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Supplementary motor accidents premiums determination guidelines

Section 24 of the Motor Accidents Compensation Act 1999

For insurance premiums proposed by insurers for all third-party policies issued for conditional registered vehicles and unregistered vehicle permits.

Approved by the State Insurance Regulatory Authority

Board of Directors – 7 December 2015

1. Introduction

These supplementary guidelines form part of the mechanism for the regulation of premiums under Chapter 2, Part 2.3 of the Motor Accidents Compensation Act 1999 (the Act).

2. Commencement of supplementary guideline

These supplementary guidelines are in addition to and do not amend or replace the Motor Accidents Premiums Determination Guidelines in force under Part 2.3 of the Act.

  • These supplementary guidelines specify the manner in which proposed premiums are to be determined and the factors taken into account for filings in relation to third party policies taken to be issued for motor vehicles the subject of conditional registration and unregistered vehicle permits effective from 1 January 2016.
  • Filings conforming to these supplementary guidelines will be used as part of a tender evaluation process for an insurer licensed under the Act to provide third party insurance policies for conditional registrations and unregistered vehicle permits under a contract with Roads and Maritime Services (RMS) and the State Insurance Regulatory Authority (SIRA)1.
  • After the tender evaluation these supplementary guidelines will be used for subsequent premium filings for motor vehicles that may be the subject of conditional registration and motor vehicles that may be issued unregistered vehicle permits.

3 Definitions

These supplementary guidelines adopt the definitions and meanings contained in sections 3, 10A, 30, 49 and 74 of the Act and clause 20 of the Motor Accidents Compensation Regulation 2015.

4 Filing under Part 2.3 of the Act

In submitting a full or partial rate filing for conditional registration and unregistered vehicle permits a licensed insurer must provide to the Executive Director, Motor Accidents Insurance Regulation, SIRA a soft copy of the filing including a covering letter, the filing report, appendices and any associated spreadsheets. The covering letter is to be signed by the NSW CTP Product Executive and must include:

  • a description of the type of filing2 and proposed effective date
  • an executive summary of the filing including the reasons for the filing and any significant variations compared to the most recent full filing and most recent partial filing, if applicable
  • CEO certificate in the form of attached Appendix B (full filing only)
  • details of consultation with RMS concerning the implementation of the proposed changes, and
  • the RMS implementation plan.

5 Premium components and factors to be calculated

5.1 Motor Accidents Schedule of Premium Relativities for Conditional Registration and Unregistered Vehicle Permits

Insurers must classify vehicles based on the Motor Accidents Schedule of Premium Relativities for conditional registration and unregistered vehicle permits in force. This schedule may be published to licensed insurers each year or other period as determined by  SIRA. Insurers must apply the premium relativity that is applicable to the conditional registration and unregistered vehicle permits vehicle class and region.

5.2 Base premium

The base, conditional registration and unregistered vehicle permit, premium for each vehicle classification and region must be calculated assuming a 12-month notional policy term as:

  1. the class 4A Non-country vehicle base premium
  2. multiplied by the relativity for the particular vehicle class and region published in the Motor Accidents Schedule of Premium Relativities for conditional registration and unregistered vehicle permits in force current at the date the third-party policy begins
  3. divided by 100.

The nominated base premium is used to define the relative base premiums for each vehicle classification and region, and the loading which allows for policyholder entitlement to an Input Tax Credit (ITC). It is equal to:

IBClass4A Non-country = the insurer’s base premium for Class 4A Non-Country including GST but excluding LTCS levy and MAF levy, calculated as if no policyholders are entitled to any ITC

the insurer’s average premium for conditional registration and unregistered vehicle permits, including GST but excluding LTCS levy and MAF levy, calculated as if no policyholders are entitled to any ITC, as shown in the Premium Filing Summary Sheet, Appendix A - CRUVP Schedule C

the premium relativity applicable to the i-th policy, as anticipated to be underwritten over the period of the premium filing

n = number of policies anticipated to be underwritten over the period of the premium filing.

Insurers must provide the filed base premium for each vehicle class and rating region in accordance with this clause in an electronic spreadsheet CRUVP Schedule A.

5.3 Ratio of insurer’s average premium to Class 4A Non-country (CRUVP Schedule C Item 11)

This factor expresses the ratio of the insurer’s average premium based on the insurer’s projected portfolio mix3 (taking into account the insurer’s vehicle class and region mix of business), relative to the base premium of a Class 4A Non-country vehicle.

This is calculated by:

  1. determining the percentage of the insurer’s projected portfolio (based on the number of vehicles) that will be written in each vehicle class and region
  2. multiplying each of the above proportions by the conditional registration and unregistered vehicle permits premium relativities published by the SIRA for the corresponding vehicle class and region
  3. adding up all of the values calculated in2 above, and
  4. dividing (3) by 100.

The formula for the calculation is:

where:

ɑk = proportion (as a %) of the insurer’s projected portfolio (based on vehicle count) for the k-th vehicle class and region

premium relativeityk = premium relativity for the k-th vehicle class and region as published by the SIRA.

5.4 Premiums where entitlement to an Input Tax Credit (ITC) is applicable

Vehicles registered under conditional registration and unregistered vehicle permits are made up of a mixture of input tax credit (ITC) entitled and non-ITC entitled vehicles. However the same CTP premium will apply regardless of the vehicle’s ITC status.

Insurers must determine an appropriate ITC loading using the Global Decreasing Adjustment Method (GDAM) and apply to all unregistered vehicle permits (UVP) and conditional registration (CR) premiums.The insurer will determine one set of premium rates that includes its view of an adequate provision for conditional registration and unregistered vehicle permits taken to be issued with entitlement to some ITC:

  • the insurer will determine the percentage loading it considers appropriate.
  • the ITC loading will be the same percentage for each vehicle classification and region. However, minor variations in the percentage loading attributable only to the calculation of premiums for non-annual policies, or to rounding, are acceptable.

5.5 Loading of premiums for short term policies not applicable

Conditional registration has two registration period terms; 12 months and three months. Unregistered vehicle permits can be issued for 7 days and 28 days only. Insurers must not apply loadings for short term conditional registration and unregistered vehicle permit policies. Insurers must pro-rata the insurance premium4 by 7/365ths, 28/365ths or 1/4th based on the registration period and round to next dollar.

5.6 Determination of Medical Care and Injury Services (MCIS) levy

The Medical Care and Injury Services (MCIS) levy is a combination of the levy under section 51 of the Motor Accidents (Lifetime Care and Support) Act 2006 (the LTCS levy) and the Fund levy under section 214 of the Act (the Motor Accidents Fund levy).The MCIS levy applicable to conditional registration and unregistered vehicle permits5 applicable for the period of the contract or other such period that  SIRA advises will be 21.5 per cent of the insurance premium6 including ITC loading. (The MAF levy is 9.2 per cent and the LTCS levy is 12.3 per cent).

6 Full filing report

A full filing report must include the manner in which proposed insurance premiums7 for conditional registration and unregistered vehicle permits were determined by the insurer and the factors and assumptions taken into account in the determination of the premiums. An explanation of the non-technical pricing factors must also be included where applicable.

The industry portfolio of conditional registration and unregistered vehicle permits (that is insured by one single insurer) is referred to as the CR and UVP portfolio. The filing report must include the covering letter outlined in clause 4 and commentary on the techniques used in assessing the following items for the CR and UVP portfolio:

Cost per policy of full claims

  • Past and projected costs (and disclosing the treatment of shared claims)

Cost per policy of ANF claims

  • Past and projected costs

Economic and investment assumptions

  • assumed future rates of wage and price inflation
  • full yield curve adopted and the single equivalent rate of discount
  • assumed future claim payment pattern for the underwriting period covered by the filing specifying if the basis is current values, inflated or discounted.

Superimposed inflation

  • assumed future rates of superimposed inflation (SI), where this is explicitly assumed
  • disclosure of the single equivalent rate of SI where this is explicitly assumed, and
  • an explanation of the approach taken in setting the SI assumptions.

Insurer expenses

  • average past actual8 and expected future rates and amounts of:
    • acquisition and policy handling expenses (excluding commission or other remuneration) associated with third-party policies taken to have been issued by RMS on behalf of the insurer with appropriate explanation provided and a description of the methodology used to allocate overhead expenses
    • commission or other remuneration payments to RMS. The commission or other remuneration9 percentage paid per policy cannot exceed the percentage listed in section 30 of the Act (or other such percentage as may be prescribed by the regulations)
    • reasonable RMS business expenses directly related to the contractual terms
    • claims handling expenses, including an explanation of what is included in this item, and a description of the methodology used to allocate overhead expenses, and
    • net cost of reinsurance.
  • the expense assumptions used and an explanation of how they relate to the above information.

Profit margin

  • proposed profit margin and the actuarial basis for its calculation – the percentage of gross insurance premiums intended to be retained as profit, before tax, to provide a reasonable rate of return on the capital supporting the business; an explanation must be included that demonstrates the profit margin is not excessive.

Adjustments to insurer premium to obtain the Class 4A Non-country base premium by disclosing details of the calculation of the:

  • ratio of the Class 4A Non-country premium to the average premium (clause 5.3)

Other

  • any other matter the insurer should reasonably take into account in the determination of premiums, and
  • details of how the ITC percentage loading applied to all premium rates was determined.

A full filing report must include Excel spreadsheets for CRUVP Schedule A, CRUVP Schedule B and CRUVP Schedule C. The CRUVP Schedule C must reconcile with the equivalent assumptions adopted in the filing report.

7. Schedules to the filing

7.1 CRUVP Schedule A

Insurers must provide the base premium including GST, but excluding MCIS levy, for each vehicle classification and region assuming no policyholders are entitled to any ITC (Excel version as an Appendix).

7.2 CRUVP Schedule B

Variation of the base insurance premium by applying bonus or malus is not permitted for conditional registration and unregistered vehicle permits. Insurers must provide the actual amounts (after application of any rounding) proposed to be charged for each conditional registration and unregistered vehicle permit vehicle classification, region and policy term sub-divided into separate amounts of:

  • Base insurance premium including ITC loading
  • GST
  • LTCS levy
  • MAF levy, and
  • Total payable by the policyholder.

7.3 CRUVP Schedule C

Insurers must provide a summary of the assumptions adopted and base premium filed, in the form specified in Appendix A.

8 Partial filing report

Insurers can submit partial filings for conditional registration and unregistered vehicle permits where all of the following conditions are met, if not the insurer must submit a full rate filing:

  • the expiry date of the partial filing lodged is within 12 months from the commencement date of the most recent full filing approved by  SIRA for conditional registration and unregistered vehicle permits
  • the change in average premium excluding GST and the MCIS levy reported in CR/UVP Schedule C (Item 10) is less than 4 per cent when compared to the most recent full filing approved by  SIRA for conditional registration and unregistered vehicle permits, and
  • the change in Base Premium Rate (Class 4A Non-country) excluding GST, LTCS levy and MAF levy reported in CR/UVP Schedule C (Item 12) is less than 4 per cent when compared to the most recent full filing approved by  SIRA for conditional registration and unregistered vehicle permits.

A partial filing must include:

  • a summary of the changes proposed
  • explanation on each filing assumption change made since the previous full filing and if relevant, previous partial filing approved.  The explanation for each individual assumption change is required to be at the same level of detail as that required in a full filing
  • CRUVP Schedule A, CRUVP Schedule B (for both annual and short term policies) and CRUVP Schedule C
  • an analysis of the change in average premium and base premium against the previous full filing and if relevant, against the previous partial filing approved, and
  • signed endorsement of the partial filing from the NSW CTP Product Executive.

The CEO certificate is not required for a partial filing.  SIRA may also request additional explanation and documentation to clarify matters about the partial filing.

9 Footnotes

  1. On 1 September 2015, the functions of the Motor Accidents Authority (MAA) were assumed by the State Insurance Regulatory Authority (SIRA)
  2. Partial filing under Section 25(2) of the Act or full filing under Section 26(1) of the Act.
  3. Annual policy equivalent
  4. Base premium plus ITC loading (excluding GST and MCIS levy)
  5. Section 214 of the Act
  6. Excludes MCIS levy and GST
  7. Excluding MCIS levy and GST and assuming no policyholders are entitled to any input tax credit.
  8. When applicable
  9. Excluding business expenses incurred by RMS.

10 Appendix

10.1 Appendix A - CRUVP Schedule C: Premium filing summary sheet

1a. Cost per policy for filing period

Full claims for insurer for filing period, calculated allowing for enactment of all of the LTCS Act, the MACA Amendment 2006 and the MACA Amendment 2007 (gross of reinsurance, net of sharing in current values(i)

$

1b. Cost per policy for filing period

Full claims for insurer for filing period, calculated allowing for enactment of all of the LTCS Act, the MACA Amendment 2006 and the MACA Amendment 2007 (gross of reinsurance, net of sharing), fully inflated and discounted to the middle of the period filed (i)

$

1c. Cost per policy for filing period

ANF only claims, calculated allowing for enactment of the MACA Amendment 2007 and MACA Amendment 2009, fully inflated and discounted to the middle of the period filed (i)

$

1d.

Insurer average risk premium (formula used to combine above assumptions to arrive at average risk premium) (1b + 1c) (i) (ii)

 

2. Average risk premium

Excluding GST calculation (substitute values in formula) (i)

$***.**

3. Average commission

Per cent gross premium excluding GST, LTCS levy and MAF levy (must comply with section 30 of the Act)

*.**%

4. Acquisition and policy handling expenses

Per cent gross premium excluding GST, LTCS levy and MAF levy

*.**%

5. Claims handling expenses

Per cent gross premium excluding GST, LTCS levy and MAF levy

*.**%

6. Net cost of reinsurance

Per cent gross premium excluding GST, LTCS levy and MAF levy

*.**%

7. RMS business expenses

Reasonable RMS business expenses directly related to the contractual terms

*.**%

8. Profit margin

Per cent gross premium excluding GST, LTCS levy and MAF levy

*.**%

9. Average premium

Formula used to arrive at average premium excluding GST, LTCS levy and MAF levy) ((2 + 7)/(1-(3+4+5+6+8)) (ii)

 

10.

Excluding GST, LTCS levy and MAF levy (substitute values in formula) (i)

$***.**

11

Ratio Class 4A Non-country vehicle to average premium calculated in accordance with clause 5.3

 

12. Class 4A Non-country vehicle

Nil ITC Class 4A Non-country base premium excluding GST, LTCS levy and MAF levy (10÷11)

 

13.

Nil ITC Class 4A Non-country base premium including GST but excluding MCIS levy

$***.**

14.

Loading applied to nil ITC premium rates to calculate inclusive of ITC premium rates (per cent nil ITC premium rates)

*.**%

15.

MCIS levy as percentage of premiums including ITC loading but excluding GST, LTCS levy and MAF levy

*.**%

16.

Period premiums are proposed to apply

 

Notes:

(i)  Estimates of average claim sizes and average premiums must be those applicable to the nil ITC premium rates, that is, calculated as if no policyholders have any entitlement to an ITC, and as if the insurer has a full entitlement to decreasing adjustments or ITC for all claims costs directly attributable to specific policies. The loading applied to nil ITC premium rates to calculate the insurer’s some ITC premium rates is then shown as item 14.

(ii)  Use item number for formula description.

Supplementary Table 1 - Further assumptions used in calculating estimate of insurer average risk premium (item 2)

Year ending Investment return AWE Inflation superimposed Payment pattern (iii) Development year % Paid
***** % % % % %
*          
*          
*          
*          

(iii):  The payment pattern shown must be that for the underwriting period covered by the proposed filing. If different payment patterns have been assumed for full claims and ANF only claims, Supplementary Table 1 must be modified to show the payment pattern assumed for each.

10.2 Appendix B - CEO Certificate

I am the CEO of ______________________________________________

I certify:

  1. I have knowledge of the matters that are the subject of this certificate and I have familiarised myself with the actuarial advice provided for this filing for conditional registration and unregistered vehicle permits.
  2. I am satisfied that the technical and commercial assumptions used in this filing for conditional registration and unregistered vehicle permits are appropriate, that the data used are sufficiently accurate and complete and that the filed rates comply with section 27(1) of the Act.
  3. I have taken reasonable steps to satisfy myself that the information in the filing has been composed with due care and that the totality of this rate filing is appropriate to this company’s financial condition and strategy.
  4. I am satisfied the filed rates will be implemented on the effective date explicitly indicated in the filing, subject to the SIRA review process and Roads and Maritime Services DRIVES database scheduling.

    ____________________________      _______________________________

    (Signature)                                              (Date)

    __________________________________________________________________

    (Name)

  5. I am satisfied this filing is in accordance with Part 2.3 of the Motor Accidents Compensation Act 1999, the terms and conditions of the CTP insurance licence and Supplementary Motor Accidents Premiums Determination Guidelines.

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