Actuarial assessment of self-insurance liabilities

Transcription

1 External Guideline # 5 Actuarial assessment of self-insurance liabilities Version April 2015 Page 1 of 12

2 Contents 1. Purpose Contents of the valuation report Compliance Presentation of results using a pro forma summary Further information... 8 Appendix A Pro forma summary of valuation results... 9 Page 2 of 12

3 1. Purpose This guideline is intended to provide a self-insurer s actuary, who shall be approved by 1 (WorkSafe), a format for reporting on the actuarial valuation of a self-insurer s assessed liabilities in accordance with Part 8 of the Workplace Injury Rehabilitation and Compensation Act 2013 (WIRC Act). The guidelines are not intended to fully prescribe the requirements of the valuation of outstanding claims liabilities. Instead they provide guidance as to the detail of analysis and reporting that is expected (in addition to the requirements of Professional Standard and other relevant guidelines and codes) and provide a pro forma summary document (pro forma) for presentation of the valuation results. The self-insurer s actuary is expected to estimate the outstanding claims liability on a sound basis taking into account the specific circumstances of the self-insurer. 2. Contents of the valuation report In the report on the actuarial value of outstanding claims liabilities, the actuary must include, as a minimum, the following items: 2.1 Effective date of valuation, which is to be the self-insurer s balance date. Where the valuation analysis and projections are performed using data extracted prior to the valuation date, the date of the data extract must be specified together with the approach and assumptions used to allow for experience between extract and valuation dates. WorkSafe requires that the actuarial report note and address the requirements of PS300 regarding Estimates appropriate to the valuation date Actuarial valuation of outstanding claims liabilities as at the date of valuation and the projected value of the liabilities so assessed 12 months from the date of valuation. 2.3 Results of the valuation summarised in such a way as to readily enable WorkSafe to calculate the required amount of the self-insurer s financial guarantee. A pro forma has been developed which is to be completed by the actuary (refer to paragraph 4 of this guideline). 1 is a trading name of the Victorian WorkCover Authority. 2 Professional Standard 300, Valuations of General Insurance Claims (PS300). 3 PS300, Section Page 3 of 12

4 The amount of the guarantee is based on the actuarial valuation of the outstanding claims liabilities, together with a prospective component. A summary of the outstanding claims liability should be provided, which separately identifies the relevant claims cohorts for the guarantee calculation. These cohorts are defined in the pro-forma summary document. It is possible that additional cohorts will need to be shown where the selfinsurer or the eligible subsidiaries 4 of the self-insurer have a complex corporate and insurance history. The actuary s report should include a summary of the facts, and the basis on which the claims cohorts have been defined. The calculation of the financial guarantee is based on the assessed liability including a prospective component. The prospective component is: the value of the claims expected to arise in the 12 months after the assessment; less the payments expected to be made in that 12 months, in respect of all claims, excluding tail claims assumed under an Exit Agreement 5 entered into prior to 1/7/10. Where the amount expected to be paid exceeds the value of the claims expected to arise, the amount of the prospective component is $ A reconciliation of the data provided for the actuarial review with the claims data files provided by the self-insurer to WorkSafe. The files extracted should be for the closest available date to the self-insurer s balance date. The reconciliation should include the following: numbers of claims reported (subdivided by injury and report year) payments (subdivided by injury and payment year), with the reconciliation either of gross payments and recoveries, or of net payments numbers of claims open at the balance date (subdivided by injury year); and self-insurer case estimates on open claims (subdivided by injury year) 6. 4 Eligible subsidiary as defined under section 372 of the WIRC Act. 5 Where a self-insurance arrangement was entered into prior to 1 July 2010, assumption of tail claim liabilities was dealt with through an agreement between the self-insurer and WorkSafe, referred to as an Exit Agreement. The financial guarantee arrangements in respect of these pre-self-insurance liabilities are specified in the Exit Agreements. The terms of these Exit Agreements are preserved and are not affected by the commencement of the WIRC Act. This exclusion does not apply to Exit Agreements entered into post 1/7/10. 6 As an alternative to reconciling case estimates, reconciliation to the incurred cost (payments plus case estimates) is acceptable. Page 4 of 12

5 Where there are no material unexplained differences between past actuarial data files and EDT files submitted by the self-insurer to WorkSafe, and the current valuation data can be shown to reconcile to past data, it is acceptable to reconcile only to the latest submitted data and payment period (by injury year). 2.5 Commentary on the approach taken by the actuary to satisfy himself or herself that the overall valuation of the outstanding claims liability makes adequate allowance for large claims 7. This should include details of sensitivity testing and other testing undertaken. A summary of the past emergence and development of large claims (both numbers and amounts) is to be included in the report. The large claim threshold or definition should be determined by the actuary, taking into account factors such as the claims experience, industry statistics, the self-insurer s retention, and the individual circumstances of the self-insurer portfolio. Note that for most self-insurers, large claim experience is one of the most significant drivers of the outstanding claims valuation. Whilst it is not a requirement that a separate valuation of large claims be undertaken, the actuary is encouraged to consider this approach, together with alternatives (such as analysis by payment type). It is not considered reasonable to adopt self-insurer case estimates for existing large claims as the actuarial estimate, without consideration and analysis of the historical development of large claim estimates and/or knowledge of both the circumstances of the largest claims and the basis used by the self-insurer to establish the estimates for those claims. 2.6 Supporting data and/or commentary on the basis used to establish the allowance for claims handling expenses. It is expected that the actuary will make reasonable efforts to periodically test that the allowance made for claims handling expenses remains appropriate. To assist in establishing a reasonable allowance in the absence of self-insurer specific data, it is noted that WorkSafe claims handling expense allowance has in recent years been in the range of 11%-12% of net claims 8. 7 This includes claims reported and identified as large, those reported but not yet identified as large, and any large claims that have been incurred but not reported. 8 The range for the claims handling expense loading noted here is that applying in the period 2009 to Please refer to WorkSafe s annual report (in the notes to the accounts) for annual updates on the rate, as required. Page 5 of 12

6 2.7 Benchmark risk rate 9 for each of the last 5 years. The rate is estimated as the inflated 3. Compliance and discounted net incurred claim cost (excluding claims handling expenses and risk margin) divided by remuneration. The claims cost and remuneration components should also be shown in the report. It is suggested that actuarial reports also include the following measures, although it is not a requirement for WorkSafe s purposes: an estimate of the benchmark premium rate, being the benchmark risk rate plus an estimate of total expenses (administration costs and other expenses); and a comparison of the benchmark premium rate with the average premium rate obtained by calculating a remuneration-weighted average of the relevant scheme-insured industry rate(s). This is considered a useful indicator for selfinsurers of performance relative to scheme average performance for the industries in which they operate. Actuarial reports should comply with the relevant professional standards and guidelines of the Institute of Actuaries of Australia and other standards set for the estimation of outstanding claims liabilities. These include, but are not necessarily limited to the Professional Standard 300 Valuations of General Insurance Claims. Where such compliance is not possible the report must state the areas of, and provide justification for, non-compliance. Each actuarial report is to be signed by an actuary approved by WorkSafe. Non-compliance with any aspect of these guidelines is to be stated in the report, together with justification for the non-compliance. 9 For the purposes of estimating the benchmark risk rate, WorkSafe has determined that it is appropriate for the actuary to use assumptions consistent with WorkSafe s pricing basis. Specifically, in establishing the break-even premium for the scheme, a fixed gap is assumed between wage inflation and scheme discount rate. The assumption at the time of preparing these guidelines is provided in the pro forma (rere to Appendix A). The actuary advising the self-insurer is not compelled to adopt this basis, but variations are to be advised to WorkSafe, together with reference to supporting information in the main actuarial report. Note that these assumptions are considered appropriate only for benchmark risk rate purposes; the assumptions used in determining the estimate of the outstanding claims provision should be derived in accordance with actuarial and accounting standards. Page 6 of 12

7 4. Presentation of results using a pro forma summary In addition to the report prepared for the self-insurer, a summary of results is to be prepared for WorkSafe, using the pro forma included as Appendix A to this guideline. This pro forma has been designed to provide information WorkSafe requires for financial management and reporting purposes, including calculation of the self-insurer s financial guarantee. For this reason, the following requirements are specified: all components of the pro forma are to be completed the pro forma is to be signed by the valuation actuary. Note that the actuary taking responsibility for the valuation is required to be approved by WorkSafe; and. whilst not a common occurrence, there are instances where a self-insurer holds a guarantee for its liabilities and a separate guarantee for the tail claim liabilities of its eligible subsidiary (that was a self-insurer before the acquisition). If the actuarial valuations of both sets of liabilities are provided in the same actuarial report, then a separate pro forma is to be completed for each guarantee held or required to be held. The cohorts specified in the pro forma will be appropriate in most circumstances. It is permissible to alter the table to show additional cohorts of claims where a complex corporate or insurance history means WorkSafe requires additional cohorts for the purposes of calculating the guarantee. Other variations to the contents of the pro forma are not permitted without prior approval of WorkSafe. The pro forma includes benchmark risk rate information, used for performance assessment and comparison. These benchmark risk rates are akin to the scheme risk premium for insured employers, and WorkSafe considers it reasonable to use a pricing basis for the estimates. WorkSafe adopts long term economic assumptions and expected investment returns for pricing purposes. At the time of preparing these guidelines, a 4% real return above wage inflation is adopted for pricing purposes 10. Alternative pricing assumptions may be selected by the self-insurer s actuary, subject to provision of supporting information. 10 For pricing purposes a real return of 4% per annum has been used by the scheme actuaries since In the event that the assumed real rate of return is changed by the scheme actuaries, WorkSafe will advise all actuaries who have received approval to conduct valuations for self-insurers under the Victorian workers compensation scheme. Page 7 of 12

8 5. Further information Requests for further information relating to the actuarial assessment of self-insurance liabilities can be directed to: Director Actuarial Division 222 Exhibition Street Melbourne VIC 3000 Phone: Freecall: Page 8 of 12

9 Appendix A Pro forma summary of valuation results Self-insurer entity or ceased self-insurer entity Effective date of valuation (valuation date) Date of actuarial report Components for calculation of financial guarantee (all amounts in $ 000) Tail claims incurred prior to self-insurance [self-insurer commencing before 1/7/10] Tail claims incurred prior to self-insurance [self-insurer commencing on or after 1/7/10] Tail claims assumed by self-insurer [acquisitions of a scheme-insured body corporate on or after 1/7/10]; &/or [acquisitions of another self-insurer on or after 1/7/14] Claims incurred during period of self-insurance Net estimated outstanding claims liability 1 at valuation date Estimated incurred cost 1,2 of claims expected to arise in the 12 months following valuation date Estimated net claims payments 3 for the 12 months following valuation date A N/a N/a B C D TOTAL N/a E F N/a N/a Notes: 1. Inflated and discounted value, including claims handling expenses and before risk margin. 2. It is suggested that the estimate be discounted to the start of the accident year (for simplicity). 3. Inflated and without discounting. Financial guarantee (all amounts in $ 000) Tail claims incurred prior to self-insurance [self-insurer commencing before 1/7/10] Other tail claims [as per table above] Claims incurred during period of self-insurance Assessed liability, for guarantee purposes 4 (a) Percentage guarantee (b) A 100% B+C 150% Required amount of guarantee (a) x (b) D + greater of (E-F, 0) 150% subject to $3m min TOTAL N/a N/a Notes: 4. There is some internal inconsistency in the discounting of the components of the calculation of the assessed liability. However, the approach is designed to be consistent with other jurisdictions, to meet the goal of harmonisation of guarantee calculations. Page 9 of 12

10 Benchmark risk rate as a percentage of remuneration Injury year (for each of last 5) Net incurred claims cost 5, Remuneration 6 Benchmark risk rate excluding claims handling expenses and risk margin (a) (b) (c) = (a)/(b), as % $ 000 $ 000 % rem Notes: 5. For the purposes of determining the net incurred claims cost it is reasonable to apply a single annual discount rate for discounting of all payments (actual past payments and projected future payments) to the injury year. For discounting through past periods, it is not necessary to use a discount rate which references actual wage inflation in those periods. 6. Remuneration refers to certified remuneration which can be reasonably adjusted where the injury year definition is not based on a financial year ending 30 June. Economic assumptions for benchmark risk rate calculation Default assumptions 7 (those adopted by Worksafe) 4% real return above wage inflation (consistent with WorkSafe pricing basis for the 13/14 breakeven premium) Selected by self-insurer actuary Location of supporting information in the actuarial report (where not using default assumptions) Notes: 7. The default economic assumptions specified are based on the pricing assumptions used by WorkSafe; they are not intended to be used for reserving purpose. Alternative pricing assumptions may be selected by the self-insurer actuary, subject to provision of supporting information. Signature of valuation actuary (approved by Worksafe Victoria) Date Name of valuation actuary (print) Page 10 of 12

11 Page 11 of 12

12 Page 12 of 12