Transitional Excess Profits and Excess Losses (TEPL)

A key objective of the current compulsory third party (CTP) scheme is to ensure that insurer profits are neither excessive nor inadequate.

The transitional excess profits and excess losses (TEPL) mechanism gives the State Insurance Regulatory Authority (SIRA) the power to control the level of profit insurers earn in the NSW CTP insurance scheme, and to return any profit recouped from insurers to Green Slip policyholders through cheaper premiums.

How TEPL Works

• TEPL is a retrospective mechanism of guiding and adjusting the premiums for CTP insurance in NSW and works in conjunction with Schedule 1E of the Motor Accident Guidelines, issued annually by SIRA, which provides prospective premium guidance.
• The prospective guidance in Schedule 1E is based on forward scheme costs assumptions informed by prior years’ experience, whilst TEPL is a correction mechanism that is using actual experience for a hindsight adjustment of premiums.
• Assessments of TEPL for a particular accident period commence twelve months past the end of the accident period (calendar year) and are performed annually. SIRA publishes the outcome of each annual TEPL assessment on completion, with the last update published on 19 December 2023.
• SIRA first activated the TEPL mechanism in October 2021, to recoup $90.6 million of excess profit from insurers for the 2018 accident year. This was redistributed to NSW motorists via decrease in fund levies, contributing to an average savings of $19 on CTP policies renewed or purchased from 15 January 2022.
• In November 2022 SIRA announced that the annual TEPL assessment identified $178.7 million in excess profit from the 2018 and 2019 accident years.
• In December 2023 SIRA announced that the TEPL assessment identified a further $183.1 million in excess profit from the 2018 and 2019 accident years. In the face of the rising cost pressures, the profit is now used to maintain the affordability of CTP insurance effective 15 January 2024.

Timing of TEPL Assessments

• An insurer's expected profit (filed with SIRA when premiums are set) may differ from the actual profit realised years later when all claims are paid.
• This is because of the significant uncertainties in the scheme about the cost of claims: as claims are received and paid over many years, insurers progressively identify, with increasing certainty, the total estimated claims cost and adjust their pricing accordingly. It may take 7 to 10 years, to gain high levels of certainty (i.e. when 95% of payments are made).
• SIRA must take a prudent approach in terms of how much excess profit recovers and when – so far only amounts at levels of certainty above 80% for recovered for any accident year. As each accident year matures, the level of certainty increases as more and more claims are paid. SIRA then adjusts the amount of excess profit recovered for each accident year as applicable.
• However, it may take many years for a specific accident year to mature – for example, for the first accident year in the scheme (AY2018), only ~67% of the expected total claims payments were made, and only 56% of the expected awards of damages payments were paid at the time of the TEPL assessment cycle.
• SIRA balances the timeliness of returning excess scheme profits to customers with the risk of recovering any estimated excess scheme profit too early, which would lead to return of recovered funds to insurers if actual claims are higher than expected, impacting customers via unnecessary premium volatility.