Super SA. Triple S Insurance Review. November 2007

Transcription

1 PricewaterhouseCoopers Securities Ltd ACN ABN Holder of Australian Financial Services Licence No Super SA Triple S Insurance Review QV1 250 St Georges Terrace PERTH WA 6000 GPO Box D198 PERTH WA 6840 DX 77 Perth Australia Telephone Facsimile Direct Phone Direct Fax November 2007

2 Contents 1 Executive summary Introduction Insurance arrangements provided by Triple S Analysis of insurance experience Death and TPD experience Income Protection experience Profitability Reserves Overall conclusions and recommendations Reliance and limitations APPENDIX A: EXTRACT FROM SOUTHERN STATE SUPERANNUATION ACT APPENDIX B: STANDARD COVER COST AND LEVEL OF COVER APPENDIX C: IBNR CALCULATIONS FOR DEATH AND TPD INSURANCE APPENDIX D: IBNER CALCULATIONS FOR INCOME PROTECTION Page C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 2

3 1 Executive summary 1.1 This actuarial investigation of the insurance arrangements of the Triple S Scheme is required by Section 13A of the Southern State Schemes Superannuation Act This is the third actuarial investigation, the previous investigation having been carried out by Dermot Balson in a report dated 17 February We were provided with electronic data by Super SA, and we are satisfied that any errors or omissions are not material. 1.3 The benefits provided by the Scheme were improved at October 2005 and again at February We adjusted the data to include allowance for claims which had been incurred prior to 30 June 2007, but which had not been finalised. 1.5 The results of our analysis were very similar to those in the previous investigation, for both death and TPD, and Income Protection. We have found no areas of concern. 1.6 We estimate that the profitability of the current benefits would be close to break even, if the premium for death and TPD benefits had remained at $1 per week. However, we note that the Board has reduced this premium to $0.75 per week, in order to share the insurance surplus with members. The cost of this subsidy, is about $2.2 million per year, assuming current levels of additional voluntary units continue. 1.7 We have established that the Scheme needs the following reserves: (a) (b) (c) (d) (e) Claims not finalised - claims which have occurred but which have not been reported and/or finalised, estimated to be 40% of annual premium, or about $3.4 million; Income protection reserve of $5 million, to guard against the costs that will be incurred if the cover is closed to new members; Guarantees - the $20,000 minimum insurance promised to members who joined prior to 1 July 2002, estimated as $2 million; Asset resilience reserve of 15% of the insurance reserve (or about $17 million), to protect against fluctuations in the market value of the insurance reserve, which is invested substantially in growth assets like equities and property; and Prudential reserve - normal fluctuations in experience, estimated at $5 million, and also the contingency of a major catastrophe, estimated at $20-40 million, based on estimates provided by Super SA. We have adopted a mid point value of $35 million, in total. 1.8 We have tested the adequacy of current surplus to support these reserves, as follows: C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 3

4 Death and TPD Income Protection Total Notional surplus allocation Less IBNR/IBNER Less income protection reserve Less guarantee cost Less asset resilience reserve Net surplus before prudential reserve Less prudential reserve Net available surplus 49.5 Expected ongoing profit pa The last line of the table shows the expected profit level going forward. There is clearly adequate surplus to support the current rates for over 20 years Accordingly, we are satisfied that the current benefits and rates are appropriate. C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 4

5 2 Introduction 2.1 The Department of Treasury and Finance of South Australia, acting on behalf of Super SA, requested PricewaterhouseCoopers (PwC) to carry out an actuarial investigation of the insurance arrangements of the Triple S Scheme as required by Section 13A of the Southern State Schemes Superannuation Act 1994(see Appendix A). 2.2 This is the third actuarial investigation, the previous investigation having been carried out by Dermot Balson in a report dated 17 February We were provided with electronic data by Super SA, which included details of each insured member of Triple S during the period 1 July 2003 to 30 June While we cannot check the accuracy of individual records, we have tested the data for reasonableness and consistency, and we are satisfied that any errors or omissions are not material. C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 5

6 3 Insurance arrangements provided by Triple S Death and Total and Permanent Disablement (TPD) 3.1 Triple S provides Death and Total and Permanent Disablement (TPD) insurance, paid as a lump sum. There are two alternatives: (a) Standard Cover for a fixed weekly premium of $0.75, the insurance is a specific dollar amount of insurance which varies with current age, up to age 65. The default insurance is one unit of Standard cover, and members may apply for additional units, subject to evidence of good health. (b) Fixed Cover the fixed cover offers insurance up to age 65, in units of $75,000 each. The premium is also fixed, and is based on the age at which the cover is taken out. Again, members may apply for additional units, subject to evidence of good health. (c) The maximum insurance cover a member can hold is $1,000,000 or $500,000 if the employee is employed on a casual basis. 3.2 The insurance and premiums for Standard cover are included as Appendix B. 3.3 In the first year of membership, Death and TPD insurance will only be payable if death or permanent disablement arises from accidental causes. Full cover will commence 12 months from the date of joining Triple S. However, this restriction is waived for members who purchase additional units of Standard or Fixed cover, because they have already provided medical evidence. Super SA reserves the right to apply limitations on cover due to any pre-existing medical conditions. 3.4 Members of the Lump Sum and Pension Schemes who salary sacrifice into Triple S are also able to apply for Death and TPD Insurance, subject to evidence of good health. 3.5 Spouse members have the option of applying for voluntary Death insurance cover, subject to evidence of good health. The maximum insurance cover a spouse member can hold is $1,000, All members, including those who work part time, and casuals, are entitled to insurance cover. Casuals may choose not to have insurance. 3.7 Approval of a TPD benefit requires permanent incapacity for all kinds of work of at least 60% or more of total incapacity. Income protection insurance 3.8 Triple S provides Income Protection insurance, payable as a fortnightly income for a limited period following temporary disablement. C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 6

7 3.9 The benefit is 75% of salary for a period of up to 18 months, and a maximum of 24 months in some extenuating circumstances, up to age 60. The cost is 0.2% of salary Income Protection insurance is provided automatically to members who have been a contributing member of Triple S for at least a year, or who have taken out voluntary Death and TPD, or Income protection insurance Non contributory members may apply for Income Protection insurance, subject to evidence of good health Casual members and members with income protection elsewhere may opt out of Income Protection insurance. Changes since the last investigation 3.13 A number of changes have taken place in benefits since the previous actuarial report dated 17 February 2005, as follows. (a) Changes occurring at October 2005: (i) The value of Standard and Fixed units increased from $50,000 to $75,000; (ii) Death cover was extended from age 60 to age 65; (iii) (iv) The cost of a Standard unit of insurance reduced from $1 to $0.75 per week; and The cost of a Fixed unit of insurance was reduced. (b) Changes occurring at February 2007: (i) TPD cover was extended from age 60 to age 65; (ii) Members of the Lump Sum and Pension Schemes who salary sacrifice into Triple S are also able to apply for Death and TPD Insurance, subject to evidence of good health; (iii) Income Protection insurance was extended to age 60 from age 55; (iv) (v) (vi) (vii) (viii) The Income Protection benefit increased from 2/3 to 75% of salary; The Income Protection benefit payment period extended from 12 months to 18 months, with the option to extend to 24 months in some extenuating circumstances; Disablement is assessed once the member has been off work for 30 days, replacing the previous requirement that members exhaust their sick leave; Non contributory members may apply for Income Protection insurance, subject to evidence of good health; Casual members and members with income protection elsewhere may opt out of Income Protection insurance. C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 7

8 4 Analysis of insurance experience Approach 4.1 We were provided with an Access database containing details of all members of Triple S who were covered for insurance between 1 July 2003 and 30 June The previous investigation covered the period up to 30 June 2004, so the investigations overlap by one year. We considered this useful as a way of checking on the consistency of the two investigations. To further assist in this, Super SA provided us with the original data provided for the 2004 investigation. 4.2 We extracted relevant data from the database into a spreadsheet and analysed the claims experience separately for Death and TPD insurance, and Income Protection, for each of the 4 years of the investigation, and for the whole period. 4.3 We have grouped the data into 5 yearly age groups, as in the previous investigation, because there is insufficient data to produce meaningful results for individual ages. 4.4 We have examined the experience both by number of claims, and by amounts of insurance. 4.5 We have examined only Standard cover, because Fixed cover is about 2% of total insurance. 4.6 We were conscious of the fact that benefits had changed during the period, and that allowance needs to be made for this in interpreting the results, as follows: (a) (b) The changes in October 2005 increased the amount of insurance and reduced premiums, and extended death cover to age 65. The increase in insurance was automatically allowed for in the way we extracted the data, and did not require any special treatment. However, the extension of death insurance to age 65 meant that there was 18 months of death only insurance experience for the age group 60 to 65. The changes in February 2007 extended TPD cover to age 65, and made a number of changes to Income Protection insurance. It is too soon to see any material changes in claims experience for any of these changes, so we have not allowed for them, except of course in estimating future claim levels. Summary of data 4.7 The data can be briefly summarised as follows: (a) Death and TPD (i) (ii) (iii) 93,500 members 159,000 units of insurance Insurance totalling over $7 billion C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 8

9 (iv) Premiums of $6 million per annum (b) Income Protection (i) (ii) (iii) 22,500 members Payroll of $1.25 billion Premiums of $2.5 million per annum. C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 9

10 5 Death and TPD experience Adjustment for incurred but not reported (IBNR) claims 5.1 The data provided to us as at 30 June 2007 was produced towards the end of July Claims are entered on the administration system not when they occur, but when they are approved, which can take a number of months. 5.3 This means that a number of claims which occurred prior to 30 June 2007 are not included in the data, because they are still being processed. We need to estimate and include the value of these claims, to ensure we capture all claims occurring in the period under review. This is similar to the way in which accounts need to include expenses which have been accrued but not yet incurred. 5.4 We analysed the historic delay between date of claim and date of settlement. Because the date of exit shown in the data is not reliable, we were also provided with date of last employer contribution, which we were advised was suitable as an estimate of date of claim. 5.5 The results are summarised in Appendix C. We increased the number and amount of claims payable as follows: (a) 3% for (b) 37% for This increases the claim amount by about $2.4 million in total. Claims experience by number of members 5.7 The number of insured members has increased steadily over the period, but the overall age distribution has remained relatively unchanged, as shown below. Note that members over age 60 are only shown for 2006 and 2007, when they began to be covered for insurance. Number of members in each age group at 30 June 16,000 14,000 12,000 10,000 8,000 6, ,000 2, year age group centred on C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 10

11 5.8 The claim rates are as shown below: 5.9 By way of explanation: (a) (b) (c) (d) (e) The solid blue line shows the rate of claim for each age group, relative to the expected rate implied by the current insurance rates, net of expenses; The dotted blue lines show the 95% confidence interval, ie the true claim rates should be somewhere within the dotted lines with a 95% probability; The shaded bars show the number of members in each age group. The dotted confidence intervals are narrowest where there is the most data; The green line shows the equivalent rates from the investigation, which are very similar to those from and well within the dotted confidence interval. We should not forget that there is an overlap of one year in the data, but the similarities are nevertheless strong; The green line stops before age 62 because insurance ceased at age 60 at that stage. The blue lines show figures for 62 (ie ages 60-64), and the results have been adjusted to include the estimated effect had TPD been applicable since October Claims experience by amount of insurance 5.10 The amount of insurance has increased dramatically over the period, following the changes in October 2005, as shown below: C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 11

12 1,600 1,400 1,200 1, Sums insured ($m) in each age group at 30 June year age group centred on 5.11 The chart below shows the claim rates by amount of insurance, for the current premium of $0.75 per week: 5.12 This chart is similar to the chart for claims by number of members. There is an apparent change in the claim rates in the age group, but the small number of claims means that we cannot draw any conclusions We note the apparent hump in the year age group. This is due to the fact that there is a higher level of claims in this age group than the age groups on either side, but the rates are the same at all ages up to age 34. The use of level rates up to about this age is normal industry practice Apart from this, the overall claim rate of 0.10% for is close to the figure of 0.11% calculated for C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 12

13 5.15 Having said this, the overall claim rate exceeds 100% of the premiums charged to members. This is due to a deliberate decision to cut premiums in October 2005, as we will explain The previous investigation considered a number of possible benefit enhancements, including the improvements in insurance amounts which were introduced in October The estimated result of improving the insurance amounts was a slight overall loss of 5% However, when the benefits were improved in October 2005, the Board decided to use some of the substantial insurance reserves to reduce premiums for members, and the cost of insurance was cut from $1 to $0.75 per week. Accordingly, we should expect to find that the current premium rates produce a loss As a check, if we show the claims experience relative to rates based on $1 per week, we should find that the result is slightly below break even, if it is consistent with The chart below, based on a premium of $1 per week, shows that this is the case, and in fact, the results indicate a 3% loss, very similar to the figure calculated for Accordingly, we believe the results are consistent with those of the investigation We have estimated that the current premiums will incur a loss averaging $2.2 million per year. As noted above, this loss is a deliberate measure intended to distribute some of the past insurance surplus back to members. C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 13

14 Voluntary insurance and fixed insurance 5.22 We have analysed the claim levels for members who have taken out more than one unit of death and TPD cover. While some of the numbers are small and somewhat unreliable, the results clearly indicate that these members have considerably lower claim rates than members with a single unit of cover, in all age groups. This is partly attributable to the health screening applied to members who apply for additional units Based on these results and discussions with Super SA, we are satisfied that Triple S has sufficient measures in place to protect the Scheme against any member who may wish to unfairly manipulate benefits to their own advantage As noted initially, we have not analysed Fixed cover separately, because there is insufficient data to do so. Claims experience in the first year of insurance 5.25 Members are restricted to accident insurance on death or TPD in their first year of membership of Triple S, unless they take out additional units. There is insufficient data to analyse claims experience in the first year of membership, but given the fact that cover is restricted, along with the better claims experience of members who take out additional units (see paragraph 4.26), and the likelihood that new members are in good health, we are confident that the results will be extremely favourable. C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 14

15 6 Income Protection experience 6.1 The analysis of Income Protection experience is complicated by the fact that benefits were improved at February However, allowing for the lag between claim event and payments, we believe these changes will have minimal effect on the claims paid in , and accordingly, we have assumed that all claims relate to the benefits as they stood prior to February We have estimated the cost effect of the February 2007 changes in the section on profitability at the end of this report. Adjustment for incurred but not reported (IBNR) claims 6.2 As with death and TPD, claims are not entered on the system until they have been approved, and approval can take several months, so the data provided to us does not include all the claims which were incurred prior to 30 June We therefore need to adjust the data to include estimated claims which have not been finalised or reported at the time the data was provided to us. 6.3 We cannot carry out an analysis of past delays in claim processing for Income Protection, because we do not have suitable dates to work from. We used date of last employer contribution as the date of claim for death and TPD, but unfortunately, in the case of Income Protection, if members return to work, the original claim date will be overwritten by newer dates as fresh contributions are made. 6.4 We have therefore had to make a simplistic assumption based on examination of past claim patterns and our own experience of similar schemes. We have increased the number of claims for by 9% (or about $100,000) to allow for unreported claims. Adjustment for incurred but not enough reported (IBNER) claims 6.5 The claims data includes the date on which Income Protection payments will cease, or, if the date is beyond 1 July 2007, the date on which the member s medical condition will next be assessed. Clearly, many claims will continue beyond this date, so we need to adjust the dates to reflect the expected total payment period. 6.6 Once again, this is difficult because of data restrictions. However, Appendix D shows how we have calculated the estimated remaining duration of existing claims, and we have used these factors to adjust the data provided. Claims experience 6.7 The chart below shows the resulting claims experience for Income Protection, by number of members, after adjustment for IBNR. It does not include results, which were not shown by number of members, and it is not shown as a percentage of expected levels, because there is no expected level for number of claims. C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 15

16 6.8 The next chart is based on claim amounts. It is shown relative to the current expected premium level of 0.2% of salary (solid red line), and the previous expected premium level of about 0.1% of salary (dotted red line), which applied for almost all of the period under review. 6.9 Comparative figures are also included. Note that the shaded area at the back reflects payroll in each age group, and it shows how the number of contributory members increases with age The results are very consistent with those of , which not only fall well within the dotted confidence interval, but are very close to the results except at age 20-24, where there is very little data. We note that recent enhancements have increased benefit levels to a point where future claim rates are likely to be very close to premium levels, as we will show below. C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 16

17 7 Profitability Profitability of Death and TPD premiums 7.1 We have estimated the profitability of death and TPD rates as follows. 7.2 The table below shows the estimated profitability of the current rates, as well as that of the previous rates, based on membership at 30 June cover at $0.75/wk 2007 cover at $1.00/wk 2004 cover at $1.00/wk ($ 000) ($ 000) ($ 000) Premiums 6,188 8,251 8,251 Expected claims -8,060-8,060-4,899 Expenses Expected profit -2, ,952 Profit % -37% -3% 36% 7.3 The first and last columns show the cover and premium levels applicable in 2007 and in 2004 respectively. The middle column shows the situation if the premium had remained at $1 per week when cover was increased in The expense figure is based on an estimate of total claim expenses of $475,000 provided by Super SA, and the figure above represents the proportion of that figure attributable to Death and TPD. 7.5 We have increased the actual claims rate for the year age group to allow for the fact that death only cover was provided for most of the review period. 7.6 The previous investigation found that the 2004 rates were very profitable, and tested the effect of increasing insurance cover, finding that there would be a small loss of 5%. Those same increases were in fact implemented in October 2005, and the results in the middle column above show that they still result in a loss of about 3%, based on a premium of $1.00 per week. 7.7 As indicated earlier in this report, the Board has deliberately reduced premiums in order to share some of the insurance surplus with members. We estimate that the cost is of the order of $2.2 million per annum, as shown in the first column of the table. 7.8 Taking this into account, we believe the premiums are appropriate. C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 17

18 Profitability of Income Protection premiums 7.9 The table below estimates the break even premium for Income Protection. Because the current benefits have only been in place for a few months, it is necessary to estimate the effect of the recent changes, and add them to the claims experience for Previous Current Effect Premium rate benefits benefits on cost (% salary) Actual claim Rate 0.10% Benefit (as % of salary) 67% 75% 15% 0.02% Payment period 12/18 months 18/24 months 25% 0.03% Expiry age 55 years 60 years 40% 0.04% Waiting period After sick leave 30 days Nil Voluntary cover No Yes Nil Nil Administration costs 3% premium 3% premium 5% 0.01% Final expected rate 0.20% 7.10 We begin with the actual claim rate for , which we have calculated as 0.1% of salary. To this, we have added adjustments for the changes made at February These adjustments are the same as proposed in the previous investigation. We have reviewed them and we believe they remain reasonable estimates of the additional cost likely to be incurred by making these changes The result is a break even premium of 0.20% of salary, which is the current premium rate charged to members. This means that the expected profitability of Income Protection premiums is nil Accordingly, we believe the premium level is appropriate. C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 18

19 8 Reserves 8.1 The Triple S scheme needs to hold reserves because it has no recourse to the employer. We propose that they be as follows. IBNR and IBNER reserve 8.2 Our analysis has showed that some claims are not finalised, or even reported, for quite some time after they are incurred. A provision needs to be made in the Scheme accounts for these claims. Death and TPD 8.3 The previous investigation recommended holding a provision of 11% of annual premiums for death and TPD claims, assuming that data was extracted 6 months after the end of the period under measurement. 8.4 We have confirmed this figure is reasonable. However, it is more common that data is extracted immediately after the end of a period, and in this case, the provision for death and TPD would need to be about 30% of the expected annual cost, which is 133% of the current premium charged to members (since the true cost is about $1.00 per week per unit, but members are charged $0.75). Therefore, if the provision is based on actual premiums, it needs to be increased by 133%, ie to 40% of premium ($2.4 million). Income Protection 8.5 The previous investigation did not consider that a provision was necessary for Income Protection, in the belief that the claim expiry dates on the system reflected expected claim termination dates. However, we understand that these dates show the date of next medical review, and there is therefore a need for an IBNER provision to allow for the fact that some expiry dates will be extended. 8.6 In addition, we need a provision for IBNR claims which have occurred but which have not yet been assessed at the date the data is extracted. The previous investigation assumed the data would be extracted 6 months after the end of the review period, and so there would be no need for an IBNR provision. 8.7 We believe that there is a need for IBNR and IBNER provisions, even after 6 months, although it would be very small, at about 5% of premiums. More importantly, if data is extracted immediately after the end of a period, the provision would need to be about 37% of premiums. For simplicity, we propose adopting a combined rate of 40% for both Death and TPD ($2.4 million), and Income Protection ($1 million). 8.8 Consideration also needs to be given to the fact that the Income Protection premium is a flat percentage of salary, whereas the actual cost varies by age. If the benefits were ever closed off to new members, the cost would rise as the average age increased, and so there is an argument for holding a reserve against this possibility. C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 19

20 In theory, the premium rate can be varied if the average age rises, and this would be the most appropriate way to deal with such a cost increase. However, we are advised that it would be difficult in practice to vary premium rates, and accordingly, we suggest that a reserve of up to $5 million may be prudent. Guarantee reserve 8.9 Members who joined the Scheme prior to 1 July 2002 are guaranteed a minimum Death and TPD insurance benefit of $20,000, up to age 60. We understand that for purposes of calculating the guarantee, all members are assumed to have a single unit of standard cover We have estimated the cost of providing this guarantee, over and above the cost of standard insurance, for all future years, for affected members. The present value is approximately $2 million, representing the amount which should be held in reserve against the guarantee. Prudential reserve 8.11 A prudential reserve is designed to protect Triple S from exceptionally high claims in almost all circumstances. This should include both normal random fluctuations in claims, and, as far as possible, catastrophic events which incur multiple claims We have estimated the random statistical variation in claim amounts for a fund of this size for Death & TPD and Income Protection combined. For a single year, a reserve of about $2.5 million should be sufficient to protect the Scheme 95% of the time. If we look at a three year period, the reserve requirement only increases marginally to $4 million. We propose setting aside $5 million against normal claim variation, as a relatively round figure which should provide adequate protection However, the main risk is from exceptional claims, which can be caused by a variety of events, such as a hospital epidemic, terrorism, or judicial risk (eg misinforming members about their benefits). In those situations, many claims can result from a single event, which makes statistical prediction very difficult The Board has considered this risk, and has decided that the worst case would be a catastrophe affecting the buildings in which most Government employees work. The potential cost was estimated at $20-40 million, which is considered to be sufficient to cover a catastrophe of the type referred to in the previous paragraph We have adopted the mid point value of $30 million as a reasonable estimate for the catastrophe reserve. As a guide, it represents something like three times the normal annual claim level on top of normal claims Taken together with the $5 million reserve for normal claim variation, the proposed prudential reserve amounts to $35 million in total. C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 20

21 Asset resilience reserve 8.17 The insurance reserve is substantially invested in equity and property assets, whose value can fluctuate substantially. We suggest that it would be prudent to allow for this by holding an asset resilience reserve which approximates the amount by which the reserve could fall. This ensures that the true value of the insurance reserve is not overstated, even when market values fall As a guide to what constitutes a reasonable reserve, we have applied the requirements applicable to general insurance. These specify a reserve of 15% for equity and property assets, which would be about 12% of the total assets making up the insurance pool for Super SA. For prudence, we propose setting the resilience reserve slightly higher, at 15% of the insurance reserve, or nearly $17 million at 30 June Existing reserve 8.19 We note that the Scheme has an insurance reserve in excess of $111 million at 30 June Subject to the Board s decision about the level of prudential reserve, the insurance reserve appears more than adequate to protect the Scheme from most adverse events. Reserve allocation 8.21 The existing insurance reserve of $111 million at 30 June 2007 has been notionally split between Death and TPD, and Income Protection. If we allow for the reserves above, then we have the following: Death and TPD Income Protection Total Notional surplus allocation Less IBNR/IBNER Less income protection reserve Less guarantee cost Less asset resilience reserve Net surplus before prudential reserve Less prudential reserve Net available surplus 49.5 Expected ongoing profit pa C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 21

22 8.22 These figures support the decision to subsidise Death and TPD premiums, given the very large surplus for Death and TPD insurance. There is little room to subsidise Income Protection premiums or benefits, bearing in mind the small residual surplus of $4.3 million has to bear some share of the prudential reserve. C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 22

23 9 Overall conclusions and recommendations 9.1 We have analysed the insurance claims experience of Triple S over the period 1 July 2003 to 30 June 2007, and we have found the results to be very similar to those of the previous investigation. 9.2 We have analysed the claims experience separately for death and TPD cover, and for income protection cover, and we have found no areas of concern. 9.3 We have estimated the profitability of current benefits and premiums, concluding that they would be close to break even, if the death and TPD premium had remained at $1 per week, instead of being reduced to $0.75 per week. However, we understand the premium reduction was carried out to share part of the insurance surplus with members. 9.4 Accordingly, we believe that the current benefits and premiums are appropriate. n Dermot Balson FIAA Retirement Incomes and Asset Consulting Catherine Nance FIAA Retirement Incomes and Asset Consulting Authorised Representative (#265248) of PricewaterhouseCoopers Securities Ltd C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 23

24 10 Reliance and limitations 10.1 Our work has been conducted for the sole use and benefit of the Department of Treasury and Finance of South Australia (the Department) in reviewing the insurance arrangements of Triple S, and for no other purpose. No third party may use or rely on our work for any purpose Unless required by law or by the terms of our engagement letter, no copy of or extract from this report is to be distributed to third parties without our prior written consent. We may at our discretion, grant or withhold our consent or grant our consent subject to conditions No oral or written reference to the content of this report may be made by the Department to any third parties without our prior written consent. We may, at our discretion grant or withhold our consent or grant it subject to conditions Our responsibilities and liabilities are to the Department in the context of the use of our report for the purpose set out above. We do not accept any liability or responsibility in relation to the use of our report for any other purpose This report must be read in its entirety. Individual sections of this report could be misleading if considered in isolation from each other All reasonable care has been taken to provide data that is accurate. However, we have relied on a range of external sources for data. As a result, we are unable to guarantee the accuracy of the data contained in this report We are not presently aware of any circumstances that, in our view, would constitute a conflict of interest or would impair our ability to provide objective assistance during our engagement We will notify you if a conflict of interest arises during this engagement. On notification of a conflict of interest we will discuss with you our continued involvement in this engagement and/or appropriate additional procedures to preserve confidentiality and to ensure independence of advice We receive remuneration from the Department only, as detailed in our engagement letter PricewaterhouseCoopers Securities Limited, its authorised representative(s) and their associates will not receive any remuneration, commissions and benefits that might reasonably be expected to be or have been capable of influencing the representative in providing this advice PricewaterhouseCoopers Securities Limited, its authorised representative(s) and their associates do not receive any remuneration, commissions and benefits relating to referrals. C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 24

25 10.12 We have identified in the body of our report any advice that, to our knowledge, is based on incomplete and/or inaccurate information (if applicable) We are not aware of any interests, associations and relationships between PricewaterhouseCoopers Securities Limited, the authorised representative(s) and other parties which may influence the advice given. If we become aware of any, then we will notify you immediately. C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 25

26 Appendix A: Extract from Southern State Superannuation Act A Report as to cost of invalidity/death insurance benefits 1.1 The Minister must obtain a report within 12 months after 30 June 2001 and thereafter within 12 months after the end of each triennium following that date. 1.2 Each report must report on the cost of invalidity and death insurance benefits (including benefits under sections 26G and 47BA) at the time of the report and in the foreseeable future and must be prepared by an actuary (not being a member of the Board) appointed by the Minister. 1.3 The Minister must, within six sitting days after receiving a report under this section, have copies of the report laid before both Houses of Parliament. 26G Voluntary death insurance 1.1 A spouse member may, if the spouse member is the spouse of a member, apply to the Board for voluntary death insurance. 1.2 A spouse member who is not the spouse of a member is not entitled to death insurance cover and any such cover enjoyed by a spouse member will cease if the spouse member ceases to be the spouse of a member. 1.3 An application must be made in a manner approved by the Board and must specify the voluntary death insurance that the spouse member is applying for. 1.4 The applicant must provide the Board with prescribed information as to the applicant's state of health and the Board may require an applicant to provide satisfactory evidence of the state of the applicant's health. 1.5 The cost of any medical examination to which an applicant is required to submit for the purposes of subsection (4) must be paid by the applicant. 1.6 If it appears to the Board (a) (b) (c) that an applicant's state of health is such as to create a risk of premature death; or that an applicant has in the past engaged in an activity of a prescribed kind that increases the risk of premature death; or that an applicant is likely in the future to engage in an activity of a kind referred to in paragraph (b) the Board may refuse the application or may grant it on conditions (being conditions authorised by the regulations). C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 26

27 1.7 If it appears to the Board that an applicant withheld information required in relation to his or her application under this section, the Board may withhold or reduce voluntary death insurance benefits that the applicant would otherwise have been entitled to. 1.8 If the Board grants an application for voluntary death insurance or for an increase or decrease in the level of voluntary death insurance, the Board must fix the date for the (a) (b) commencement of the insurance, or of the increase or decrease in the level of insurance. 47BA Post retirement invalidity/death insurance 1.1 Subject to this section (a) (b) a public sector superannuation beneficiary may apply to the Board for invalidity/death insurance; and the spouse of a public sector superannuation beneficiary may apply to the Board for death insurance and the Board may provide such insurance, subject to the terms and conditions (if any) prescribed by regulation. 1.2 A person who is aged 65 years or over cannot apply for, and is not entitled to, invalidity or death insurance. 1.3 The amount of invalidity and death insurance benefits under this section and the amount of the premiums in respect of those benefits will be fixed by or under regulation. 1.4 The regulations may provide (a) (b) (c) for different amounts of invalidity or death insurance depending on a person's age or whether a person is employed on a full time, part time or casual basis, or is not employed, or on any other relevant factor; and for annual increases in the amount of invalidity or death insurance for the benefit of persons who wish to have annual increases in their insurance; and for the amount of premiums to be fixed by the Board. 1.5 In this section public sector superannuation beneficiary has the same meaning as in section 47B. C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 27

28 Appendix B: Standard cover Cost and level of cover 1.1 The table below shows the current Standard cover. Age last birthday One unit ($) Premium per week ($) Up to 34 75, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 28

29 Appendix C: IBNR calculations for Death and TPD insurance 1.1 The table below shows the amount of death claims paid in each year, summarised by delay in payment since date of claim. 1.2 This table calculates the additional amount paid in each 3 month period, as a percentage of the total paid up to that point. The cumulative figures underneath are used to determine an IBNR factor. The figures from the analysis are included as a comparison, and then a final set of rates is adopted. 0-3 mths 3-6 mths 6-9 mths 9-12 mths mths mths mths mths mths % 152% 113% 109% 112% 100% 100% 104% 100% % 134% 125% 117% 108% 101% 100% 100% 100% % 118% 119% 104% 107% 103% % 113% 107% 102% Total 100% 126% 114% 107% 109% 102% 100% 102% 100% Cumulative 100% 126% 144% 154% 168% 170% 170% 174% 174% IBNR Factor 174% 139% 121% 113% 104% 102% 102% 100% 100% Factor 207% 139% 122% 114% 106% 100% Adopted Factor 175% 140% 120% 113% 105% 101% 100% 100% 1.3 Bearing in mind that the data was produced very soon after 30 June 2007, we calculated the IBNR factor for as the average of the factors for 0-12 months, producing a figure of 137%. The corresponding figure for was the average of the month factors, or 103%. 1.4 A similar analysis was carried out by number of claims, and it produced similar results. 1.5 We repeated the analysis for TPD claims, and it produced lower results, eg 150% for 0-3 months, 120% for 3-6 months, and 110% for 6-9 months. The figures were much closer to the figures for death, and so we adopted the death rates shown above, for both death and TPD claims. C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 29

30 Appendix D: IBNER calculations for Income Protection 1.1 The claim cessation dates given in the data, where they are beyond 1 July 2007, are the date of the next medical review, not the expected date on which benefits will cease. The tables below estimate the adjustment required to arrive at the actual date benefits will cease. 1.2 The table below shows the number of claims completed with the durations shown, in each of the years. Number of claims with duration (months) Year starting Total 30/06/ /06/ /06/ The table below uses this data to calculate the average remaining duration for a claim with a given existing duration. The adopted rates are then averaged to give a figure applicable to claims in a three month range, eg 3-6 months, and these are used to adjust the claims data and to extend the dates shown to reflect the adopted claim periods. Remaining duration for a claim with current duration of Year starting /06/ /06/ /06/ /06/ Adopted Remaining duration for a claim with current duration in the range Mid period C:\WINDOWS\Temp\notesC4A9C8\ REP Triple S Insurance Review.doc 30