quarter

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5.34 The number of elective surgeries for existing claims has also decreased. Some of

these procedures take place decades after the accidents occurred. The size of this reduction is smaller than that seen for new accidents. Again the main driver of the reduction has been the focus on ensuring that elective surgery requests are only accepted when the injuries are wholly or substantially accident related.

5.35 Despite this, the number of claims at very long durations (15+ years after accident) continues to increase. Most likely this is in response to the deterioration of materials involved in the original surgeries. Whether this aspect of experience continues into the future, given advancements in medical technology, is questionable.

Elective Surgery – Increases in Costs in Excess of Inflation 5.36 The elective surgery payment type has historically experienced increases in costs

well in excess of inflation. This phenomenon is not unusual in the health sector and is generally referred to as super-imposed inflation. Super-imposed inflation occurs for many benefits funded by ACC, but particularly elective surgery. Graph 5.36 shows the historical increase in average costs in excess of underlying economic inflation.

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Graph 5.36 – Elective Surgery Super-imposed Inflation

Elective Surgery - Cost per Claim & Super-imposed Inflation

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5.37 The average cost increase has consistently exceeded inflation for the past 10 years,

generally by 5%p.a. or more. The increases in cost in the past three years have been in line with the levels assumed in assessing the liability. As such this has not had a material impact on the insurance experience of the Scheme.

5.38 Whilst the experience has been in line with the levels assumed, the levels assumed have been high, so this should not be taken as an indication that performance is satisfactory. Super-imposed inflation will, all other things being equal, cause levy rates to increase generally at 2% p.a. ahead of underlying economic inflation. This is a matter that requires management attention. The general need for follow-up surgery many years after accidents emphasises the importance of this matter.

Medical Payments 5.39 The insurance experience for medical payments, being payments made to primary

care providers, has been favourable for each of the past three years. In total this favourable experience has resulted in a reduction in liability of $0.6b. The two main drivers have been the number of new claims for other medical claims, and the rehabilitation rates for longer term active claims.

Medical - New Claims Experience for Other Medical Claims 5.40 The medical payment type covers a number of services, including GPs, radiology,

physiotherapy and other medical services such as medical specialists and pain management. The other medical category accounts for around 50% of the costs of medical payments.

5.41 Graph 5.41 shows the number of other medical claims in the quarter following the date of accident, when claim numbers are highest for this category.

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Graph 5.41 – Other Medical Claims One Quarter after Accident Other medical claims reported in the quarter following accident

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Actual claims in quarter follow ing accidentProjected future claims - 2009 valuationProjected future claims - 2010 valuationProjected future claims - 2011 valuationProjected future claims - 2012 valuation

5.42 The number of new claims for other medical services was increasing between 2006

and 2008. The number of new claims then decreased by approximately 10% in the 2009 year, following which they have been stable.

5.43 The decrease in new claims has arisen from changes in claim management and rehabilitation services. This has resulted in fewer referrals to other medical services as part of the claim rehabilitation process.

Medical - Rehabilitation Rates for Long Term Claims 5.44 Graph 5.44 shows the rehabilitation rates for longer term claims that receive medical

services (i.e. those claims still receiving medical services more than five years after accidents).

Graph 5.44 – Rehabilitation Rates for Long Term Medical Claims

Medical actual rehabilitation rates for long-term claims by year of experience

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5.45 Recent rehabilitation experience has been favourable compared with the experience prior to 2010.

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5.46 The impact of the high rehabilitation rates for long term claims is that the number of active longer term claims will be lower. Graph 5.46 shows the number of active longer term claims (i.e. claims that have received medical benefits more than one year after the accidents that caused the claims) in the past three years.

Graph 5.46 – Long Term Medical Claim Numbers

Medical claims for existing accidents greater than one year old by quarter

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Actual active claims more than a year after accidentProjected long-term claims - 2009 valuationProjected long-term claims - 2010 valuationProjected long-term claims - 2011 valuationProjected long-term claims - 2012 valuation

5.47 The number of long term claims fell from June 2009 to early 2011 as a result of

higher rehabilitation rates and lower numbers of new other medical claims. Since then numbers have stabilised.

Super-imposed Inflation 5.48 Super-imposed inflation refers to the phenomenon whereby the costs of health

services increase at rates in excess of underlying economic inflation. This is a widely recognised phenomenon around the world. It is generally argued that this is a result of improvements in technology and demand increases.

5.49 The Board was presented with a paper in June that challenged this assertion. In

particular the paper suggested that the real cause was the lack of interest in spending decisions on the part of patients and, in ACC’s case, specific incentives supplied to health professionals due to contracting and other procurement arrangements. It was noted that a key contributor was a trend towards increasingly complex services, apparently for the same injury types. In essence the argument is that health care is primarily funded by third parties (insurers, employers and the Government) and hence there is a lack of expenditure control incentives in the system.

5.50 Super-imposed inflation is evident across a range of ACC’s services, but particularly

in elective surgery (discussed above), radiology and other specialised disciplines. This is an important matter, increasing levies by around 2% more than standard inflation per annum, all other things being equal.

5.51 In order for ACC to arrest this trend, a careful strategy that better aligns client and

provider financial incentives with those of the levy payer, as well as a range of appropriate control points in the claims management process to ensure that medical interventions are provided only as required, will be necessary.

Page 48 of 122

Long Term Weekly Compensation Claims 5.52 Long term claims are defined as those that have been receiving some kind of

support for more than one year. This section focuses on long term weekly compensation claims.

5.53 Graph 5.53 shows the number of long term claims over time. Graph 5.53 – Long Term Weekly Compensation Claims

Number of long-term claims by WC duration

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5.54 Claims that have been in existence for more than 2.5 years have been shown

separately as these are managed by the RIS team, other than seriously injured clients.

5.55 There has certainly been a general trend downwards in the number of long term

claims, from around 16,000 in 2001 to around 10,500 currently. There was a period of increase during the years 2005 to 2009, consistent with the general expansion of Scheme usage during that time, following which there has been a sharp decline.

5.56 Shorter duration claim numbers (1 to 2.5 years) are currently slightly below the

levels of 2001. Claim numbers virtually doubled in the eight year period leading up to 2009. Since then, focused management has reduced the number of claims towards more reasonable levels.

5.57 Longer term claim numbers (more than 2.5 years) have decreased fairly consistently

in the period, although a small rise occurred in the years leading up to 2009. 5.58 Graph 5.58 shows the number of new long term claims.

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Graph 5.58 – Number of New Long Term Claims

Number of new long-term entries by WC duration, rolling 12 month basis

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5,0002.5+ WC years1 to <2.5 WC years All long-term

5.59 As was noted at the start of this section, claim frequencies and rehabilitation rates

both deteriorated in the years leading up to 2009. The impact of these two factors on the number of long term claims is clear in Graph 5.58. It is not difficult to envisage the outcome should these two trends have been allowed to continue.

5.60 Since 2009 new claim numbers have fallen, due to lower claim frequencies and a

greater claims management focus on rehabilitation when claims first occur, such that injured people are returned to work before becoming long term claimants.

5.61 Graph 5.61 shows the number of long term claims that have closed during the

period. These closures include retirements.

Page 50 of 122

Graph 5.61 – Number of Closed Long Term Claims

Number of long-term exits by WC duration, rolling 12 months basis(Exits = closed + reexit - reopen, excludes new entries)

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5.62 Other than a hump that is centred around 2010, claim closure numbers have been

fairly consistent over time. In particular, the current level of closures does not look unusual compared with that in the early to mid-2000s, although it does represent a higher percentage. The large number of closures around 2010 coincides roughly with the increase in new long term claims.

5.63 Overall the number of long term claims has decreased substantially in the last three

years. This appears to have been caused by three factors:

• Lower rates of new claims. • Higher rates of rehabilitation in the period immediately following injury. • A management focus on long term claim rehabilitation.

Claim Experience since 30 June 2012

5.64 Since 30 June 2012 there has been emerging evidence that the claims experience is beginning to turn, following three years of continuous improvement. Claims experience by its nature is volatile and as such it is important to keep this in perspective. Nonetheless, the number of new weekly compensation claims has shown an increase for the first time since 2009, albeit a small increase at this stage. The impact of this increase in claim numbers has been largely offset by lower claim sizes, perhaps indicating a greater take-up of partial return-to-work, which of itself would be a good outcome for the clients.

5.65 Medical claim numbers are also increasing, particularly those for physiotherapy and

radiology. Again average payments per claim have reduced such that the overall payment experience has been within expectations.

5.66 At this stage it is important that management closely monitors the emerging trends,

undertakes investigations to assess causes and, in particular, ensures an appropriate focus on the rehabilitation of clients in the early period following claims.

Page 51 of 122

6 Non-insurance Experience

Investment Performance 6.1 Graph 6.1 compares ACC’s investment performance with benchmark returns in the

past 20 years. The benchmarks represent the returns that ACC would have achieved had it passively invested in benchmark indices and allocated funds between markets according to the benchmark weightings set (in advance) by the Board. In only one year were actual returns less than benchmark. This is an excellent result.

Graph 6.1 – Comparison with Benchmark Returns

ACC Financial Year Returns against Benchmark

-5%

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6.2 Investment returns for 2012 (9.5%) were slightly lower than in 2011 and 2010

(12.6% in both years) in line with lower market returns generally. Investment returns vary by Account (from 8.8% for the Non-Earners’ Account to 9.9% for the Work Account) due to their different allocations. Each Account’s return was satisfactory.

6.3 Overall, investment performance has been very strong for a prolonged period and

has contributed markedly to ACC’s progression to full funding. Expenses 6.4 Expenses are separated into five categories: claims handling, investment, net

operating, injury prevention and levy collection. The last three can be collectively referred to as head office expenses.

6.5 During the year ACC reviewed its expense allocation model, essentially to better

align expense allocation with the drivers of activity. The main impacts of the new model were as follows:

• The Non-Earners’ Account’s allocation of claims handling costs increased. This

was offset by decreases in the Earners’ and Work Accounts. The change reflected increased allocations of lodgement, entitlement management and rehabilitation costs to the Non-Earners’ Account.

Page 52 of 122

• A higher proportion of operating costs was allocated to the Motor Vehicle Account, with most of the offsetting reduction being in the Non-Earners’ Account.

• Injury prevention costs allocated to the Work Account increased due to a greater focus of activity in this Account.

6.6 Table 6.6 shows the expenditure for 2012 and compares this with the budget as well

as the previous two years. Table 6.6 – Expenses

($M)Motor

Vehicle Account

Work Account

Earners' Account

Treatment Injury

Account

Non Earners' Account

2012 TOTAL

2012BUDGET

2011ACTUAL

2010ACTUAL

Claims Handling Costs 34.6 82.6 117.2 14.8 66.0 315.3 322.9 307.3 304.4

Net Operating 4.4 44.5 8.8 0.4 2.7 60.9 48.3 48.2 35.7Injury prevention costs 5.2 8.7 5.2 0.0 3.9 23.0 26.7 27.9 30.6Levy collection costs 5.4 17.9 17.9 0.0 0.0 41.3 50.2 48.6 47.8Head Office Expenses 15.0 71.2 31.9 0.4 6.7 125.2 125.2 124.6 114.2

Investment Costs 15.1 13.7 14.0 4.5 6.6 54.0 46.9 43.2 38.9

Total Expenses 64.7 167.5 163.2 19.7 79.3 494.4 495.0 475.2 457.5 6.7 Expenditure was basically on budget for 2012. Claims handling costs, which

comprise two thirds of total expenditure, were 2.4% less than budget. This was offset by investment expenses, which were over budget due to higher than planned fund growth.

6.8 Levy collection costs were 18% less than budget and 15% less than 2011. The

reduction was predominantly in the Motor Vehicle Account and was due to the New Zealand Transport Agency ceasing to charge ACC for levy collection costs. This new policy came into effect in November 2011 and resulted in an $8m cost reduction.

6.9 Overall expenditure has increased by $38m since 2010, or 4% pa. $15m of this is a

result of increasing funds under management. A further $11m reflects a greater focus on claims and rehabilitation management.

6.10 Head office expenditure grew significantly in 2011, but was stable in 2012. As

discussed in Section 2, expenditure on injury prevention activities has decreased each year.

6.11 Table 6.11 compares claims handling expenses with claim payments. Table 6.11 – Claims Handling Expenses

Motor Vehicle Account

Work Account

Earners' Account

Treatment Injury

Account

Non Earners' Account

2012 TOTAL

2012BUDGET

2011ACTUAL

2010ACTUAL

Claims Handling Costs (CHE) ($M) 34.6 82.6 117.2 14.8 66.0 315.3 322.9 307.3 304.4Claim Payments ($M) 396.2 552.0 811.5 106.2 737.2 2,603.0 2,811.2 2,588.2 2,870.4

CHE / Claim Payments 8.7% 15.0% 14.4% 13.9% 9.0% 12.1% 11.5% 11.9% 10.6% 6.12 Claim handling expenses have increased from 10.6% to 12.1% as a proportion of

claims payments. This reflects a number of factors:

• A greater focus on rehabilitation. • A more active focus on claims shortly after injury to facilitate as far as possible an

early return to work. • Reducing caseloads.

Page 53 of 122

• A greater effort on claims not receiving weekly compensation.

6.13 The Motor Vehicle and Non-Earners’ Accounts have lower claims handling expenses to claim payment ratios than the other Accounts. The injuries in these two Accounts tend to be more serious in nature. This means that activity is primarily directed toward ensuring clients receive the appropriate support, with relatively small amounts spent on rehabilitation activities.

6.14 Table 6.14 compares head office expenses with levy income. Table 6.14 – Head Office Expenses

Motor Vehicle Account

Work Account

Earners' Account

Treatment Injury

Account

Non Earners' Account

2012 TOTAL

2012BUDGET

2011ACTUAL

2010ACTUAL

Head Office Expenses ($M) 15.0 71.2 31.9 0.4 6.7 125.2 125.2 124.6 114.2Levy Income ($M) 1,054.1 1,035.1 1,523.4 348.9 905.2 4,866.7 5,056.1 4,834.4 4,599.4

Expense Ratio 1.43% 6.87% 2.10% 0.12% 0.74% 2.57% 2.48% 2.58% 2.48% 6.15 The expense ratio of 2.57% in 2012 is broadly in line with those of previous years.

Overall expenditure has increased by $10m during the period, with increases in net operating costs being largely offset by savings in injury prevention and levy collection costs; the injury prevention reduction underscores the comments made earlier regarding its treatment as an administration expense rather than an investment. The net operating cost increase primarily resulted from the introduction of experience rating and other expenses associated with supporting employer levy payers. It is for this reason that the expense ratio for the Work Account is comparatively high. The Non-Earners’ and Treatment Injury Accounts’ expense ratios are comparatively low due to the low costs of levy collection.

6.16 Table 6.16 compares investment expenses with funds under management. Table 6.16 – Investment Expenses

Motor Vehicle Account

Work Account

Earners' Account

Treatment Injury

Account

Non Earners' Account

2012 TOTAL

2012BUDGET

2011ACTUAL

2010ACTUAL

Investment Costs ($M) 15.1 13.7 14.0 4.5 6.6 54.0 46.9 43.2 38.9Average Assets ($M) 5,015.1 5,583.4 5,177.4 1,612.0 2,117.0 19,504.7 19,215.4 15,983.2 12,596.6

Investment Costs / Average Assets 0.30% 0.25% 0.27% 0.28% 0.31% 0.28% 0.24% 0.27% 0.31% 6.17 Whilst overall investment expenditure has increased each year, as a percentage of

assets this has decreased since 2010. Investment expenses will tend to grow broadly in line with asset growth.

Conclusion 6.18 ACC’s rate of expenditure, excluding investment expenses, was 12% of levy income

(excluding funding adjustment) in 2012. Comparisons with other insurers are difficult to make for a number of reasons. ACC is much larger than other insurers, so should be expected to have certain economies of scale, but it also deals with by far the most complex types of claim, takes a much more proactive role in rehabilitation, spends money on matters such as injury prevention, and incurs significant expenditure due to its relationship with the Crown. In this context, an expense ratio of 12% of levy income appears to be more than satisfactory.

6.19 The rate of investment expenses, at less than 0.3% of funds under management, is

highly competitive.

Page 54 of 122

6.20 ACC is required by Treasury to include investment expenses as part of its administration budget. This is not a helpful construct and runs the risk of requiring reductions in other administration expenditure to offset the natural increase in investment expenditure as the size of the asset portfolio increases. A better construct would be to treat investment expenses as a deduction from investment returns, which is what most other enterprises with significant investment functions do.

Page 55 of 122

7 Liability Valuation

Summary of Approach 7.1 ACC undertakes a valuation of its OCL every six months. This valuation complies

with the New Zealand Equivalent to International Financial Reporting Standard No. 4 – Insurance Contracts (NZ IFRS 4), issued by the New Zealand Institute of Chartered Accountants, and Professional Standard No. 4.1 – Valuations of General Insurance Claims, issued by the New Zealand Society of Actuaries.

7.2 The calculation of the OCL is outsourced to PricewaterhouseCoopers (PwC). PwC’s final report, “Accident Compensation Corporation – Valuation of Outstanding Claim Liabilities as at 30 June 2012”, dated 31 August 2012, was prepared by Paul Rhodes FIA, FNZSA, Chris Latham, FIAA, FNZSA and Ross Simmonds, FIA, FNZSA.

7.3 The OCL is calculated by forecasting the expected future cash flows associated with

accidents that have occurred prior to the valuation date. These cash flows are then discounted back to the valuation date using a “risk free” interest rate. Allowances for claims handling expenses and risk margins are also included.

7.4 The calculation of expected cash flows is undertaken separately by payment type. The main payments analysed are shown in Table 7.4 along with the valuation methodology adopted:

Table 7.4 – Payment Types

Payment type Description Methodology Non-fatal weekly compensation

Income replacement Payment per active claim

Vocational rehabilitation

Rehabilitation services provided in order to assist claimants to return to work

Payment per active claim

Social rehabilitation –serious injury

Non-vocational rehabilitation provided to claimants who have suffered a serious injury

Individual projection

Social rehabilitation – non-serious injury

Non-vocational rehabilitation services provided to claimants who have not suffered a serious injury

Payment Decay

Medical Medical services, including GPs, physiotherapy, imaging services and other medical services

Payment per active claim

Elective surgery Surgical procedures Payment per active claim

Fatal weekly compensation

Income support provided to surviving dependants of fatally injured claimants

Payment per active claim

Independence allowance

Compensation for long term impairment

Individual projection

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7.5 The methodologies noted are described briefly below: • Payment per active claim - the number of future active claims is projected based

on the number of starting claims and an assumed rate of discontinuance. The future average claim size by duration is determined based on the starting average size and assumed inflation. The average size and number of claims are multiplied at each future point in time in order to calculate the expected cash flows.

• Payment decay - future cash flows are projected based on the starting level of

payments and an assumed rate of reduction over time. • Individual projection - future cash flows are projected based on the individual

characteristics of each claim, such as age and severity of injury.

Key Assumptions 7.6 The assumptions used in establishing the OCL are required to be “best estimate”

(i.e. they should not contain any deliberate bias towards conservatism or optimism). The liability produced from these assumptions is considered to be a “central estimate”.

7.7 The key assumptions used in determining the OCL can be separated into two broad

groups:

• Economic assumptions - these apply to all payment types, being discount and underlying inflation rates.

• Payment type assumptions - assumptions made in order to estimate future cash

flows, primarily rehabilitation rates, super-imposed inflation (i.e. health inflation in excess of underlying economic inflation) and claim handling expenses. These are set separately by Account.

Economic Assumptions

7.8 Under NZ IFRS 4, discount rates are required to be “risk free”. For this purpose Treasury prescribe the risk free rates that are used in financial accounting for all Crown entities. Short term discount rates reflect the yields of New Zealand Government bonds. Long term discount rates, which cannot be observed from New Zealand Government bond yields, are based on long term historical norms. A smoothing methodology is used to transition between the last observed short term rate and the assumed long term rate.

7.9 The discount rates used in the liability valuation as at 30 June 2012, together with the rates used in the two previous valuations, are shown in Graph 7.9.

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Graph 7.9 – Discount Rates Application of yield curve to the 30 June 2012 liability by year

2.0%

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7.10 The assumed long term discount rate of 6% p.a. is unchanged. However, discount rates for all short and medium term durations have fallen significantly in the past year in line with market yields available on Government bonds.

7.11 The large fall in short term bond yields has caused Treasury to alter the smoothing methodology. Previously the smoothing between short term and long term rates was applied linearly over a five year period. Observed yields have now fallen to such an extent that an unrealistically steep slope emerged in the five year smoothing period. Treasury has in response specified that the maximum smoothing slope that can be applied is 0.15%p.a. The effect is to extend the duration of the smoothing period from five years to, in this case, 11 years, with a resultant reduction in medium term assumed discount rates.

7.12 Inflation rates are set by payment type in order to reflect the differing economic drivers of cost. Table 7.12 outlines the payment types to which the inflation assumptions are applied.

Table 7.12 – Application of Inflation Assumptions Inflation type Payment type used Average Weekly Earnings

(AWE) Starting level of non-fatal weekly compensation for future new claims, as the payment made is based on income at the date of accident.

Labour Cost Index (LCI) Non-fatal weekly compensation for growth in payments once on claim, as legislation indexes payments to the LCI. Fatal weekly compensation, medical, elective surgery, vocational rehabilitation and social rehabilitation.

Consumer Price Index (CPI)

Independence allowance, lump sum and funeral grants / benefits.

7.13 The assumptions for future CPI rates are specified by Treasury. The assumptions

for future rates of AWE and LCI have been set relative to the CPI assumptions, based on historical differences between the relevant indices. The assumptions used in the 30 June 2012 liability valuation are shown in Table 7.13.

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Table 7.13 – Inflation Assumptions

Inflation Assumptions for years ended 30 June Year AWE CPI LCI 2012 3.2% 1.1% 2.1% 2013 3.0% 2.1% 2.2% 2014 3.3% 2.4% 2.5%

2015+ 3.5% 2.5% 2.7% 7.14 The long term inflation assumptions are unchanged from the 30 June 2011

assessment. Shorter term inflation assumptions have been reduced from those used in 2011 in line with generally lower inflation expectations.

Payment Type Assumptions 7.15 The payment type assumptions are reviewed annually, in light of actual experience

since the previous valuation.

7.16 Short term assumptions are set to follow recent experience quite closely. In many cases a “bounce-back” is assumed whereby recent experience is assumed to continue for one year before it increases to a longer term level. Rehabilitation rates are generally assumed to return to historical norms.

7.17 Longer term assumptions, such as long term rehabilitation rates, are changed infrequently. These tend to be volatile, often due to small volumes of data, whilst changes can have a large impact.

7.18 At an overall Scheme level, assumption changes reduced the liability by $191m. The major changes were:

• An increase in rehabilitation rates, most notably for medical payments ($225m) • A reduction in the number of claims for medical payments ($27m) • An increase in the growth rate of payments for serious injury claimants (-$62m)

7.19 I am satisfied that the assumptions adopted are appropriate for the purpose. Risk Margins 7.20 As noted, the application of the assumptions discussed above produces a “central

estimate” of the OCL. This central estimate has equal likelihoods of being overstated and understated. NZ IFRS 4 requires insurers to add a risk margin to the OCL to increase the likelihood that the final OCL is ultimately sufficient to meet the claims to which it relates. NZ IFRS 4 does not specify the required level of the risk margin, but industry practice is to add a margin to the 75% sufficiency level (which means that the reported OCL will be sufficient to meet claims payments 75% of the time). ACC follows this industry norm.

7.21 The risk margins added to the central estimate to meet the 75% sufficiency requirement are shown in Table 7.21. These are unchanged from 2011.

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Table 7.21 – Risk Margins

Account Risk Margin

Earners' 11.2%Work 12.1%Treatment Injury 14.7%Motor Vehicle 13.4%Non Earners' 13.8%Total Risk Margin 12.9%

Claim Handling Expenses 7.22 The OCL must include an allowance for claims handling expenses. These are

allowed for based on the assumed costs per expense driver for each expense type. The expense driver used is active claim numbers for most payment types. Unit costs have been estimated based on budgeted expenses. These expenses are allocated to an expense type and Account, using an activity based apportionment model.

7.23 The expense allocation was altered during the year, essentially to better align the expense allocation with the drivers of activity. The main impact of the new model was to allocate more claims handling expenses to the Non-Earners’ Account; this was offset by decreases in the Earners’ and Work Accounts. The change primarily reflected increased allocations of entitlement management and rehabilitation costs to the Non-Earners’ Account.

Results 7.24 The results of the liability valuation as at 30 June 2012 are shown in Table 7.24.

This shows the current OCL, the OCL as at 30 June 2011 and major causes of change.

Table 7.24 – Liability Valuation at 30 June 2012

($M) Liability at 30 June 2012

Changes due to economic

assumptions

Changes due to insurance

experienceChanges due to

assumptionsExpected increase

Liability at 30 June 2011

Medical Costs 4,762.9 840.6 (187.3) (199.8) 308.5 4,000.9Social Rehabilitation 12,169.2 2,423.6 (800.9) 55.5 458.7 10,032.2Compensation Related 7,353.0 1,051.1 (558.4) (46.4) 150.7 6,756.0Other 2,245.0 286.4 (169.5) (72.7) (0.4) 2,201.1Claims Handling Expenses 1,866.3 273.7 46.4 0.0 26.0 1,520.2Total Liability 28,396.4 4,875.5 (1,669.6) (263.4) 943.5 24,510.4 7.25 The OCL as at 30 June 2012 is $28.396b. This is an increase of $3.886b from the

previous OCL. $0.944b of the increase was “expected”. This reflects the fact that the Scheme is not yet mature, so we expect new claims to come on to the Scheme at a greater rate than at which they are removed.

7.26 The $1.933b reduction in liability reflects the insurance and expense experiences performing at better levels than anticipated in the 2011 OCL assessment. The major contributions to this were:

• Lower claim numbers, most notably for weekly compensation and medical

payment types ($734m). This reflects higher rates of rehabilitation and a lower number of new claims

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• Lower care packages for serious injury clients ($647m). This resulted from the realignment of care packages to injury needs

• A change was made to the AC Act to remove weekly compensation following suicide ($72m)

• Assumption changes, as discussed above ($191m)

7.27 The major impact on the OCL movement has been the reduction in discount rates, which increased the liability by $5.1b. This was partially offset by a small reduction in inflation expectations, which reduced the liability by $0.2b.

Sensitivity Analysis 7.28 Many of ACC’s claims are very long term in nature. This makes assessments of the

OCL highly sensitive to long term assumptions. Table 7.28 shows the impacts on the liability of changes to several key assumptions.

Table 7.28 – Sensitivity Analysis of OCL Key Assumption Scenario Impact on Liability

Liability as at 30 June 2012 $28,396m

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 Long term gap between discount rates and inflation rates Decrease of 1% $1,643m Discounted mean term +1 year -$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 Super-imposed inflation - excluding social rehabilitation for serious injury Decrease of 1% -$800m

Increase of 1% $872m Long term continuance rates for non-fatal weekly compensation Decrease of 1% -$724m

Increase of 10% -$365m Mortality rates for social rehabilitation for serious injury Decrease of 10% $403m Short term continuance rates for non-fatal weekly compensation Set to 2009 experience $190m

Medium to long term claim size for non-fatal weekly compensation Reduced by 10% -$682m

Long term claim size for elective surgery Reduced by 10% -$204m

7.29 All long term assumptions can have significant impacts on the OCL, although the

economic assumptions have the largest effect. 7.30 From the levy payer’s perspective, these sensitivities can be considered in the

context of levy rates. Underlying annual claims costs are approximately $3.7b, so a $1b change in the OCL, assuming that the effect is spread over five years, translates to roughly a 5% change in levy rates. Of course the actual impact on levies is dependent on other factors and will not necessarily be evenly distributed across the Accounts.

7.31 Table 7.31 shows the distribution of potential estimates of the OCL, excluding risk

margin. This shows the wide variability in ACC’s financial performances, with estimates generally ranging between $15b and $40b. This highlights the need to view ACC’s performance with an appropriately long time horizon.

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Table 7.31 – Estimated Distribution of OCL at 30 June 2012

Estimated Distribution of the Outstanding Claim Liabilityas at 30 June 2012

Net Central Estimate = $25.154b

Provision = $28.396(75% Probability

Level)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

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)

Incr

emen

tal P

roba

bilit

y

24000000000

24200000000

24400000000

24600000000

24800000000

25000000000

25200000000

25400000000

Adequacy of Past Estimates of the OCL

7.32 Graph 7.32 shows the movement in the OCL (excluding risk margins) between the years ending 30 June 2004 and 30 June 2012. These liability estimates are compared with the hindsight 30 June 2012 estimates, using the same discount rates as the original estimates. For the hindsight estimates the actual payments to 30 June 2012 have been combined with the 30 June 2012 valuation projected cash flows. The hindsight estimates for 2010 and 2011 are also shown for comparison.

Graph 7.32 – Movement in the OCL Central Estimate

Total Account - Outstanding Claims Liability Central EstimateFinancial Years Ending 30 June 2004 to 30 June 2012

25,154

18,63317,573

15,45214,71415,21114,41913,094

19,930

25,15421,12313,73512,71511,3849,347 21,72115,998 21,6540

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2004 2005 2006 2007 2008 2009 2010 2011 2012

Financial year ending 30 June

Out

stan

ding

Cla

ims

Liab

ility

($m

)

Social Rehabilitation Weekly Compensation & Vocational RehabilitationMedical Related Death and Impairment RelatedClaims Handling Expense Hindsight (2010)Hindsight (2011) Hindsight (2012)

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7.33 The bars show the general increasing trend in the OCL over time. From 2004 to 2008 this reflected the increasing pattern of Scheme utilisation, although this growth was muted by generally increasing discount rates, particularly in 2007. At this time it is fair to say that the valuation assumptions lagged the experience; the trend was for increasing claims, but this was only reflected as it was observed. The hindsight estimates confirm this, as they are all greater than the original estimates in this period.

7.34 In 2009 the valuation approach was amended to reflect the trends that had been observed in the previous four or five years. This meant that in addition to a further year of claim deterioration being allowed for, the trend was projected to continue. Hence there was a large increase in the OCL. With hindsight this has proven to be overstated, as the projected trend not only failed to eventuate, but was reversed as a result of management’s attention to fundamental insurance disciplines, as noted earlier in this report.

7.35 The 2010 and 2011 estimates increased slightly. The impacts of insurance experience improvements were offset by changes in economic assumptions and the natural increase to be expected in the OCL as the Scheme matures. The 2012 estimate is a large increase entirely due to a sizeable revision to economic assumptions as discussed above.

7.36 The hindsight comparisons show that the 2010 and 2011 estimates were overstated. This was effectively due to a reverse of the valuation lag phenomenon mentioned above; the experience has been improving but is only being reflected as it is observed.

7.37 Overall, the hindsight comparisons show that the OCL estimates in recent years have been adequate, but in early years they were not so. In theory, the OCL is a best estimate and as such should be adequate 50% of the time. The above shows that this has largely been the case, although it is not a random outcome but rather a function of trends in experience and how quickly these are reflected. This is of course something that can only be known with hindsight.

Unexpired Risk Provision

7.38 NZ IFRS 4 requires that a Liability Adequacy Test (LAT) be performed. This simply tests that the provision for unearned premiums in the balance sheet is sufficient to meet the claims and associated expenses that are expected to arise during the period covered by the unearned premiums.

7.39 To the extent that the LAT shows a deficit, an unexpired risk provision is required to be established.

7.40 The LAT test is conducted separately by Account, but excludes the Non-Earners’ Account as levies are paid monthly, meaning that there is no unearned premium liability. The Earners’ Account assessment includes its contribution to the Treatment Injury Account.

7.41 Table 7.41 sets out the LAT results (all figures in $000):

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Table 7.41 – Liability Adequacy Test

Liability Adequacy Test Motor Earners Work 2012 2011Unearned Levy Liability 268,983 1,101,501 473,293 1,843,777 2,104,274

Present Value of Costs of injuries 177,026 929,027 419,660 1,525,713 1,475,662Allow ance for expenses 9,045 30,386 30,452 69,883 67,194

Risk Margin 42,874 153,623 80,239 276,736 266,753Adjustment for surplus 40,037 0 0 40,037 294,665

Unexpired Risk Liability 0 11,534 57,057 68,592 0

7.42 The LAT shows that an unexpired risk provision of $68.6m is required at 30 June 2012. No provision was required at 30 June 2011. The surplus in the Motor Vehicle Account cannot be offset against the deficits in the other Accounts.

7.43 At 30 June 2011 there was a surplus of $295m. This year there is an overall deficit of $29m (being the unexpired risk provision less the surplus in the Motor Vehicle Account). The total movement of $324m has been driven by three factors:

• Levy rates for the Earners’ and Work Accounts have decreased, causing a deficit of $344m.

• Claims experience has improved, generating a surplus of $220m.

• Discount rates have decreased, causing a deficit of $185m.

7.44 The Motor Vehicle Account is significantly underfunded and as such its levies are much higher than the underlying cost of claims. Hence no unexpired risk provision is required here. The other two Accounts’ levies are closer to expected claims costs such that the risk margin results in a small provision being required.

7.45 In the future, all other things being equal, it is to be expected that the unexpired risk provisions will increase as full funding is reached and levy rates return toward the underlying annual cost of new claims. The provisions will approximate the required risk margins.

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8 Income Statement

8.1 This section discusses the financial performance of ACC in the past year. In considering this, it is important to put the term “profit” into context. ACC is not a profit making entity. It collects and invests levies for only one reason – to meet claims and related expenses. In the fullness of time, every cent of levy and investment income received by ACC must be returned to the public in the form of claims payments, used in the administration of the Scheme, or invested in injury prevention activity. “Profit”, then, refers to the movement toward or away from full funding; for this reason I have used the terms “surplus” and “deficit” throughout this report, rather than “profit” and “loss”.

8.2 For the purposes of this report I have restated the Income Statement presented in

the Annual Report to an “incurred” basis, which is more consistent with the full funding requirements of the Scheme. I have separated the movement in the OCL into its component parts, being claims, insurance assumption changes and economic assumption changes. I have also separated investment income into the amount required to offset the assumed interest earning in the OCL and the remainder; this remainder is essentially the mismatching surplus or deficit. For this reason many of the line items will not match those in the Annual Report.

8.3 One of the consequences of this presentation is that claims incurred for the current

year reflect the full estimated lifetime cost of new claims reported during the year. For prior years, claims incurred represents changes to the estimate of lifetime costs in respect of claims that were in existence at the start of the year, other than by assumption changes that are separately identified. This will mainly reflect rehabilitation rates, but also the average size of claims. So a negative claims incurred cost for prior years will mean that rehabilitation rates have been higher than allowed for in the previous OCL assessment, or the average size of the claims has fallen.

8.4 The surplus can be thought of as comprising seven items: Additional levies collected to return the Scheme to full funding - levies collected in

respect of prior year claims. Claims experience - the extent to which the insurance experience is better or worse

than that implied by the assumptions adopted in the determination of the OCL. This incorporates actual experience during the year and any changes made to the assumed future experience.

Movement in risk margin - the OCL must be established including a risk margin.

This acts in the nature of capital. As claims come on to or leave the Scheme, the risk margin is increased or decreased respectively. This movement forms part of the reported surplus.

Expense surplus - variation in expenses. Movement in unexpired risk provision Investment returns in excess of risk free rates - the OCL is set with reference to risk

free discount rates, essentially Government bond yields. To the extent that ACC earns more than this there is a surplus that can be used to reduce levies in the future (and vice versa). There are two parts to this: the rate of return earned on the investment portfolio and the amount of assets ACC has relative to the size of its liability.

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Changes in economic assumptions - discount and inflation rates. 8.5 The first four are collectively the underwriting surplus. The last two can be

considered as economic impacts. The movement in unexpired risk provision is an artificial accounting outcome, so should be considered separately from the other contributors to the surplus.

8.6 Table 8.6 sets out the Income Statement for the year ended 30 June 2012, and

compares this with budget as well as the results for the preceding two years. The result for the 2012 year is separated into performance related to claims occurring during the year and prior year claims.

Table 8.6 – Income Statement Statement of Comprehensive Income for the past three years

2012 ACTUAL

($M) Current Year Prior Year Total

2012BUDGET

2011ACTUAL

2010ACTUAL

INCOMELevies 3,324.2 1,542.6 4,866.7 5,058.1 4,834.4 4,599.4TOTAL INCOME 3,324.2 1,542.6 4,866.7 5,058.1 4,834.4 4,599.4

EXPENDITURE

CLAIMS INCURREDMedical Costs 1,497.1 (272.2) 1,224.9 1,434.7 823.6 1,079.7Social Rehabilitation 575.1 (851.6) (276.5) 543.0 (624.6) (86.6)Compensation Related 837.7 (629.0) 208.7 833.2 (24.7) 26.4Other 325.7 (368.2) (42.5) 71.7 80.4 164.8Total Incurred Claims 3,235.6 (2,121.0) 1,114.6 2,882.7 254.8 1,184.4

CHANGE IN CLAIM ASSUMPTIONSRehabilitation rates (53.2) (171.8) (225.0) 0.0 199.7 (10.8)Growth to long term active claims experience (12.0) (15.5) (27.5) 0.0 0.0 0.0Change in growth assumptions 0.0 62.3 62.3 0.0 492.6 227.6Superimposed Inflation (0.6) 6.9 6.2 0.0 105.1 217.9Legislative 0.0 (72.7) (72.7) 0.0 (185.1) (63.5)Other 0.0 (6.7) (6.7) 0.0 0.0 32.4Total Assumption Changes (65.8) (197.6) (263.4) 0.0 612.2 403.6

ADMINISTRATION EXPENSESNet Operating 49.3 11.6 60.9 48.3 48.2 35.7Injury prevention costs 23.0 0.0 23.0 26.7 27.9 30.6Levy collection costs 32.3 9.0 41.3 50.2 48.6 47.8Claims handling expenses 115.6 199.7 315.3 322.9 307.3 304.4Total Expenses 220.2 220.3 440.5 448.1 432.0 418.6

TOTAL EXPENDITURE 3,390.0 (2,098.3) 1,291.7 3,330.8 1,298.9 2,006.5

SURPLUS / (DEFICIT) FROM UNDERWRITING ACTIVITIES (65.8) 3,640.9 3,575.1 1,727.3 3,535.4 2,592.9

DECREASE / (INCREASE) IN UNEXPIRED RISK LIABILITY (68.6) 0.0 (68.6) 0.0 105.3 459.8

ECONOMICChange in discount rate assumption (312.5) (4,772.3) (5,084.8) 0.0 (862.1) (1,169.4)Change in inflation rate assumption 15.9 193.4 209.3 0.0 (107.9) (48.8)Investment Costs (3.9) (50.1) (54.0) (46.9) (43.2) (38.9)Investment Income (Actual less Expected) 86.1 863.1 949.2 318.9 922.7 702.9Total Economic (214.3) (3,765.9) (3,980.2) 272.0 (90.4) (554.2)

TOTAL SURPLUS / (DEFICIT) (348.7) (125.1) (473.8) 1,999.4 3,550.3 2,498.5 8.7 The budget surplus of $1,999m largely comprised:

• $1,601m of additional levies to return the Scheme to full funding • $142m of claims experience • $272m of investment returns in excess of risk free rates.

8.8 The actual result for the year was a deficit of $474m, being $2,473m below budget.

The major contributions to the result were:

• $1,543m of additional levies to return the Scheme to full funding • $2,052m of claims experience

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• A -$69m increase in unexpired risk provisions • $895m of investment return in excess of risk-free rates • -$4,876m from changes to economic assumptions.

8.9 The underwriting surplus, at $3,575m (essentially the first two bullets in paragraph

8.8), was $1,847m ahead of budget. Each of the past three years has produced very strong underwriting results, reflecting a strongly improving trend in insurance experience, as discussed in Section 5. Claims incurred were $1,115m, well below the budgeted $2,883m, largely driven by rehabilitation rates on prior year claims as well as a lower number of new claims than anticipated. This has been a feature of each of the past three years’ financial results.

8.10 Administration expenditure was 2% below budget and 2% up on 2011. 8.11 Investment performance contributed strongly, as has been the case for each of the

past three years. 8.12 However, the large impact from reductions in the discount rate, at $5,085m, has

more than offset the strong insurance and investment performance. Current Year Claims 8.13 Table 8.13 sets out the Income Statement for the year ended 30 June 2012 by

Account in respect of claims that occurred during the year, whilst Table 8.14 shows the sources of surplus in respect of these claims.

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Table 8.13 – Income Statement in respect of Current Year Claims Statement of Comprehensive Income for Accident Year Ending 30 June 2012

($M)Motor

Vehicle Account

Work Account

Earners' Account

Treatment Injury

Account

Non Earners' Account TOTAL

2012BUDGET

INCOMELevies 442.1 621.3 1,121.0 243.3 896.5 3,324.2 3,457.3TOTAL INCOME 442.1 621.3 1,121.0 243.3 896.5 3,324.2 3,457.3

EXPENDITURE

CLAIMS INCURREDMedical Costs 113.7 175.1 483.6 105.3 619.2 1,497.1 1,458.0Social Rehabilitation 185.3 33.5 90.3 96.5 169.4 575.1 602.2Compensation Related 103.3 264.4 405.9 53.6 10.5 837.7 890.0Other 54.7 88.0 103.7 31.2 48.1 325.7 381.2Total Incurred Claims 457.1 561.0 1,083.5 286.6 847.3 3,235.6 3,331.3

CHANGE IN CLAIM ASSUMPTIONSRehabilitation rates (4.0) (9.2) (3.5) (35.2) (1.2) (53.2) 0.0Growth to long term active claims experience (0.8) (1.8) (5.4) (0.9) (3.2) (12.0) 0.0Change in growth assumptions 0.0 0.0 0.0 0.0 0.0 0.0 0.0Superimposed Inflation 0.1 (0.2) (0.2) 0.2 (0.5) (0.6) 0.0Legislative 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total Assumption Changes (4.8) (11.2) (9.1) (35.9) (4.8) (65.8) 0.0

ADMINISTRATION EXPENSESNet Operating 3.1 36.9 6.2 0.4 2.7 49.3 37.8Injury prevention costs 5.2 8.7 5.2 0.0 3.9 23.0 26.7Levy collection costs 2.4 13.0 16.9 0.0 0.0 32.3 36.5Claims handling expenses 5.8 25.5 51.8 1.8 30.7 115.6 114.3Total Expenses 16.5 84.1 80.1 2.2 37.3 220.2 215.4

TOTAL EXPENDITURE 468.8 633.9 1,154.5 252.9 879.8 3,390.0 3,546.7

SURPLUS / (DEFICIT) FROM UNDERWRITING ACTIVITIES (26.7) (12.6) (33.6) (9.6) 16.7 (65.8) (89.4)

DECREASE / (INCREASE) IN UNEXPIRED RISK LIABILITY 0.0 (57.1) (11.5) 0.0 0.0 (68.6) 0.0

ECONOMICChange in discount rate assumption (75.9) (47.9) (84.6) (53.6) (50.4) (312.5) 0.0Change in inflation rate assumption 3.0 3.1 5.1 2.1 2.6 15.9 0.0Investment Costs (1.0) (0.6) (1.4) (0.4) (0.5) (3.9) (2.3)Investment Income (Actual less Expected) 22.6 15.2 35.7 6.1 6.4 86.1 17.1Total Economic (51.2) (30.2) (45.2) (45.8) (41.9) (214.3) 14.8

TOTAL SURPLUS / (DEFICIT) (77.9) (99.9) (90.3) (55.4) (25.2) (348.7) (74.6)

2012 ACTUAL

Table 8.14 – Sources of Surplus for Current Year Claims Analysis of Surplus for Accident Year Ending 30 June 2012

($M)Motor

Vehicle Account

Work Account

Earners' Account

Treatment Injury

Account

Non Earners' Account TOTAL BUDGET

FUNDING ADJUSTMENT 0.0 0.0 0.0 0.0 0.0 0.0 0.0

CLAIMS EXPERIENCEClaims Incurred 11.0 43.0 25.0 (12.8) 61.9 128.1 154.6Assumption Changes 4.8 11.2 9.1 35.9 4.8 65.8 0.0Legislative Changes 0.0 0.0 0.0 0.0 0.0 0.0 0.0Sub-Total 15.7 54.1 34.1 23.2 66.8 193.9 154.6

ADMINISTRATION EXPENSESClaims handling expenses (0.1) (0.2) 7.4 (0.4) (8.0) (1.3) 0.0Other expenses 6.5 (14.7) 3.2 0.9 0.5 (3.5) 0.0Sub-Total 6.3 (14.9) 10.6 0.6 (7.5) (4.8) 0.0

RISK MARGINS ON NEW CLAIMS (48.8) (51.9) (78.2) (33.3) (42.6) (254.8) (244.0)

SURPLUS / (DEFICIT) FROM UNDERWRITING ACTIVITIES (26.7) (12.6) (33.6) (9.6) 16.7 (65.8) (89.4)

UNEXPIRED RISK 0.0 (57.1) (11.5) 0.0 0.0 (68.6) 0.0

ECONOMICInvestment Income 22.6 15.2 35.7 6.1 6.4 86.1 17.1Investment Costs (1.0) (0.6) (1.4) (0.4) (0.5) (3.9) (2.3)Economic Assumptions (72.8) (44.8) (79.5) (51.5) (47.9) (296.6) 0.0Sub-Total (51.2) (30.2) (45.2) (45.8) (41.9) (214.3) 14.8

TOTAL SURPLUS / (DEFICIT) (77.9) (99.9) (90.3) (55.4) (25.2) (348.7) (74.6) 8.14 A deficit of $349m was produced in respect of current year claims, being $274m

below the budgeted deficit of $75m. This budget deficit results from the requirement to establish a risk margin on new claims. When setting levies ACC does not include

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an allowance for the risk margin as it is assumed that this will be broadly offset by the release of risk margins on existing claims. Hence an accounting deficit in respect of current year claims is expected, which will be offset by a similar surplus on prior year claims.

8.15 The risk margin contributed $255m to the deficit. A further $69m came from the

requirement to establish an unexpired risk reserve as levy rates were reduced (as discussed in Section 7). This is an artificial outcome of the requirements of NZ IFRS 4. Adjusting for these two matters gives a small deficit of $25m, which was $194m short of the budget (also adjusted for these two matters).

8.16 The underwriting surplus, net of risk margin, was satisfactory at $189m, spread fairly

evenly across the Accounts. The $189m represents 5.5% of levy income. 8.17 Claims incurred were 5% below budget and generally 90% to 95% of levy income,

although the Motor vehicle Account recorded 103%. For Treatment Injury, incurred claims were 118% of levy income, indicating that claims were significantly higher than anticipated when levies were set. The Treatment Injury Account is naturally more volatile than the others as its claims experience tends to be dominated by a small number of very large claims. Nonetheless, this result warrants investigation.

8.18 The claims incurred surplus of $128m shown in Table 8.14 is primarily a function of

two factors, the number of new claims and the average size of new claims. The average size has been virtually as expected. Hence the surplus is due to a lower number of new claims. Comparing this with the cost of incurred claims indicates that the rate of new claims has been approximately 4% less than allowed for in levy setting. Most of this arose in the Non-Earners’ and Work Accounts.

8.19 The assumption changes were generally positive, particularly in respect of

rehabilitation rates in the Treatment Injury Account. 8.20 The major feature of the result is the impact of the changes in the discount rate

during the year, which has offset all other surplus sources. 8.21 Overall then, the levies collected in respect of the year’s new claims activity have,

net of risk margins and unexpired risk liabilities, been broadly set at the correct level, essentially as a result of good claims and investment experience being offset by discount rate movements.

Prior Year Claims 8.22 Table 8.22 sets out the Income Statement for the year ended 30 June 2012 by

Account in respect of prior year claims, whilst Table 8.23 shows the sources of surplus in respect of these claims.

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Table 8.22 – Income Statement in respect of Prior Year Claims Statement of Comprehensive Income for Accident Years to 30 June 2011

($M)Motor

Vehicle Account

Work Account

Earners' Account

Treatment Injury

Account

Non Earners' Account TOTAL

2012BUDGET

INCOMELevies 612.0 413.8 402.4 105.6 8.7 1,542.6 1,600.8TOTAL INCOME 612.0 413.8 402.4 105.6 8.7 1,542.6 1,600.8

EXPENDITURE

CLAIMS INCURREDMedical Costs (63.4) 52.6 (118.3) (72.3) (70.8) (272.2) (23.3)Social Rehabilitation (333.9) (62.7) (131.5) (85.1) (238.5) (851.6) (59.1)Compensation Related (140.9) (260.4) (155.7) (25.7) (46.3) (629.0) (56.7)Other (53.9) (157.1) (128.8) 1.4 (29.8) (368.2) (309.5)Total Incurred Claims (592.1) (427.5) (534.2) (181.7) (385.4) (2,121.0) (448.7)

CHANGE IN CLAIM ASSUMPTIONSRehabilitation rates (15.7) (135.3) (15.3) (10.1) 4.6 (171.8) 0.0Growth to long term active claims experience (6.0) 3.7 (7.6) (0.7) (4.9) (15.5) 0.0Change in growth assumptions 8.1 0.9 1.1 0.0 52.1 62.3 0.0Superimposed Inflation 2.1 (2.5) 3.4 1.2 2.8 6.9 0.0Legislative (4.6) 4.2 (61.1) (5.7) (5.4) (72.7) 0.0Other (3.2) (1.7) (1.0) 0.3 (1.1) (6.7) 0.0Total Assumption Changes (19.4) (130.8) (80.5) (15.1) 48.1 (197.6) 0.0

ADMINISTRATION EXPENSESNet Operating 1.3 7.6 2.6 0.0 0.0 11.6 10.5Injury prevention costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0Levy collection costs 3.1 5.0 1.0 0.0 0.0 9.0 13.6Claims handling expenses 28.7 57.2 65.5 13.0 35.3 199.7 208.7Total Expenses 33.1 69.7 69.1 13.0 35.4 220.3 232.8

TOTAL EXPENDITURE (578.3) (488.6) (545.6) (183.8) (301.9) (2,098.3) (215.9)

SURPLUS / (DEFICIT) FROM UNDERWRITING ACTIVITIES 1,190.4 902.4 948.1 289.4 310.6 3,640.9 1,816.7

ECONOMICChange in discount rate assumption (1,465.9) (849.8) (766.7) (630.7) (1,059.2) (4,772.3) 0.0Change in inflation rate assumption 55.3 41.0 33.6 21.7 41.7 193.4 0.0Investment Costs (14.1) (13.1) (12.6) (4.1) (6.2) (50.1) (44.6)Investment Income (Actual less Expected) 207.6 335.7 276.1 22.0 21.7 863.1 301.9Total Economic (1,217.1) (486.2) (469.6) (591.2) (1,001.9) (3,765.9) 257.3

TOTAL SURPLUS / (DEFICIT) (26.8) 416.2 478.5 (301.8) (691.3) (125.1) 2,074.0

2012 ACTUAL

Table 8.23 – Sources of Surplus for Prior Year Claims Analysis of Surplus for Accident Years to 30 June 2011

($M)Motor

Vehicle Account

Work Account

Earners' Account

Treatment Injury

Account

Non Earners' Account TOTAL BUDGET

FUNDING ADJUSTMENT 612.0 413.8 402.4 105.6 8.7 1,542.6 1,600.8

CLAIMS EXPERIENCEClaims Incurred 506.1 284.1 392.5 155.5 321.8 1,660.0 (13.0)Assumption Changes 14.8 135.0 19.3 9.3 (53.5) 124.9 0.0Legislative Changes 4.6 (4.2) 61.1 5.7 5.4 72.7 0.0Sub-Total 525.5 414.9 473.0 170.6 273.7 1,857.6 (13.0)

ADMINISTRATION EXPENSESClaims handling expenses (0.6) 12.2 9.4 (2.8) (9.2) 9.0 0.0Other expenses 6.0 (3.8) 1.3 0.0 0.0 3.5 0.0Sub-Total 5.4 8.4 10.6 (2.7) (9.2) 12.5 0.0

RELEASE OF RISK MARGINS ON EXPECTED CLAIM PAYMENTS 47.4 65.4 62.0 15.9 37.5 228.2 228.9

SURPLUS / (DEFICIT) FROM UNDERWRITING ACTIVITIES 1,190.4 902.4 948.1 289.4 310.6 3,640.9 1,816.7

ECONOMICInvestment Income 207.6 335.7 276.1 22.0 21.7 863.1 301.9Investment Costs (14.1) (13.1) (12.6) (4.1) (6.2) (50.1) (44.6)Economic Assumptions (1,410.6) (808.8) (733.1) (609.0) (1,017.4) (4,578.9) 0.0Sub-Total (1,217.1) (486.2) (469.6) (591.2) (1,001.9) (3,765.9) 257.3

TOTAL SURPLUS / (DEFICIT) (26.8) 416.2 478.5 (301.8) (691.3) (125.1) 2,074.0 8.23 Prior year claims produced a $125m deficit, $2,199m behind budget. 8.24 Each of the Accounts reported a strong claims experience. Two sources can

contribute to this: higher rates of rehabilitation than expected and a lower average size of claims. The average size of claims has remained very close to the levels expected in the OCL assessment, so the $1,660m claims incurred surplus shown in

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Table 8.23 is entirely due to higher rates of rehabilitation. This was discussed in Section 5.

8.25 Assumption changes, including changes to legislation, have contributed $198m to

the surplus. The primary contributions have been:

• Higher rehabilitation rates in the Work Account ($135m) • Higher growth in serious injury care packages in the Non-Earners’ Account (-

$52m) • The removal of weekly compensation following suicide ($73m).

8.26 These have combined to produce a healthy underwriting surplus of $3,641m, which

is $1,824m ahead of budget. 8.27 Investment performance has contributed strongly, adding another $813m to the

result, net of expenses. 8.28 Again, this good insurance and investment performance has been completely offset

by economic assumptions, which have acted to reduce the result by $4,579m. This has had sufficient effect to more than consume the $1,543m of levies collected to return the Scheme to full funding, although this impact has not been consistent across the Accounts.

8.29 Comparing the final surplus number with the funding adjustment for each Account

shows the Work and Earners’ Accounts to have performed satisfactorily, with the surplus being marginally ahead of the funding adjustment. In other words, the impact of the discount rates has been more than matched by a good claims experience, although this result has been aided by a release of risk margins, essentially the opposite of the matter discussed in paragraph 8.14. The other three Accounts are more sensitive to the discount rates so have recorded deficits. The poor funding positions of these Accounts have also contributed as the gains made from investment income were very low. This highlights one of the problems with low funding positions: the Accounts are left more exposed to movements in market discount rates.

Conclusion 8.30 The underwriting performance has been strong in virtually all areas, with a lower

number of new claims and higher rates of rehabilitation. Investment performance has also been more than satisfactory. Unfortunately these have been offset by the decreases in Government bond yields during the year. This highlights the matters discussed in Section 4 regarding investment policy. It is not possible for ACC to hedge out the large interest rate risks inherent in its liabilities. In managing the Scheme, therefore, it is important to focus on the underlying fundamentals and manage the economic uncertainties with an appropriately long term view.

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9 Balance Sheet

9.1 In the years preceding 1999 ACC was managed as a pay-as-you-go scheme whereby sufficient levies were collected to meet the cash cost of claims in each year. This naturally meant that the level of assets accumulated was very small.

9.2 In 1999 the AC Act was amended to require full funding in the Levied Accounts. In

principle this means that levies are collected to meet the full lifetime costs of claims in the year they occur. The Act also required that ACC fully fund past claims by 2014 (later amended to 2019). Since then, ACC has been collecting additional levies to meet the full funding requirement.

9.3 In 2001 Cabinet agreed to fully fund the Non-Earners’ Account, including that

Account’s contribution to the Treatment Injury Account, but only for future claims (i.e. pre-2001 claims are still funded on a pay-as-you-go basis).

9.4 Table 9.4 summarises the balance sheet of each Account at 30 June 2012. It is

important to consider the balance sheet in the context of the history of the funding requirements.

Table 9.4 – Balance Sheet

Consolidated Statement of Financial Position2012 by Account 2012 2011

Motor Vehicle Account

Work Account

Earners' Account

Treatment Injury

Account

Non Earners' Account Total Total

Assets ($m)Cash and cash equivalents 20 137 83 6 45 291 607Receivables 76 168 115 9 13 380 278Accrued levy revenue 109 1,257 1,223 0 0 2,589 2,908Net investment assets 6,238 5,622 5,734 1,980 2,501 22,075 17,808Net intangible and other assets 16 40 39 5 19 118 133Property, plant and equipment 7 17 17 2 8 52 63Total assets [A] 6,465 7,243 7,211 2,001 2,586 25,505 21,796

Less liabilities ($m)Payables, accrued liabilities, and provisions 552 510 415 221 341 2,039 1,564Unearned levy liability 384 697 1,102 0 0 2,183 2,429Unexpired risk liability 0 57 12 0 0 69 0Outstanding claims liability 8,147 5,949 5,342 3,345 5,613 28,396 24,510Total liabilities [B] 9,082 7,213 6,871 3,566 5,954 32,688 28,502

Net liabilities -2,618 29 340 -1,565 -3,369 -7,182 -6,706

9.5 The balance sheet has grown significantly during the year, with both assets and

liabilities increasing by approximately $4b. Net assets have fallen slightly to -$7.2b. 9.6 This shortfall needs to be put in context. At 30 June 2009, the reported net asset

position was -$12.8b. Since then, discount rates have consistently fallen, which has the impact of increasing ACC’s liabilities. As noted in Section 8, the effect of this has been $5.1b in the past year alone. Further, there have been large falls in equity prices in recent years. In this context, the current reported deficit of $7.2b represents excellent progress toward a long term sustainable financial position.

9.7 In accordance with the requirements of NZ IFRS 4, the liabilities for the Work

Account include gradual process claims on a “claims made” basis (i.e. only those claims that have been reported to ACC are included). The liability in relation to unreported claims is excluded (i.e. no “Incurred But Not Reported” liability is established in this case).

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9.8 Regardless of the accounting requirement, the treatment is not helpful for funding purposes as it fails to present a liability that ACC must meet. The liability in question is $0.9b. Adjusting for this gives a Scheme deficit of $8.1b and a Work Account deficit of $0.9b.

9.9 ACC’s balance sheet is expected to grow with time. Despite the Scheme being

almost 40 years old, it is not yet “mature”. Further, population growth and the inflation of medical costs will naturally lead to liability increases, which must be matched by asset growth.

9.10 The growth in the OCL was discussed in Section 7. Assets grew by $3.7b during

the year. The main contributors were:

• $0.9b is expected as the Scheme matures • $1.5b was due to additional levies collected to return the Scheme to full funding • $0.9b resulted from investment returns in excess of the risk free interest rates

assumed in the liability assessment. 9.11 The important thing to note from this is that it is to be expected that ACC’s assets

will increase by a little under $1b a year for the foreseeable future. Further, whilst additional levies are being collected in order to achieve full funding, assets will naturally grow to the extent of these additional levies. Of course the actual rate of asset growth will be affected by investment and insurance experience, but the baseline expectation is for the balance sheet to grow significantly in the coming years.

9.12 A very large proportion of the assets is represented by investment assets, the

majority of which are in highly rated fixed interest securities. Overall, the balance sheet is highly liquid and of good quality, the overall deficit of assets to liabilities notwithstanding.

9.13 The majority of the deficit is represented by the Non-Earners’ and Treatment Injury

Accounts, which are not targeted for full funding, as follows: Pre-2001 Non-Earners’ claims $3.3b Risk margin on post-2001 Non-Earners’ claims $0.3b Pre-2001 non-earner Treatment Injury claims $1.0b Risk margin on post-2001 non-earner Treatment Injury claims $0.2b Total $4.8b 9.14 Thus the majority of the deficit results from conscious funding decisions. Allowing

for these funding decisions and comparing them with the deficits shown in the balance sheet, it can be seen that the Non-Earners’ Account is overfunded by $0.2b and the Treatment Injury Account is underfunded by $0.4b.

9.15 The Motor Vehicle Account remains in significant deficit ($2.6b), with the majority of

this being related to pre-1999 claims. A large proportion of the Account’s liability is in respect of serious injuries, the assessment of which has increased significantly in recent years. The reasons for the increases have been:

• In 2007, an increased allowance for future cost growth in services provided

added $440m to the liability • In 2008, Cabinet approved a 17% increase in rates paid to family carers, which

added $150m

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• Prior to 2009, ACC was not allowed to reflect future increases in carer pay rates as to do so was considered to pre-empt Cabinet decisions. The removal of this restriction added $540m to the liability.

9.16 The last point emphasises the importance of managing ACC on a sound set of

assumptions rather than imposing artificial constraints. In effect ACC was required to understate its liability deliberately in respect of serious injuries. It also meant that levy rates were set too low, the consequence being that they are now higher than would otherwise be necessary.

9.17 These three factors increased the Motor Vehicle Account’s liability by $1.1b in the

three years to 2009. Since then discount rates have fallen significantly, adding a further $1.4b to the liability in the most recent year alone. It is shown, then, that the Motor Vehicle Account’s deficit is primarily a matter of the large proportion of serious injury claims that occur in that Account.

9.18 Whilst each of these matters related to serious injuries had impacts on the other

Accounts, they did so to a lesser extent. Serious injuries are not a significant portion of either the Work or Earners’ Account, so the impact on their path to full funding is limited, and the majority of the impacts in the Non-Earners’ and Treatment Injury Accounts simply fall into the unfunded pre-1 July 2001 liability.

9.19 Overall, the Scheme continues to carry a significant deficit. This is discussed in

relation to the funding policies of the various Accounts in Section 10. 9.20 Despite the deficit, the Scheme has sufficient assets to meet claims as and when

they fall due for at least the next 10 years, and these assets are generally high quality and liquid. There is therefore no liquidity issue.

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10 Solvency

10.1 Solvency in the case of ACC, which is a statutory monopoly with the right to raise levies, needs to be considered in a different light from that of a commercial insurer that faces insolvency risk. For the purposes of this report, solvency is considered in the context of the funding policies of the various Accounts.

Funding Policy – Levied Accounts 10.2 The Board is required to establish a policy on fully funding the OCL for the Levied

Accounts. Fully funded is defined in the AC Act and simply means that ACC must have an adequate level of assets to fund the amount of the OCL. In determining this, legislation requires ACC to take into account the uncertainty inherent in forecasting and the objective of levy stability over time.

10.3 The Board’s funding policy is defined in terms of the proportion that each Account’s assets bear to its reported liabilities. The funding policy establishes target bands as well as mid-points for each Account. These interact as follows:

• Each Account is managed to stay within the funding band.

• Generally, levy rates will not be changed whilst an Account is within the funding band. Exceptions are when trends or other factors indicate that the band will be breached.

• Once an Account moves outside the funding band, levy rates are adjusted to

bring the funding back to the mid-point within five years. 10.4 The funding bands and mid-points are shown in Table 10.4.

Table 10.4 – Funding Bands Account Minimum Mid-point MaximumEarners' 100% 115.5% 135%Motor Vehicle 100% 116.0% 140%Work 100% 117.5% 140%

10.5 The funding bands have been set such that if each Account is at the mid-point, there is a 1 in 20 probability of it falling outside the band within a two year period.

10.6 An important point is that the 100% minimum is set with reference to the OCL reported in the financial accounts, and as such includes a risk margin. The Board has determined that the AC Act’s requirement that a full funding policy have regard to “forecast uncertainty” means that the risk margin should be funded.

10.7 Once within the band, it is anticipated that if changes are needed to levy rates (when funding ratios are projected to breach the limits with no levy changes), these changes will be gradual to target a return to the mid-point in five years.

10.8 The funding policy has a sound framework and is a reasonable basis for achieving the objective of a sustainable Scheme whilst balancing the underlying risks and uncertainties. In particular this allows the Board to balance the requirements of full funding versus levy stability.

10.9 This funding policy is currently the subject of a Government review. In essence the Government’s concern is to ensure that ACC, as a statutory monopoly with the right

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to raise levies, is not taking too much money out of the economy. Whilst this is a valid question, it does highlight the unusual nature of the accountabilities when it comes to levy setting. Normally the Government would set policy and the agency would be charged with its implementation. In ACC’s case the Board sets the funding policy but the final decisions on levy rates rest with the Government.

Funding Policy – Non-Earners’ Account 10.10 Cabinet has determined that the Non-Earners’ Account will be funded as follows:

• Pre-1 July 2001 claims – pay-as-you-go. • Post-1 July 2001 claims – fully funded (excluding risk margin).

10.11 The fully funded portion is treated as a point estimate. Rather than using funding

bands, any surplus or deficit is funded over a three year period. This can lead to a reasonable level of volatility in the Government’s appropriation.

10.12 The pre-2001 claims currently represent a liability of $3.3b ($4.3b including the non-

earners’ portion of the Treatment Injury Account). This liability is projected to remain stable for the next five years as annual claim payments are of a similar size to the unwinding of the discount rate. These claims will take many decades to run off. Until this time, the Non-Earners’ Account will record a deficit with respect to these claims.

10.13 The decision not to fund the risk margin naturally results in a reported deficit to the

extent of that risk margin. Funding Policy – Treatment Injury Account 10.14 The Treatment Injury Account is not directly funded, but rather receives monies

raised via the Earners’ and Non-Earners’ Accounts, the proportion being set with respect to the expected future costs of treatment injury claims to earners and non-earners. Its funding policy reflects those of the Earners’ and Non-Earners’ Accounts.

Funding Ratios 10.15 Table 10.15 shows the funding ratios of each of the Accounts in the past three

years. Table 10.15 – Funding Ratios in Past three Years

30 Jun 2010 30 Jun 2011 30 Jun 2012

Earners' Account 80% 99% 106%Motor Vehicle Account 48% 64% 68%Non-Earners' Account 35% 43% 40%Treatment Injury Account 43% 54% 53%Work Account 58% 79% 87%

TOTAL 54% 70% 72%

Funding ratios by acccount

10.16 As can be seen, the funding ratios of all three Levied Accounts have improved in the

period, with the Earners’ Account now being at the low end of its funding band and able to be considered “fully funded”, albeit that it remains short of its target. The Motor Vehicle Account remains significantly short of its target band.

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10.17 The Work Account’s funding ratio is shown to be lower than the level implied by the

balance sheet. For the purposes of financial reporting ACC has been required to report gradual process claims on a “claims made” basis (i.e. liability is only reported for those claims that have been reported to ACC). Whilst this has been determined to be consistent with NZ IFRS 4, for funding purposes it is clearly inappropriate; liability should also be established in respect of claims that have yet to be reported but for which exposure has been incurred. As noted in Section 9, the Incurred But Not Reported liability for these claims has been assessed at $0.9b. It is important to note that ACC is raising levies in respect of these claims.

10.18 The Non-Earners’ Account’s funding ratio fell during the 2012 year. This was partly

due to the long tail liabilities of the Account, such that the reduction in the discount rates had a large impact, and also the fact that, under Cabinet’s funding policy, the Account was considered to be over funded so the Government’s appropriation was less than it would have been otherwise.

10.19 The Treatment Injury Account’s funding ratio is driven primarily by the non-earners’

portion, which accounts for 74% of the total liability. In the coming years the Account’s funding ratio will increase relatively rapidly as the post-2001 claims, which are fully funded, will form a larger proportion of the total claims of the Account. However, the Account will remain well below 100% funding as the non-earners’ portion does not fund pre-2001 claims or the risk margin on post-2001 claims. Pre-2001 claims are predominantly serious injuries, which will remain on the books for many decades.

10.20 Overall, satisfactory progress is being made with regards to the funding of the

Levied Accounts. Whilst the Non-Earners’ and Treatment Injury Accounts’ solvency positions are quite low, this is, as noted, a specific decision of Cabinet.

10.21 Despite this progress, only the Earners’ Account has assets in excess of its

liabilities, and even in this case it is below the target funding level according to the Board’s policy. The Motor Vehicle Account’s deficit increased in size (although it fell as a percentage of liabilities) due to the large discount rate impact. Further work is required. Section 12 sets out forecasts and funding paths for each of the five Accounts.

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11 Levies

Levy Consultation 11.1 ACC is required to consult on proposed levy rates for the Earners’, Work and Motor

Vehicle Accounts. For this purpose, the Earners’ levy includes the amount required to fund that Account’s contribution to the Treatment Injury Account.

11.2 Following consultation, ACC’s Board considers feedback received prior to making

levy recommendations to the Minister for ACC. Final levy rates are determined by Cabinet. At the time of writing, consultation has been completed and the Board has provided its advice to the Minister for ACC. No recommended changes were made to the levy rates consulted on.

11.3 The levy setting approach involves an extended timeframe. Levies are set one year

prior to their adoption. This is not ideal and limits the ability to react to insurance experience as it develops. A claims trend cannot often be responded to, in the form of levy rates, in a timeframe of less than two years; any required response may be hampered by the political nature of levy decisions. The need for and correctness of consulting publicly on ACC’s levy rates are acknowledged. Nonetheless, the timeframe involved is limiting.

11.4 The Board is required to have a policy on fully funding the Levied Accounts when

making its levy recommendations. The funding policy is discussed in Section 10. 11.5 Consultation levy rates were determined on the following basis:

• Claims experience assumed to continue as per the most recent year. • Realistic investment returns given current and expected future market conditions. • Risk free interest rates develop over time as implied by the New Zealand

Government bond yield curve at 30 June 2012. 11.6 On this basis the Board has decided to consult on the following levy rates for the

2013/14 year (all GST exclusive):

• Earners’ – 1.3% (down from 1.48%). • Work – 1.0% (down from 1.15%). • Motor Vehicle - $334.52 (unchanged).

11.7 These are all average rates. In the case of the Work and Motor Vehicle Accounts

different rates apply to different industries and vehicle types respectively. Both the Earners’ and Work rates apply up to a maximum salary level, which is consistent with the maximum weekly compensation amount payable under the Scheme.

11.8 The Work Account levy includes an allowance for all gradual process claims,

whether reported or not. Previously Work Account levies did not include an allowance for gradual process claims that occurred after 1999 unless they had been reported. The Board has determined that this is not an appropriate basis on which to assess levies. The additional liability to be funded as a result of the change is $300m; the consultation rate has been able to be reduced despite this change.

11.9 It may seem surprising that a reduction in levies is being consulted on following a

year in which a deficit was recorded. There are a few points to note here:

• Both the Work and Earners’ Accounts reported surpluses, albeit below budget.

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• Without the impact of the discount rates, which is one-off in nature, a substantial surplus would have been reported.

• The yield curve implies that a reasonable portion of this discount rate impact will be reversed in the coming years; this has been allowed for.

• The improved claims experience is assumed to be ongoing. 11.10 Table 11.10 below shows the composition of these proposed levies, and compares

them with those expected out of last year’s levy consultation (i.e. for the 2012/13 levy year).

Table 11.10 – Consultation Levies

11.11 The cost of new claims has reduced in each of the Accounts. Expenses have

overall remained flat. The increases in the Earners’ and Work Accounts reflect inclusion of claim lodgement expenses in the setting of levy rates; these were previously excluded. The lower expense allowance in the Motor Vehicle Account reflects the fact that the NZ Transport Agency is no longer charging ACC for levy collection.

11.12 The main feature to note is the funding adjustments. The Earners’ Account is within

the funding band whilst the Work Account is close thereto. As such the Board has determined that it is appropriate to reduce levies towards longer term underlying cost levels and allow a more gradual progress towards the full funding target.

11.13 The Motor Vehicle Account, however, remains significantly underfunded. It was also

the only Levied Account to record a deficit during the year. The Board has determined that the existing levy rate remains appropriate, with the additional funding adjustment allowing a faster path toward the funding band.

11.14 Both the Earners’ and Work levy rates largely comprise expected new year claim

costs and associated expenses, with relatively small amounts directed towards achieving full funding in the respective Accounts. The Motor Vehicle levy, however, largely comprises a funding adjustment. This implies that the Earners’ and Work levies may be able to be reduced by small amounts as full funding is achieved, whereas the Motor Vehicle levy should be able to be reduced by a substantial margin.

11.15 The funding adjustment reported for the Work Account comprises two items: the

residual levy, which is set in legislation, of 0.31; and the remaining funding adjustment of -0.11. As noted earlier in this report, the residual levy acts in the nature of a funding adjustment, and as such I have generally simply combined the two items. However, in the Work Account, the split between the two is of consequence as the residual levy is charged to all employers, including AEP

Levy rate Earners’ (% earnings)

Work (% earnings)

Motor Vehicle ($ per vehicle)

2012/13 2013/14 2012/13 2013/14 2012/13 2013/14

Cost of new claims 0.99 0.92 0.59 0.55 123.03 121.31

Expenses 0.27 0.28 0.17 0.19 21.16 15.76 Cost of Incentive Programmes 0.00 0.00 0.08 0.06 0.00 0.00

Funding adjustment 0.22 0.10 0.31 0.20 190.33 197.45

Total 1.48 1.30 1.15 1.00 334.52 334.52

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employers, whilst the remaining funding adjustment is not charged to AEP employers.

11.16 The purpose of the residual levy is to fund the pre-1999 claims. Previously the

assessment of the cost of these claims was generally increasing, such that a greater burden over time was being put on employers with respect to these claims. In 2009 the Government fixed the total amount to be collected via residual levies to guard against this. Since then, with the general improvement in the Scheme’s claims experience, the estimate of the pre-1999 claims costs has decreased to such a level that the residual levy is now substantially greater than necessary.

11.17 The matter of consequence is that AEP employers are now subsidising non-AEP

employers. To some extent this can be argued to be an outcome of the transaction undertaken when the residual levy amount was fixed: had claim costs continued to increase, AEP employers would have been subsidised; given they did not, the reverse must also apply. However, on balance, the result seems unsatisfactory. ACC has no choice in this matter as the residual levy amount is set in legislation. Nonetheless, the search for a solution is warranted.

11.18 Section 12 sets out forecasts for the various Accounts. These forecasts have been

prepared on the same basis as underlies the levy consultation. They show that full funding is achieved for all three Accounts under the consultation levies, although the Earners’ levy does not reduce. The reason for this is that the funding adjustment available to be released is relatively small and is ultimately eroded by super-imposed inflation.

11.19 Super-imposed inflation was discussed in Section 5. It is worth noting that, all other

things being equal, the current level of super-imposed inflation implies that the Earners’ levy will increase by 2% per annum, noting that this levy is expressed relative to salaries so already adjusts naturally to underlying inflation. Similar impacts can be observed in the other Accounts. This highlights the importance of this issue. If this phenomenon is allowed to continue to occur unabated, levy rates will in time simply rise, regardless of claims performance.

11.20 I am satisfied that the consultation rates are adequate to both meet the cost of the

coming year’s claims and achieve the Board’s full funding targets. Further, I consider that the consultation rates are sustainable, barring some major change to economic conditions or Scheme performance.

Past Levy Rates 11.21 Table 11.21 shows the levy rates that have applied in the past three years as well as

the rates proposed for 2013/14. The Earners’ and Work Accounts’ levies have reduced as a result of both decreasing claims costs and improving funding positions. The continuing large deficit in the Motor Vehicle Account has not allowed any reduction in the period despite lower claims costs, although it has been kept flat in dollar terms, so represents a reduction net of inflation.

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Table 11.21 – Recent Year Levy Rates

Non-Earners’ Account 11.22 The Non-Earners’ Account is funded by the Government through annual

appropriation. This includes the Non-Earners’ Account’s contribution to the Treatment Injury Account.

11.23 As noted elsewhere, claims incurred prior to 1 July 2001 are funded pay-as-you-go,

with post-2001 claims fully funded (excluding risk margins). Any surplus or deficit from the pay-as-you-go target is recouped in the immediately following year. Any surplus or deficit from the fully funded target is recouped in the following three years.

11.24 The appropriation for the 2012/13 year compared with 2011/12 is set out in Table

11.24 (all figures in $000). Table 11.24 – Non-Earners’ Appropriation

11.25 The majority of the appropriation is in respect of claims costs expected to arise in the coming year. The three year adjustment for any surplus or deficit regarding post-1 July 2001 claims can lead to some volatility in the Government’s appropriation from year to year. This volatility is likely to increase in dollar terms as the post-1 July 2001 liability grows.

11.26 I consider the approved Government appropriation to be adequate and consistent

with the funding policy as determined by Cabinet. Adequacy of Past Levies 11.27 Levy adequacy can only be assessed with certainty when all claims related to a

specific accident year have been closed. In ACC’s case this will be many decades into the future. As such, it is only possible to make a current assessment of adequacy. As each year passes, more claims in respect of any past accident year will have closed, meaning that we can be more confident of the conclusion regarding the adequacy of the levies for that year. However, we can only be certain when all claims have closed.

11.28 The comparison between hindsight and actual levy rates is illustrated in Graph

11.28.

evy rate Earners’ (% earnings)

Work (% earnings)

Motor Vehicle ($ per

vehicle) 010/11 1.78 1.47 334.52

011/12 1.78 1.47 334.52

012/13 1.48 1.15 334.52

013/14 (proposed) 1.30 1.00 334.52

Appropriation 2011/12 2012/13

Cost of new claims 951,929 1,002,991 Expenses (incl CHE) 66,933 66,931 Funding adjustment -68,795 -47,698 Pay-as-you-go 118,318 105,556 Total 1,068,385 1,127,779

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Graph 11.28 – Actual Versus Hindsight Levies

Comparison of Accrued and Hindsight Rate IndicationsFully Funded Years 2002 - 2012

435 49

6

500

490

527

565 628 72

2

768 85

4

882

430

425

460

487 56

4 668 75

1

695

609

651 72

4

-

100

200

300

400

500

600

700

800

900

1,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Coverage Year Ending 30 June

Agg

rega

te R

ate

Per P

erso

n

Accrued Rate Per Person Hindsight Rate Per Person

11.29 Graph 11.28 illustrates the adequacy of past levies for all Accounts combined since

2002. The hindsight assessments allow for actual claims payments and investment returns to 30 June 2012 and future claim payments on current assumptions for claims still in payment, exclusive of risk margins. These are compared with the fully funded portion of each year’s levy income (i.e. excluding residual amounts). All cash flows are discounted to the start of the coverage year. The bars are expressed in dollars per person resident in New Zealand. So the levies charged in 2012 (exclusive of the residual levy) equate, on average, to $882 per person.

11.30 Graph 11.28 shows that, with hindsight, the levies for the years 2006 to 2008 proved

to be inadequate. Essentially each year’s claims were not met and hence full funding was not achieved. Since 2010 levies have been adequate and have thus contributed to attaining full funding.

11.31 The hindsight rates for 2011 and 2012 have been higher than those for 2010. This

reflects a relatively conservative valuation approach for 2012, noting that this year’s experience is not well developed, and high investment returns in 2010 and 2011, which have the effect of decreasing the hindsight rates for these years.

11.32 The comparison in Graph 11.28 is shown separately by Account in the appendices.

The pattern of levy inadequacy from 2006 to 2008 followed by adequate levies is broadly followed in each Account with minor variations, although the Treatment Injury Account levies were inadequate to a very large extent up to 2008, as the cost of the expanded coverage introduced in 2005 was significantly higher than anticipated.

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12 Forecasts

12.1 I have prepared financial forecasts on the same basis as underlies the 2013/14 levy consultation. Essentially this assumes that recent claims experience continues into the future, whilst investment returns are assumed at realistic levels given forecast economic and market conditions.

12.2 Table 12.2 sets out the future assumed levy rates (which are as provided in the

2013/14 consultation documents): Table 12.2 – Assumed Levy Rates

Earners’ Work Motor Vehicle 2012/13 1.48% 1.15% $334.52 2013/14 1.30% 1.00% $334.52 2014/15 1.30% 0.90% $334.52 2015/16 1.30% 0.90% $300.00 2016/17 1.30% 0.90% $260.00

12.3 For the Non-Earners’ Account and the non-earners’ portion of the Treatment Injury

Account, appropriations have been included at the levels approved by Cabinet through Vote ACC in 2012, being $1.128b for 2012/13 then $1.181b per annum thereafter.

12.4 Table 12.4 sets out projected funding positions. Table 12.4 – Projected Funding Positions Projected Funding Ratio (June Year End) 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 TargetMotor Vehicle Account 68% 77% 86% 94% 102% 107% 116.0%Earners' Account 106% 110% 111% 112% 112% 111% 115.5%Work Account 86% 93% 97% 101% 104% 107% 117.5%Non-Earners' Account 42% 44% 44% 45% 46% 45% 47.6%Treatment Injury Account 55% 62% 69% 71% 73% 74% 77.6%Total Scheme 73% 79% 83% 87% 90% 92% 98%* The Work Account includes WRGPDI on an exposure basis (on a claims-made basis would increase the position by 9% initially decreasing to 3% by 2016/17) 12.5 The Levied Accounts are projected to continue to move towards the mid-point of the

selected funding bands. All three are projected to be within the funding bands by 2015/16. The Work Account path is slightly lower than that shown in the 2013/14 consultation as a modelling error was discovered in the consultation projections.

12.6 The Non-Earners’ Account is projected to fall short of the funding target as the

appropriations approved by Cabinet are lower than required under the projection basis. These appropriations are reviewed annually in light of emerging experience.

12.7 Tables 12.7 and 12.8 provide projected income statements by Account for 2012/13

separately for the current and prior accident years.

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Table 12.7 – Projected 2012/13 Income Statement for Current Year Claims Statement of Comprehensive Income for Accident Year Ending 30 June 2013

($m)Motor

Vehicle Account

Work Account

Earners' Account

Treatment Injury

Account

Non Earners' Account TOTAL

INCOMELevies 414.0 622.1 1,110.0 243.6 925.3 3,314.9

EXPENDITURE

CLAIMS INCURREDMedical Costs 119.9 181.1 530.7 93.0 675.4 1,600.1Social Rehabilitation 218.0 57.7 105.6 126.2 199.8 707.3Compensation Related 127.5 294.5 432.3 53.1 16.2 923.6Other 63.0 64.5 137.2 30.8 42.0 337.4Total Incurred Claims 528.4 597.8 1,205.8 303.2 933.3 3,568.4

ADMINISTRATION EXPENSESNet Operating 3.8 20.7 11.7 0.4 2.9 39.7Injury prevention costs 4.9 6.5 4.2 0.0 3.1 18.6Levy collection costs 0.5 16.5 12.2 0.0 0.0 29.3Claims Handling Expenses 7.0 28.2 61.3 1.6 36.5 134.6Total Expenses 16.2 71.9 89.4 2.0 42.6 222.2

TOTAL EXPENDITURE 544.6 669.8 1,295.2 305.2 975.8 3,790.5

UNDERWRITING SURPLUS / (DEFICIT) (130.6) (47.7) (185.2) (61.6) (50.5) (475.7)

DECREASE / (INCREASE) IN UNEXPIRED RISK LIABILITY 0.0 (180.5) (220.5) 0.0 0.0 (401.1)

ECONOMICExpected return in excess of risk free and mis-match 2.6 5.6 7.3 2.7 4.0 22.2Investment costs (0.4) (0.5) (0.9) (0.3) (0.4) (2.5)

TOTAL SURPLUS / (DEFICIT) (128.3) (223.2) (399.3) (59.2) (47.0) (857.0)CLOSING FUNDING RATIO (excluding URL) 71% 91% 79% 80% 88% 81%

2013 PROJECTED

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Table 12.8 – Projected 2012/13 Income Statement for Prior Year Claims Statement of Comprehensive Income for Accident Years to 30 June 2012

($m)Motor

Vehicle Account

Work Account

Earners' Account

Treatment Injury

Account

Non Earners' Account TOTAL

INCOMELevies 636.2 243.9 189.4 151.8 (26.0) 1,195.4

EXPENDITURE

CLAIMS INCURREDMedical Costs (4.2) (8.9) (19.7) (3.9) (26.5) (63.2)Social Rehabilitation (16.8) (10.0) (5.4) (12.9) (25.4) (70.5)Compensation Related (16.4) (32.1) (26.5) (4.6) (3.3) (82.9)Other (39.5) (70.0) (73.9) (13.2) (31.8) (228.5)Total Incurred Claims (76.8) (121.0) (125.5) (34.7) (87.1) (445.0)

ADMINISTRATION EXPENSESNet Operating 1.4 6.0 0.7 0.0 0.1 8.2Injury prevention costs 0.0 0.0 0.0 0.0 0.0 0.0Levy collection costs 0.3 7.3 0.4 0.0 0.0 8.0Claims Handling Expenses 29.7 58.0 61.9 9.3 21.8 180.7Total Expenses 31.4 71.3 62.9 9.4 21.8 196.9

TOTAL EXPENDITURE (45.4) (49.7) (62.6) (25.3) (65.2) (248.2)

UNDERWRITING SURPLUS / (DEFICIT) 681.6 293.6 252.0 177.1 39.2 1,443.6

DECREASE / (INCREASE) IN UNEXPIRED RISK LIABILITY 0.0 57.1 11.5 0.0 0.0 68.6

ECONOMICExpected return in excess of risk free and mis-match 131.1 140.6 182.5 24.8 (10.3) 468.7Investment costs (14.5) (13.2) (13.7) (4.0) (5.5) (51.0)

TOTAL SURPLUS / (DEFICIT) 798.2 477.9 432.3 198.0 23.5 1,929.9CLOSING FUNDING RATIO (excluding URL) 77% 92% 115% 60% 40% 78%

2013 PROJECTED

12.8 All Accounts are projected to produce deficits in respect of current year claims (i.e.

levies are insufficient to cover the liabilities projected to be required at 30 June 2013). This is because the OCL established in respect of these claims must include a risk margin and be discounted at risk free rates. Both of these have the effect of consuming capital that can be expected to be released over time. ACC is not exposed to insolvency risk so does not need to charge for this capital consumption as long as it maintains sufficient assets on its balance sheet to meet full funding requirements. Thus an accounting deficit is recorded, which is somewhat artificial.

12.9 Further, the unexpired risk liability is projected to grow as levy rates fall. As noted in

Section 7, this is an artificial accounting requirement and not part of the economic substance of the levy rates.

12.10 For prior year claims, the funding adjustment collected to meet the Board’s funding

policy, investment returns in excess of risk free rates and the unwinding of the risk margin (which is the reverse of the capital consumption for current year claims) result in a significant surplus.

12.11 The exception is the Non-Earners’ Account, which is projected to produce only a

small surplus for 2012/13. This is because both the post-2001 fully funded component and the pay-as-you-go components are currently over funded (based on the Non-Earners’ Account funding policy). In effect, then, funds are returned to the Government in the form of a lower appropriation, indicated by negative levies in respect of prior years.

12.12 Table 12.12 provides the projected income statement for the total Scheme for

2012/13 to 2016/17.

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Table 12.12 – Projected Income Statement Statement of Comprehensive Income for the next five years

($m)2013

Current YearPROJECTED

2013Prior Year

PROJECTED

2013Total

PROJECTED2014

PROJECTED2015

PROJECTED2016

PROJECTED2017

PROJECTED

INCOMELevies 3,314.9 1,195.4 4,510.2 4,428.2 4,472.7 4,505.4 4,480.8

EXPENDITURE

CLAIMS INCURREDMedical Costs 1,600.1 (63.2) 1,536.9 1,647.8 1,754.7 1,870.8 1,989.2Social Rehabilitation 707.3 (70.5) 636.8 708.8 731.6 758.3 780.7Compensation Related 923.6 (82.9) 840.7 871.1 890.4 919.0 941.9Other 337.4 (228.5) 108.9 113.2 113.3 104.0 102.0Total Incurred Claims 3,568.4 (445.0) 3,123.3 3,340.9 3,490.0 3,652.1 3,813.8

ADMINISTRATION EXPENSESNet Operating 39.7 8.2 47.8 50.0 50.9 52.6 53.8Injury prevention costs 18.6 0.0 18.6 19.5 19.8 20.5 21.0Levy collection costs 29.3 8.0 37.2 38.9 39.7 40.9 41.9Claims Handling Expenses 134.6 180.7 315.3 329.9 346.5 363.6 380.6Total Expenses 222.2 196.9 419.0 438.2 456.9 477.5 497.2

TOTAL EXPENDITURE 3,790.5 (248.2) 3,542.4 3,779.1 3,946.9 4,129.7 4,311.0

UNDERWRITING SURPLUS / (DEFICIT) (475.7) 1,443.6 967.9 649.1 525.8 375.7 169.7

DECREASE / (INCREASE) IN UNEXPIRED RISK LIABILITY (401.1) 68.6 (332.5) (127.7) (51.7) (54.3) (53.2)

ECONOMICExpected return in excess of risk free and mis-match 22.2 468.7 491.0 549.3 541.0 477.8 406.3Investment costs (2.5) (51.0) (53.5) (55.9) (61.3) (66.6) (71.7)

TOTAL SURPLUS / (DEFICIT) (857.0) 1,929.9 1,072.8 1,014.6 953.8 732.7 451.2CLOSING FUNDING RATIO (excluding URL) 81% 78% 79% 83% 87% 90% 92%

12.13 The major items of note from these projections are:

• Levy income is flat in dollar terms, reflecting lower levy rates being offset by inflation and population growth

• Total investment income increases as the Scheme approaches full funding. The mismatch investment income falls, however, as the gap between investment returns and risk free rates used to value the OCL is projected to decrease in the next five years. The unwind of the risk free rate is included in claims incurred

• Claims costs are projected to increase by 7% in 2013/14 because discount rates are expected to be low in the short term. This results in less investment income offsetting claims growth. Claims costs then increase at almost 5% p.a. due to inflation, super-imposed inflation and population growth

• Expenses increase at 5% per annum. This is primarily driven by assumed growth in claim handling costs as claim expenses increase.

• The unexpired risk liability gradually rises as levy rates come down • Scheme surpluses gradually fall as the Scheme approaches full funding and the

funding adjustment is gradually removed. 12.14 Tables 12.4 and 12.14 show that levy rates assumed in the 2013/14 levy

consultation are sufficient to meet solvency requirements as specified in the funding policies. However, the Non-Earners’ appropriation, under the projection assumptions, will need to rise at some point in the future to ensure the specified levels are met.

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13 Risk Management

Framework 13.1 ACC established an enterprise risk management framework based on the “three

lines of defence” model in late 2010. 13.2 The management of risk is embedded within each business group as the first line of

defence, which includes risk identification, assessment, ownership, management and accountability. The second line of defence consists of the Risk Management Office (RMO) which is responsible for the development of risk management policies, procedures and tools, training and advice, and monitoring and reporting risk exposure. The third line of defence is the Assurance function (internal audit), whose role includes the provision of independent assurance to senior management and the Board on risk management structures, procedures and plans and their operation.

Implementation 13.3 Since its establishment, the RMO has been focused on creating and rolling out the

framework for risk management. This has included developing operational guidelines to direct risk related activity and the provision of training to selected staff who have roles in promoting and coordinating such activity in each business group. Formal risk identification and reporting is now occurring within the business groups, as well as the continued monitoring and management of risks.

13.4 Specialised information relating to variations in investments and claims liabilities is

combined with a broader assessment of other risks to provide an overall picture of ACC’s risk exposure. Reporting mechanisms have been introduced to enable regular examinations of ACC’s risk profile and management at executive and Board level. The time allowed and the depth of these discussions continues to improve.

Performance 13.5 Progress to date in implementing the enterprise risk management framework has

been satisfactory, with the establishment of risk coordinator roles throughout the business, the development of policies and training, and improved awareness of risk management generally throughout the organisation. However, the application of risk management principles is not yet mature in all parts of the business. Increased consistency and maturity needs to be promoted in the coming year. This is an important part of managing both small scale and wider strategic risks.

13.6 As a large and operationally complex organisation, ACC faces challenges in

ensuring that risk identification, assessment and reporting are complete and correct. For example the report of the “Independent Review of ACC’s Privacy and Security of Information” released in August 2012 highlighted deficiencies in ACC’s culture, processes and systems in relation to privacy best practice. Although privacy and other information handling requirements were known areas of risk prior to 2012, the magnitude was assessed to be relatively low. As a result, insufficient management attention was directed toward the mitigation of privacy risks.

13.7 Treatment plans have been developed in respect of key risks. The formal tracking of

progress against these treatment plans and subsequent reporting to the Board Audit and Risk Committee are developing. Work is in progress to ensure treatment plans are in place, where needed, for all other risks identified.

13.8 ACC’s tolerance of risks has been calibrated against a matrix approved in April

2011. Work is underway to review the Corporation’s risk appetite and tolerance

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levels as well as detailed descriptions of risks and their ratings. This will culminate in an updated risk matrix.

13.9 ACC’s risk culture needs to become more mature. In practical terms risk

management must become an integral part of all business practices and decision making (i.e. from strategic planning through to operations), and not treated as an add-on or isolated formal exercise.

13.10 The focus of the RMO to date has been the implementation of the enterprise risk management model, with practical guidelines and processes. ACC now needs to enhance risk governance structures, improve clarity of roles, and further integrate risk management with decision making throughout the organisation.

Exposure 13.11 Key risks identified through the framework are placed into three broad categories:

financial, non-financial and reputational. Financial 13.12 ACC’s primary financial risks arise from large scale movements in investments and

the OCL, as well as major trends in claims payments. 13.13 ACC has a large exposure to external economic factors, in particular interest rates

and equity market returns. Its investment policy (which is discussed in Section 4) aims to manage and partially mitigate the fluctuations generated by these exposures.

• Interest rates - ACC has long dated real payment obligations. Changes in

projected real discount rates can have a significant impact on the OCL. These movements are partially offset by movements in the value of bond investments.

• Equities - Approximately 40% of ACC’s investments are equity related. Although this increases the overall expected returns they have potential to fall in value, especially in shorter periods.

13.14 The Scheme is subject to variations in claim numbers and claims costs arising from

a number of factors, some that can be influenced by the Corporation and some arising externally. These are partially mitigated by a regular monitoring of claim trends. This monitoring is used to develop initiatives targeted at improving operational performance.

13.15 ACC is exposed to non-financial risks that, if realised, could have a high impact on

its operations and, as a result, lead to a large financial impact (for example via the cost of response). Explicit analysis and management of these is required to reduce the likelihood and cost of any such response.

Non-financial 13.16 Non-financial risks considered cover a broad range of operations, including process

and system performance, delivery on programmes of change, governance, court rulings, physical security of staff and buildings and the response to natural disasters.

13.17 ACC operates within a complex legislative framework that is open to different

interpretations. ACC decisions and interpretations may be challenged before the courts, and in select instances this may result in systemic changes in the Scheme. This risk is managed through a range of measures, including monitoring of the legal

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environment, proactive involvement in policy setting, and detailed analyses of the impacts of potential legislative changes.

13.18 ACC needs to be ready to respond to localised incidents or events affecting a major

operations hub, considering both core service provision and its own staff and systems. Disaster recovery programmes are either in place or in the process of being finalised.

13.19 ACC needs to be able to respond to policy changes within acceptable timeframes.

Failure to do this may result in an inability to maintain financial and operating performance. ACC is actively involved in consultation which generally allows appropriate planning to occur.

13.20 The rotation of a number of Board members at the same time may lead to a loss of

expertise on the Board; a new Board member typically requires 9 to 12 months to understand the size and complexity of ACC and the levers through which to apply influence. This risk was indeed realised during the year.

Reputational 13.21 Risks to ACC’s reputation are an important consideration and relate closely to the

objective of improving public trust and confidence. Initiatives in progress following the independent review of ACC’s privacy and security of information will address significant aspects of this.

13.22 The reliance on third parties for healthcare and other services increases the

complexity of managing risks to ACC’s reputation. 13.23 The risk of staff fraud is managed through systems and operational processes

designed to prevent unauthorised activities, along with controls embedded in financial processes. ACC also has related policies and codes of conduct in place.

Actions 13.24 The Board Audit and Risk Committee has approved an action plan designed to

improve the operation of risk management throughout ACC. The major actions are summarised below.

• Develop increased formalisation of processes for risk identification, analysis and

management, clarify specific roles related to risk management, and strengthen risk rating and reporting mechanisms.

• Treatment plans require more focused monitoring and a wider application to smaller risks and those identified through operational analysis.

• Review the Corporation’s risk appetite and tolerance levels, and the detailed descriptions of risks and their ratings.

• ACC’s governance arrangements need to reflect the importance of risk management at the highest levels of leadership and decision making. The working of the framework needs to be enhanced by sharper clarity of roles and accountabilities across all three lines of defence. This is planned to include a Risk Management Committee at executive level.

• It is necessary to improve engagement with the business to better support integrated risk management.

• Staff training needs to continue and an e-learning module developed and implemented.

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Conclusion

13.25 Regular reporting and analysis, along with specific realised risks (in particular matters related to privacy), have highlighted that ACC can be exposed to major risks that are not fully described during the initial phases of risk identification. This emphasises the need for continuous improvement in the management of risk, including governance structures, staff training, regular scrutiny of risks and controls, awareness of the changes in the operating environment, and an appropriate focus on risk management at all levels of the organisation.

13.26 Overall, satisfactory progress has been made in developing an enterprise risk management framework, but more work is required to ensure that it is fully embedded and that the appropriate risk culture is developed across the organisation.

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14 Other matters

14.1 This section discusses other matters of importance to the Scheme’s operation that have not been discussed elsewhere in this report.

Two-Tier System 14.2 New Zealand effectively runs a two-tier system when it comes to incapacity. Matters

involving accidents are covered by ACC, whilst other agencies cover incapacity due to other causes.

14.3 ACC’s entitlements are substantially greater than otherwise available. This leads to

boundary concerns: people suffering from some level of incapacity have a natural incentive for that incapacity to be deemed an accident. Indeed, medical advisers have a similar incentive, as they wish for the best outcomes for their patients.

14.4 These boundary issues cause a significant amount of tension with regards to the

Scheme’s operation. Without wishing to enter the public debate regarding ACC claims decisions, it is fair to say that much of the attention in recent times has concerned this boundary matter and ACC’s interpretation thereof.

14.5 It seems unlikely that the two-tier approach will be altered. It is therefore essential

that this boundary be set as clearly as possible. Unfortunately, the AC Act does not do this.

14.6 Complicating this further is the volatility inherent in the Scheme. Changes in

management direction can lead to significant changes in financial performance. 14.7 The result of all this is that the public does not have its expectations set clearly and

consistently, which can and does lead to dissatisfaction. It also leads to levy instability.

14.8 An area worthy of investigation is how to define better ACC’s boundary in a way that

is clear to the public and health professionals and, ideally, has the agreement of the major political parties.

14.9 Regardless of the clarity of the boundary, it is important that ACC acknowledge this

issue and attempt to define it as clearly and consistently as possible. This would have the added benefit of making ACC’s accountability for decision making clearer to all stakeholders.

Privacy 14.10 In March 2012, a major privacy breach by ACC was reported in The Dominion Post.

Following this, the Board agreed with the Office of the Privacy Commissioner to appoint Malcolm Crompton, former Privacy Commissioner in Australia, and KPMG to undertake a major review of ACC’s privacy processes.

14.11 As was noted in Section 13, privacy had been recognised as a risk within ACC, but it

had been given an insufficient rating. 14.12 The report of the investigation was released in August 2012. It detailed a range of

actions required to improve ACC’s performance with respect to privacy. 14.13 It is not my role, nor the purpose of this report, to review or consider the

recommendations made. These have been accepted by the Board and

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management. Rather, what is important from this report’s viewpoint is to acknowledge the large organisational risks involved in the programme.

14.14 The review’s recommendations encompass virtually all areas of ACC’s operations.

Noting ACC’s large number of interactions with the public in many forms (as claimants, levy payers, health providers and indeed providers of other services), completing the review’s recommendations whilst maintaining satisfactory operational, financial and client outcomes is no small challenge. Management will need to manage carefully its priorities and balance calls on resources if the programme is to be successful.

14.15 Management is in the process of establishing the operational parameters of the

change programme. Key to this will be ensuring that the scope is well defined and that disciplines are in place to ensure that work remains within this scope. This is likely to be the largest piece of work ACC has ever undertaken. ACC’s project management disciplines will be tested.

Ageing Population 14.16 It is well known that New Zealand’s population is ageing, consistent with other

developed countries. 14.17 The impact of this ageing on ACC is unclear. There is little doubt that as people age

they are more likely to injure themselves through simple falls and that they recover from injuries more slowly than younger people. Of course, older people are generally not able to access weekly compensation support, and they tend not to undertake risky activities or injure themselves playing amateur and professional sports.

14.18 The ageing population encompasses broader concerns. It is often difficult to

determine the extent to which a person’s symptoms are due to the natural effects of ageing and the extent to which they’re due to accident. Again, the question of the boundary of ACC provided cover is an issue. This is exacerbated when considered in combination with greater levels of obesity and resultant co-morbidities.

14.19 In my opinion, ACC needs to consider a strategy for dealing with the ageing

population. This needs to encompass matters such as the intent of the AC Act, the boundary definition, longer term operational and financial planning, and how to secure the best outcomes for the public.

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15 Appendices 15.1 In Appendices A to E a summarised overview of each Account is provided. Each

appendix includes the following information:

a. A summary highlighting the nature of the exposure in the Account.

b. Information related to the current and historical adequacy of the Account’s OCL.

c. Information related to the current and historical levy adequacy of the Account.

15.2 Appendix F contains cumulative revenue statements by Account and coverage year.

15.3 Appendix G contains claims development and projections by claim type for each Account and coverage year.

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APPENDIX A – EARNERS’ ACCOUNT A.1 The Earners’ Account is funded by levies paid by earners to cover non-work related,

personal injuries occurring on or after 1 July 1992. The breadth of exposure under the Earners’ Account is wide, covering all non-work related injuries, including but not limited to those that occur in the home, during sport, while in/on the water, and in public/commercial environments (e.g. restaurants, shopping areas). However, it does exclude those injuries covered by the Motor Vehicle and Treatment Injury Accounts.

A.2 Based on recent statistics, annually, on average just over 25% of earners experience non-work related injuries that result in ACC claims. Approximately 92% of these claims are medical only. From 2005 to 2008 rates of injury rapidly increased. Since early 2009 the rate of injury has decreased substantially. Annual injury/claim frequency rates are shown in Graph A.2. Additional support claims receive rehabilitation and/or compensation support in addition to medical treatment.

Graph A.2 – Injury/Claim Frequency Rates

Earners' Account - Indicated Injury/Claim Frequency Rates per 1,000 Earners

18

19

20

21

22

23

24

25

26

27

28

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Coverage Year Ending 30 June

Add

ition

al S

uppo

rt C

laim

Freq

uenc

y

180

200

220

240

260

280

300

Tota

l Cla

im F

requ

ency

Additional Support Claim Frequency Total Claim Frequency

A.3 Table A.3 provides a range of the average annual number of injuries and the estimated

nominal severities (undiscounted average lifetime costs, including the cost to service) by claim type, exclusive of bulk-billed injuries.

Table A.3 – Average Annual Claim Statistics (excluding bulk-billed injuries) Claim Type Estimated Annual

Number of InjuriesEstimated Average

Nominal Claim SeverityFatal 350 - 450 $100,000 - $150,000Serious Injury 55 - 70 $4.0M - $6.0MRecovery Support 45,000 - 55,000 $15,000 - $25,000Medical Only 500,000 - 600,000 $400 - $500Total Claims 550,000 - 650,000 $2,500 - $3,500

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A.4 Graph A.4 shows the movement in the outstanding claims liability central estimate between the financial years ending 30 June 2004 to 30 June 2012. This compares the original estimates (excluding risk margins) with the hindsight 30 June 2012 estimates (excluding risk margins) using the same discount rates as the original estimates. For the hindsight estimates the actual payments to 30 June 2012 have been combined with the 30 June 2012 valuation future projected cash flows.

Graph A.4 – Movement in the Outstanding Claims Liability Central Estimate

Earners' Account - Outstanding Claims Liability Central EstimateFinancial Years Ending 30 June 2004 to 30 June 2012

4,808

3,4813,263

2,8792,594

2,4812,241

1,966

3,802

4,1962,4532,2221,9541,563 4,2513,135 4,106 4,8080

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2004 2005 2006 2007 2008 2009 2010 2011 2012Financial year ending 30 June

Out

stan

ding

Cla

ims

Liab

ility

($m

)

Social Rehabilitation Weekly Compensation & Vocational RehabilitationMedical Related Death and Impairment RelatedClaims Handling Expense Hindsight (2010)Hindsight (2011) Hindsight (2012)

A.5 The hindsight estimates capture the pattern of Scheme utilisation, including the

increase in utilisation occurring from 2005 to 2008. Hindsight estimates for the financial years prior to 2008 are higher than the original liability estimates, reflecting this increasing utilisation and therefore the deficiency in prior projections. The 30 June 2009 outstanding claims estimate incorporated a refinement in assumptions, and better reflected past increases in utilisation and the likely impact on the Scheme if these continued. Since 2009 an improved focus on Scheme sustainability and claims management has resulted in reductions to the hindsight estimates for each financial year. The current estimate of the 30 June 2012 liability is higher than hindsight estimates of older liabilities because reductions in discount rates have more than offset the improvements in experience.

A.6 Weekly compensation and vocational rehabilitation claims drive a large portion of the cost associated with the Earners’ Account. As at 30 June 2012 approximately 35% of the outstanding claims liability is for future weekly compensation support, while another 28% is for medical treatment, much of which is orthopaedic elective surgery.

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A.7 Graph A.7 shows a comparison of the hindsight rates with the rate indicated by the levy accrued during each of the fully funded years. A definition of the hindsight rate is provided in paragraph 11.29 of this report. The graph illustrates that the increase in injury rates and deterioration in recovery rates in 2006-2009 were not fully funded. Approximately 50% to 55% of the lifetime cost of earners’ injuries occurring in any given coverage year is funded from levies collected for that year. The balance of the cost is funded by the future investment income expected to be earned on those levies.

Graph A.7 – Comparison of Accrued and Hindsight Fully Funded Rates per Exposure Unit

Earners' AccountComparison of Accrued and Hindsight Rate Indications

Fully Funded Years 2002 - 2012

277 34

0

330

356

357 401 45

4 498 58

3 651

637

298

288

307

338 38

7 473 53

7

508

438

459

493

-

100

200

300

400

500

600

700

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Coverage Year Ending 30 June

Agg

rega

te R

ate

Per E

arne

r

Collected Rate Per Earner Hindsight Rate Per Earner

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APPENDIX B – WORK ACCOUNT B.1 The Work Account is funded by levies paid by employers and self-employed persons to

cover employees and self-employed persons (‘employed people’) who experience work related personal injuries on or after 1 July 1974, and non-work injuries between 1 July 1974 and 30 June 1992.

B.2 Based on recent statistics, annually, on average 10% of employed people1 experience work related injuries that result in ACC claims. Since 2003 the number of work related injuries/claims has trended downwards. Approximately 88% of these claims are medical only. Annual injury/claim frequency rates are shown in Graph B.2. Additional support claims receive rehabilitation and/or compensation support in addition to medical treatment.

Graph B.2 – Injury/Claim Frequency Rates

Work Account - Indicated Injury/Claim Frequency Rates per 1,000 Employed People

9

10

11

12

13

14

15

16

17

18

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Coverage Year Ending 30 June

Add

ition

al S

uppo

rt C

laim

Freq

uenc

y

70

80

90

100

110

120

130

140

Tota

l Cla

im F

requ

ency

Additional Support Claim Frequency Total Claim Frequency

B.3 Table B.3 provides a range of the average annual number of injuries and the estimated

nominal severities (undiscounted average lifetime costs, including the cost to service) by claim type, exclusive of bulk-billed injuries.

Table B.3 – Average Annual Claim Statistics (excluding bulk-billed injuries) Claim Type Estimated Annual

Number of InjuriesEstimated Average

Nominal Claim SeverityFatal 40 - 60 $150,000 - $350,000Serious Injury 15 - 25 $2.0M - $5.0MRecovery Support 20,000 - 25,000 $20,000 - $25,000Medical Only 130,000 - 170,000 $300 - $450Total Claims 150,000 - 200,000 $3,000 - $4,000

1 This analysis excludes the Accredited Employers Programme, in which larger employers are allowed to self-insure, unless otherwise stated.

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B.4 Graph B.4 shows the movement in the outstanding claims liability central estimate between the financial years ending 30 June 2004 to 30 June 2012. This compares the original estimates (excluding risk margins) with the hindsight 30 June 2012 estimates (excluding risk margins) using the same discount rates as the original estimates. For the hindsight estimates the actual payments to 30 June 2012 have been combined with the 30 June 2012 valuation future projected cash flows. Claims handed-back to ACC by the Accredited Employers Programme are included in this analysis as any differences in the valuation of these claims affect ACC’s liability.

Graph B.4 – Movement in the Outstanding Claims Liability Central Estimate

Work Account - Outstanding Claims Liability Central EstimateFinancial Years Ending 30 June 2004 to 30 June 2012

5,313

4,3764,3324,056

3,9584,1804,1083,940

4,483

5,3135,2704,0344,0923,6823,267 4,8924,300 5,1980

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2004 2005 2006 2007 2008 2009 2010 2011 2012

Financial year ending 30 June

Out

stan

ding

Cla

ims

Liab

ility

($m

)

Social Rehabilitation Weekly Compensation & Vocational RehabilitationMedical Related Death and Impairment RelatedClaims Handling Expense Hindsight (2010)Hindsight (2011) Hindsight (2012)

B.5 The hindsight estimates up to 30 June 2007 are higher than the original liability

estimates, but not markedly so, indicating a small deficiency in the estimates. The 30 June 2009 outstanding claims liability estimate incorporated an increased assumed claims experience assumption in line with the higher Scheme utilisation generally. Since 2009 an improved focus on Scheme sustainability and claims management has resulted in reductions to the hindsight estimates for each financial year. The current estimate of the 30 June 2012 liability is higher than hindsight estimates of older liabilities because reductions in discount rates have more than offset the improvements in experience. Overall, the liability for the Work Account has been fairly steady, reflecting the fact that steadily decreasing claim frequencies have broadly offset the natural liability increase that would otherwise have been expected.

B.6 Weekly compensation and vocational rehabilitation claims drive the majority of the cost associated with the Work Account. As at 30 June 2012, approximately 52% of the outstanding claims liability is future weekly compensation and vocational rehabilitation support and another 20% is medical treatment, much of which is orthopaedic elective surgery.

Page 98 of 122

B.7 Graph B.7 shows a comparison of the hindsight rates with the rate indicated by the levy accrued during each of the fully funded years. A definition of the hindsight rate is provided in paragraph 11.29 of this report. Levies have generally proved to be slightly higher than the hindsight cost estimates, allowing a gradual improvement in the Account’s funding position. Approximately 50% to 55% of the cost of work related injuries occurring in any given coverage year is funded from levies collected for that year.

Graph B.7 – Comparison of Accrued and Hindsight Fully Funded Rates per Exposure Unit

Work AccountComparison of Accrued and Hindsight Rate Indications

Fully Funded Years 2002 - 2012

246 27

6

268

263

262 281

268

242 264 30

2

311

203

206

208

215 23

9 263 29

0

248

203

224 25

4

-

50

100

150

200

250

300

350

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Coverage Year Ending 30 June

Agg

rega

te R

ate

Per E

mpl

oyed

Pers

on

Collected Rate Per Employed Person Hindsight Rate Per Employed Person

Page 99 of 122

APPENDIX C – MOTOR VEHICLE ACCOUNT C.1 The Motor Vehicle Account covers injuries where moving motor vehicles are involved

and includes injuries to pedestrians and bicyclists hit by motor vehicles while on or walking along public roads. The Motor Vehicle Account is funded by levies paid by motor vehicle owners and petrol users. The levy payers are both individuals and commercial employers.

C.2 Based on recent statistics, annually, there is just over one motor vehicle related injury

that results in an ACC claim for every 100 vehicles. Depending on the year, approximately 80% to 85% of these claims are medical only. Annual injury/claim frequency rates are shown in Graph C.2.

Graph C.2 – Injury/Claim Frequency Rates

Motor Vehicle Account - Indicated Injury/Claim Frequency Rates per 1,000 Motor Vehicles

1.30

1.40

1.50

1.60

1.70

1.80

1.90

2.00

2.10

2.20

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Coverage Year Ending 30 June

Add

ition

al S

uppo

rt C

laim

Freq

uenc

y

9

10

11

12

13

14

15

Tota

l Cla

im F

requ

ency

Additional Support Claim Frequency Total Claim Frequency

C.3 Table C.3 provides a range of the average annual number of injuries and the estimated

nominal severities (undiscounted average lifetime costs, including the cost to service) by claim type, exclusive of bulk-billed injuries.

Table C.3 – Average Annual Claim Statistics (excluding bulk-billed injuries)

Claim Type Estimated Annual Number of Injuries

Estimated Average Nominal Claim Severity

Fatal 300 - 450 $90,000 - $110,000Serious Injury 80 - 120 $6.0M - $10.0MRecovery Support 5,000 - 6,000 $45,000 - $65,000Medical Only 25,000 - 35,000 $550 - $800Total Claims 30,000 - 45,000 $25,000 - $35,000

Page 100 of 122

C.4 Graph C.4 shows the movement in the outstanding claims liability central estimate between the financial years ending 30 June 2004 to 30 June 2012. This compares the original estimates (excluding risk margins) with the hindsight 30 June 2012 estimates (excluding risk margins) using the same discount rates as the original estimates. For the hindsight estimates the actual payments to 30 June 2012 have been combined with the 30 June 2012 valuation projected cash flows.

Graph C.4 – Movement in the Outstanding Claims Liability Central Estimate

Motor Vehicle Account - Outstanding Claims Liability Central EstimateFinancial Years Ending 30 June 2004 to 30 June 2012

7,184

5,3284,977

4,3504,1864,3744,189

3,822

5,684

7,1846,0313,9643,5543,2382,588 6,1864,475 6,2100

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2004 2005 2006 2007 2008 2009 2010 2011 2012Financial year ending 30 June

Out

stan

ding

Cla

ims

Liab

ility

($m

)

Social Rehabilitation Weekly Compensation & Vocational RehabilitationMedical Related Death and Impairment RelatedClaims Handling Expense Hindsight (2010)Hindsight (2011) Hindsight (2012)

C.5 The hindsight estimates capture the pattern of Scheme utilisation, including the

increase in utilisation occurring from 2005 to 2008. Hindsight estimates for the financial years prior to 2008 are higher than the original liability estimates, reflecting this increasing utilisation and therefore the deficiency in prior projections. The 30 June 2009 outstanding claims liability estimate incorporated a refinement in assumptions, and better reflected past increases in utilisation and the likely impact on the Scheme if these continued. Since 2009 an improved focus on Scheme sustainability and claims management has resulted in reductions to the hindsight estimates for each financial year. The current estimate of the 30 June 2012 liability is higher than hindsight estimates of older liabilities because reductions in discount rates have more than offset the improvements in claims experience.

C.6 Serious injury claims drive the majority of the cost associated with the Motor Vehicle Account. As at 30 June 2012 approximately 54% of the outstanding claims liability is future social rehabilitation support, which is predominantly home care and assistance to permanently impaired individuals. For the accident years prior to 2009, a significant portion of the increase in the hindsight estimates was driven by increases in the provision for serious injury claims, as super-imposed inflation assumptions had been increased to better reflect the likely trend. Part of the past deficiency was due to a Cabinet directive not to allow for future increases as this would pre-empt Cabinet decisions.

Page 101 of 122

C.7 Graph C.7 shows a comparison of the hindsight rates with the rate indicated by the levy accrued during each of the fully funded years. A definition of the hindsight rate is provided in paragraph 11.29 of this report. The graph illustrates the uncertainty in estimating the cost of motor vehicle related injuries that will occur each year. The influx of injuries occurring in 2006-2010 and the seriousness of those injuries have not been funded for and will require additional funding from levy payers in the future. Approximately 25% to 30% of the cost of motor vehicle related injuries occurring in any given year is funded from levies collected for that year. The balance of the cost is funded by the future investment income expected to be earned on those levies.

Graph C.7 – Comparison of Accrued and Hindsight Fully Funded Rates per Exposure Unit

Motor Vehicle AccountComparison of Accrued and Hindsight Rate Indications

Fully Funded Years 2002 - 2012

102

89

122

107

97

76 95 111

117

181 22

8

81 90 103

98 114 14

6

152

131

132

136

149

-

50

100

150

200

250

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Coverage Year Ending 30 June

Agg

rega

te R

ate

Per M

otor

Veh

icle

Collected Rate Per Motor Vehicle Hindsight Rate Per Motor Vehicle

C.8 In 2007 ACC developed a team of experts to manage serious injury clients, the

National Serious Injury Service. This team has improved ACC’s knowledge of the needs of and funding required to support these clients throughout their lifetimes. The team has refined the criteria for identifying these clients early on in the life of the claims. Given the large cost associated with motor vehicle related serious injury claims, the Motor Vehicle Account is highly affected by ACC’s understanding and servicing the needs of these clients.

Page 102 of 122

APPENDIX D – NON-EARNERS’ ACCOUNT D.1 The Non-Earners’ Account is funded through Government appropriations (Vote ACC)

from general taxation to cover personal injuries occurring to non-earners. The breadth of exposure under the Non-Earners’ Account is wide, covering all non-motor vehicle related injuries to non-earners including, but not limited to, those that occur in the home, during sport, while in/on the water, and in public/commercial environments (e.g. schools, playgrounds).

D.2 Based on recent statistics, annually, on average around 35% of non-earners

experience injuries that result in ACC claims. Prior to 2005 the rate remained fairly stable between 31% and 33%, but grew between 2005 and 2008. Approximately 96% of these claims are medical only. Annual injury/claim frequency rates are shown in Graph D.2. Additional support claims receive rehabilitation and/or compensation support in addition to medical treatment. For non-earners this is mostly home care and assistance.

Graph D.2 – Injury/Claim Frequency Rates

Non-Earners' Account - Indicated Injury/Claim Frequency Rates per1,000 Non-Earners

9

10

11

12

13

14

15

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Coverage Year Ending 30 June

Add

ition

al S

uppo

rt C

laim

Freq

uenc

y

220

240

260

280

300

320

340

360

380

Tota

l Cla

im F

requ

ency

Additional Support Claim Frequency Total Claim Frequency

D.3 Table D.3 provides a range of the average annual number of injuries and the estimated

nominal severities (undiscounted average lifetime costs, including the cost to service) by claim type, exclusive of bulk-billed injuries.

Table D.3 – Average Annual Claim Statistics (excluding bulk-billed injuries)

Claim Type Estimated Annual Number of Injuries

Estimated Average Nominal Claim Severity

Fatal 450 - 800 $10,000 - $18,000Serious Injury 70 - 100 $8.0M - $10.5MRecovery Support 25,000 - 30,000 $8,000 - $10,000Medical Only 700,000 - 800,000 $300 - $350Total Claims 750,000 - 800,000 $1,500 - $2,000

Page 103 of 122

D.4 Graph D.4 shows the movement in the outstanding claims liability central estimate between the financial years ending 30 June 2004 to 30 June 2012. This compares the original estimates (excluding risk margins) with the hindsight 30 June 2012 estimates (excluding risk margins) using the same discount rates as the original estimates. For the hindsight estimates the actual payments to 30 June 2012 have been combined with the 30 June 2012 valuation future projected cash flows.

Graph D.4 – Movement in the Outstanding Claims Liability Central Estimate

Non-Earners' Account - Outstanding Claims Liability Central EstimateFinancial Years Ending 30 June 2004 to 30 June 2012

4,933

3,811

2,4082,696

2,833 2,683 2,772

3,2703,519

4,9333,9812,906 4,0791,464 1,866 2,074 2,398 3,7330

1,000

2,000

3,000

4,000

5,000

6,000

2004 2005 2006 2007 2008 2009 2010 2011 2012Financial year ending 30 June

Out

stan

ding

Cla

ims

Liab

ility

($m

)

Social Rehabilitation Weekly Compensation & Vocational RehabilitationMedical Related Death and Impairment RelatedClaims Handling Expense Hindsight (2010)Hindsight (2011) Hindsight (2012)

D.5 The hindsight estimates capture the pattern of Scheme utilisation, including the

increase in utilisation occurring from 2005 to 2008. Hindsight estimates for the financial years prior to 2008 are higher than the original liability estimates, reflecting this increasing utilisation and therefore the deficiency in prior projections. The 30 June 2009 outstanding claims liability estimate incorporated a refinement in assumptions, and better reflected past increases in utilisation and the likely impact on the Scheme if these continued. Since 2009 an improved focus on Scheme sustainability and claims management has resulted in reductions to the hindsight estimates for each financial year. The current estimate of the 30 June 2012 liability is higher than hindsight estimates of older liabilities because reductions in discount rates have more than offset the improvements in experience.

D.6 Serious injury claims drive the majority of the cost associated with the Non-Earners’ Account. As at 30 June 2012 approximately 58% of the outstanding claims liability is future social rehabilitation support, which is predominantly home care and assistance to permanently impaired individuals, of whom many were children at the time of injury.

Page 104 of 122

D.7 Graph D.7 shows a comparison of the hindsight rates with the rate indicated by the levy accrued during each of the fully funded years. A definition of the hindsight rate is provided in paragraph 11.29 of this report. The graph illustrates that the increase in injury rates and the utilisation and cost of social rehabilitation in 2005-2008 were not fully funded for. Approximately 35% to 45% of the cost of non-earners’ injuries occurring in any given coverage year is funded from appropriations and the balance of the cost is funded by the future investment income expected to be earned on those appropriations.

Graph D.7 – Comparison of Accrued and Hindsight Fully Funded Rates per Exposure Unit

Non-Earners' AccountComparison of Accrued and Hindsight Rate Indications

Fully Funded Years 2002 - 2012

217

237

224

186 25

3 288 33

5 406

409

378

365

231

211

218

224 26

0 314 35

4

362

315

340 37

7

-

50

100

150

200

250

300

350

400

450

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Coverage Year Ending 30 June

Agg

rega

te R

ate

Per N

on-E

arne

r

Collected Rate Per Non-Earner Hindsight Rate Per Non-Earner

D.8 Overall the net funding position of the Non-Earners Account as at 30 June 2012 is a

deficit of $3.369b. Most of this deficit ($3.25b) relates to injuries incurred prior to 1 July 2001, and as these claims are funded on a pay-as-you-go basis the Account will remain in deficit until all these claims are paid; some claims will not be fully paid for decades.

D.9 The majority of the non-earners who continue to receive support from the Scheme have been seriously and permanently injured as a result of injury. Many of them were injured as children, some through domestic violence.

Page 105 of 122

APPENDIX E – TREATMENT INJURY ACCOUNT E.1 The Treatment Injury Account covers injuries that occur, when receiving medical

treatment, that are not commonly associated with the potential risks of receiving the medical treatment. Treatment injuries to earners are funded by levies paid by earners and treatment injuries to non-earners are funded out of taxes paid to the Government. Health care professionals do not directly pay levies. Prior to 2005, the Account was called the Medical Misadventure Account and covered only the more serious treatment injuries occurring in the health care system. In 2005 the Account was renamed as the Treatment Injury Account and it became no longer necessary to prove that an injury was both rare and severe or caused by medical error for a claim to be accepted.

E.2 Since the treatment injury legislation was introduced in 2005, the number of treatment

injury claims serviced by ACC has been on the rise. Based on recent statistics, about 0.2% of the population experiences treatment injuries that result in ACC claims. Since 2005 the number of treatment injuries/claims has continued to increase and has yet to fully stabilise. However, there are indications that claims may be beginning to stabilise as the number of claims requiring GP consultations (a lead indicator for all other claims) has levelled off in the past couple of years. Recent data shows that approximately 60% of these claims are medical only. Annual injury/claim frequency rates are shown in Graph E.2. Additional support claims receive rehabilitation and/or compensation support in addition to medical treatment.

Graph E.2 – Injury/Claim Frequency Rates

Treatment Injury Account - Indicated Injury/Claim Frequency Rates per1,000 People

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Coverage Year Ending 30 June

Add

ition

al S

uppo

rt C

laim

Freq

uenc

y

0.0

0.5

1.0

1.5

2.0

2.5

Tota

l Cla

im F

requ

ency

Additional Support Claim Frequency Total Claim Frequency

Page 106 of 122

E.3 Table E.3 provides a range of the average annual number of injuries and the estimated nominal severities (undiscounted average lifetime costs, including the cost to service) by claim type, exclusive of bulk-billed injuries.

Table E.3 – Average Annual Claim Statistics (excluding bulk-billed injuries)

Claim Type Estimated Annual Number of Injuries

Estimated Average Nominal Claim Severity

Fatal 75 - 110 $55,000 - $70,000Serious Injury 40 - 60 $9.0M - $17.0MRecovery Support 2,500 - 4,000 $55,000 - $75,000Medical Only 4,500 - 5,500 $3,000 - $5,500Total Claims 7,500 - 9,500 $70,000 - $140,000

E.4 Graph E.4 shows the movement in the outstanding claims liability central estimate

between the financial years ending 30 June 2004 to 30 June 2012. This compares the original estimates (excluding risk margins) with the hindsight 30 June 2012 estimates (excluding risk margins) using the same discount rates as the original estimates. For the hindsight estimates the actual payments to 30 June 2012 have been combined with the 30 June 2012 valuation future projected cash flows.

Graph E.4 – Movement in the Outstanding Claims Liability Central Estimate

Treatment Injury Account - Outstanding Claims Liability Central EstimateFinancial Years Ending 30 June 2004 to 30 June 2012

2,916

2,151

957

1,1851,344 1,293

1,396

1,729

1,928

2,9162,1591,181 2,313465 644 773 886 1,8930

500

1,000

1,500

2,000

2,500

3,000

3,500

2004 2005 2006 2007 2008 2009 2010 2011 2012Financial year ending 30 June

Out

stan

ding

Cla

ims

Liab

ility

($m

)

Social Rehabilitation Weekly Compensation & Vocational RehabilitationMedical Related Death and Impairment RelatedClaims Handling Expense Hindsight (2010)Hindsight (2011) Hindsight (2012)

E.5 The hindsight estimates capture the pattern of Scheme utilisation, including the

increase in utilisation occurring from 2005 to 2008. Hindsight estimates for the financial years up until 2008 are higher than the original liability estimates, reflecting this increasing utilisation and therefore the deficiency in prior projections. The 30 June 2009 outstanding claims liability estimate incorporated a refinement in assumptions, and better reflected past increases in utilisation and the likely impact on the Scheme if these continued. Since 2009 an improved focus on Scheme sustainability and claims management has resulted in reductions to the hindsight estimates for each financial year. The current estimate of the 30 June 2012 liability is higher than hindsight estimates of older liabilities, largely because of reductions in discount rates.

Page 107 of 122

E.6 Most of the increase in the estimates has been driven by increases in the provision for serious injury claims, as superimposed inflation assumptions have been increased to better reflect the likely trend. Part of the past deficiency was due to a Cabinet directive not to allow for future increases as this would pre-empt Cabinet decisions. Serious injury claims make up a large portion of the liability for the Account.

E.7 For the non-earners’ portion of the Treatment Injury Account, serious injury claims drive the majority of the cost associated with its outstanding claims liability and future levies. Each year more of these claims are added to the outstanding claims liability. The most costly of these claims are from birth related treatment injuries. Injuries at birth make up 40% to 50% of treatment injury serious injury claims. These claims may require advanced nursing care for decades into the future. In addition, upon reaching the age of 18, a child experiencing a serious injury becomes eligible for loss of potential earnings compensation. Table E.7 provides an estimate of the proportion of total treatment injury nominal costs related to injuries to non-earners. Note that the non-earners’ proportion of death and impairment related payments is higher for older accident years; this is because older accident years have greater levels of ongoing independence allowance payments.

Table E.7 – Non-earners’ Proportion of Treatment Injury Nominal Costs

Pre-1999 1999-2001

2001-2012 2012/13+

Social Rehabilitation 96% 95% 94% 92%Weekly Compensation & Vocational Rehabilitation 20% 20% 20% 24%Medical Related 50% 50% 50% 48%Death & Impairment Related 59% 59% 45% 41%Claims Handling Expense 88% 88% 75% 76%Overall 95% 95% 88% 76%

Non-Earners' Account Proportion of Projected Treatment Injury Account Costs

E.8 The majority of treatment injuries that occur to earners typically only result in follow-up medical treatment. Claims that move into the outstanding claims liability are predominantly recovery support claims if the treatment injuries result in compensation or rehabilitation support. Table E.8 provides an estimate of the proportion of total treatment injury nominal costs related to injuries to earners.

Page 108 of 122

Table E.8 – Earners’ Account Proportion of Treatment Injury Nominal Costs

Pre-1999 1999-2001

2001-2012 2012/13+

Social Rehabilitation 4% 5% 6% 8%Weekly Compensation & Vocational Rehabilitation 80% 80% 80% 76%Medical Related 50% 50% 50% 52%Death & Impairment Related 41% 41% 55% 59%Claims Handling Expense 12% 12% 25% 24%Overall 5% 5% 12% 24%

Earners' Account Proportion of Projected Treatment Injury Account Costs

E.9 Graph E.9 shows a comparison of the hindsight rates to the rate indicated by the levies accrued during each of the fully funded years. A definition of the hindsight rate is provided in paragraph 11.29 of this report. The graph illustrates that the amount of extra claim activity following the 2005 broadening of the definition of a treatment injury was not fully anticipated. It also illustrates that the inflationary pressures associated with social rehabilitation and medical services were not fully recognised and accounted for when setting levy rates until 2009.

Graph E.9 – Comparison of Accrued and Hindsight Fully Funded Rates per Exposure Unit

Treatment Injury AccountComparison of Accrued and Hindsight Rate Indications

Fully Funded Years 2002 - 2012

17

10 15

21 22 26

66

56 61 65

17 18

27 32

39 35

45

39 37

44

57

5-

10

20

30

40

50

60

70

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Coverage Year Ending 30 June

Agg

rega

te R

ate

Per P

erso

n

Collected Rate Per Person Hindsight Rate Per Person

Page 109 of 122

APPENDIX F – Cumulative Revenue Statement to 30 June 2012 F.1 This appendix shows for the Scheme and for each Account:

• The surplus/deficit that has emerged in each financial year separately by year of cover. The surplus/deficit is derived from the cash flows in the accident year (i.e. aggregate levy collected (excluding the residual portion), claims payments, expenses and investment returns), and the movement in the outstanding claims liability (including risk margin) and unexpired risk liability.

• The cumulative revenue statements, which show the aggregate levy collected (excluding the residual portion) for that accident year (including any positive or negative funding adjustment); cumulative claims payments and expenses to 30 June 2012; the future estimate of claims liability including risk margin and claims handling expenses; and cumulative investment returns to date to give the estimated surplus or deficit for each accident year.

F.2 The surplus or deficit can be considered as a transfer to or from the total Account for that accident year. This amount includes any planned funding adjustment in the actual levies/appropriations that were set but is effectively a revised hindsight funding adjustment. A surplus means an increase in the overall Account’s reserves and a deficit means a reduction in the overall Account’s reserves. A deficit may indicate a conscious decision to return funds during that year if the Account was, at the time, considered to be over funded.

Total Scheme F.3 The financial position generally deteriorated until 30 June 2009 due to increasing

Scheme utilisation. Since 30 June 2009 the financial position has improved significantly for all accident years due to an increased focus on Scheme sustainability and improved claims management, although the impact of the movement in discount rates on the outstanding claims liability had a negative impact on most accident years in the year to 30 June 2012.

Page 110 of 122

Table F.3 – Total Scheme Position by Accident Year Accident Year to 30 June

2006 2007 2008 2009 2010 2011 2012($000) ($000) ($000) ($000) ($000) ($000) ($000)

Surplus / (Deficit) at 30/06/2005 0Levy Income 2,338,022Investment Income 92,623Claim Paid (incl all expenses) (1,056,368)Movement in OCL (1,441,514)Movement in URL 0

Surplus / (Deficit) at 30/06/2006 (67,237) 0Levy Income 0 2,510,390Investment Income 101,855 59,827Claim Paid (incl all expenses) (507,517) (1,232,658)Movement in OCL 416,358 (1,525,377)Movement in URL 0 0

Surplus / (Deficit) at 30/06/2007 (56,541) (187,818) 0Levy Income 0 0 2,658,666Investment Income (6,964) (8,352) (4,936)Claim Paid (incl all expenses) (182,312) (581,150) (1,360,824)Movement in OCL (42,451) 157,531 (2,108,267)Movement in URL (14,596) 67,257 (584,436)

Surplus / (Deficit) at 30/06/2008 (302,864) (552,532) (1,399,798) 0Levy Income 0 0 0 3,153,098Investment Income 22,555 21,883 22,470 18,914Claim Paid (incl all expenses) (123,454) (223,243) (677,059) (1,443,781)Movement in OCL (136,567) (135,659) 239,650 (2,554,714)Movement in URL 0 0 584,436 (565,064)

Surplus / (Deficit) at 30/06/2009 (540,330) (889,551) (1,230,301) (1,391,547) 0Levy Income 0 0 0 0 3,406,034Investment Income 71,284 60,640 61,088 137,708 115,472Claim Paid (incl all expenses) (84,470) (127,857) (214,290) (590,988) (1,331,352)Movement in OCL 108,598 212,212 370,137 855,780 (2,326,871)Movement in URL 0 0 0 565,064 (105,287)

Surplus / (Deficit) at 30/06/2010 (444,917) (744,557) (1,013,365) (423,983) (242,003) 0Levy Income 0 0 0 0 0 3,967,999Investment Income 70,093 55,701 48,936 139,606 218,154 150,449Claim Paid (incl all expenses) (61,289) (82,096) (112,258) (168,204) (460,145) (1,318,120)Movement in OCL 74,884 68,458 220,125 366,955 829,595 (2,237,434)Movement in URL 0 0 0 0 105,287 0

Surplus / (Deficit) at 30/06/2011 (361,229) (702,494) (856,562) (85,626) 450,888 562,893Levy Income 0 0 0 0 0 0 4,103,601Investment Income 56,049 43,413 32,634 98,436 160,265 224,819 117,075Claim Paid (incl all expenses) (51,739) (66,037) (82,976) (99,202) (146,024) (474,294) (1,366,654)Movement in OCL (86,363) (68,895) (49,999) (10,907) 73,568 570,479 (2,350,689)Movement in URL 0 0 0 0 0 0 (68,592)

Surplus / (Deficit) at 30/06/2012 (443,282) (794,013) (956,903) (97,298) 538,696 883,898 434,741

F.4 Deficits were recorded for accident years to 2009. Since then, the financial condition

has improved significantly. This result is slightly different from that implied by Graph 11.28 as this appendix includes an allowance for the risk margin on the outstanding claims liability.

Table F.4 – Total Scheme Cumulative Revenue Statement Pre 2006 2006 2007 2008 2009 2010 2011 2012 TOTAL

($000) ($000) ($000) ($000) ($000) ($000) ($000) ($000) ($000)

Levy Income 2,338,022 2,510,390 2,658,666 3,153,098 3,406,034 3,967,999 4,103,601Investment Income 407,494 233,113 160,192 394,663 493,891 375,268 117,075

Cumulative Claims Paid (incl CHE) (1,988,531) (2,234,095) (2,343,004) (2,198,750) (1,843,753) (1,691,345) (1,262,032)Outstanding Claims Liability (1,107,055) (1,291,731) (1,328,354) (1,342,886) (1,423,708) (1,666,955) (2,350,689)Claims Incurred (3,095,585) (3,525,826) (3,671,358) (3,541,636) (3,267,461) (3,358,300) (3,612,720)

Expenses (93,213) (11,690) (104,403) (103,423) (93,769) (101,070) (173,215)

Surplus / (Deficit) (443,282) (794,013) (956,903) (97,298) 538,696 883,898 434,741

Assets 11,133,617 663,773 497,718 371,451 1,245,587 1,962,404 2,550,853 2,785,430 21,210,833Liabilities 17,885,017 1,107,055 1,291,731 1,328,354 1,342,886 1,423,708 1,666,955 2,350,689 28,396,395Net Assets (6,751,400) (443,282) (794,013) (956,903) (97,298) 538,696 883,898 434,741 (7,185,562)

Accident Year to 30 June

Page 111 of 122

Earners’ Account

F.5 The financial position deteriorated across all accident years until 30 June 2009, with the exception of the 2008 accident year, which improved significantly over 2009. Since then the financial position has improved for all accident years.

Table F.5 – Earners’ Account by Accident Year Accident Year to 30 June

2006 2007 2008 2009 2010 2011 2012($000) ($000) ($000) ($000) ($000) ($000) ($000)

Surplus / (Deficit) at 30/06/2005 0Levy Income 784,743Investment Income 26,360Claim Paid (incl all expenses) (372,422)Movement in OCL (509,172)Movement in URL 0

Surplus / (Deficit) at 30/06/2006 (70,491) 0Levy Income 0 880,215Investment Income 25,006 16,863Claim Paid (incl all expenses) (210,651) (430,610)Movement in OCL 168,318 (560,944)Movement in URL 0 0

Surplus / (Deficit) at 30/06/2007 (87,818) (94,476) 0Levy Income 0 0 990,261Investment Income 519 578 211Claim Paid (incl all expenses) (71,227) (265,837) (502,361)Movement in OCL 14,174 91,998 (808,316)Movement in URL (759) (1,400) (311,915)

Surplus / (Deficit) at 30/06/2008 (145,111) (269,137) (632,120) 0Levy Income 0 0 0 1,105,674Investment Income 5,421 5,205 5,885 4,715Claim Paid (incl all expenses) (45,685) (94,854) (319,679) (544,897)Movement in OCL (12,956) (14,328) 139,169 (1,018,712)Movement in URL 0 0 311,915 (284,697)

Surplus / (Deficit) at 30/06/2009 (198,331) (373,115) (494,829) (737,917) 0Levy Income 0 0 0 0 1,338,050Investment Income 14,677 9,913 15,127 33,156 50,516Claim Paid (incl all expenses) (29,113) (49,114) (87,370) (273,645) (465,584)Movement in OCL 51,264 104,326 194,305 468,554 (841,632)Movement in URL 0 0 0 284,697 0

Surplus / (Deficit) at 30/06/2010 (161,502) (307,991) (372,767) (225,156) 81,349 0Levy Income 0 0 0 0 0 1,509,239Investment Income 12,595 5,987 8,654 31,208 88,232 56,935Claim Paid (incl all expenses) (20,169) (30,884) (43,659) (71,265) (209,707) (453,392)Movement in OCL 29,940 35,689 78,017 148,891 353,328 (799,251)Movement in URL 0 0 0 0 0 0

Surplus / (Deficit) at 30/06/2011 (139,136) (297,198) (329,754) (116,322) 313,203 313,530 0Levy Income 0 0 0 0 0 0 1,487,337Investment Income 10,229 3,094 4,737 24,483 71,094 92,851 46,772Claim Paid (incl all expenses) (16,655) (25,007) (31,356) (38,717) (60,569) (211,064) (461,048)Movement in OCL (3,921) 12,431 23,908 13,655 49,943 273,836 (795,659)Movement in URL 0 0 0 0 0 0 (11,535)

Surplus / (Deficit) at 30/06/2012 (149,483) (306,681) (332,465) (116,901) 373,671 469,154 265,866

F.6 Deficits have been produced by accident years up to 2009, with more recent years’

experience producing surpluses. These have resulted from higher levies and a reducing claim rate. The overall financial position is now a small surplus of assets over liabilities.

Table F.6 – Earners’ Account Cumulative Revenue Statement Pre 2006 2006 2007 2008 2009 2010 2011 2012 TOTAL

($000) ($000) ($000) ($000) ($000) ($000) ($000) ($000) ($000)

Levy Income 784,743 880,215 990,261 1,105,674 1,338,050 1,509,239 1,487,337Investment Income 94,807 41,639 34,615 93,561 209,841 149,786 46,772

Cumulative Claims Paid (incl CHE) (742,542) (871,858) (954,105) (899,112) (707,597) (634,525) (432,695)Outstanding Claims Liability (262,352) (330,830) (372,917) (387,612) (438,361) (525,415) (795,659)Claims Incurred (1,004,894) (1,202,688) (1,327,021) (1,286,724) (1,145,957) (1,159,940) (1,228,354)

Expenses (24,139) (25,847) (30,320) (29,412) (28,263) (29,932) (39,888)

Surplus / (Deficit) (149,483) (306,681) (332,465) (116,901) 373,671 469,154 265,866

Assets 2,364,817 112,869 24,149 40,451 270,711 812,032 994,569 1,061,525 5,681,123Liabilities 2,228,860 262,352 330,830 372,917 387,612 438,361 525,415 795,659 5,342,005Net Assets 135,957 (149,483) (306,681) (332,465) (116,901) 373,671 469,154 265,866 339,118

Accident Year to 30 June

Page 112 of 122

Work Account

F.7 The Work Account has produced more stable results than the rest of the Scheme, with consistently decreasing claim frequencies, although the 2008 and 2009 financial years saw some deterioration in performance. This was mainly a result of an increased claim expectation built into the outstanding claims liability assessments as Scheme utilisation increased generally; in hindsight this expectation was not met.

Table F.7 – Work Account by Accident Year Accident Year to 30 June

2006 2007 2008 2009 2010 2011 2012($000) ($000) ($000) ($000) ($000) ($000) ($000)

Surplus / (Deficit) at 30/06/2005 0Levy Income 591,149Investment Income 28,159Claim Paid (incl all expenses) (183,814)Movement in OCL (396,596)Movement in URL 0

Surplus / (Deficit) at 30/06/2006 38,898 0Levy Income 0 627,266Investment Income 28,407 17,015Claim Paid (incl all expenses) (147,643) (252,159)Movement in OCL 167,099 (358,961)Movement in URL 0 0

Surplus / (Deficit) at 30/06/2007 86,761 33,161 0Levy Income 0 0 584,128Investment Income (616) (717) (128)Claim Paid (incl all expenses) (50,939) (137,373) (241,296)Movement in OCL 22,434 75,964 (444,715)Movement in URL (12,438) 70,382 (233,688)

Surplus / (Deficit) at 30/06/2008 45,202 41,417 (335,699) 0Levy Income 0 0 0 538,957Investment Income 7,616 8,649 4,984 1,421Claim Paid (incl all expenses) (31,431) (56,478) (159,712) (240,740)Movement in OCL (20,502) 299 87,007 (493,072)Movement in URL 0 0 233,688 (210,247)

Surplus / (Deficit) at 30/06/2009 886 (6,113) (169,732) (403,681) 0Levy Income 0 0 0 0 479,194Investment Income 20,621 24,683 15,008 11,761 12,440Claim Paid (incl all expenses) (22,819) (33,589) (60,033) (141,453) (217,320)Movement in OCL 18,786 52,772 90,162 202,342 (431,174)Movement in URL 0 0 0 210,247 0

Surplus / (Deficit) at 30/06/2010 17,474 37,752 (124,595) (120,784) (156,859) 0Levy Income 0 0 0 0 0 702,234Investment Income 21,783 25,746 12,821 14,754 22,182 24,366Claim Paid (incl all expenses) (16,444) (19,968) (29,255) (44,552) (104,585) (214,465)Movement in OCL 15,588 15,590 34,763 72,816 179,808 (425,945)Movement in URL 0 0 0 0 0 0

Surplus / (Deficit) at 30/06/2011 38,402 59,120 (106,266) (77,766) (59,454) 86,191Levy Income 0 0 0 0 0 0 731,683Investment Income 21,828 25,745 11,330 12,460 17,063 44,607 21,630Claim Paid (incl all expenses) (12,309) (15,116) (19,001) (22,913) (31,366) (102,858) (227,833)Movement in OCL 4,064 (5,945) (4,464) 10,343 39,072 140,330 (429,570)Movement in URL 0 0 0 0 0 0 (57,057)

Surplus / (Deficit) at 30/06/2012 51,984 63,804 (118,401) (77,875) (34,685) 168,270 38,853

F.8 Deficits were produced for accident years 2008 to 2010. Otherwise, levies have been

more than adequate, resulting in the Account being fully funded. Table F.8 is based on the annual accounts so includes gradual process claims on a “claims made” basis rather than on an incurred basis. Hence this shows the Account to have a minor surplus, rather than the deficit reported in Section 10.

Table F.8 – Work Account Cumulative Revenue Statement Pre 2006 2006 2007 2008 2009 2010 2011 2012 TOTAL

($000) ($000) ($000) ($000) ($000) ($000) ($000) ($000) ($000)

Levy Income 591,149 627,266 584,128 538,957 479,194 702,234 731,683Investment Income 127,798 101,122 44,015 40,396 51,686 68,973 21,630

Cumulative Claims Paid (incl CHE) (433,233) (481,499) (464,833) (406,502) (314,198) (273,481) (169,243)Outstanding Claims Liability (189,127) (220,282) (237,247) (207,571) (212,294) (285,615) (429,570)Claims Incurred (622,360) (701,781) (702,080) (614,073) (526,491) (559,095) (598,813)

Expenses (44,603) 37,198 (44,463) (43,156) (39,073) (43,842) (115,647)

Surplus / (Deficit) 51,984 63,804 (118,401) (77,875) (34,685) 168,270 38,853

Assets 4,103,655 241,111 284,086 118,846 129,696 177,608 453,884 468,422 5,977,310Liabilities 4,167,397 189,127 220,282 237,247 207,571 212,294 285,615 429,570 5,949,103Net Assets (63,742) 51,984 63,804 (118,401) (77,875) (34,685) 168,270 38,853 28,207

Accident Year to 30 June

Page 113 of 122

Treatment Injury Account

F.9 The Treatment Injury Account’s performance deteriorated sharply in financial years 2008 and 2009 as the impact of the expanded coverage introduced in 2005 started to take effect. Since then the performance of the accident years up to 2008 has been stable, although the discount rate fall had an impact in the most recent financial year. Later accident years benefited from more appropriate levy rates as the full effect of the coverage expansion was better understood.

Table F.9 – Treatment Injury Account by Accident Year Accident Year to 30 June

2006 2007 2008 2009 2010 2011 2012($000) ($000) ($000) ($000) ($000) ($000) ($000)

Surplus / (Deficit) at 30/06/2005 0Levy Income 92,699Investment Income 6,327Claim Paid (incl all expenses) (8,034)Movement in OCL (81,439)Movement in URL 0

Surplus / (Deficit) at 30/06/2006 9,553 0Levy Income 0 98,606Investment Income 8,916 4,781Claim Paid (incl all expenses) (13,737) (8,384)Movement in OCL (2,641) (88,027)Movement in URL 0 0

Surplus / (Deficit) at 30/06/2007 2,091 6,977 0Levy Income 0 0 108,653Investment Income (3,014) (3,261) (1,784)Claim Paid (incl all expenses) (11,584) (16,025) (13,811)Movement in OCL (55,088) (37,519) (152,374)Movement in URL (270) (297) 0

Surplus / (Deficit) at 30/06/2008 (67,864) (50,125) (59,316) 0Levy Income 0 0 0 285,033Investment Income 1,017 1,075 1,276 2,127Claim Paid (incl all expenses) (12,226) (12,995) (22,462) (12,201)Movement in OCL (42,334) (30,373) (40,694) (219,029)Movement in URL 0 0 0 0

Surplus / (Deficit) at 30/06/2009 (121,407) (92,418) (121,196) 55,931 0Levy Income 0 0 0 0 259,034Investment Income 6,554 6,837 7,483 30,678 14,288Claim Paid (incl all expenses) (7,334) (9,274) (14,888) (21,672) (13,011)Movement in OCL (7,070) 318 10,726 19,705 (243,401)Movement in URL 0 0 0 0 0

Surplus / (Deficit) at 30/06/2010 (129,257) (94,537) (117,875) 84,641 16,909 0Levy Income 0 0 0 0 0 284,522Investment Income 6,903 7,185 7,356 34,356 31,148 16,817Claim Paid (incl all expenses) (6,359) (5,269) (9,284) (9,129) (14,009) (11,001)Movement in OCL 5,126 757 10,994 29,032 49,783 (242,761)Movement in URL 0 0 0 0 0 0

Surplus / (Deficit) at 30/06/2011 (123,587) (91,865) (108,809) 138,900 83,831 47,577Levy Income 0 0 0 0 0 0 300,705Investment Income 3,883 4,146 3,989 20,947 18,646 19,250 9,840Claim Paid (incl all expenses) (6,587) (5,152) (8,863) (8,057) (11,597) (19,793) (13,995)Movement in OCL (29,655) (13,627) (25,596) (22,856) (4,666) 12,413 (295,172)Movement in URL 0 0 0 0 0 0 0

Surplus / (Deficit) at 30/06/2012 (155,947) (106,498) (139,279) 128,933 86,215 59,446 1,378

F.10 Deficits were produced for accident years up to 2008, following which the Account’s financial position has gradually improved, primarily owing to higher levies. There remains a significant unfunded portion, which is primarily responsible for the large remaining deficit.

Table F.10 – Treatment Injury Account Cumulative Revenue Statement Pre 2006 2006 2007 2008 2009 2010 2011 2012 TOTAL

($000) ($000) ($000) ($000) ($000) ($000) ($000) ($000) ($000)

Levy Income 92,699 98,606 108,653 285,033 259,034 284,522 300,705Investment Income 30,586 20,762 18,320 88,108 64,082 36,066 9,840

Cumulative Claims Paid (incl CHE) (65,247) (56,549) (68,255) (49,968) (37,431) (29,275) (13,591)Outstanding Claims Liability (213,101) (168,471) (196,943) (193,148) (198,284) (230,348) (295,172)Claims Incurred (278,348) (225,020) (265,198) (243,116) (235,715) (259,623) (308,764)

Expenses (884) (846) (1,054) (1,092) (1,185) (1,519) (403)

Surplus / (Deficit) (155,947) (106,498) (139,279) 128,933 86,215 59,446 1,378

Assets 409,490 57,154 61,973 57,665 322,082 284,499 289,795 296,550 1,779,208Liabilities 1,849,347 213,101 168,471 196,943 193,148 198,284 230,348 295,172 3,344,815Net Assets (1,439,857) (155,947) (106,498) (139,279) 128,933 86,215 59,446 1,378 (1,565,607)

Accident Year to 30 June

Page 114 of 122

Motor Vehicle Account

F.11 The Motor Vehicle Account’s position deteriorated until 2009, particularly due to improved modelling of serious injury claims, which acted to increase significantly the assessed liability. Since then there has been a general improvement, although the discount rate impact in 2012 is evident.

Table F.11 – Motor Vehicle Account by Accident Year Accident Year to 30 June

2006 2007 2008 2009 2010 2011 2012($000) ($000) ($000) ($000) ($000) ($000) ($000)

Surplus / (Deficit) at 30/06/2005 0Levy Income 305,483Investment Income 16,883Claim Paid (incl all expenses) (108,479)Movement in OCL (239,650)Movement in URL 0

Surplus / (Deficit) at 30/06/2006 (25,763) 0Levy Income 0 276,182Investment Income 21,237 9,063Claim Paid (incl all expenses) (48,875) (114,495)Movement in OCL 4,923 (260,174)Movement in URL 0 0

Surplus / (Deficit) at 30/06/2007 (48,477) (89,425) 0Levy Income 0 0 290,756Investment Income (575) (383) (199)Claim Paid (incl all expenses) (26,954) (59,391) (132,560)Movement in OCL (15,334) (11,903) (342,898)Movement in URL (613) (562) (38,833)

Surplus / (Deficit) at 30/06/2008 (91,953) (161,663) (223,734) 0Levy Income 0 0 0 346,307Investment Income 3,917 2,491 2,854 1,975Claim Paid (incl all expenses) (20,383) (32,706) (61,588) (126,997)Movement in OCL (41,554) (102,139) (59,509) (427,815)Movement in URL 0 0 38,833 (70,120)

Surplus / (Deficit) at 30/06/2009 (149,973) (294,018) (303,144) (276,650) 0Levy Income 0 0 0 0 383,552Investment Income 18,207 9,450 11,473 21,847 10,471Claim Paid (incl all expenses) (16,700) (22,026) (30,532) (52,558) (124,947)Movement in OCL 26,993 36,547 36,906 27,478 (445,395)Movement in URL 0 0 0 70,120 (105,287)

Surplus / (Deficit) at 30/06/2010 (121,473) (270,047) (285,296) (209,762) (281,607) 0Levy Income 0 0 0 0 0 590,727Investment Income 17,422 7,514 8,953 22,871 24,798 30,244Claim Paid (incl all expenses) (12,517) (17,174) (19,716) (21,743) (43,173) (115,455)Movement in OCL 25,035 7,451 63,802 88,730 94,678 (407,033)Movement in URL 0 0 0 0 105,287 0

Surplus / (Deficit) at 30/06/2011 (91,533) (272,256) (232,256) (119,905) (100,016) 98,483Levy Income 0 0 0 0 0 0 742,192Investment Income 12,452 4,456 5,339 16,038 20,903 42,351 27,513Claim Paid (incl all expenses) (10,788) (13,823) (16,556) (15,920) (22,450) (40,651) (111,777)Movement in OCL (34,391) (32,725) (30,688) 2,741 (8,619) 38,401 (436,938)Movement in URL 0 0 0 0 0 0 0

Surplus / (Deficit) at 30/06/2012 (124,259) (314,349) (274,161) (117,046) (110,182) 138,583 220,990

F.12 Only the past two accident years have produced surpluses. The Account remains in

significant deficit.

Table F.12 – Motor Vehicle Account Cumulative Revenue Statement Pre 2006 2006 2007 2008 2009 2010 2011 2012 TOTAL

($000) ($000) ($000) ($000) ($000) ($000) ($000) ($000) ($000)

Levy Income 305,483 276,182 290,756 346,307 383,552 590,727 742,192Investment Income 89,543 32,590 28,420 62,732 56,172 72,595 27,513

Cumulative Claims Paid (incl CHE) (231,612) (247,898) (243,755) (200,534) (175,236) (138,393) (101,123)Outstanding Claims Liability (273,977) (362,943) (332,386) (308,866) (359,336) (368,632) (436,938)Claims Incurred (505,590) (610,842) (576,141) (509,400) (534,573) (507,025) (538,061)

Expenses (13,695) (12,279) (17,196) (16,685) (15,333) (17,713) (10,654)

Surplus / (Deficit) (124,259) (314,349) (274,161) (117,046) (110,182) 138,583 220,990

Assets 3,666,280 149,719 48,595 58,225 191,820 249,155 507,216 657,928 5,528,937Liabilities 5,704,114 273,977 362,943 332,386 308,866 359,336 368,632 436,938 8,147,195Net Assets (2,037,834) (124,259) (314,349) (274,161) (117,046) (110,182) 138,583 220,990 (2,618,258)

Accident Year to 30 June

Page 115 of 122

Non-Earners’ Account

F.13 The Account’s position generally deteriorated until 2009, following which it has steadily improved across all accident years, although again the discount rate impact on the 2012 year is evident.

Table F.13 – Non-Earners’ Account by Accident Year Accident Year to 30 June

2006 2007 2008 2009 2010 2011 2012($000) ($000) ($000) ($000) ($000) ($000) ($000)

Surplus / (Deficit) at 30/06/2005 0Levy Income 563,948Investment Income 14,893Claim Paid (incl all expenses) (383,618)Movement in OCL (214,658)Movement in URL 0

Surplus / (Deficit) at 30/06/2006 (19,435) 0Levy Income 0 628,121Investment Income 18,288 12,105Claim Paid (incl all expenses) (86,611) (427,011)Movement in OCL 78,659 (257,271)Movement in URL 0 0

Surplus / (Deficit) at 30/06/2007 (9,098) (44,055) 0Levy Income 0 0 684,868Investment Income (3,278) (4,569) (3,036)Claim Paid (incl all expenses) (21,609) (102,524) (470,796)Movement in OCL (8,637) 38,991 (359,964)Movement in URL (516) (866) 0

Surplus / (Deficit) at 30/06/2008 (43,138) (113,023) (148,928) 0Levy Income 0 0 0 877,127Investment Income 4,584 4,464 7,471 8,675Claim Paid (incl all expenses) (13,730) (26,209) (113,618) (518,946)Movement in OCL (19,221) 10,883 113,676 (396,086)Movement in URL 0 0 0 0

Surplus / (Deficit) at 30/06/2009 (71,505) (123,886) (141,400) (29,230) 0Levy Income 0 0 0 0 946,204Investment Income 11,225 9,758 11,996 40,266 27,758Claim Paid (incl all expenses) (8,504) (13,854) (21,467) (101,659) (510,490)Movement in OCL 18,625 18,249 38,038 137,701 (365,268)Movement in URL 0 0 0 0 0

Surplus / (Deficit) at 30/06/2010 (50,159) (109,733) (112,833) 47,077 98,203 0Levy Income 0 0 0 0 0 881,277Investment Income 11,390 9,270 11,152 36,418 51,794 22,087Claim Paid (incl all expenses) (5,800) (8,801) (10,344) (21,515) (88,671) (523,808)Movement in OCL (805) 8,971 32,548 27,486 151,998 (362,444)Movement in URL 0 0 0 0 0 0

Surplus / (Deficit) at 30/06/2011 (45,374) (100,294) (79,477) 89,466 213,324 17,112Levy Income 0 0 0 0 0 0 841,684Investment Income 7,657 5,972 7,239 24,508 32,559 25,761 11,321Claim Paid (incl all expenses) (5,400) (6,940) (7,201) (13,595) (20,043) (99,927) (552,001)Movement in OCL (22,460) (29,028) (13,159) (14,789) (2,163) 105,499 (393,350)Movement in URL 0 0 0 0 0 0 0

Surplus / (Deficit) at 30/06/2012 (65,578) (130,289) (92,598) 85,591 223,677 48,444 (92,346)

F.14 Accident years up to 2008 produced deficits, followed by steady surpluses. The 2012

year produced a deficit primarily due to the impact of discount rates.

Table F.14 – Non-Earners’ Account Cumulative Revenue Statement Pre 2006 2006 2007 2008 2009 2010 2011 2012 TOTAL

($000) ($000) ($000) ($000) ($000) ($000) ($000) ($000) ($000)

Levy Income 563,948 628,121 684,868 877,127 946,204 881,277 841,684Investment Income 64,759 37,000 34,822 109,866 112,110 47,847 11,321

Cumulative Claims Paid (incl CHE) (515,896) (576,290) (612,057) (642,635) (609,291) (615,671) (545,379)Outstanding Claims Liability (168,497) (209,205) (188,861) (245,688) (215,433) (256,945) (393,350)Claims Incurred (684,393) (785,494) (800,918) (888,323) (824,724) (872,616) (938,729)

Expenses (9,892) (9,915) (11,370) (13,079) (9,914) (8,064) (6,622)

Surplus / (Deficit) (65,578) (130,289) (92,598) 85,591 223,677 48,444 (92,346)

Assets 589,375 102,919 78,916 96,263 331,279 439,110 305,389 301,004 2,244,255Liabilities 3,935,299 168,497 209,205 188,861 245,688 215,433 256,945 393,350 5,613,278Net Assets (3,345,924) (65,578) (130,289) (92,598) 85,591 223,677 48,444 (92,346) (3,369,022)

Accident Year to 30 June

Page 116 of 122

APPENDIX G – Schedule of Use and Funding G.1 The following tables show the cumulative number of claims reported and claim

payments to date as at 30 June 2012. They also provide estimates of the number of claims yet to be reported and the total estimate of outstanding claims costs (undiscounted).

G.2 Claims are grouped according to the type of claim and by coverage year, the year in which the claim occurred. The claim types are Fatal, Serious Injury, Medical Only, Time Off Work (Weekly Compensation), and Other Recovery. The past 10 coverage years are shown.

A provides the cumulative number of claims reported to 30 June 2012. B provides the estimated number of claims that have been incurred but not yet reported. C provides the estimated ultimate number of claims. This is the sum of A and B. D provides the number of exposure units for each accident year. E provides the claim frequency. This is C divided by D. F provides the cumulative amount of claims payments to 30 June 2012. G provides the estimated amount of future claims payments. H provides the estimated ultimate claim payments. This is the sum of F and G. I provides the nominal claim severity. This is H divided by C.

G.3 These splits are used to gain an additional understanding of the Scheme but are not

currently used for setting liability provisions or levies. The methodology for how projections are split by claim type is still being developed and should continue to be refined.

Page 117 of 122

Summary of Scheme Use by Type of ClaimTotal of All Accounts

Coverage Year is the Year in Which Injuries Occurred

Number of Claims Reported = [A] Estimated Incurred But Not Reported = [B]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 997 194 1,281,051 56,583 38,349 1,377,174 58 10 1,358 341 1,713 3,480 2004 1,034 188 1,301,637 59,719 39,781 1,402,359 92 13 2,289 415 2,080 4,889 2005 1,077 200 1,320,265 60,463 41,222 1,423,227 84 10 2,677 491 2,077 5,339 2006 1,158 236 1,392,251 64,065 40,832 1,498,542 106 22 3,741 618 2,785 7,272 2007 1,382 283 1,475,252 67,845 44,934 1,589,696 118 19 3,588 793 3,310 7,827 2008 1,549 325 1,517,189 69,195 46,633 1,634,891 151 19 4,291 963 2,907 8,332 2009 1,554 319 1,505,276 64,502 43,459 1,615,110 191 27 5,087 1,129 3,325 9,759 2010 1,508 251 1,431,660 55,107 37,820 1,526,346 209 44 7,562 1,504 4,376 13,696 2011 1,117 228 1,449,384 51,456 35,328 1,537,513 397 83 10,461 4,926 9,490 25,357 2012 721 162 1,359,605 43,984 22,972 1,427,444 568 154 118,055 13,488 19,717 151,982

Estimated Ultimate Number of Claims = [C] = [A] + [B] [D] Claim Frequency per 1000 People = [E] = [C] / [D]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

Population(000) Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 1,055 204 1,282,409 56,924 40,062 1,380,654 4,003 0.264 0.051 320 14.2 10.0 345 2004 1,126 201 1,303,926 60,134 41,861 1,407,248 4,078 0.276 0.049 320 14.7 10.3 345 2005 1,161 210 1,322,942 60,954 43,299 1,428,566 4,128 0.281 0.051 320 14.8 10.5 346 2006 1,264 258 1,395,992 64,683 43,617 1,505,814 4,177 0.303 0.062 334 15.5 10.4 360 2007 1,500 302 1,478,840 68,638 48,244 1,597,523 4,218 0.356 0.072 351 16.3 11.4 379 2008 1,700 344 1,521,480 70,158 49,540 1,643,223 4,255 0.400 0.081 358 16.5 11.6 386 2009 1,745 346 1,510,363 65,631 46,784 1,624,869 4,286 0.407 0.081 352 15.3 10.9 379 2010 1,717 295 1,439,222 56,611 42,196 1,540,042 4,351 0.395 0.068 331 13.0 9.7 354 2011 1,514 311 1,459,845 56,382 44,818 1,562,870 4,399 0.344 0.071 332 12.8 10.2 355 2012 1,289 316 1,477,660 57,472 42,689 1,579,426 4,458 0.289 0.071 331 12.9 9.6 354

Claim Payments ($000) = [F] Estimated Future Claim Payments ($000) = [G]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 $52,790 $118,398 $192,173 $583,828 $160,297 $1,107,487 $27,008 $1,454,200 $97,289 $549,748 $160,899 $2,289,1442004 $50,279 $130,807 $206,244 $626,140 $163,733 $1,177,204 $42,427 $2,024,567 $102,009 $574,175 $157,339 $2,900,5172005 $49,117 $116,198 $243,062 $688,280 $180,104 $1,276,761 $42,886 $1,624,801 $116,258 $700,604 $182,730 $2,667,2782006 $54,431 $124,570 $287,702 $771,933 $190,707 $1,429,343 $45,701 $1,804,482 $144,073 $814,958 $191,893 $3,001,1072007 $56,083 $134,468 $333,330 $853,385 $220,571 $1,597,838 $51,462 $2,216,631 $164,381 $887,652 $196,457 $3,516,5812008 $59,149 $115,479 $377,057 $890,909 $239,559 $1,682,152 $72,347 $1,994,450 $175,600 $976,858 $228,193 $3,447,4482009 $49,490 $88,701 $399,327 $788,907 $219,561 $1,545,986 $78,511 $2,367,685 $183,814 $951,880 $290,635 $3,872,5252010 $39,470 $67,900 $354,948 $574,928 $191,025 $1,228,272 $84,155 $2,553,954 $201,786 $873,256 $273,575 $3,986,7262011 $24,438 $45,805 $351,838 $479,731 $174,922 $1,076,734 $83,582 $2,625,125 $256,612 $1,187,129 $399,607 $4,552,0562012 $8,542 $15,134 $301,613 $269,268 $96,317 $690,873 $86,453 $2,969,109 $346,575 $1,483,635 $528,304 $5,414,077

Estimated Ultimate Claim Payments ($000) = [H] = [F] + [G] Claim Severity = [I] = [H] / [C]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 $79,798 $1,572,598 $289,462 $1,133,576 $321,196 $3,396,631 $75,607 $7,711,591 $226 $19,914 $8,017 $2,4602004 $92,705 $2,155,374 $308,253 $1,200,315 $321,073 $4,077,720 $82,335 $10,725,901 $236 $19,961 $7,670 $2,8982005 $92,003 $1,740,999 $359,320 $1,388,884 $362,834 $3,944,040 $79,245 $8,282,292 $272 $22,786 $8,380 $2,7612006 $100,132 $1,929,053 $431,775 $1,586,892 $382,600 $4,430,450 $79,242 $7,469,017 $309 $24,533 $8,772 $2,9422007 $107,545 $2,351,099 $497,711 $1,741,037 $417,028 $5,114,420 $71,703 $7,787,131 $337 $25,366 $8,644 $3,2012008 $131,496 $2,109,928 $552,657 $1,867,766 $467,751 $5,129,599 $77,341 $6,134,439 $363 $26,622 $9,442 $3,1222009 $128,002 $2,456,386 $583,140 $1,740,787 $510,196 $5,418,511 $73,349 $7,101,605 $386 $26,524 $10,905 $3,3352010 $123,625 $2,621,854 $556,734 $1,448,185 $464,600 $5,214,997 $72,008 $8,888,953 $387 $25,581 $11,010 $3,3862011 $108,020 $2,670,931 $608,451 $1,666,859 $574,529 $5,628,790 $71,362 $8,578,740 $417 $29,564 $12,819 $3,6022012 $94,995 $2,984,243 $648,188 $1,752,903 $624,621 $6,104,950 $73,704 $9,457,012 $439 $30,500 $14,632 $3,865

Page 118 of 122

Summary of Scheme Use by Type of Claim

Earners' AccountCoverage Year is the Year in Which Injuries Occurred

Number of Claims Reported = [A] Estimated Incurred But Not Reported = [B]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 198 34 431,760 31,234 9,788 473,014 28 0 665 182 299 1,174 2004 215 29 457,926 33,462 10,422 502,054 55 2 1,363 221 552 2,192 2005 220 37 458,642 34,091 10,585 503,575 36 0 1,308 258 361 1,962 2006 219 44 487,320 36,960 10,612 535,155 48 8 1,797 322 934 3,109 2007 303 64 536,657 40,496 12,108 589,628 45 1 1,700 409 1,041 3,196 2008 394 68 573,827 42,460 13,148 629,897 65 0 1,977 525 471 3,037 2009 356 61 573,226 40,569 12,206 626,418 93 0 2,414 631 681 3,820 2010 344 51 504,839 34,699 10,030 549,963 88 3 2,315 850 470 3,726 2011 142 55 509,148 32,459 9,316 551,120 235 3 3,082 3,205 455 6,981 2012 94 33 484,706 27,906 5,658 518,397 261 21 38,702 8,526 987 48,498

Estimated Ultimate Number of Claims = [C] = [A] + [B] [D] Claim Frequency per 1000 Earners = [E] = [C] / [D]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

Number of Earners

(000) FatalSerious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 226 34 432,425 31,416 10,087 474,188 1,924 0.118 0.018 225 16.3 5.24 247 2004 270 31 459,289 33,683 10,974 504,246 1,981 0.136 0.016 232 17.0 5.54 255 2005 256 37 459,950 34,349 10,946 505,537 2,048 0.125 0.018 225 16.8 5.35 247 2006 267 52 489,117 37,282 11,546 538,264 2,104 0.127 0.025 232 17.7 5.49 256 2007 348 65 538,357 40,905 13,149 592,824 2,149 0.162 0.030 251 19.0 6.12 276 2008 459 68 575,804 42,985 13,619 632,934 2,178 0.211 0.031 264 19.7 6.25 291 2009 449 61 575,640 41,200 12,887 630,238 2,184 0.206 0.028 264 18.9 5.90 289 2010 432 54 507,154 35,549 10,500 553,689 2,169 0.199 0.025 234 16.4 4.84 255 2011 377 58 512,230 35,664 9,771 558,101 2,193 0.172 0.027 234 16.3 4.46 254 2012 355 54 523,408 36,432 6,645 566,895 2,228 0.160 0.024 235 16.4 2.98 254

Claim Payments ($000) = [F] Estimated Future Claim Payments ($000) = [G]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 $22,075 $18,516 $66,517 $274,744 $31,977 $413,828 $8,202 $114,139 $42,566 $166,462 $54,998 $386,3672004 $15,604 $22,157 $73,997 $301,227 $34,934 $447,918 $19,900 $124,551 $44,337 $172,993 $57,006 $418,7882005 $16,476 $27,966 $88,119 $330,639 $37,892 $501,091 $16,134 $128,682 $45,360 $185,326 $57,785 $433,2882006 $21,709 $26,528 $106,055 $380,891 $40,694 $575,877 $20,141 $227,174 $62,295 $252,250 $48,068 $609,9292007 $22,176 $34,525 $127,960 $449,542 $49,748 $683,950 $26,059 $238,707 $77,071 $318,471 $43,129 $703,4372008 $27,093 $25,830 $150,379 $484,315 $55,394 $743,011 $38,128 $257,729 $87,389 $343,541 $59,648 $786,4332009 $22,655 $19,384 $159,613 $446,398 $50,683 $698,732 $41,884 $210,784 $95,495 $358,578 $96,564 $803,3052010 $16,728 $15,869 $128,864 $333,419 $42,331 $537,210 $41,516 $198,519 $111,750 $400,412 $130,716 $882,9132011 $6,345 $13,357 $126,535 $285,207 $38,024 $469,468 $33,131 $249,773 $124,652 $582,083 $175,454 $1,165,0942012 $1,810 $3,512 $106,187 $164,563 $17,533 $293,606 $34,892 $263,216 $147,358 $688,110 $207,413 $1,340,989

Estimated Ultimate Claim Payments ($000) = [H] = [F] + [G] Claim Severity = [I] = [H] / [C]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 $30,277 $132,655 $109,082 $441,206 $86,975 $800,195 $133,813 $3,901,610 $252 $14,044 $8,623 $1,6882004 $35,504 $146,708 $118,333 $474,220 $91,940 $866,706 $131,657 $4,731,372 $258 $14,079 $8,378 $1,7192005 $32,610 $156,648 $133,479 $515,965 $95,677 $934,379 $127,529 $4,233,722 $290 $15,021 $8,741 $1,8482006 $41,850 $253,703 $168,350 $633,142 $88,762 $1,185,806 $156,566 $4,877,725 $344 $16,983 $7,688 $2,2032007 $48,235 $273,232 $205,031 $768,013 $92,877 $1,387,387 $138,621 $4,218,786 $381 $18,775 $7,063 $2,3402008 $65,220 $283,559 $237,767 $827,855 $115,043 $1,529,444 $142,097 $4,169,980 $413 $19,259 $8,447 $2,4162009 $64,539 $230,168 $255,108 $804,976 $147,246 $1,502,037 $143,619 $3,773,252 $443 $19,538 $11,426 $2,3832010 $58,243 $214,388 $240,614 $733,831 $173,047 $1,420,122 $134,721 $3,978,963 $474 $20,643 $16,480 $2,5652011 $39,476 $263,130 $251,187 $867,291 $213,478 $1,634,562 $104,701 $4,498,509 $490 $24,318 $21,847 $2,9292012 $36,703 $266,728 $253,545 $852,673 $224,946 $1,634,594 $103,247 $4,916,387 $484 $23,405 $33,851 $2,883

Page 119 of 122

Summary of Scheme Use by Type of ClaimWork Account

Coverage Year is the Year in Which Injuries OccurredExcluding Accredited Employer Programme

Number of Claims Reported = [A] Estimated Incurred But Not Reported = [B]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 46 20 174,947 21,839 3,072 199,924 1 0 265 85 214 566 2004 50 13 174,944 22,461 3,226 200,694 1 0 394 106 232 733 2005 39 18 175,793 22,300 3,553 201,703 1 0 626 125 247 999 2006 59 12 172,055 22,527 3,589 198,242 2 0 542 150 268 962 2007 46 19 167,225 22,417 3,607 193,314 2 0 507 179 283 972 2008 34 26 166,447 21,805 3,007 191,319 3 0 746 218 285 1,252 2009 44 20 154,590 19,613 2,303 176,570 4 1 725 266 281 1,277 2010 45 13 159,156 16,934 2,058 178,206 7 4 679 363 280 1,333 2011 120 14 156,958 15,678 2,073 174,843 18 4 1,052 1,237 432 2,744 2012 28 18 140,633 13,321 1,146 155,146 34 9 11,953 3,762 1,021 16,778

Estimated Ultimate Number of Claims = [C] = [A] + [B] [D] Claim Frequency per 1000 Workers = [E] = [C] / [D]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

Number of Workers

(000) FatalSerious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 47 20 175,212 21,924 3,286 200,490 1,515 0.031 0.013 115.7 14.5 2.17 132 2004 51 13 175,338 22,567 3,458 201,427 1,555 0.033 0.009 112.7 14.5 2.22 130 2005 40 18 176,419 22,425 3,800 202,702 1,611 0.025 0.011 109.5 13.9 2.36 126 2006 61 12 172,597 22,677 3,857 199,204 1,647 0.037 0.007 104.8 13.8 2.34 121 2007 48 19 167,732 22,596 3,890 194,286 1,686 0.029 0.011 99.5 13.4 2.31 115 2008 37 26 167,193 22,023 3,292 192,571 1,729 0.021 0.015 96.7 12.7 1.90 111 2009 48 21 155,315 19,879 2,584 177,847 1,737 0.027 0.012 89.4 11.4 1.49 102 2010 52 17 159,835 17,297 2,338 179,539 1,710 0.031 0.010 93.5 10.1 1.37 105 2011 138 18 158,010 16,915 2,505 177,587 1,729 0.080 0.010 91.4 9.8 1.45 103 2012 62 27 152,586 17,083 2,167 171,924 1,756 0.035 0.015 86.9 9.7 1.23 98

Claim Payments ($000) = [F] Estimated Future Claim Payments ($000) = [G]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 $5,719 $14,980 $21,902 $237,370 $7,899 $287,870 $3,892 $51,700 $11,488 $153,853 $12,182 $233,1162004 $7,218 $10,855 $23,919 $244,438 $8,167 $294,597 $3,572 $42,077 $10,959 $113,149 $7,599 $177,3552005 $5,225 $10,795 $27,118 $261,933 $9,528 $314,599 $5,362 $74,894 $10,541 $171,863 $10,029 $272,6892006 $7,870 $6,129 $29,527 $290,506 $9,834 $343,866 $5,892 $31,202 $12,110 $199,011 $12,105 $260,3192007 $6,826 $10,044 $31,823 $298,731 $10,447 $357,871 $4,421 $60,748 $14,077 $201,647 $12,033 $292,9262008 $5,639 $12,672 $34,500 $301,314 $9,912 $364,037 $6,847 $73,688 $15,986 $246,469 $14,379 $357,3682009 $4,985 $4,234 $34,494 $261,409 $8,559 $313,680 $8,464 $29,798 $18,271 $265,106 $12,000 $333,6392010 $3,765 $4,167 $32,407 $181,407 $7,881 $229,625 $12,449 $59,763 $16,555 $219,673 $8,513 $316,9522011 $6,605 $3,788 $31,254 $147,469 $6,899 $196,016 $17,684 $83,511 $28,755 $260,641 $13,290 $403,8802012 $918 $1,965 $25,432 $80,278 $2,992 $111,585 $8,062 $74,657 $42,828 $388,202 $19,794 $533,542

Estimated Ultimate Claim Payments ($000) = [H] = [F] + [G] Claim Severity = [I] = [H] / [C]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 $9,611 $66,680 $33,390 $391,223 $20,081 $520,985 $206,290 $3,295,601 $191 $17,844 $6,110 $2,5992004 $10,789 $52,932 $34,878 $357,586 $15,766 $471,951 $212,374 $4,001,084 $199 $15,846 $4,559 $2,3432005 $10,587 $85,689 $37,659 $433,796 $19,557 $587,289 $264,480 $4,695,871 $213 $19,344 $5,146 $2,8972006 $13,762 $37,331 $41,637 $489,516 $21,939 $604,186 $225,501 $3,047,976 $241 $21,587 $5,689 $3,0332007 $11,247 $70,792 $45,900 $500,378 $22,480 $650,797 $232,540 $3,672,257 $274 $22,144 $5,779 $3,3502008 $12,487 $86,360 $50,485 $547,782 $24,291 $721,405 $336,069 $3,285,089 $302 $24,873 $7,380 $3,7462009 $13,449 $34,031 $52,765 $526,515 $20,559 $647,319 $282,574 $1,599,648 $340 $26,486 $7,955 $3,6402010 $16,213 $63,929 $48,962 $401,080 $16,393 $546,577 $310,527 $3,764,002 $306 $23,188 $7,011 $3,0442011 $24,289 $87,299 $60,009 $408,109 $20,189 $599,895 $176,123 $4,840,186 $380 $24,127 $8,059 $3,3782012 $8,980 $76,621 $68,260 $468,480 $22,786 $645,127 $144,726 $2,879,639 $447 $27,424 $10,516 $3,752

Page 120 of 122

Summary of Scheme Use by Type of ClaimMotor Vehicle Account

Coverage Year is the Year in Which Injuries Occurred

Number of Claims Reported = [A] Estimated Incurred But Not Reported = [B]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL Fatal Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 395 73 29,517 3,082 1,135 34,202 8 0 136 37 33 213 2004 419 71 31,523 3,373 1,543 36,929 9 0 177 43 46 275 2005 438 70 31,856 3,619 1,614 37,597 9 0 200 51 50 310 2006 373 83 33,725 3,947 1,554 39,682 8 0 221 58 57 345 2007 409 107 35,680 4,122 1,717 42,035 9 0 288 67 69 433 2008 420 121 32,500 4,179 1,715 38,935 10 0 346 75 81 513 2009 380 114 30,209 3,729 1,629 36,061 10 0 359 79 85 532 2010 352 106 28,069 2,956 1,355 32,838 10 0 1,969 76 742 2,796 2011 302 86 26,562 2,864 1,254 31,068 12 18 1,040 106 988 2,164 2012 249 67 23,379 2,478 922 27,095 61 40 2,961 541 1,318 4,920

Estimated Ultimate Number of Claims = [C] = [A] + [B] [D] Claim Frequency per 1000 Motor Vehicles = [E] = [C] / [D]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

Number of Motor

Vehicles Fatal Serious InjuryMedical

OnlyTime Off

Work (WC)Other

Recovery TOTAL2003 403 73 29,653 3,119 1,168 34,415 2,637 0.153 0.028 11.24 1.18 0.443 13.05 2004 428 71 31,700 3,416 1,589 37,204 2,748 0.156 0.026 11.53 1.24 0.578 13.54 2005 447 70 32,056 3,670 1,664 37,907 2,825 0.158 0.025 11.35 1.30 0.589 13.42 2006 381 83 33,946 4,005 1,611 40,027 2,919 0.131 0.028 11.63 1.37 0.552 13.71 2007 418 107 35,968 4,189 1,786 42,468 2,988 0.140 0.036 12.04 1.40 0.598 14.21 2008 430 121 32,846 4,254 1,796 39,448 3,064 0.140 0.040 10.72 1.39 0.586 12.87 2009 390 114 30,568 3,808 1,714 36,593 3,072 0.127 0.037 9.95 1.24 0.558 11.91 2010 362 106 30,038 3,032 2,097 35,634 3,078 0.118 0.034 9.76 0.99 0.681 11.58 2011 314 104 27,602 2,970 2,242 33,232 3,089 0.102 0.034 8.94 0.96 0.726 10.76 2012 310 107 26,340 3,019 2,240 32,015 3,113 0.100 0.034 8.46 0.97 0.719 10.28

Claim Payments ($000) = [F] Estimated Future Claim Payments ($000) = [G]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL Fatal Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 $20,612 $45,596 $8,419 $56,776 $9,441 $140,844 $10,919 $534,431 $4,376 $125,701 $17,028 $692,4552004 $22,569 $55,556 $8,797 $61,575 $10,518 $159,014 $14,393 $580,499 $4,774 $119,416 $21,015 $740,0962005 $21,888 $41,690 $9,742 $75,130 $11,571 $160,021 $14,555 $395,332 $5,046 $154,326 $27,359 $596,6172006 $18,134 $49,890 $10,699 $76,044 $11,630 $166,398 $15,381 $444,025 $9,463 $196,489 $36,329 $701,6862007 $19,276 $54,145 $12,145 $80,778 $13,554 $179,899 $17,423 $759,916 $6,399 $201,663 $35,002 $1,020,4032008 $19,192 $45,311 $12,791 $80,162 $12,471 $169,926 $23,505 $588,412 $5,052 $233,277 $49,074 $899,3222009 $13,030 $32,819 $12,966 $65,714 $11,528 $136,057 $22,593 $647,166 $6,280 $195,791 $45,883 $917,7142010 $10,859 $30,287 $12,020 $46,071 $9,515 $108,752 $22,514 $1,064,208 $5,460 $136,096 $34,018 $1,262,2952011 $6,942 $15,317 $11,224 $37,436 $7,484 $78,403 $24,629 $831,917 $9,758 $219,576 $51,610 $1,137,4912012 $2,992 $5,877 $9,716 $20,736 $4,090 $43,412 $30,440 $978,423 $11,230 $252,693 $59,394 $1,332,181

Estimated Ultimate Claim Payments ($000) = [H] = [F] + [G] Claim Severity = [I] = [H] / [C]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL Fatal Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 $31,531 $580,028 $12,795 $182,476 $26,469 $833,298 $78,298 $7,942,191 $431 $58,506 $22,668 $24,2132004 $36,961 $636,055 $13,570 $180,991 $31,533 $899,111 $86,450 $8,954,698 $428 $52,977 $19,844 $24,1672005 $36,443 $437,022 $14,787 $229,455 $38,930 $756,638 $81,466 $6,240,508 $461 $62,528 $23,391 $19,9602006 $33,514 $493,915 $20,162 $272,533 $47,959 $868,083 $87,921 $5,948,240 $594 $68,043 $29,776 $21,6882007 $36,699 $814,061 $18,543 $282,442 $48,556 $1,200,301 $87,693 $7,604,798 $516 $67,428 $27,181 $28,2632008 $42,697 $633,723 $17,843 $313,439 $61,546 $1,069,248 $99,215 $5,235,144 $543 $73,678 $34,271 $27,1062009 $35,623 $679,985 $19,246 $261,505 $57,412 $1,053,771 $91,439 $5,962,276 $630 $68,679 $33,503 $28,7972010 $33,373 $1,094,494 $17,480 $182,167 $43,533 $1,371,048 $92,248 $10,321,007 $582 $60,084 $20,764 $38,4762011 $31,571 $847,234 $20,982 $257,011 $59,094 $1,215,894 $100,685 $8,162,590 $760 $86,526 $26,355 $36,5882012 $33,432 $984,301 $20,946 $273,429 $63,485 $1,375,592 $107,917 $9,240,384 $795 $90,577 $28,344 $42,967

Page 121 of 122

Summary of Scheme Use by Type of ClaimNon-Earners' Account

Coverage Year is the Year in Which Injuries Occurred

Number of Claims Reported = [A] Estimated Incurred But Not Reported = [B]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 325 42 644,559 256 22,987 668,169 17 0 282 9 1,081 1,389 2004 308 48 636,916 220 23,247 660,739 19 0 351 14 1,152 1,536 2005 346 46 653,318 208 24,025 677,943 23 0 439 16 1,281 1,760 2006 461 64 696,694 220 23,989 721,428 35 0 608 25 1,406 2,074 2007 575 65 732,357 326 25,908 759,231 47 1 703 48 1,516 2,314 2008 643 67 740,332 196 27,096 768,334 56 1 904 26 1,662 2,649 2009 694 95 742,764 38 25,789 769,380 65 3 1,165 16 1,782 3,031 2010 705 63 735,012 12 23,005 758,797 75 14 1,849 30 2,086 4,054 2011 506 54 752,092 5 21,541 774,198 67 27 4,498 25 6,110 10,727 2012 320 38 706,932 7 14,657 721,954 132 44 62,887 36 14,013 77,111

Estimated Ultimate Number of Claims = [C] = [A] + [B] [D] Claim Frequency per 1000 Non-Earners = [E] = [C] / [D]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

Number ofNon-Earners

(000) FatalSerious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 342 42 644,841 265 24,068 669,558 2,079 0.164 0.020 310 0.128 11.6 322 2004 327 48 637,267 234 24,399 662,275 2,097 0.156 0.023 304 0.111 11.6 316 2005 369 46 653,757 224 25,306 679,703 2,080 0.177 0.022 314 0.108 12.2 327 2006 496 64 697,302 245 25,395 723,502 2,073 0.239 0.031 336 0.118 12.2 349 2007 622 66 733,060 374 27,424 761,545 2,069 0.300 0.032 354 0.181 13.3 368 2008 699 68 741,236 222 28,758 770,983 2,077 0.337 0.033 357 0.107 13.8 371 2009 759 98 743,929 54 27,571 772,411 2,102 0.361 0.047 354 0.026 13.1 367 2010 780 77 736,861 42 25,091 762,851 2,182 0.358 0.035 338 0.019 11.5 350 2011 573 81 756,590 30 27,651 784,925 2,206 0.260 0.037 343 0.014 12.5 356 2012 452 82 769,819 43 28,670 799,065 2,230 0.203 0.037 345 0.019 12.9 358

Claim Payments ($000) = [F] Estimated Future Claim Payments ($000) = [G]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 $2,967 $22,282 $95,259 $4,788 $104,690 $229,985 $707 $353,176 $38,391 $62,774 $54,606 $509,6532004 $2,874 $23,869 $99,444 $4,559 $103,673 $234,419 $521 $484,353 $38,767 $68,475 $36,772 $628,8882005 $3,632 $17,658 $117,885 $3,169 $113,203 $255,547 $515 $217,848 $52,754 $81,110 $49,652 $401,8802006 $4,614 $20,154 $140,885 $3,815 $118,965 $288,434 $1,570 $418,366 $56,807 $71,707 $50,158 $598,6082007 $5,849 $26,132 $160,610 $4,469 $135,756 $332,816 $937 $592,781 $57,079 $70,667 $57,165 $778,6292008 $5,771 $16,935 $178,266 $2,607 $148,437 $352,018 $1,003 $542,270 $54,969 $70,188 $50,237 $718,6672009 $6,567 $23,684 $191,003 $595 $137,932 $359,781 $1,509 $911,044 $46,265 $50,501 $35,954 $1,045,2732010 $6,726 $13,799 $180,441 $319 $121,983 $323,268 $3,360 $658,561 $47,917 $50,464 $31,586 $791,8882011 $3,773 $9,375 $181,673 $37 $115,664 $310,522 $2,931 $817,892 $63,694 $46,392 $66,486 $997,3942012 $2,413 $2,717 $159,445 $36 $69,143 $233,755 $5,756 $867,434 $116,481 $44,553 $121,587 $1,155,810

Estimated Ultimate Claim Payments ($000) = [H] = [F] + [G] Claim Severity = [I] = [H] / [C]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 $3,674 $375,458 $133,650 $67,562 $159,295 $739,639 $10,749 $8,919,408 $207 $254,775 $6,619 $1,1052004 $3,394 $508,222 $138,211 $73,034 $140,446 $863,307 $10,370 $10,563,617 $217 $312,477 $5,756 $1,3042005 $4,147 $235,506 $170,639 $84,279 $162,855 $657,427 $11,235 $5,092,141 $261 $376,109 $6,435 $9672006 $6,185 $438,520 $197,692 $75,523 $169,122 $887,042 $12,476 $6,810,539 $284 $308,229 $6,660 $1,2262007 $6,786 $618,913 $217,690 $75,135 $192,921 $1,111,444 $10,916 $9,419,546 $297 $200,861 $7,035 $1,4592008 $6,774 $559,206 $233,235 $72,795 $198,675 $1,070,685 $9,690 $8,207,284 $315 $328,402 $6,909 $1,3892009 $8,077 $934,728 $237,267 $51,097 $173,886 $1,405,055 $10,642 $9,539,223 $319 $949,337 $6,307 $1,8192010 $10,085 $672,361 $228,358 $50,783 $153,569 $1,115,156 $12,930 $8,767,576 $310 $1,196,929 $6,120 $1,4622011 $6,703 $827,267 $245,367 $46,429 $182,150 $1,307,917 $11,691 $10,235,685 $324 $1,546,266 $6,588 $1,6662012 $8,169 $870,151 $275,926 $44,589 $190,731 $1,389,565 $18,087 $10,654,136 $358 $1,027,832 $6,653 $1,739

Page 122 of 122

Summary of Scheme Use by Type of ClaimTreatment Injury Account

Coverage Year is the Year in Which Injuries Occurred

Number of Claims Reported = [A] Estimated Incurred But Not Reported = [B]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 33 25 268 172 1,367 1,865 5 10 9 28 87 139 2004 42 27 328 203 1,343 1,943 9 11 5 30 98 153 2005 34 29 656 245 1,445 2,409 15 10 104 41 138 308 2006 46 33 2,457 411 1,088 4,035 12 14 572 64 120 783 2007 49 28 3,333 484 1,594 5,488 14 17 390 89 400 911 2008 58 43 4,083 555 1,667 6,406 17 17 318 119 410 881 2009 80 29 4,487 553 1,532 6,681 20 23 424 137 496 1,099 2010 62 18 4,584 506 1,372 6,542 29 23 751 186 797 1,786 2011 47 19 4,624 450 1,144 6,284 65 31 788 352 1,505 2,741 2012 30 6 3,955 272 589 4,852 80 41 1,552 623 2,379 4,675

Estimated Ultimate Number of Claims = [C] = [A] + [B] [D] Claim Frequency per 1000 People = [E] = [C] / [D]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

Population(000) Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 38 35 277 200 1,454 2,004 4,003 0.010 0.009 0.069 0.050 0.36 0.50 2004 51 38 333 233 1,441 2,096 4,078 0.012 0.009 0.082 0.057 0.35 0.51 2005 49 39 760 286 1,583 2,717 4,128 0.012 0.009 0.184 0.069 0.38 0.66 2006 58 47 3,029 475 1,208 4,818 4,177 0.014 0.011 0.725 0.114 0.29 1.15 2007 63 45 3,723 573 1,994 6,399 4,218 0.015 0.011 0.883 0.136 0.47 1.52 2008 75 60 4,401 674 2,077 7,287 4,255 0.018 0.014 1.034 0.158 0.49 1.71 2009 100 52 4,911 690 2,028 7,780 4,286 0.023 0.012 1.146 0.161 0.47 1.82 2010 91 41 5,335 692 2,169 8,328 4,351 0.021 0.010 1.226 0.159 0.50 1.91 2011 112 50 5,412 802 2,649 9,025 4,399 0.025 0.011 1.230 0.182 0.60 2.05 2012 110 47 5,507 895 2,968 9,527 4,458 0.025 0.010 1.235 0.201 0.67 2.14

Claim Payments ($000) = [F] Estimated Future Claim Payments ($000) = [G]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 $1,418 $17,024 $77 $10,151 $6,290 $34,961 $3,288 $400,753 $468 $40,958 $22,086 $467,5532004 $2,015 $18,370 $88 $14,342 $6,441 $41,255 $4,042 $793,087 $3,172 $100,142 $34,947 $935,3902005 $1,896 $18,089 $198 $17,410 $7,911 $45,503 $6,319 $808,045 $2,558 $107,979 $37,904 $962,8042006 $2,103 $21,868 $536 $20,677 $9,584 $54,768 $2,716 $683,716 $3,398 $95,501 $45,234 $830,5652007 $1,956 $9,623 $792 $19,865 $11,066 $43,303 $2,622 $564,478 $9,755 $95,204 $49,128 $721,1872008 $1,453 $14,730 $1,122 $22,511 $13,343 $53,160 $2,864 $532,350 $12,204 $83,383 $54,854 $685,6572009 $2,254 $8,580 $1,251 $14,791 $10,860 $37,736 $4,061 $568,893 $17,502 $81,904 $100,233 $772,5942010 $1,394 $3,779 $1,216 $13,712 $9,315 $29,416 $4,317 $572,904 $20,104 $66,611 $68,742 $732,6772011 $774 $3,968 $1,151 $9,582 $6,851 $22,326 $5,207 $642,032 $29,754 $78,437 $92,767 $848,1972012 $408 $1,062 $833 $3,655 $2,558 $8,516 $7,303 $785,380 $28,679 $110,077 $120,116 $1,051,555

Estimated Ultimate Claim Payments ($000) = [H] = [F] + [G] Claim Severity = [I] = [H] / [C]Coverage

Year Ending 30 June Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL Fatal

Serious Injury

Medical Only

Time Off Work (WC)

Other Recovery TOTAL

2003 $4,706 $417,777 $545 $51,109 $28,376 $502,514 $123,536 $12,085,745 $1,965 $255,814 $19,520 $250,8062004 $6,056 $811,458 $3,260 $114,483 $41,388 $976,645 $119,683 $21,596,989 $9,795 $490,452 $28,715 $466,0042005 $8,215 $826,133 $2,755 $125,388 $45,815 $1,008,307 $168,514 $21,357,781 $3,624 $437,902 $28,942 $371,0832006 $4,820 $705,584 $3,934 $116,178 $54,818 $885,333 $82,549 $15,144,627 $1,299 $244,587 $45,363 $183,7702007 $4,579 $574,101 $10,546 $115,069 $60,194 $764,490 $72,182 $12,721,835 $2,833 $200,740 $30,183 $119,4712008 $4,318 $547,081 $13,327 $105,895 $68,198 $738,817 $57,836 $9,046,765 $3,028 $157,086 $32,840 $101,3882009 $6,315 $577,473 $18,753 $96,696 $111,093 $810,330 $63,385 $11,195,306 $3,819 $140,066 $54,787 $104,1522010 $5,711 $576,682 $21,320 $80,323 $78,057 $762,093 $63,080 $13,943,220 $3,996 $116,138 $35,979 $91,5052011 $5,980 $646,000 $30,905 $88,019 $99,618 $870,522 $53,496 $12,869,229 $5,711 $109,728 $37,604 $96,4572012 $7,711 $786,442 $29,512 $113,733 $122,674 $1,060,072 $70,167 $16,911,400 $5,359 $127,019 $41,335 $111,275

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ACC6546 November 2012 Print ISSN: 2230–2042 Online ISSN: 2230–2050