Motor accidents premiums determination guidelines practice note 2015

Part 2.3 Motor Accidents Compensation Act 1999

State Insurance Regulatory Authority

7 December 2015

1 Background

The NSW Compulsory Third-Party Insurance Scheme is privately underwritten by insurers licensed under the Motor Accidents Compensation Act 1999 (the Act). The State Insurance Regulatory Authority (SIRA¹) administers insurance premiums through the following legislative hierarchy:

• Motor Accidents Compensation Act 1999 (as amended)
• Motor Accidents Compensation Regulation 2015 (as amended)
• Motor Accidents Premiums Determination Guidelines (PDG) in force, and
• Supplementary Motor Accidents Premiums Determination Guidelines for conditional registered vehicles and unregistered vehicle permits.

Licensed insurers will need to consider each part of this legislative framework when preparing NSW CTP insurance premium filings.

2 Purpose of the PDG Practice Note

This document does not form part of the PDG. It provides information and guidance for licensed insurers in working with the PDG.

The PDG are enforceable by law whereas the Practice Note is not. This Practice Note is intended to assist licensed insurers to understand how to meet the requirements of the PDG, and to describe SIRA’s expectations for premium filings and for insurer engagement with SIRA. SIRA wishes to ensure that premium filings are prepared on the following understanding:

• projected claim costs (including associated economic assumptions and superimposed inflation assumptions) are on a central estimate basis; that is, not conservative (intentionally or unintentionally) given the requirement for filed premiums to be fully funded and not excessive
• prospective changes in claims costs as a result of changes in portfolio mix (arising from changes to the acquisition strategy, bonus and malus, competitor behaviour, etc.) and any other relevant factors are reasonable and based on sound analysis
• the expense loadings filed by insurers represent an efficient policy administration and claims handling process. This will be assessed by SIRA through benchmarking costs across insurers after taking into account different distribution strategies adopted by insurers
• the expense loadings filed by insurers are set with reference to insurers’ best estimate of expenses taking into account their current internal management budgets and internal strategies to control costs
• the profit margins and expense types included within filed expense loadings take into account the compulsory nature of the CTP product.

3 NSW CTP Insurance premiums framework

The primary objects of the Act² relating to a premium framework are to:

• promote competition in the setting of premiums
• keep premiums affordable
• ensure that insurers charge premiums that fully fund their anticipated liability, and
• that insurers, as receivers of public money that is compulsorily levied, should account for their profit margins.

To promote competition and innovation by insurers, SIRA allows risk based pricing but within limits to keep premiums affordable. The premium framework recognises that this liability scheme, which is compulsory and privately underwritten, blends risk-based and community-rated approaches. Generally, premiums reflect the underlying risk, plus or minus a subsidy, so good risks subsidise the poor risks within imposed limits. To keep insurance affordable for the poorer risks, limits are imposed via a bonus malus structure that includes an elastic gap mechanism.

The elastic gap mechanism progressively reduces the rate of maximum malus that an insurer may apply, in line with the extent to which an insurer’s filed base premium for a Sydney passenger vehicle exceeds the Reference Base Rate set by SIRA.

Conversely, the rate of maximum malus that may be applied by an insurer increases in line with the extent that an insurer’s filed base premium for a Sydney passenger vehicle is less than the Reference Base Rate. The chart below provides an example of the maximum premium and maximum malus relative to an insurer’s filed premium and Reference Base Rate. For this example, the Reference Base Rate is assumed to be $500.

This example shows that, if the Reference Base Rate is set at $500, an insurer filing a Sydney passenger vehicle base premium of $450 may charge a maximum malus of 63 per cent (or maximum Sydney passenger vehicle premium of $735), while an insurer filing a Sydney passenger vehicle base premium of $550 may only charge a maximum malus of 39 per cent (or a maximum Sydney passenger vehicle premium of $765). Overall, an insurer with a higher filed base premium is permitted a lower maximum malus rate than an insurer with a lower filed base premium.

Base premiums depend on the vehicle class and the region in NSW where the vehicle is garaged. Exceptions include where the premium is based on the:

• registration plate prefix or suffix, Taxi, State Transit Authority buses and tow truck vehicle classes, and
• specialist vehicle types including Ambulance, Fire Brigade, Police and Light Rail vehicles.

4 Premium determination process

The diagram below outlines the steps involved in determining an insurer’s premium for SIRA filing purposes.

After an insurer establishes the average premium across its own portfolio, two adjustments are made to determine its Sydney passenger vehicle base premium:

• ratio of average premium to Sydney passenger vehicle
• bonus malus factor.

These adjustments are insurer specific and based on the insurer’s own portfolio mix. Once the Sydney passenger vehicle base premium has been determined, the base premium for each vehicle class and rating region can be calculated using the Motor Accidents Schedule of Premium Relativities.

Insurer risk-rating based on approved objective rating factors is allowed within set parameters. The application of risk- rating allows an insurer to offer a range of premiums within each vehicle class and rating region. The final insurance premium for a specific vehicle class and rating region is determined depending on these individual risk-rating factors. The Motor Accidents Fund and Lifetime Care and Support levies plus GST, displayed to policyholders as a Medical Care and Injury Support (MCIS) levy, are added to the insurance premium to make up the total amount payable (no GST is payable on the MCIS levy).

The diagram below shows the components of the total CTP premium payable by policyholders.

5 Data and guidance provided by SIRA

5.1 Guidance on assumptions provided by SIRA

At any time during the year, SIRA may provide guidance on the trends and outlook for specific assumptions including claims frequency, claims cost and superimposed inflation with advice from the Scheme Actuary. Information on aspects of the claims experience may be shared with insurers.

5.2 SIRA Reference Base Rate

A key consideration in setting the Reference Base Rate is the premium affordability objective of the Act. SIRA wishes to contain the average maximum CTP premium payable for a NSW passenger vehicle³ (including MCIS levy but excluding GST) to be within 50 per cent of the average weekly earnings⁴ for NSW workers. While SIRA will set the Reference Base Rate with consideration of this benchmark, it may set it at any level at its discretion.

5.3 Premium relativities

Premium relativities for each vehicle class, relative to Class 1 Metro, and for each region are determined by SIRA and communicated to licensed insurers each year or other period as determined by SIRA.

5.4 Rounding of premiums

For each vehicle classification and premium region each of the following components will be calculated to the nearest one cent:

• Insurance premium excluding GST and MCIS levy
• GST
• Total of MCIS levy
• Total payable.

5.5 Frequency of review of guidance provided by SIRA

Unless otherwise advised by SIRA, each year SIRA will review:

• Reference Base Rate
• Premium relativities
• Permitted range for the percentage loading used in calculating some Input Tax Credit (ITC) premium rates
• Administrative costs loading for quarterly and half yearly policies, and
• Forgone investment income loading for quarterly and half yearly policies.

SIRA will undertake an immediate review of forgone investment income loadings if the annual market yield on five-year Australian Government bonds, as published by the Reserve Bank of Australia, changes by more than 2 per cent relative to the annual market yield which SIRA considered during the previous review of these parameters.

If no change to one or more of the parameters is deemed necessary, SIRA may simply confirm by letter that no change has been made.

6 Filing under Part 2.3 of the Act

A full filing must be lodged at least once each year by each licensed insurer unless SIRA allows the extension of a current filing period. All filings submitted by a licensed insurer and not rejected by SIRA will supersede the existing filing, so the current filing will expire on the effective date of the new filing in accordance with section 25(3) of the Act.

Insurers can lodge either a full⁵ or partial⁶ filing with SIRA. All filings are considered commercial in confidence.

A full filing must be for a full set of proposed premiums and can be lodged at any time at the discretion of the licensed insurer.

A partial filing can be lodged for a specific proposed premium, for example one vehicle class, or a set of proposed premiums for more than one vehicle class. A partial filing can only be lodged if the proposed premium is within the limits defined in the PDG, otherwise a full filing will need to be lodged.

The constraint on the expiry date of any partial filing to be within 12 months of the most recent approved full filing is intended to trigger engagement with SIRA to discuss emerging claims experience and any other material factors at least three months before the expiry of the current full filing (clause 6.3).

It is SIRA's intention to seek a full filing from insurers at least every 12 months, as described in the Act.

Insurers should note that the tender for ‘Conditional Registration and Unregistered Vehicle Permits’ or any subsequent premium variation is filed under Part 2.3 of the Act in accordance with the Supplementary Motor Accidents Premiums Determination Guidelines for Conditional Registration and Unregistered Vehicle Permits.

6.1 Commission

All filings need to comply with Part 2.3 of the Act. Regarding commission, insurers need to refer to:

• section 30 of the Act which refers to the maximum commission or other remuneration percentage payable to an insurer’s agent and defines ‘commission or other remuneration’ and ‘insurer’s agent’
• the Motor Accidents Compensation Regulation (that may prescribe an amended maximum commission percentage)
• the Market Practice Guidelines.

6.2 Insurer engagement with SIRA is encouraged

SIRA encourages insurers to participate in pre-filing meetings and filing lodgement meetings.

These preliminary meetings facilitate two-way engagement between SIRA and the insurers, including discussion about the context of the filing. The intention is to improve the filing lodgement and review processes by discussing the adequacy of explanation and analysis available to support the filing changes, both before the statutory six-week review period commences and when the filing is lodged. This is aimed at reducing timetable pressures that can arise following requests for additional information after filings have been submitted.

6.3 Pre-filing meetings

Each licensed insurer is encouraged to meet with SIRA for a pre-filing meeting; such meetings should take place at least two weeks before lodging a filing or three months before the expiry of the current full filing.

SIRA anticipates licensed insurers could present:

• reasons for the filing, including the analysis to support the change and/or any qualitative support such as changes to the insurer’s business strategy
• its view of the industry experience, its own experience and how its experience compares to the industry
• proposed Class 1 Metro base rate and Class 1 Metro best rate (that is, bonus of 15 per cent)
• change in the filed average premium compared to the previous full filing
• significant changes in its bonus malus structure and any proposed new rating factors
• a summary of the key assumptions and changes to them (supported by claims experience) and the impact on the proposed premiums
• material differences with the most recent NSW CTP full valuation assumptions, and
• its implementation plan based on the effective date, including systems testing and scheduling.

SIRA will provide comments to the insurer at the meeting (or soon after) on the information provided, and outline any further analysis or explanation of assumptions the insurer may need to provide. Information presented and discussed at the preliminary meeting is not binding on the insurer or SIRA.

The intention is that SIRA will gain a better understanding of the licensed insurer’s plans and proposed pricing. Likewise the licensed insurer will be fully informed of SIRA’s requirements.

6.4 Filing lodgement meetings

Each licensed insurer is encouraged to meet with SIRA when it submits either a full or partial rate filing. At this meeting the licensed insurer can present the highlights of its proposed filing, including the context of the filing, material changes from the previous full filing, and if relevant, the most recently approved partial filing since the full filing and any variations to the proposals indicated at the pre-filing meeting.

6.5 SIRA premium review process

SIRA will conduct an internal review of all filings lodged in accordance with Part 2.3 of the Act and the PDG. The extent of the review and the time taken by SIRA will be influenced by the scope of the premium changes and explanations provided, both quantitative and qualitative.

SIRA internal review is designed firstly to consider whether a filing is incomplete. SIRA will determine completeness by conducting a procedural review of the documentation and schedules required by the PDG, and confirming there is materially sufficient explanation of the assumptions and filed premium to enable a review of the quantitative and qualitative elements of the filing. SIRA may consider a filing as incomplete if it is expected that resulting delays to obtain the necessary information will not allow SIRA sufficient time to review the filing.

If a filing is classified as incomplete, SIRA will request its withdrawal and, if not withdrawn, will reject the filing. SIRA is adopting a more rigorous approach to rejecting incomplete filings taking into account the maximum six-week review period. In other words, SIRA will readily reject filings that are non-compliant based on its initial procedural review without considering the premium aspects. The expectation is that the pre-filing engagement process can minimise this risk for insurers.

Insurers need to be mindful of the importance of supplying sufficient information to SIRA such that an analysis of the filing can lead to the conclusion that the filing:

• has been based on central or best estimate assumptions where required
• satisfies the fully funded test under s. 27(8) of the Act, and
• represents a genuine effort on the part of the insurer to offer competitive premiums and thereby allows SIRA to form an opinion under s. 27 (1)(b) of the Act that the filed premium is not excessive.

SIRA expects to be able to allocate maximum time to reviewing the filing itself rather than waiting for additional information to proceed.

Once a filing has been accepted as complete, SIRA will conduct a detailed review of the analysis presented by the insurer supporting the change in premium filed to consider whether the premium has been explained to the satisfaction of SIRA.

SIRA has introduced a framework to assess the set of filed assumptions. The criteria currently used to assess the assumptions filed are:

• the materiality of the assumptions on the premium
• the extent to which the assumption is supported by analysis or has been sufficiently explained by the insurer
• the extent to which the assumptions accord with SIRA’s view of those assumptions
• the combined effect of the above and thus the overall level of acceptance of the assumptions by SIRA.

For guidance, insurers should be aware of the scale of materiality on which SIRA currently operates:

• low materiality: that premiums could be up to 2 per cent⁷ lower (or higher) than filed
• medium materiality: that premiums could be 2 per cent to 8 per cent lower (or higher) than filed
• high materiality: that premium could be more than 8 per cent lower (or higher) than filed.

SIRA may request the Scheme Actuary to review the set of assumptions underpinning a filing, assess whether the filed premium in aggregate is within a reasonable range, and consider whether it satisfies the fully funded test and any other legislative requirements.

The detailed technical review by the Scheme Actuary may include investigating the reasonableness of the:

• explanations provided for the assumptions used and the adequacy of the explanations
• dollar impact of individual assumption changes
• insurer’s assumptions against wider industry claims experience trends observed
• insurer’s assumptions against comparable peers
• insurer’s assumptions against those adopted by the Scheme Actuary
• assumptions compared with the insurer’s own reserving assumptions to assess whether the filed assumptions represent a central estimate of the future experience.

It is important to highlight that whilst each filed assumption may be initially considered in isolation, the aggregate impact of all assumption changes and claims experience trends will be used to form a view on whether or not the filed premium is fully funded, reasonable and justified.

The Scheme Actuary does not provide any recommendations on whether SIRA should accept or reject the insurer’s filing. The Scheme Actuary will, however, highlight items that when considered in isolation or in aggregate may be of concern to SIRA and require further action.

SIRA recognises that premiums are implemented in a competitive market but discourages insurers from ‘retrofitting’ claims and other actuarial assumptions to achieve a desired premium. When reviewing a filing, SIRA will consider insurers’ business plans, competitive and market positioning strategies (as disclosed in the filing), in addition to SIRA’s own analysis and the Scheme Actuary’s advice on the technical aspects of the filing.

6.6 Timing of SIRA filing response

SIRA can notify a licensed insurer of its decision about a filing any time within six weeks⁸ from the day after a premium filing has been lodged. Licensed insurers should allow for the full six-week review period when considering their implementation plans and effective dates before lodging a filing.

Insurers should not expect expedited response times from SIRA.

6.7 Charging third-party premiums

Insurers are advised that there is no express or implied power under Part 2.3 of the Act or the PDG that allows a licensed insurer to charge a premium net of commission or other remuneration to a policyholder who is not an agent of the insurer.

Insurers have explicit requirements relating to insurance agents and brokers under section 30 of the Act.

6.8 Level of explanation and justification

When considering the level of detail to be included in full or partial filings, insurers should include in a premium filing report sufficient information within the report such that an informed reader can draw the required conclusions. This level of detail and this level of criterion is comparable to the details required for a full valuation report subject to the Institute of Actuaries Professional Standard 300.

In the case of all premium filing reports, insurers must provide sufficient detail to enable SIRA to make its own assessment as to whether the filed assumptions lead to a premium that is in aggregate fully funded and not excessive.

Any chart used in a filing report must be supported with commentary on its relevance. Data underlying key charts (for example, claim frequency, claim size) must be provided in electronic format.

6.9 Adjustment of industry experience for an insurer’s own vehicle and region mix

To adjust their adopted industry experience to reflect their individual vehicle and region mix, each insurer must use the underlying actuarial work done published by SIRA in the Motor Accidents Schedule of Premium Relativities. This will allow them to determine the relativity adjustments for claim frequency and risk premium.

6.10 Provision of insurers’ insurance liability valuation report

Each insurer is to provide SIRA with a copy of its latest full valuation report relating to its NSW CTP business.

This report may be the insurer’s Insurance Liability Valuation Report (ILVR) or it may be a report and/or appendices drawn on by the group’s appointed actuary to prepare the Group ILVR. Note that two reports that may not provide sufficient detail are the insurer’s Group ILVR on its own or any roll forward valuations conducted to achieve balance date reporting deadlines; to be relevant a report must contain a ‘ground up’ analysis of claims experience.

6.11 Comparison against insurers’ full valuation assumptions

An insurer should compare filing assumptions against those adopted in the latest full liability valuation of the NSW CTP portfolio.

In reviewing this comparison, SIRA does not necessarily expect the assumptions to be the same. There are reasons why they may be different, for example:

• the way that assumptions are chosen for pricing and reserving may be different, reflecting among other things an existing portfolio versus a future portfolio
• the reserving methodology or portfolio segmentation may be different to that adopted for pricing purposes
• there may be a timing difference between the valuation work and the pricing work
• exposures considered within the valuation may be different to the exposures considered for the purpose of pricing, as a result of timing differences or portfolio composition.

If situations like these occur and lead to different assumptions, the nature of the differences will require explanation and if feasible, their impact estimated. Note that simply stating that one or other of the above points is the cause does not constitute a sufficient explanation.

It is important that the reasons for any differences are explained in the filing to demonstrate to SIRA that the rate filing assumptions are genuine central estimates of expected future experience and are appropriate for pricing purposes, whichever approach is taken for the valuation.

6.12 Provision of insurers’ management accounts

SIRA expects an insurer’s NSW CTP management accounts to include the following breakdown:

• gross written premium
• net written premium
• gross incurred claims cost (split between all prior years and current accident year)⁹
• commission
• policy administration expenses and other acquisition costs, and
• claims handling expenses.

Insurers should disclose the above breakdown to the extent it is possible given the format of their internal management accounts.

The insurer should disclose whether an undiscounted or discounted basis has been adopted for claims costs.

6.13 Analysis of superimposed inflation

SIRA requires insurers to analyse industry experience as well as their own experience for superimposed inflation, and to disclose the results in full filings.

SIRA recognises that analysis of superimposed inflation may produce volatile and inconclusive results, especially for smaller insurer portfolios. Nevertheless, SIRA requires the results to be disclosed in filings to assist with its assessment of the assumptions, unless an alternative approach can be adequately explained to SIRA.

SIRA expects historical trends as well as recent trends to be disclosed in filings to assist SIRA with its assessment of the assumptions.

SIRA expects the adopted methodology and relevant historical experience used in setting this assumption to be consistent from filing to filing unless there is good reason for a structural change in the approach.

Insurers will also need to explain why a superimposed inflation assumption has been adopted if it is counter to any guidance provided by SIRA (clause 5.1). Insurers may also explain and disclose any additional considerations relevant in setting the future superimposed inflation assumption.

6.14 Rating factors

SIRA recognises it may not always be possible for an insurer to provide empirical evidence when a new rating factor is being introduced. In these circumstances, the insurer will need to demonstrate the extent to which a proposed rating factor is pertinent using other relevant experience, for example comprehensive motor claims experience, especially if it results in a significant malus being applied to a material proportion of the cohort distinguished by the proposed rating factor.

The insurer will also have to show how the impact of the rating factor, if implemented, will be measured. SIRA expects the insurer to monitor and validate the appropriateness of the rating factor as CTP claims experience under the proposed rating structure emerges.

6.15 Discount rates used

For clarity, the following methodology for determining the risk free discount rate is adopted by SIRA:

1. derive the zero-coupon equivalent spot rate curve based on the yields of available coupon-paying Commonwealth Government Securities at the time of preparing the filing
2. derive the forward rates of interest, based on the above spot rate curve, that would apply from the average underwriting date until the average payment date of liabilities in respect of the underwriting period filed.

SIRA does not accept the spot rates available at the time of preparing the filing as a proxy for the spot rates at the average underwriting date of the period filed.

6.16 Portfolio analysis

Portfolio analysis commentary in the filing report must include an explanation of the methodology adopted to compare against the actual premium¹⁰ last paid by the policyholder.

Insurers must take into account all relevant previous full and partial filings including any explicit and consequential risk-rating changes.

• Relevant filings
  • There may be more than one relevant filing for the price change comparisons depending on the prices in-force at the time a policy was purchased.
• Treatment of non-annual policies
  • For simplicity non-annual policies can be excluded from this analysis.
• Use the price change bands desiginated in the Motor Accidents filing template.

Broad example

Renewals to be issued during the proposed filing period (assuming retention rate of 100%).

Proposed filing period 1 February 2016 to 31 January 2017.

Previous full filing period 1 November 2015 to 31 January 2016 (price changes compared to these filed prices for in force annual policies with a commencement date during this period).

Previous partial filing period 1 July 2015 to 31 October 2015 (price changes compared to these filed prices for in force annual policies with a commencement date during this period).

Previous full filing period 1 November 2014 to 31 October 2015 (price changes compared to these filed prices for in force annual policies with a commencement date between 1 February 2015 to 30 June 2015).

6.17 Penalties for non-compliance with the PDG

Generally non-compliance with the PDG will be managed through the filing review process and section 27 of the Act. SIRA's Regulatory and Enforcement Policy may be utilised depending on the circumstances.

It is a condition of a licence issued under Part 7.1 of the Act that the licensed insurer comply with the PDG. If a licensed insurer does not comply with the PDG under section 166 of the Act SIRA may impose a penalty of up to $50,000 per breach of this licence condition. Examples of non-compliance with the PDG may include, but are not limited to, a licensed insurer:

• charging a premium net of commission to a policyholder who is not an agent of the insurer
• intentionally misleading SIRA by omission or deception in relation to premium filing information
• intentionally charging the incorrect premium.

6.17 Contacting SIRA

SIRA welcomes feedback and questions relating to this Practice Note and the PDG review process.

Please direct enquiries to:

Jon Vallance, Director
Scheme Performance Branch
Motor Accidents Insurance Regulation
State Insurance Regulatory Authority

Level 25, 580 George Street
Sydney NSW 2000
E: [email protected]
T: 02 8267 1918

Footnotes

1. On 1 September 2015, the functions of the Motor Accidents Authority (MAA) were assumed by the State Insurance Regulatory Authority (SIRA)
2. Section 5 of the Act
3. Class 1 all regions
4. Average weekly ordinary time earnings (AWOTE) for full time adults in New South Wales
5. Section 26(1) of the Act
6. Section 25(3) of the Act
7. On Class 1 Metro excluding GST and levies
8. Section 25(3) of the Act
9. If reserves are on a discounted basis, the amount of unwinding of discount on prior year reserves should be disclosed if included in the management accounts
10. Including levies and GST.

Disclaimer: