Section 24 of the Motor Accidents Compensation Act 1999
The MAA has reviewed the operation of the premium filing approach to address some of the pressures on and issues with the current Scheme pricing, these being:
- increased public scrutiny of CTP premiums
- constraints on achieving a fully competitive market
- recent concerns specifically with the premium filing process
- the need to refresh the premium filing approach, which has been in place for more than 20 years, to reflect the current insurance environment
The objectives of the review were to:
- create a more robust filing process from both the insurer and MAA perspectives
- create a more transparent process for filings, including a process to avoid unexpected findings and results
- clarify and communicate the MAA's expectations about insurers' rate filings submissions
The Premium System review was also guided by the primary objectives of the Motor Accidents Compensation Act 1999 (the Act)1 as they relate to the premium framework, these being to:
- promote competition in the setting of premiums
- keep premiums affordable
- ensure that insurers charge premiums that fully fund their anticipated liability
- ensure that insurers, as receivers of public money that is compulsorily levied, should account for their profit margins
The MAA has been working with insurers over the past 18 months to improve the premium rate filing process and has trialled some initiatives. The revised Premiums Determination Guidelines (PDG) codify some of the initiatives trialled and introduce some further initiatives as part of the first stage of changes to the CTP premium system. The review of the premium system later this year will be the second step in this journey.
To assist insurers understand the proposed changes, they are described in the documents accompanying the PDG:
- Explanatory Note (this document) – provides the context and a high level summary of the changes to the filing process and PDG
- Practice Note (PN) – provides background information of the premium system and clarifies the MAA’s expectations on how insurers apply the PDG in practice
2. The case for change
Increased public scrutiny of CTP premiums
Since 2008, CTP premium rates in NSW have increased substantially and are now the least affordable of any state. The rising premiums have resulted in increasing public and government focus on appropriateness of premiums charged to the public, as demonstrated by:
- current and past Law and Justice Committee reviews, which have focused on insurers’ profits and claims efficiency, and have highlighted that profits have been significantly higher than filed profit margins over a protracted period, even in relatively recent underwriting periods
- the 2012-13 CTP Scheme reform process including the July 2013 Roundtable that scrutinised the MAA's role in relation to the regulation of premiums
- the government’s goal of increasing price competition in the CTP market to drive maximum operational efficiency within CTP insurers and deliver the cheapest premiums possible
Constraints on achieving a fully competitive market
In addition to the above, the MAA is aware of features within the Scheme that hinder the operation of a fully competitive market, in particular:
- the concentration of insurers operating in the CTP market, both as a whole and particularly within specific market segments
- the compulsory nature of the product, necessitating price regulations to ensure premiums are affordable and fair for NSW vehicle owners
- but at the same time obliging insurers to accept a component of community rating which runs counter to their normal approach to risk-based pricing
Recent concerns specifically with the premium filing process
The MAA, in exercising its power under s. 5(2)(d) of the Act, has trialled a more robust process for reviewing insurers’ filings over the last 18 months, requiring insurers to provide more detailed information and explanation of assumptions in their filings. This was to help assess whether:
- projected claim costs (including associated economic assumptions and superimposed inflation assumptions) were on a central estimate basis; that is, not conservative (intentionally or unintentionally) given the one-sided requirement for filed premiums to be fully funded
- prospective changes in claims frequency as a result of changes in portfolio mix (arising from changes acquisition strategy, bonus/malus, competitor behaviour, etc.) were reasonable and based on clear evidence
- expense projections were on a best estimate and the expense loadings filed represented an efficient policy administration and claims handling process by reference to benchmarking costs across insurers
In addition, the MAA has the following concerns about the current premium filing process:
- inadequate information in filings of the analysis of claims experience, past or projected, and changes in portfolio mix
- an unacceptable level of requests of insurers by the MAA for more information, partly as a result of insurers not providing all information that is requested in the PDG in their premium filings, causing time pressure on the review process
- inadequate analysis provided to justify large changes in bonus malus for targeted cohorts of policyholders
- inconsistency in the disclosure of information in filings requested in the PDG and differences between insurers’ interpretation of some requirements in the PDG
- the wide range of actuarially reasonable claim and other projection assumptions in light of the uncertainty associated with the cost of claims
- significant differences in insurers' expenses and risk profiles reflected in large variations in profitability between insurers but not in premium differences
- with the increases in premiums over the last five years, thresholds in the PDG that have been set as a percentage of premiums now representing a larger amount when expressed in dollar terms
- some insurers making additional changes to filed assumptions after the filing has been lodged, adding to the time pressure of the review process
- inadequacy of the partial filing requirements in the PDG as well as inadequacy of the information supplied by insurers for an appropriate review by the MAA. This has resulted in the MAA having to make an unacceptable level of requests for additional information.
Current approach has been in place for more than 20 years
The current approach and related guidelines adopted for premium filings have been in place for more than 20 years, with relatively small changes to the PDG over that time. A culture or understanding of how the approach operates from the perspective of the insurers and the MAA has developed over this time. A refresh of the filing process and the PDG is intended to reset requirements of the PDG and clarify the MAA’s expectations of insurers and their filings.
The proposed changes to the PDG represent the first stage of changes to the CTP premium system. The review of the premium system later this year will be the second step in this journey. The review of the CTP premium system forms part of the MAA's wider program of review of all its guidelines, instruments and regulatory processes to enhance the overall efficiency, affordability and claimant health outcomes of the Scheme.
Appendix A – Summary of the changes to the PDG
A summary of the main changes and the areas they are intended to address are shown in the table below and expanded in the following sections of this Appendix.
Clarification of the MAA's expectations of insurers and their filings
Variations in the interpretation of PDG requirements
Inconsistency between insurers on how information within filings is disclosed
Inadequate information provided to the MAA, causing inefficiencies, time delays and risk of unexpected review findings.
Assessment of whether adopted assumptions are on a central estimate basis.
Assessment of whether expenses allocated to CTP were appropriate and represent efficient administration and claims processes
Clarification of responsibility for filing assumptions, their explanation and provision of requested information in the PDG
Unintended increases to limits and thresholds over time as premiums have increased
A.1 – Clauses 4 to 7 of the PDG – Premium framework and review process
These clauses contain the following details:
- The guiding principles of the premium framework adopted in drafting the PDG are described in clause 4
- An overview of the documents to be submitted including a covering letter to be signed by the NSW CTP Product Executive are covered in clause 5. The existing CEO and Reviewing Actuary Certificates have been maintained
- The basis of rejection of filings and the MAA’s review of insurer filings which may include obtaining actuarial or other relevant advice are covered in clause 6. Importantly, the MAA’s review will focus on whether the filing satisfies the requirements of the PDG and the premium has been explained to the satisfaction of the MAA
- Clause 7 deals with charging third party premiums, and states that insurers cannot charge a premium to a policyholder net of commission where the policyholder is not an agent of the insurer
A.2 – Clause 8 of the PDG – Premium components and specified factors to be calculated
The main change to this clause is the simplification of existing formulas.
This clause covers:
- requirement for insurers to classify vehicles according to the MAA Schedule of Premium Relativities and to apply the relativities
- calculation of the base premium for a passenger vehicle in the Sydney metropolitan region (that is, Class 1 Metro)
- determination of bonus malus limits, premiums where ITC entitlements exist and loadings for short term policies
- calculation of the ratio of insurers' average premium to Class 1 Metro base premium in Schedule C
- calculation of the bonus malus factor in Schedule C
A.3 – Clause 9 of the PDG – Justifying third-party premium assumptions
This clause provides an overview of the MAA's requirements of the approach and standard analysis expected in rate filings. The key changes are:
- The onus is on insurers to explain the premiums they wish to implement. Particular note should be taken of the following:
- Risk premiums (that is, claims cost assumptions) are to be determined on a central estimate basis and not contain any implicit or explicit margins either positive or negative. This is intended to clarify the basis on which premiums are to be set
- Expenses including commission and net reinsurance cost should similarly not contain any implicit or explicit margins either positive or negative, take into account insurer’s best estimate of expenses based on current internal management budgets and internal strategies to control costs. Insurers are expected to have an efficient policy administration and claims handling process and this should be reflected in expense loadings adopted
- The MAA expects all filings to include detailed analysis of their own and industry claims experience including a comparison of their own claims experience against the industry adjusted for their mix of business by vehicle class and region
- The MAA's expectations in regard to bonus/malus are:
- levels of bonus/malus must be supported by relevant experience and/or the strategic reasons for applying them
- each risk rating factor must be objective and supported by relevant experience
- Clauses 9.4 and 9.5 set out the MAA's requirements for the supply of Insurance Liability Valuation Reports (ILVR) and CTP business plans and management accounts. In particular:
- Insurers must supply the full ILVR report including all appendices and ancillary reports that relate to NSW CTP business. The Group ILVR or roll forward valuations are not acceptable
- Insurers must compare and explain the differences in specific assumptions between the filed assumptions and those adopted in the latest IVLR report
- Insurers must compare filed expense assumptions with budget and actual past expenses
- Clause 9.6 sets out the basis on which discount rates are to be derived.
- Capital allocation and profit margin in clause 9.7 has been updated and further clarification provided.
A.4 – Clause 10 of the PDG – Full filing report, and Clause 11 – Schedules to the filing
Clause 10 sets out the MAA's minimum requirements of the contents of the insurer's premium filing report, with key changes being:
- inclusion of the relativities of insurers' claim frequency and average claim size to the industry, with adjustment for insurers' mix of business
- disclosure of analysis of superimposed inflation for the insurer and the industry, and the analysis to cover a minimum of the most recent 10 years of experience
- clarification of details of expense information required
- details of portfolio analysis required
- the use of $5 bands (excluding GST and the MCIS levy) instead of 5 per cent when assessing the impact on policyholder premiums for all policies to be issued a renewal notice and the vehicle classes where this must be performed
- details of the requirements of the comparison between the assumptions adopted in the filing compared to the previous filing
- inclusion of a covering letter to be signed by the CTP Product Manager and the matters to be covered in the letter
- minor changes to the Schedules
Templates may be provided to insurers to facilitate the supply of standard information in rate filings.
A.5 – Clause 12 of the PDG – Partial filing report
This clause sets out the conditions the insurer must satisfy to submit a partial filing and the details required in the partial filing. The main changes to the existing PDG are:
- The existing 5 per cent limit in premium change has been replaced by a 4 per cent change in either the average premium or base premium (Class 1 Metro) both excluding GST and the MCIS levy compared to the most recent full filing not rejected by the MAA.
- The level of explanation of assumptions changes is to be similar to full filings.
A.6 – Clauses 13 – Other MAA documents, and Clause 14 – Penalties for non-compliance
These clauses refer to the other documents referred to in the PDG the MAA will publish that insurers are required to adopt in their premium filings, and the penalties applicable to insurers for non-compliance with the PDG.
A.7 – Schedule C, CEO and Reviewing Actuary Certificates
Details of Schedule C, CEO and Reviewing Actuary Certificates required to be submitted to the MAA with the premium filing are contained at the end of the PDG.
Appendix B – Summary of Practice Note (PN)
The contents of the PN are summarised in the following sections of this Appendix. Some of the details of the previous PDG have been moved to the PN and additional explanations have been included.
B.1 – Sections 1 and 2 – Background and purpose of the PN
The main matters to note in these sections are:
- The PDG is enforceable by law so some of the language has changed, for example, 'expected' to 'must'. In comparison, the PN is not enforceable
- The intention of the PN is to assist insurers to understand the PDG and the MAA's expectations for premium filings
- Summary of a more robust review of premium filings and the matters the MAA is focused on in reviewing filings.
B.2 – Sections 3 and 4 – Insurance premiums framework and premium determination process
Section 3 provides an overview of the NSW CTP premium system including the operation of the elastic gap.
Section 4 provides an overview of the components of the premiums.
B.3 – Section 5 – Data and guidance provided by the MAA
This section contains:
- advice that the MAA may provide guidance to insurers on the trends and outlook for specific assumptions
- information about the MAA's objective to contain the average maximum passenger vehicle premiums to be less than 50 per cent of average weekly wages. This is the benchmark for premium affordability and will be used to update the Reference Base Rate on a regular basis
- details of matters previously included in the PDG including the Reference Base Rate, rounding of premiums and items supplied by the MAA including the Schedule of Premium Relativities.
B.4 – Section 6 – Filings under Part 2.3 of the Act
This section of the PN covers details of the premium filing and review process including:
- expectations of the engagement between insurers and the MAA including pre-filing meetings and filing lodgement meetings, and the details the MAA expects insurers to present at those meetings
- details of the process and the matters considered by the MAA in reviewing premium filings including the matters the Scheme Actuary considers
- that the MAA is adopting a more rigorous approach in rejecting filings considered incomplete, as it expects to be able to allocate maximum time in reviewing the filing itself rather than waiting for additional information to be provided
- the scale of materiality used by the MAA when assessing the reasonableness of assumption changes
- that the MAA will consider qualitative items such as insurers' business plans and competitive strategies (as disclosed in the filing) as well as technical quantitative items when reviewing a filing.
This publication may contain information about the NSW Compulsory Third Party scheme. It may include some of your obligations under the various legislations that the MAA administers. To ensure you comply with your legal obligations you must refer to the appropriate legislation. Information on the latest laws can be checked by visiting the NSW legislation website legislation.nsw.gov.au.
This publication does not represent a comprehensive statement of the law as it applies to particular problems or to individuals or as a substitute for legal advice.
You should seek independent legal advice if you need assistance on the application of the law to your situation.
Catalogue No. MAA28