ACTUARIAL INSIGHTS INTO SELF INSURANCE

Transcription

1 ACTUARIAL INSIGHTS INTO SELF INSURANCE What Self Insurers Need to Know to Protect their Future Balance Sheet Daniel Lavender & Clive Amery 1

2 AGENDA Actuarial Role in Self Insurance Global Uncertainty Emerging Issues Case Reserving Techniques Future Challenges 2

3 WHAT DOES AN ACTUARY DO? 3

4 Unlock Client Value Personalised Advice Tailored to the Client Allow Actuary to be a Business Partner 4

5 ECONOMIC DRIVERS & GLOBAL UNCERTAINTY? Economic Drivers Claims inflation Discount rates Unemployment Direct & Indirect Effects of Economic Downturn 5

6 CLAIMS INFLATION Driven by:- Wage Inflation for Incapacity Medical CPI for Medical Superimposed Inflation Drivers of Superimposed Inflation:- Key drivers include longevity, technological advancement, new injuries, number of treatments, landmark court cases 6

7 LONG TAIL NATURE OF SELF INSURANCE Self insurance is long tail claims paid over many years Tail length varies by Scheme Longer tail = greater volatility and sensitivity to economic impacts (and superimposed inflation) 7

8 DISCOUNT RATE IMPACTS Liability Provisions Required to be discounted at risk-free rates discount rate = provision Recognised immediately Currently in very low interest rate environment Small balance sheet impact but potentially large impact on profit! *Source: RBA 8

9 OTHER POSSIBLE DISCOUNT RATE IMPACTS Exit fees may come under pressure Cost of Reinsurance (Premium rate increases for premium payers) 9

10 STRATEGIES? Forward Rates Resilience Reserving Insurance Bonds 10

11 CHARACTERISTICS OF ECONOMIC DOWNTURNS unemployment GDP interest rates During the GFC Australia technically did not enter a recession so observed impacts may be muted Theory claims frequency falls in recessions, and rises in booms *Workers Compensation and the Business Cycle, Institute for Work & Health, Canada (2009) Fewer inexperienced workers Less overtime (less exposure) Smaller workforce (use safest equipment) Workers fearing job loss may defer lodging claims Hazardous industries experience the largest decline in employment 11

12 JOB SECURITY FEARS IN ECONOMIC DOWNTURNS *Based on statistics provided by Comcare *Source: HSE UK & Statistics Canada Workers fearing job loss may defer lodging claims Presenteeism Fewer sick days taken during economic downturn 12

13 EMERGING ISSUES Ageing Workforce Mental Health 13

14 FREQUENCY & RECOVERY TIMES FOR OLDER WORKFORCE Claims frequency increases by age *Source: Compendium of OHS and Workers Compensation Statistics December 2011 Older claimants take longer to recover and return to work *Source: Safe Work Australia 2009/10 14

15 MORE FALLS & STRESS CLAIMS FOR OLDER WORKERS *Source: Compendium of OHS and Workers Compensation Statistics December 2011 Frequency generally increases by age for all mechanisms of incident Mental stress claims cost significantly more than other injuries 15

16 ISSUES FOR SELF INSURERS Further increases? Retirement savings Mature age participation Present value Higher frequency & recovery Superimposed inflation Rehab effectiveness Existing & new claims Safety & prevention focus 16

17 MENTAL STRESS CLAIMS Characteristics Lower frequency but high severity Can take several years to manifest Long recovery times Tends to depend on industry Issues to Consider Poor management of injuries can lead to mental health claims Suboptimal treatment can lead to deterioration Requires effective management Implemented strategies may not be observed for several years *Source: Compendium of OHS and Workers Compensation Statistics December

18 CASE RESERVING 18

19 CASE RESERVING PRACTICES Variety of Approaches Optimistic Pessimistic Management Perception Penalise business units Comfort levels Financial Impact No balance sheet or P&L impact Advise actuary if change approach 19

20 WHAT S RIGHT & DOES IT MATTER? Purpose Identify high cost claims Formulate strategy Improvement incentives Notify reinsurer Actuarial As a guide, not reliance Lifetime cost Consistency Leapfrog? Management Narrow view Allocate to business lines Leverage responsibility Overestimation = attention 20

21 OTHER OBSERVATIONS Volatility Cashflow Large Claims / Reinsurance Accident Year vs Financial Year 21

22 FUTURE CHALLENGES? Claim Evolution Obesity Medication dependency New injuries Technology Telecommuting Medical advancements Climate Change Extreme weather conditions Health impacts Regime Changes Insurance bonds Legislation / scheme benefits NDIS/NIIS 22

23 RECAP OF THE ISSUES 1. Discount rate movements can be significant and drive profit (or loss) however there are strategies available 2. An understanding of the drivers and implications of the ageing workforce and mental health is critical to managing claims costs 3. Case reserving practices are important for identifying problem claims early and preventing cost blow outs in the future The actuary may be the missing piece of the puzzle 23

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