lengthened workers’ compensation tails implications for self … · 2011-12-14 · lengthened...

LengthenedWorkers’ Compensation TailsImplications for Self-Insurers

Prepared byAndrew Houltram & Scott Duncan

Presented to the Institute of Actuaries of AustraliaAccident Compensation Seminar

20 - 22 November 2011Brisbane

This paper has been prepared for the Institute of Actuaries of Australia’s (Institute) 2011 Accident CompensationSeminar.

The Institute Council wishes it to be understood that opinions put forward herein are not necessarily those ofthe Institute and the Council is not responsible for those opinions.

Taylor Fry Pty Ltd

The Institute will ensure that all reproductions of the paperacknowledge the Author/s as the author/s, and include the above

copyright statement:

The Institute of Actuaries of AustraliaLevel 7 Challis House 4 Martin Place

Sydney NSW Australia 2000Telephone: +61 (0) 2 9233 3466 Facsimile: +61 (0) 2 9233 3446

Email: [email protected] Website: www.actuaries.asn.au

Lengthened Workers’ Compensation Tails – Implications for Self-Insurers

Abstract

In several jurisdictions self-insurers find that, compared with what would have beenanticipated some years earlier, the length of their workers’ compensation liability tail hasincreased.

Any entity that has contemplated self-insurance under Comcare will have discovered thatcompared with most jurisdictions, the liability tail is long. A longer tail than previously alsocharacterises liabilities in other jurisdictions where settlement of serious injury claims bylump sum has become rarer. New South Wales and South Australia are particular cases inpoint.

This paper analyses the effect of an increased tail-length on:

The value of the deferral of cash outflows under self-insurance; The expected effects on financial statements; including a reduced likelihood under

current Accounting Standards that a benefit will be observable in the workers’compensation expense line of the profit & loss statement, even in circumstanceswhere a benefit exists;

Profit & loss statement volatility and the potential impact of prior year cost revisions; On-costs such as those associated with financial guarantees and general

administration expenses.

Keywords: workers’ compensation, self-insurance, feasibility assessments;


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1. Introduction

1.1 Background and Paper Structure

Background

Benefit entitlements and utilisation patterns in several jurisdictions have changed over time.In many cases, claims associated with long-term injuries that might previously have settledafter two or three years with a lump sum, will now be more likely to generate paymentstreams that extend over many more years; possibly decades.

This paper explores some of the impacts of longer workers’ compensation tails on self-insurers and highlights the need to capture these when analysing how self-insurance costscompare with the cost of insurance. The paper’s particular areas of focus are:

the value to a self-insurer of the extension of the deferral of cash outflows; two expense categories, namely:

o financial guarantee costs; ando general administration expenses;

impacts on a self-insurer’s financial statements; and profit and loss statement volatility.

The investigation uses changes that have occurred in New South Wales since 2001 as its mainillustration. Due to statutory benefit changes that took effect from that time, lengthening ofthe payment tail in that jurisdiction has been particularly stark. However, the generalconclusions are applicable wherever liability profiles lengthen. For example:

companies that move to self-insurance under Comcare from other jurisdictions willexperience the effects of a lengthened tail. This is because, with the exception of NewSouth Wales, workers’ compensation liabilities incurred under Comcare have aconsiderably longer tail than those of the state-based jurisdictions.

workers’ compensation liability tail length has increased in South Australia;1 and there will undoubtedly be future changes in these and other schemes, some of which

will involve tail lengthening.

Structure

The paper covers the following topics:

The components of self-insurance cost

Section 2 describes the self-insurance cashflows that it is appropriate to compare with thepremium payable for a policy year, along with the expected payment patterns assumed in theanalysis.

Special attention is paid to the cost of the financial guarantee that is required as a self-insurance license condition, since for various reasons the financial significance of the cost ofthe financial guarantee has grown substantially in recent years, and it is higher where liabilityprofiles are longer.

1Most recently, a lengthening has occurred due to statutory changes imposing restrictions on the use of

redemptions, but larger increases appear to have occurred prior to that. The discounted mean term of outstandingclaims liabilities recognised in the WorkCoverSA financial statements at June 2001 was 2.6 years (using adiscount rate of the risk free rate plus 2.5%). At June 2010 (using a risk free rate), the discounted mean term was7.5 years. The discount rate bases are inconsistent, but it seems clear that the increase in mean term is very muchhigher than could be attributed to the discount rate change alone.


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The dynamics of cash outflow deferral under self-insurance and its impact on the finances ofa company

In section 3, a framework is set out for considering the impact that self-insurance is expectedto have on a company’s finances as a result of the deferral of cash outflows. The frameworktakes into account returns that the company can achieve on funds retained in the business as aconsequence of self-insuring, and in a simplified form, explores tax considerations.

The analysis considers the sensitivity of the results to the length of the liability tail, the rate ofreturn that can be achieved by the company on retained funds, tax, and the presence orabsence of a risk margin in the accounting provisions.

The impact on financial statements

Section 4 explores the impact of self-insurance on the way workers’ compensation expensesare disclosed in a company’s financial statements. The analysis highlights that self-insurancecan be of benefit to a company, even in circumstances where the workers’ compensation costsit requires to be recognised in the financial statements are expected to be higher than underinsurance.

Profit & Loss Statement Volatility

In assessing the suitability of self-insurance as the mechanism to provide for its workers’compensation obligations, a company needs to consider both expected cost and variability.The cost variability that is usually of most concern to a self-insurer is not the variation thatultimately emerges between accident years. Rather, it is the much higher variability that aself-insurer experiences in the contribution of workers’ compensation expenses to the profitand loss result across accounting years.

Section 5 describes why, when liability profiles are longer, the variability in results betweenaccounting years is likely to be considerably higher. Because longer tails are associated withgreater result volatility, it becomes increasingly important to manage self-insurersexpectations on this front in longer-tailed environments.

The emergence of Paid Loss Retro Policies in Schemes with lengthening tail.

With a longer liability tail, both the potential financial risks and rewards associated with self-insurance is magnified. A paid loss retro policy offers a mid-ground solution for thoseentities that do not want to assume the full risks and responsibilities that accompany self-insurance.

Currently, paid loss retro policies are available in New South Wales, while in South Australiaa similar option is planned for introduction in 2012. In the final section of the paper, thegeneral features of paid loss retro policies as they currently apply in New South Wales arediscussed, and the key differences between insurance, self-insurance and paid loss retropolicies are flagged.


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2 Components of Self-Insurance Cost

To explore the effects of extended liability tails on self-insurers, a series of projections hasbeen performed that simulate aspects of their experience under two scenarios; one where theliability profile is relatively long-tailed, and one where it is relatively short. The simulateditems include cashflows, balance sheet provisions, profit & loss statement changes and thecost of financial guarantees.

The projections require assumptions about:

premium that would be paid if insurance was in place; the cost of claims that would be covered by a policy of insurance, and the time at which

claim payments would be made; and the amount and timing of payments under self-insurance for :

o reinsurance premium;2

o financial guarantees;o contribution/levies to the workers’ compensation authorities; ando claims handling and general administration expenses.

Collectively, the items under the third bullet point are referred to in this paper as theaccompanying expenses.

Though the assumptions are intended to be realistic, qualitatively, the general conclusions setout in the paper would not be materially different under alternative reasonable assumptions.

2.1 Matching

In any meaningful comparison of costs under self insurance and insurance, costs need to bematched. That is, when assessing the cost of self-insurance, all the expenses that would notbe incurred if an insurance policy were put in place need to appropriately captured.

Self-insurance of one policy year generates obligations to make payments in some expensecategories well after the exposure period has expired. Those categories are:

claim payments; claim handling expenses; and. costs in respect of a financial guarantee.

Payments in these categories will be required throughout the entire period over which claimsfrom the accident year run off.

Self-insurance costs that should be deemed comparable with a single year’s premium are:

Direct claims cost for all claims with an injury date falling within the ‘policy year,’regardless of when they are paid:

o compensation to injured workers;o treatment and rehabilitation expenses;o the cost of legal advice relating to claims; ando the cost of investigation.

2 The ‘cost’ of reinsurance is really the excess of reinsurance premium over any reinsurance recoveries. However,retentions that apply to reinsurance of self-insured workers’ compensation risks are typically set sufficiently highthat it is reasonable to treat the expected reinsurance recoveries as zero, and to treat premiums as representing thereinsurance ‘cost’.


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For this reason the terms policy year and accident year are used interchangeablythroughout the paper.

Accompanying expenses associated with those claims. These are comprised of:

o claims handling expenses incurred throughout the period over which claim run-off (this category includes a share of general administration expenses andactuarial fees);

o the reinsurance premium paid at the start of the policy period;o any contribution/levy payable to workers’ compensation authorities at the start of

the policy period; ando the cost of financial guarantees that workers’ compensation authorities require as

a condition of license. At the start of each year during the period over whichclaims from the accident year run off, a portion of the required financialguarantee will relate to that accident year.

2.2 Detailed Projection Assumptions

The comparisons apply the following assumptions:

Insurance:

Premium: The self-insurance scenarios are compared with the case where, ifconventional workers’ compensation insurance arrangements are entered into, thepremium payable for the policy year would be $7.25m.

In practice, for each policy year, premium calculations are performed twice; once at itscommencement, and once again at the policy year’s expiry. The calculation at the enddiffers from the initial one by using true wages in place of an estimate, and by bringingin more claims experience. The difference between the two generates an adjustmentpremium which can be positive or negative.

The modeling makes the simplifying assumption that premium payments are made as asingle installment, paid on the policy period start date. Equivalently, the amount of anyadjustment premium at the end of the policy year is taken to be zero. Further, the costassociated with the employer excess on individual claim amounts has been ignored.

The simplifications aid the ease with which the calculations progress, but should notaffect the conclusions drawn from the analysis.

The comparisons assume that the premium is a tax-deductible expense.

Self-insurance:

Direct Claims Cost: Two scenarios are considered; which are termed the shorter-tailand longer-tail scenarios. The scenarios are based on scheme assessments of liabilityprofiles in New South Wales at distinct time-points.

Diagram 2.1 illustrates the two profiles. Each is taken from projections made by theactuaries who have advised the NSW Scheme at different times. The shorter-tailscenario comes from the assessment for the 2001 accident year that was made on a pre-reform basis at the 31 December 2001 valuation. The longer-tail scenario comes fromthe assessment for the 2010 accident year that was made at the 31 December 2010valuation. The undiscounted mean term for the shorter-tail scenario is 4.3 years. Forthe longer-tail scenario it is 12.1 years.


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The projections have been scaled so that, when risk-free discount rates are applied, thepresent values of the payment streams are identical.

Diagram 2.1 Projected Payment Pattern Comparisons

0

200

400

600

800

1,000

1,200

0 5 10 15 20 25 30 35 40 45 50 55

Development Year

Am

ou

nt

Shorter Tail Scenario

Longer Tail Scenario

Summaries of the benefit changes that are the primary reason for the profile change aredescribed in the NSW Scheme’s actuarial report.3 Although there is a link between thescenarios and the NSW WorkCover assessments now and before the scheme reforms,that connection is of no particular consequence to the topics explored in the paper.

Discounted at risk free rates to the start of the policy year, the present value of thedirect claims cost for each scenario is $5m. The claim payment projections associatedwith each scenario are set out in attachment A.1. Claim payments are assumed to bemade, on average, half-way through each year.

Except where otherwise specified, where a liability estimate is made, the assumption ismade that there is perfect foresight on the part of the actuary. That is, payments in agiven year are assumed to equal those projected by the valuation basis.

Claims handling expenses are assumed to amount to 10% of claim payments underboth scenarios. They are assumed to be paid, on average, half-way through each year.Although the projections assume an equal claims handling expense rate under bothscenarios, some remarks are included later in this section about how rates may compareunder the longer-tail and shorter-tail scenarios. A claims handling expense allowanceequal to 10% of projected claim payments is included as part of the outstanding claimsprovision.

Workers’ compensation authority contributions are incurred at the start of theaccident year. The assumed amount has been determined with reference to theobligations that currently apply in New South Wales (4% of deemed tariff premium).The projections assume a cost of $290,000 applies, which is paid at the start of theaccident year.

3

http://www.workcover.nsw.gov.au/formspublications/publications/Documents/workcover_nsw_scheme_valulation_at_december2010_3458.pdf


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Reinsurance premium - The projections allow for a premium of $240,000, payable atthe commencement of the accident year.

Financial guarantee costs are assumed to be 1% of the required guarantee amount. Anaccident year will contribute to the financial guarantee requirement throughout the fullperiod over which its claims run off. The cost of the financial guarantee is assumed tobe paid at the commencement of each financial year.

The risk margin held in the balance sheet outstanding claims provision is 15% of thediscounted outstanding claims liability inclusive of the claims handling expenseprovision. In the commentary, some remarks are made about the sensitivity of theresults to this assumption.

Risk free discount rates assumed are those that applied at 30 June 2011. They are setout in attachment A.2. Commentary regarding the effects of variations in discount ratesbetween balance dates is included in Section 5.

The following expenses are tax deductible:o direct claim payments made in the year;o claims handling expenses paid in the year;o reinsurance premium;o workers compensation authority contributions/levies;o the financial guarantee charge; ando the provision for outstanding claims at the end of each year, inclusive of the risk

margin, but exclusive of any amounts relating to claims handling expenses.

Company Rates of Return – The projections assume the company can achieve a pre-tax rate of return 3% higher than risk free rates on any additional funds retained as aresult of deferring cash outflows. This is the subject of further discussion in Section 3of the paper.

Corporate Tax Rate – a rate of 30% has been applied. Any tax is paid on the last dayof the financial year. The possibility of any complications in the company’sarrangements that might mean that the tax effect of any contribution to before-tax profitor loss does not generate a tax effect of 30% of that contribution, due at the end of thattax year, are ignored.

Diagrams 2.2 and 2.3 set out the gross of tax cashflow profiles associated with a singleaccident year that are applied in the projections, inclusive of the accompanying expenses.


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Diagram 2.2 – Longer Tail Scenario

0

200

400

600

800

1,000

1,200

1,400

1,600

0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54

Development Year

$'0

00 Accompanying Expenses

Claim Payments

Diagram 2.3 – Shorter Tail Scenario

0

200

400

600

800

1,000

1,200

1,400

1,600

0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54

Development Year

$'0

00

Accompanying Expenses

Claim Payments

2.3 Some comments regarding the assumptions and general assessments of self-insurancesavings

A brief examination of the assumptions set out in section 2.2 reveals that the sum of thepresent value of the direct claims cost and the various expenses is significantly less than theassumed premium of $7.25m, even at risk-free discount rates (later in the paper, the use ofhigher discount rates is discussed). Hence, under the assumptions it is a fait accompli thatself-insurance will be assessed as a ‘cheaper’ option than insurance.

There is some justification for anticipating that it should be the exception rather than the rule,that at risk-free rates, the present value of expected claim payments and expenses should belower than premium. This can be seen by considering entities insured in a jurisdiction whichhas a monopoly, publicly underwritten scheme, which does not seek to make a profit over thelonger-term. General reasoning suggests that (if one sets aside the possible effect ofincentives self-insurance carries to improve outcomes and to lower costs, then) on average,self–insurance should be expected to be a more expensive means of satisfying workerscompensation obligations than insurance.


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The reason for this is that, summed across all policyholders, expected claim payments arethose for the entire scheme. Similarly, summed across all policyholders, the premiumamounts should reflect:

expected claim payments, expected expenses; and expected investment returns between the receipt of premium and payment of claims and

expenses.

As a proportion of expected claim payments, self-insurer expenses are likely to be greaterthan those associated with the scheme, since self-insurers bear some expenses that the schemedoes not. Those expenses are:

reinsurance premium, and financial guarantee costs.

Additionally, due to economies of scale one would expect the expenses associated with thewider scheme to be lower than would apply if the scheme were partitioned into a largenumber of self-insured units.

Self-insurance viability assessments that conclude the present value of claims costs andassociated expenses are lower than the insurance premium warrant careful inspection beforethe results are accepted. While there will be exceptions, for a policy selected at random, thereasoning set out above suggests the opposite result is more likely.

There are several reasons why, without foreshadowing experience changes under self-insurance, or better returns that the company might be able to achieve during the periodbetween when premium would have been paid and when claim payments are required, theconclusion that self-insurance will be the cheaper option in the long-run could be reachederroneously. They include:

due to the unavailability of a more extensive claims history, viability assessments aretypically based on data that is limited to a few accident periods, and which includesonly the first few years of claim development:o by chance, this could be a set of claim cohorts with costs lower than the

(unknown) longer-run average;o being based on a small data set, without a full run-off history of any accident

year, the risk of setting an inappropriate valuation basis is high. For example, therisk of underestimating the impact of low frequency, high cost claims (whichmight not be present in the data, but which should be allowed for in a long-runcost comparison unless reinsurance retentions are low enough to remove them asan issue) is heightened. Similarly, with low data volumes, the risk of inadequateallowance for persistence of claims in the tail; or failure to recognise the presenceof superimposed inflation effects is higher.

failure to recognise the full extent of claims handling expenses, or the financialguarantee cost associated with an accident cohort; and

premium may have been captured over a period that was more expensive than is likelyto reflect its longer run cost.


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If one accepts that sustained bias against a prospective self-insurer is unlikely to exist in thepremium system, it follows that a decision to self-insure should not be based primarily onhow past premium levels have compared to the cost that would have been involved inretaining liability for the claims which have emerged, and the other accompanying costs ofself-insurance. Rather, a decision to self-insure should be based on an assessment that:

self-insurance will motivate a greater emphasis on injury prevention and claimsmanagement that will reduce costs (both through the direct cost of claims and theindirect benefit of improved productivity associated with reduced injury rates); and

retained funds can be applied to generated better returns for the company than can beachieved by the investments of the workers’ compensation authorities, and

these benefits outweigh the risks associated with retaining the liability, including thedifficulties associated with the increased volatility that will apply to workers’compensation expenses across financial years.

Many of the projection assumptions applied in this paper, including how the cost of premiumcompared to the expected cost of claims and accompanying expenses that would apply underself-insurance have been drawn from a commercial analysis performed for a prospective self-insurer. Those assumptions embed a cost advantage to self-insurance. For the reasons listedabove, there is a risk that the bias in favour of self-insurance embedded in the assumptionsmight not reflect the underlying reality. If this turns out to be the case, the general themes ofthis paper, which focus on characteristics of self-insurance where liability tail lengths change,will still hold. The paper’s conclusions are not contingent on the cost advantage under self-insurance being realised.

2.4 Claims Handling Expenses

The assumptions applied in the paper’s modeling make no allowance for differences in claimshandling expense rates between the shorter and longer-tail scenarios. However because claimsmanagement effort is more likely to be required for a sustained period of many more yearsunder the longer-tail scenario, it seems likely that as a proportion of claim payments, claimshandling expenses are likely to be higher.

It is noteworthy that for the NSW workers’ compensation managed scheme, the claimshandling expense rate included in the outstanding claims provision was 3.6% of the expectedclaims cost in December 2001, when a shorter-tail scenario applied. In December 2010,under a longer-tail scenario, the rate was 8.6%.

2.5 Financial Guarantee Costs

All jurisdictions require the annual lodgment of a deposit or financial guarantee as a conditionof self-insurance. In practice, lodgment of a deposit is rare. Almost all self-insurers satisfythe requirement with a financial guarantee.

The detail of the financial guarantee calculation varies by jurisdiction, but in recent yearsthere has been some convergence. The calculation approach is now similar for New SouthWales, Queensland and Victoria.

The projections follow the requirement that applies in New South Wales, but most of thegeneral conclusions that are drawn about the impact of an increased tail length on theeffective cost of the financial guarantee apply across all jurisdictions.4

4 Most of the conclusions rely upon the impact that a longer-tail liability profile has on self-insurers’ outstandingclaims liability estimates and their run-off patterns, and all jurisdictions have financial guarantee requirements thatare a function of the self-insurers outstanding claims liability.


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In New South Wales, the required financial guarantee is 150% of the greater of:

the central estimate of the outstanding claims liability estimate as at the balance date,plus

an estimate of the expected liability which will emerge in the next 12 months, less an estimate of the total amount expected to be paid on all claims during the next

12 months

And

the central estimate of the outstanding claims liability as at the balance date.

For calculation purposes, the estimate of the claims liability includes an allowance for claimshandling expenses.

The cost of the financial guarantee associated with an accident year has been estimated in twosteps:

Firstly, the position of an entity which has been a longstanding self-insurer has beenconsidered and the required financial guarantee for the upcoming year has been estimated.For this purpose, longstanding means long enough so that the oldest accident year hascompletely run-off. The calculation allows the cost to be divided into that attributable to eachaccident year.

Then, the attribution is converted to track the contribution of the upcoming accident year tofuture financial guarantees throughout the period over which its claims run off.

Attachment B shows the calculation of the financial guarantee for an entity which has self-insured for many years, for which:

the upcoming accident year has expected claim payments by development year thatcorrespond to those set out in Attachment A.1; and

by development year, projected payments for all earlier accident years is identical tothose for the upcoming year, except that for earlier accident years they are reduced by8% pa. The reduction allows for inflation and an assumed rate of business growth.

For the longer-tail scenario the total amount of the required financial guarantee is $40.019m.Attachment B.2 shows full details of the portion of this that is related to each accident year.If the upcoming accident year was 2011/12, then the contribution of each accident year to thefinancial guarantee is set out in Table 2.1.

Table 2.1 Contribution of each accident year to the required financial guarantee atthe commencement of 2011/12

Accident YearEnding30 June

$’000*Accident

Year Ending30 June

$’000*Accident

Year Ending30 June

$’000*

2012 6,843 2004 1,391 1996 524

2011 5,195 2003 1,206 1995 468

2010 4,193 2002 1,058 1994 418

2009 3,372 2001 935 1993 374

2008 2,733 2000 830 1992 333

2007 2,264 1999 738 1991 297

2006 1,907 1998 657 1990 265

2005 1,624 1997 587 earlier 1,809

Total 40,019

* see attachment B, Table 2, column (L).


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The contribution of the 2011/12 accident year to the financial guarantee requirements infuture years can be determined from table 2.1 by backing out the 8% pa reduction.5 Valuesfor the first 27 years are shown in table 2.2. The full projection extends to 2070 and is set outin attachment B.2.

Table 2.2 Contribution of the 2011/12 accident year to the required financialguarantee at the commencement of future financial years

FinancialYear Ending

30 June$’000*

FinancialYear Ending

30 June$’000*

FinancialYear

Ending30 June

$’000*

2012 6,843 2021 2,411 2030 1,671

2013 5,610 2022 2,283 2031 1,613

2014 4,891 2023 2,181 2032 1,554

2015 4,248 2024 2,089 2033 1,496

2016 3,718 2025 2,006 2034 1,438

2017 3,326 2026 1,930 2035 1,380

2018: 3,026 2027 1,861 2036 1,322

2019 2,783 2028 1,795 2037 1,263

2020 2,574 2029 1,732 2038 1,203

* see attachment B, Table 2, column (N).

Diagram 2.4 shows the projected contribution of the accident year to the required financialguarantee in future financial years under the shorter and longer-tail scenarios.

Diagram 2.4 also shows the contribution that would have been required for the shorter-tailscenario had financial guarantee requirements remained as they were some years ago in NewSouth Wales; when the requirements did not include a prospective element, and when theyincorporated a margin of 20% rather than 50%. This has been included to examine changes infinancial guarantee cost that have arisen due to explicit changes in the statutory requirements,as a separate matter from those that have arisen due to changes in the liability profile.

Diagram 2.4 Contribution of 2011/12 Accident Year to the required financial guaranteein future years

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2012 2017 2022 2027 2032 2037 2042 2047 2052 2057 2062 2067

Financial Year Ending 30 June

$'0

00



Shorter-Tail Scenario -Previous Requirements

5 For example, 5,610= 5,195 x (1.08) ; 4,891 = 4,193 x (1.08) ^2


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The slower run-off of the liability under the longer-tail scenario generates a more persistentcontribution to future financial guarantee requirements. Consequently, the significance of thecost of the financial guarantee has become more pronounced where liability tails havelengthened.

Assuming the cost of the financial guarantee is 1% of the guarantee amount, then applyingrisk free discount rates, the present value of the cost of the financial guarantee associated withthe accident year is:

$474k in the case of the longer-tail scenario (approximately 9.5% of the present valueof claims cost);

$274k in the case of the shorter-tailed scenario (approximately 5.5% of the presentvalue of claims cost); and

$221k in the case of the shorter-tailed scenario under the previous arrangements, wherethere was no prospective element and a 20% margin applied (approximately 4.4% ofthe present value of claims cost);

Taken in isolation, explicit changes to financial guarantee requirements over time would haveincreased their effective cost by 25% (from 4.4% to 5.5% of the present value of claims cost).The change due to increasing the tail length has added a further 73% (from 5.5% to 9.5%)

2.5 The increasing significance of financial guarantee expenses

Tail lengthening has coincided with other changes that have added to the significance of thefinancial guarantee cost. In particular:

Banks and other financial institutions have significantly re-assessed their risk appetite.The rates charged for financial guarantees have increased markedly compared withthose that would have applied in 2007 and earlier. It is not unusual to encounterinstances where rates have tripled or quadrupled over that time. Some self-insurershave seen considerably larger increases. Furthermore, general terms and conditionsattaching to the financial guarantee product have often become more onerous. Forexample, in some cases the company may be required to maintain a deposit with theinstitution from which the guarantee is sourced.

In some jurisdictions, changes to the financial guarantee requirements have:o increased the margin applied to the central estimate; ando introduced a prospective element.

The aggregate effect of:

increases in the tail length of workers’ compensation liabilities; introduction of a prospective element to financial guarantee requirements; increases to the margin applied to the central estimate when determining the financial

guarantee requirement; and increases to the rates charged by financial institutions for financial guarantees,

has been very significant.


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For example, the present value of the cost of the financial guarantee, where:

the rate charged by financial institutions was 0.3% of the guarantee amount (which foran entity now being charged a rate of 1%, was more typical prior to the global financialcrisis of 2008); rather than the 1.0% which now applies; and

a prospective element did not apply to financial guarantee requirements; and the margin was 20% rather than 50%.

would have been approximately $66k (1.3% of the present value of claims cost) under theshorter-tail scenario.

Hence, with new rates charged by financial institutions, the regulatory change in financialguarantee requirements; and the change in liability profile, in this illustration the effectivecost of the financial guarantee has increased from 1.3% of the present value of claims cost, to9.5%.

What was once a trivial component of the cost of self-insuring is now much more significant.This highlights the need to accurately capture to cost of financial guarantees in anycomparison of self-insurance costs with the costs of conventional insurance.


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3. The value of deferral of cash outflows

A significant attraction of self-insurance is that, during the deferral period, funds that wouldhave been lost to the company if an up-front premium was paid to an insurer, are available forgeneral investment in the business.

The return that can be achieved on the additional funds retained in the business as a result ofself-insuring will depend on the circumstances of the company and will change with time.Though the expected rate of return will vary, in the long-run most entities would expect togenerate returns in excess of risk-free rates. One useful way to consider the value of havingadditional funds available is that they could be applied to reduce corporate borrowings.Corporate borrowings would certainly attract interest rate charges in excess of risk-free rates.

A thorough examination of the effect of self-insurance on an entity needs to recognise thevalue associated with retention of funds during the period over which cash outflows aredeferred.

The examination will also be more relevant to the company if it takes into account tax effects.In practice, accurate representation of any particular company’s tax position can becomplicated. The illustrative projections provided here reflect how tax operates in a simplecase, in line with the assumptions set out in Section 2. Although taking tax effects intoaccount may seem important, at least under the assumptions applied for the modelingdescribed in this paper, the projections suggest that the ratio of self-insurance to insurancecost is quite insensitive to the assumed taxation rate (including an assumption of zero).

An approach to the comparison of the expected cost of insurance and self-insurance that takesinto account tax effects and the returns expected to be achieved on retained funds is set out inAttachment C.

For self-insurance, the comparison envisages deposit into a notional fund, which is called theAdditional Funds Account in this paper, by the workers’ compensation business unit, of theamount that would have been paid as premium if the liability were insured. Throughout theperiod over which the accident year’s claims run-off, the fund accrues interest at the rate thecompany is assumed to earn on any retained funds. In the case where retained funds areapplied to reduce corporate borrowing, this is equivalent to crediting the notional fund withthe interest cost saved by the company.

Draw-downs are made from the notional account to satisfy:

claim payments; claims handling expenses; the contribution that the accident year’s outstanding claims liability estimates make to

the financial guarantee requirement throughout the run-off period; the Workers Compensation Authority contribution at the commencement of the

accident year; and the reinsurance premium for the accident year, payable at its commencement.

At the end of each year, the before-tax investment return on the notional fund is determined,along with the associated tax liability. The net of tax earnings are then credited to the fund.

At the end of the run-off period, the accumulated value of the notional fund is returned to theworkers’ compensation business unit.


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For each year throughout the run-off period, a projection is also made of the incurred cost fortax purposes associated with claims and expenses attributable to the accident year. Theassociated tax credit or debit is ‘charged’ to the workers’ compensation business unit at theend of each year.

Constructed this way, the cashflows that contribute to the workers’ compensation costs underself-insurance are:

the initial payment from the workers’ compensation business unit to the AdditionalFunds Account;

credits at the end of each year corresponding to the tax effect of the progress of incurredclaims cost and other self-insurance expenses; and.

the credit at the conclusion of the run-off period of the accumulated value of theAdditional Funds Account.

To summarise the projected profit cost of self-insuring as a single value to compare with thepremium, modeled costs attributable to the workers’ compensation business unit need to bediscounted to the commencement of the accident year. The appropriate rate to apply is therate, net of tax, that the company is assumed to be able earn on the retained funds. Where thecompany can apply funds to earn a return in excess of risk-free rates, discounting using risk-free rates is likely to understate the full value to the entity, of the additional funds at itsdisposal under self-insurance. This is the case regardless of the accounting standard’srequirement to apply risk-free discount rates when constructing balance sheet provisions.

This analysis framework is useful for examining the impacts of self-insurance on the financialdynamics of a company. However, because of the way the longer and shorter liability profileshave been derived, little can be read into specific differences in the outcomes that have beenmodeled under the two scenarios. The two scenarios were constructed by equating the claimscost present values applying a risk-free discount rate and deeming them to be ‘equivalent’ onthis basis. The analysis framework applies a different discount rate, which complicates anycomparison of outcomes under the two scenarios.

The objective of this section of the paper does not extend to quantification of the financialeffect of the additional deferral of cash outflows that has accompanied the extension of self-insurer liability tails. Self-evidently however, an extended deferral period will increase theamount of funds retained, and will increase the period for which those funds can be put to usein the wider company. This will amplify the benefits associated with cash outflow deferral.Consequently, as liability tails have lengthened, it has become more important that theassessment framework captures the benefits associated with the deferral. The frameworkpresented here, and which is set out in greater detail in Attachment C, aims to do that.

While the example set out in this paper assumes that the company can use any excess fundsinternally to reduce corporate borrowings, for which it is charged a 3% interest premium overrisk-free rates, in practice, a company is likely to be interested in illustrations of the effect ofapplying a range of scenarios assuming a variety of earning rates on additional funds.

Applying discount rates that exceed risk-free rates by 3%, the present value of cashflows toand from the workers’ compensation business unit, at the commencement of the accident yearis $3.989m.

A similar modelling exercise can be undertaken for the shorter-tail scenario, and also for thecase of insurance (where the modelling is simple since there is only the premium at thecommencement of the policy year, and the associated tax credit at the end). The results aresummarised in table 3.1.


- 16 -

Table 3.1 Present value cost comparison taking into account earnings on retainedfunds and tax effects

Present value of the net of taxworkers’ compensation cost

$’000

Insurance 5,1876

Self-insurance – Longer-tail scenario 3,989

Self-insurance – Shorter-tail scenario 4,110

The sensitivity of the results for the longer-tail scenario to changes in some of theassumptions is set out in tables 3.2 to 3.4.

Table 3.2 Sensitivity Test – Return above risk free

Return achieved onretained funds

risk free rates plus

Present value of the net oftax workers’

compensation costself-insurance longer-tail

scenario$’000

Insurance7

$’000

Ratio of self-insurance expectedcost to insurance

cost

0% 4,643 5,145 90

1% 4,398 5,159 85

2% 4,181 5,173 81

3% 3,989 5,187 77

4% 3,818 5,201 73

5% 3,663 5,241 70

The assessed benefit of self-insurance is highly sensitive to the assumed rate of return that thecompany could achieve on retained funds. In this paper’s example, if risk free rates areassumed the difference between expected costs under insurance and self-insurance are muchcloser. It seems that taking into account the return that a company can earn on retained fundsin the analysis is important.

Table 3.3 Sensitivity Test – Tax Rate

Tax Rate

Present value of the net oftax workers’ compensation

costself-insurance longer-tail

scenario$’000

Insurance$’000


cost

0% 5,712 7,250 79

10% 5,142 6,572 78

20% 4,568 5,885 78

30% 3,989 5,187 77

40% 3,409 4,479 76

50% 2,826 3,760 75

6 $7.250m – 30% x $5.187m x 1.0476) ^ -17 The small increase that is attributed to the Insurance cost as the assumed return available on retained funds isincreased relates to the cost of paying a gross of tax premium at the commencement of the year, but then waitinguntil the end of the year for the associated tax effect.


- 17 -

The assessed result is quite insensitive to the assumed rate of tax. The example suggests thatperforming the analysis gross of tax rather than net of tax understates the financial benefit ofself-insuring, but only trivially.

Table 3.4 Sensitivity Test – Risk Margin

Tax Rate

Present value of the net oftax workers’ compensation

costself-insurance longer-tail

scenario$’000

Insurance$’000


cost

0% 4,067 5,187 78

15% 3,989 5,187 77

30% 3,911 5,187 75

The effect is small, but carrying a risk margin lowers the expected cost of self-insurance. Itdoes this by introducing an additional tax deduction for the additional component of theoutstanding claims provision.

Table 3.5 sets out sensitivity results equivalent to those set out in table 3.2 for the shorter-tailscenario. Illustrating the increased importance under longer-tailed scenarios of taking intoaccount the returns that the company expects to generate on retained funds, the present valueof self-insured costs under the shorter-tail scenario is less sensitive to the assumed rate ofreturn that can be achieved on those funds, than is the case for the longer-tail scenario.

Table 3.5 Sensitivity Test – Return above risk free – Shorter-Tail Scenario

Return achieved onretained funds

risk free rates plus

Present value of the net oftax workers’

compensation costself-insurance shorter-tail

scenario$’000

Insurance8

$’000


cost

0% 4,488 5,145 87

1% 4,356 5,159 84

2% 4,230 5,173 82

3% 4,110 5,187 79

4% 3,996 5,201 77

5% 3,888 5,241 75

In light of what will be discussed in Section 4, an important point to note from the results ofthe examples set out in this section is that when the full effects of self-insurance on thefinances of the company are considered, the conclusion has been reached that self-insuranceis expected to carry a significant financial benefit.

In section 4, this conclusion is contrasted with another measure that some might use to gaugethe outcomes of self-insurance.

8 The small increase that is attributed to the Insurance cost as the assumed return available on retained funds isincreased relates to the cost of paying a gross of tax premium at the commencement of the year, but then waitinguntil the end of the year for the associated tax effect.


- 18 -

4. Accounting Effects

This section considers the effect that moving from insurance to self-insurance is expected tohave on an entity’s financial statements.

4.1 Incurred Claims Cost definition and the impact of the unwind of discount

Where a company self-insures, the incurred claims cost taken up in the financial statements ina given year equals:

claim payments made during the accounting yearplus the closing outstanding claims provisionless the opening outstanding claims provision

The full cost of workers’ compensation under self-insurance also includes accompanyingexpenses being:

the reinsurance premium paid in the yearplus the workers compensation authority contribution/levy paid in the yearplus the financial guarantee paid in the yearplus claims handling expenses paid during the year

Implicit in this definition is that the effect of unwinding a year’s discounting is taken up in thefinancial statements as part of workers’ compensation expenses.

For fair comparison with effect of insurance on the financial statements, an offset to thediscount unwind should be taken into account. The offset is the return earned on funds thecompany retains under self-insurance by virtue of the deferral of cash outflows. While thefinancial statements will carry the benefit of those returns, it will not be explicitly treated asan offset to workers’ compensation expenses. Rather, it will be spread throughout thefinancial statements as items such as reduced interest charges on borrowings, or returnsgenerated on additional investment in plant and equipment. Typically the return on retainedfunds isn’t explicitly identifiable.

The treatment of discount unwinding means that when the workers’ compensation expenseline is considered in isolation, the expected charge under self-insurance may very well besignificantly higher than it appears under insurance. This can be the case even where self-insurance carries an expected financial benefit. The excess of the expected charge under self-insurance tends to be greater the longer the liability profile.

The financial significance of the discount unwind (and the return on retained funds) is higherin a longer-tail than a shorter tail scenario. It will gradually increase as the self-insuredoutstanding claims provision builds over the years after self-insurance commences, or aftertransition from a short-tail to longer tail scenario begins. All other things being equal, in thefirst few years after either of these events occurs, the workers’ compensation expensesrecognised in the financial statements should be expected to increase gradually, even whereclaims experience is stable, and it is likely to settle at a higher level than the workers’compensation premium that would have applied had the liability been insured.

It is important for a self-insurer to be aware of this effect if it is to avoid forming the view thatself-insurance has been detrimental to the company’s finances in circumstances where a moreholistic view would lead to the opposite conclusion. If performance monitoring exercises areundertaken to compare self-insurance and insurance costs, the benefit of deferring cashoutflows also needs to be appropriately taken into account.


- 19 -

To illustrate the increase in expected workers’ compensation expense charged to the financialstatements, the financial statements of a self-insurer have been modelled that has expectedclaims and accompanying expenses that follow the shorter-tail and longer-tail profilesdescribed in Section 2, and for which those claim and expense payments are borne out inpractice as the liability runs off. The assumptions for the simulation are consistent with thoseunderlying the projections described in Sections 2 and 3. Those projections showed thatunder these assumptions self-insurance was expected to carry a financial benefit.9

The modelling of the workers’ compensation expenses recognised in the financial statementsis conducted in two steps:

Firstly, the workers’ compensation expense disclosed in the financial statements istracked across the run-off period for a single accident year. The comparative cost underinsurance is the premium paid at the commencement of the policy year. Underinsurance, there are no further expenses throughout the run-off.10

Secondly, under assumptions regarding past rates of company growth and inflation, thecollective effect of successive accident years on the workers’ compensation expensesdisclosed in the financial statements is determined for a single accounting year. Thecollective effect is calculated assuming that, as a proportion of salaries, claims costs andthe costs of accompanying expenses are the same as those for the single accident yearcase.

4.2 The impact of a single accident year on the workers’ compensation expense line for aself-insurer throughout claims run-off period

Applying the assumptions set out in Section 2 and 3; and assuming that outcomes are exactlyas projected, the contributors to workers’ compensation costs under self-insurance have beencalculated, as they would be disclosed in the financial statements. In line with theirpresentation in company accounts, the calculations have been performed on a gross of taxbasis. Attachment D sets out the full details of the projection.

To indicate how the calculations progress, those relating to the first two years of the longer-tail scenario are set out below:

First Year (Development Year Zero)

The workers’ compensation charge to the profit & loss statement is the sum of:

Claim payments11 $0.853mClaims handling expenses12 $0.085mContribution to the financial guarantee requirement13 $0.068mWorkers Compensation Authority contribution $0.290mReinsurance premium $0.240mOutstanding claims provision at year end $5.548mTotal cost in development year zero $7.085m

The cost of insurance charged to the accounts in development year zero is the premium;which is $7.250m.

Hence, workers’ compensation expenses recognised in the financial statements in the firstyear are lower than those for insurance by $0.165m.

9 See table 3.1.10 Section 2 acknowledges that this is a simplification; but expected later payments (primarily the employer excesson claims) should not be significant.11 Attachment A.112 10% of the claim payments13 1% of the contribution to the financial guarantee set out in table 2.2.


- 20 -

Second Year (Development Year One)

In the next year of run-off (development year 1) the contribution of the accident year tothe workers compensation expense recognised in the financial statements is the sum of:

Claim payments14 $0.986mClaims handling expense15 $0.099mContribution to the bank guarantee requirement16 $0.056mOutstanding claims provision at year end $4.560mless Outstanding claims provision at start of year ($5.548m)Total cost in development year one $0.152m

The cost of insurance in development year one is zero17 (it is also zero throughout theremainder of the run-off).

Therefore, workers’ compensation expense recognised in the financial statements indevelopment year one is higher than that under insurance by $0.152m.

The projected emergence of workers’ compensation expenses through the accounts for asingle accident year for the longer and shorter-tail scenarios is set out in Diagram 4.1. Theexpected costs are expressed as the amount by which they exceed the cost of insurance.

Diagram 4.1 – Excess of the expected cost of self-insurance over insurance bydevelopment year; full run-off of a single accident year

-200

-150

-100

-50

0

50

100

150

200

250

0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48

Development Year

$'0

00



14 Attachment A.115 10% of the claim payments16

1% of the contribution to the financial guarantee set out in table 2.2.17

This is a simplification, but not a financially important one. In practice an excess is usually payable on claims,so late-reported ones will generated some cash outflow for an insured entity. There may also be some expensesincurred in dealing with the insurer.


- 21 -

Several features are apparent:

Only in the development year zero is the profit and loss charge under self-insurancesignificantly lower than it is for insurance.

For the longer-tail scenario, for decades after development year zero, the accident yearproduces a profit and loss charge, where-as under insurance there is none. The chargeunder self-insurance arises because:o the accident year contributes to the financial guarantees required throughout the

run-off period; ando the unwind of discount is treated as a workers’ compensation expense under the

Accounting Standards, but any offsetting returns from retained funds arerecognised elsewhere in the financial statements. The release of risk marginproduces a partial offset, but the release is slow when the run-off tail is long, sothe net profit and loss charge in later development years remains significant.

Compared to the shorter-tail scenario, the longer-tail scenario produces a profit and losscharge which persists over a much longer period (decades), and which is of muchgreater financial significance. That is, where the tail is longer, the slower rate of claimpayment increases the financial significance of both the unwind of discount, and thecontribution to the financial guarantee.

As the illustrations assume that payments and claim handling expenses emerge exactly asprojected, no profit or charge emerges due to a difference between actual and projectedpayments.

Whether or not a risk margin is included in the outstanding claims provision makes asignificant difference to the pattern profit and loss charge emergence. Diagram 4.2 comparesthe expected emergence patterns assuming a 15% risk margin is included in the provision, andassuming no risk margin is held.

Diagram 4.2 – Excess of the expected cost of self-insurance over insurance bydevelopment year; full run-off of a single accident yearRisk margin impact

-1,000

-800

-600

-400

-200

0

200

400

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50

Development Year

$'0

00

Longer Tail Scenario - no risk margin

Longer Tail Scenario - 15% risk margin

Eliminating the risk margin, increases the up-front profit recognition substantially. The offsetis that there is no release of risk margin in later development years to mitigate the chargesarising from discount unwind and the maintenance of the financial guarantee.


- 22 -

In summary, considering costs associated with a policy year cohort of claims:

In the policy year itself, insurance generates an up-front charge which is higher than theexpected charge recognised in the financial statements under self-insurance.

Self-insurance will continue to generate a profit and loss charge throughout the run-offperiod, where-as insurance generates none.

These effects are magnified if a risk margin is not incorporated in the outstandingclaims provision. That is, the profit and loss charge under self-insurance will be lowerin the policy year itself by a much greater amount, but the expected ongoing charge inlater years will also be higher.

Under self-insurance, both the required financial guarantee, and the impact of discountunwind are approximately proportional to the outstanding claims liability at the start ofeach financial year. Consequently, the longer the liability tail, the higher and morepersistent the ongoing impact of the accident year’s claims are likely to be on chargesgenerated for future financial statements.

4.3 Longer-term financial statement impacts of self-insurance

This section explores the aggregate financial statement impact across groups of accident yearsfor an entity that has been self-insuring for an extended period. To examine the impact, themodelling assumes that the same claim payment profile applies to the entity in each accidentyear. However, as one goes back through prior accident years, the claim cost amountsinvolved are reduced by 8%pa (the reduction aims to take into account inflation and thegrowth in the business over time to its current size).

Additional prior years are brought into consideration by adding profit and loss componentsfrom successive development years, reduced by 8% pa.

For example, for an entity in its second year of self-insurance under the longer-tail scenario,the total profit & loss charge is estimated as the sum of:

the development year zero charge for the latest accident year ($7.085m as described inSection 4.1); and.

the development year one charge for the preceding accident year ($0.152m as describedin Section 4.1, but reduced by 8% to allow for inflation and business growth).

The result is summarised in the table 4.1. Table 4.1 also shows the profit & loss chargeassuming the current year is the third year of self-insurance.


- 23 -

Table 4.1 Workers’ compensation expenses – longer-tail scenarioExpected profit & loss charge in first, second and third year of self-insurance(development years 0, 1 & 2) $m

DevelopmentYear 0

DevelopmentYear 1

Aggregate atdevelopment

Year 1

DevelopmentYear 2

Aggregate atdevelopment

Year 2

Claim payments 0.853 0.913 1.766 0.519 2.315

Claims handling expense 0.085 0.091 0.177 0.052 0.231

Contribution to the financialguarantee requirement

0.068 0.052 0.120 0.042 0.162

Workers’ CompensationAuthority Contribution

0.290 0.000 0.290 0.000 0.290

Reinsurance Premium 0.240 0.000 0.240 0.000 0.240

Outstanding claims Provisionat year end

5.548 4.222 9.770 3.403 13.173

Outstanding claims Provisionat year start

0.000 (5.137) (5.137) (3.909) (9.047)

Aggregate 7.085 0.141 7.226 0.139 7.365

Under this scenario, the total workers’ compensation charge that the entity should expect torecognise if it is in its second year of self-insurance is $7.226m, if it is in its third then theexpected charge is $7.365m.

The process can be extended to estimate the profit & loss charge if the company is in its,fourth and later years of self-insurance by adding the impact from earlier accident years underthe same inflation and growth assumptions. The process can also be repeated for the shorter-tailed scenario.

Eventually the position is reached whereby assuming earlier starting points for self-insurancemakes no difference to the expected costs recognised in the current year’s profit & lossstatement (because the earliest accident year of self-insurance will have fully run off). In thispaper, that position is referred to as the ‘mature position’.

Full details leading to the estimate of expected cost recognised in the workers’ compensationexpense line of the financial statements in a mature position is set out in attachment D.2 andD.4. Diagram 4.3 summarises the progression leading to the mature position result, which isset out in table 4.2.


- 24 -

Diagram 4.3 Workers’ compensation cost comparisonWorkers’ compensation expense line only

6,600

6,800

7,000

7,200

7,400

7,600

7,800

8,000

8,200

8,400

1st Year 6th Year 11th

Year

16th

Year

21st

Year

26th

Year

31st

Year

36th

Year

41st

Year

46th

Year

Years since implementation

$'0

00

Insurance

Self-insurance Longer-Tail Scenario

Self-insurance Shorter-Tail Scenario

Table 4.2 Financial Statement Workers’ compensation expensesExpected charge at mature position $m

Longer-TailScenario

Shorter-TailScenario

Claim payments 4.514 4.683

Closing outstanding claims provision 32.471 20.832

Opening outstanding claims provision (30.066) (19.289)

Claims handling expenses 0.451 0.468

Workers Compensation Authority Contribution 0.290 0.290

Reinsurance Premium 0.240 0.240

Cost of financial guarantee 0.400 0.257

Total Cost 8.301 7.481

Closing outstanding claims provision as a proportionof claim and expense payments in the year

551% 351%

Table 4.2 also shows the ratio of the closing outstanding claims provision to the sum of claimpayments and accompanying expenses during the year. This statistic is discussed in thesection 5 commentary on profit and loss volatility.

The following features are apparent from table 4.2 and diagram 4.3:

Under the assumptions, in the mature position, insurance generates the lowest workers’compensation expense charge in the accounts. This is the opposite result to thatdetermined from the analysis in Section 3 (where returns on retained funds and taxeffects were explicitly modeled).

As tail-length increases, the expected workers’ compensation charge seen in theaccounts increases, driven by the impact of discount unwind and the cost of thefinancial guarantee.

As tail length increases, it takes more time to reach a mature position. During this timethe relative size of the workers’ compensation charge seen in the accounts increasesfrom one year to the next.


- 25 -

Initially, a move to self-insurance will be expected to be favorable for the workers’compensation expense line of the financial statements, but this position is temporary.

The workers’ compensation expense line does not capture an important benefit of self-insurance. That is, that cash outflow is deferred, and funds are retained that can beapplied to earn a return for the company. The effects of this deferral are capturedelsewhere in the financial statements. This needs to be appreciated when assessing thebenefits of the decision to self-insure.

The outstanding claims provision will ultimately be significantly higher under thelonger-tail scenario than under the shorter-tail scenario.

In summary, in cases where these is a financial benefit associated with self-insurance, it maynot seem so if one focuses on workers’ compensation costs as they are disclosed in thefinancial statements. This effect is magnified when liability tails are longer. Full assessmentof self-insurance effects needs to incorporate the impact of the capacity to use the retainedfunds for the general financing of the business. This becomes more important when liabilitytails are longer.

It is not uncommon for self-insurers to hold no risk margin in their outstanding claimsprovision. For the longer-tail scenario, diagram 4.4 illustrates the impact of removing the riskmargin on the reported expense.

Diagram 4.4 Workers’ compensation cost comparisonWorkers’ comp expense line only – Risk margin effect

6,600

6,800

7,000

7,200

7,400

7,600

7,800

8,000

8,200

8,400

1st Year 6th Year 11th

Year

16th

Year

21st

Year

26th

Year

31st

Year

36th

Year

41st

Year

46th

Year

Years since implementation

$'0

00 Insurance

Self-Insurance Longer-Tail Scenario - 15% margin applied

Self Insurance Longer-Tail Scenario - no risk margin applied

Notwithstanding the observation from table 3.4 that adding a risk margin should be expectedto reduce the ‘real’ cost of self-insurance to the company by a small amount (by generating anadditional tax deduction), it has the opposite effect on the appearance of the workers’compensation expense line in the financial statements. The workers’ compensation expensesappear higher when a margin is included.18

18 If the exercise is repeated for the shorter-tail scenario, removing the risk margin also reduces the amount ofworkers’ compensation expenses disclosed in the financial statements, but the size of the effect is much smaller.Under the assumptions set out in this paper, the expected expense still exceeds the expected cost of insurance, butonly by a trivial amount.


- 26 -

5. Profit & Loss Volatility and Risk

Unavoidably, workers’ compensation costs are volatile expense items. Volatility is a featureof the expense regardless of whether the arrangements to provide for the obligation take theform of conventional insurance, paid loss retro policies or self-insurance.

Conventional insurance carries the lowest volatility expectation, but it is nonetheless volatile.It carries cost certainty in the sense that once the policy year ends, the workers’ compensationexpense is finalised. However, claims outcomes for a policy year do affect the workers’compensation expense for future accounting periods, but only indirectly, through its impact infuture years on the premium formulae that apply in most jurisdictions.19

Premium rate volatility

The discussion in this section focuses on cost variability under self-insurance, and how this isaffected by a longer-tail liability profile, but it is worthwhile re-iterating that volatility is alsoa feature of premium rates when the liability is insured, and that the premium rate volatilitycan be significant.

Several factors contribute to premium rate volatility under insurance:

Workers’ compensation authorities (and insurers in the case of privately underwrittenschemes) continuously monitor the experience of the pool of risks they manage toestimate an aggregate breakeven premium rate. This is the average premium rate thatmust be collected from insured entities to provide for total expected claims from theupcoming policy year. For all schemes, there have been periods when this rate hasvaried substantially between years. Changes in this assessment contribute tofluctuations in rates charged to individual policyholders.

From time to time, workers’ compensation authorities have deliberately aimed tocollect amounts different to the breakeven premium rate (for example, to assist with thefunding of deficits or distribution of surplus)

The experience of individual industry classifications is monitored and individual tariffrates can be adjusted by degrees that vary from changes in the overall breakevenpremium rate

In most jurisdictions, claims experience over recent policy periods is factored into thepremium rate charged.

Volatility under self-insurance

In assessing the suitability of self-insurance as the mechanism to provide for its workers’compensation obligations, in addition to operational matters, a company needs to considerboth expected cost and variability.

There are two broad categories of cost variability that could be considered:

variability in the cost of claims between accident years; and variability in the contribution that workers’ compensation expenses make to profit

outcomes between accounting years.

Variability in the cost of claims between accident years can be significant, but longstandingself-insurers find that variability in the contribution that workers’ compensation expenses canmake to profit outcomes between financial years is much higher. This second category ofvariability is far and away the more problematic for them.

19 Where workers’ compensation risks are privately underwritten, no formula applies to premium setting, but onewould still expect an individual policyholder’s claims history to be factored into the premium rate.


- 27 -

The main reason that accounting year variability is much greater relates to the accountingtreatment of the outstanding claims provision. In particular, the most significant contributoris the treatment of revisions to estimates of the liability associated with prior-year claims.

Over time, the outstanding claims provision becomes a large balance sheet item. Under theaccounting standards, any change in the assessment of the liability associated with prior yearclaims is taken up in the profit and loss statement in the year the revision is made.Consequently, even a change that is small as a proportion of the outstanding claims provisioncan generate a profit and loss expense that can be very high in comparison to the expectedworkers’ compensation profit and loss charge. Even though the revision relates primarily topast years, it is the current year’s profit and loss statement that carries the impact.

This point is well appreciated by actuaries, but the impact can come as a surprise to new self-insurers. It is well worth emphasising the accounting treatment of revisions to prior-yearliability provisions, the fact that they are likely to occur each year, and their likely financialsignificance, to prospective self-insurers at the time that self-insurance viability is beingassessed. This variability will generally prove to be much more important to a self-insurerthan variations in cost between accident years.

Increases in the liability tail length magnify the potential for volatility to be generated fromrevision to prior-year liability estimates. The self-insurer will ultimately build up a muchlarger outstanding claims provision, with a financially significant contribution from manymore accident years than when the tail length was shorter. This generates higher levels ofsensitivity to (and hence risk from):

Changes to discount rates and inflation projections. These will generate liabilityestimate changes of increasing financial significance.

Valuation basis changes. The self-insurer is subject to greater ‘analysis risk’ in thesense that if components of the outstanding claims valuation basis emerge asinappropriate, then the rectification can affect a greater number of accident periods thanwould have been the case when the liability tail was shorter. This is especially true ofany changes required to the far tail. This increases the potential financial effect ofvaluation basis changes.

Environmental Effects. There is greater exposure to financial impacts from legislativechanges which may have some retrospective effect (an example from recent years is theincrease to the pension age).

As longer liability tails generate greater volatility across accounting the importance ofcommunicating its potential effects to current and prospective self-insurers is increased.

In what follows, a selection of the effects is examined in greater detail:

Discount Rate Changes

The relevant accounting standards require that the outstanding claims provision to be set asthe present value of the projected future payments associated with pre-balance date claims.The standards further require that discount rates should reflect current market assessments ofthe time value of money. The requirements are generally interpreted as mandating discountrates that reflect the yields available on a basket of Commonwealth Government securitieswith cashflows that match the projected claim payments associated with the liability.

Yields on Commonwealth Government securities fluctuate over time according to marketconditions, changing the required discount rates from one balance date to the next. Even ifthere are no changes to projections of future claim payments, the impact of relatively minorchanges in discount rates can have a significant effect.


- 28 -

The projections indicate that if:

the self-insurer is in the long-run ‘mature’ position described in section 4.3, and experience over the year has been exactly as projected, and no changes are made to the valuation projections,

then if discount rates were to be lower by 1% across the yield curve at the closing valuation,the closing outstanding claims provision would be:

$0.59m higher for the shorter-tail scenario; but $2.70m higher for the shorter-tail scenario.

For the shorter tail scenario, the total pre-tax workers’ compensation expense shown in theprofit and loss statement would increase from $7.48m to $8.08m (an increase ofapproximately 8%).

However, for the longer-tail scenario, the total pre-tax workers’ compensation expense shownin the profit and loss statement would increase much more significantly, from $8.30m to$11.03m (an increase of approximately 33%).

The effect is much greater in the longer-tail case for two reasons:

because of its longer duration, the liability estimate is more sensitive to discount ratechanges, and

as a multiple of the expected expense for the year, the outstanding claims provision islarger.

At least in part, insurers can immunise their insurance results against the impact of discountrate changes by investing the funds that support the outstanding claims provision inGovernment fixed interest securities of equivalent term. When interest rates change, themovement in the provision that needs to be brought to account is matched by a change in thevalue of assets (full matching can’t be achieved in the case of very long-tailed liabilitiesbecause, in practice, there are no securities of sufficiently long duration to permit it, but theeffect can at least be mitigated)

It is open to self-insurers to take a similar approach to mitigate the impact of discount ratechanges, but in practice few do, preferring instead to invest funds in the general business.Consequently, for self-insurers, when discount rates fall, claims costs in the financialstatements typically increase without the offsetting effect of increases in the value of amatching asset portfolio.

Self-insurers typically struggle to understand a higher profit and loss charge for workers’compensation expenses arising from discount rate changes that can occur even incircumstances where claims costs are actually well-controlled. It is clear that as theoutstanding claims provision builds after transition to a longer-tailed scenario, and thesensitivity of the profit and loss charge to discount rate changes grows, this source ofvolatility magnifies and becomes even more problematic for them.

For longstanding New South Wales self-insurers, it is worth highlighting that the process oftransition from the short to long tail scenario is still in progress. Sensitivity of the profit andloss charge to discount rate changes has grown over the past ten years or so, but it willcontinue to grow for many years yet.


- 29 -

Valuation Basis Changes

Initially, when a scheme changes from providing shorter-tail to longer-tail benefits, theprospect of setting an outstanding claims valuation basis that reflects experience is slim. Thevaluation basis will be based primarily on judgement, accessing whatever relevant collateralinformation can be drawn upon to estimate claims run-off patterns. Inevitably in suchcircumstances, the risk of misstatement is high, and the degree of misstatement could besignificant.

As claims experience under a longer-term scenario emerges, experience can begin to informvaluation basis changes. However, it will be many years from the commencement of alonger-term scenario until the far tail begins to emerge. In the interim, projectionassumptions will continue to be based to a large extent on the judgement of the actuary. Asthe experience emerges, and the properties of the tail become better appreciated, the valuationbasis can be changed to be more experience and less judgement-based. When those changesare made, many accident years are affected simultaneously, with the potential to generate asignificant effect on the profit and loss charge.

A particularly problematic scenario is one in which the actuary is initially unaware of theneed to apply judgement to provide for a longer-tail, and instead continues to developprojection assumptions by drawing on experience from accident years that were part of ashorter-term scenario. By the time it becomes apparent through experience that a longer-tailscenario has commenced, it is likely that the outstanding claims liability will be understatedacross several accident years. The impact on the profit and loss statement of rectifying thevaluation basis can be large.

Valuation basis changes will also be required as a matter of course to reflect any emergingtrends. In a shorter-tail scenario the likely impact of such changes is limited, since theoutstanding claims liability estimate will only be financially significant across a few accidentyears. By contrast, in a longer-tail scenario, the potential financial impact can be muchhigher, since by the time they are recognised, the impact will often affect the liability estimatefor many more accident years simultaneously.

Self-insurance outstanding claims analysis is typically based on small datasets. Theexperience on which valuation bases are set, are therefore affected to a greater degree bychance variation. Consequently, in percentage terms there is greater scope for moresignificant hindsight adjustments.

In the context of a self-insurer, where the data available for analysis is typically sparse,valuation basis changes generating a 10% increase in the outstanding claims liability estimatewould not normally be regarded as remarkable; greater increases would not be unusual. Inthe absence of any other changes, in the calculation examples set out in this paper a 10%increase in the closing outstanding claims liability estimate would increase the workers’compensation profit and loss charge:

from $7.481m to $9.564m for the shorter-tail scenario (an increase of 28%); and from $8.301m to $11.548m in the longer-tail scenario (an increase of 39%).

Once again, the volatility in workers’ compensation expenses is significantly amplified whenliability tails are longer.


- 30 -

Because self-insurers are exposed to greater volatility when liability tails are longer, itbecomes more important that their expectations with respect to result stability are setrealistically. This is particularly the case when an entity has self-insured for an extendedperiod in a jurisdiction such as New South Wales, or has transferred from other statejurisdictions to Comcare. This is because although the self-insurer may think they appreciatethe degree of result volatility they should anticipate, in reality it is likely to be greater than inthe past, and is likely to continue increasing for some time yet.

Random variation that is not so random

An unfortunate reality for self-insurers is that circumstances that are likely to lead tohindsight increases to outstanding claims liability estimates are not entirely random. Theytend to be correlated with circumstances which are adverse for most companies’ widerfinancial results. For example:

reduced interest rates (requiring discount rate reductions) tend to accompany a weakeconomy (the environment around the global financial crisis provides a stark example);

a weak economy often reduces return to work prospects, leading to deteriorating claimscontinuance rates.

adverse circumstances specific to the self-insurer resulting in retrenchments canincrease claims from the retrenched; and

in an environment where increased retrenchments are occurring, return to workprospects are likely to be poorer, leading to deteriorating claims continuance rates.

This is another point that is relevant to an entity considering the merits of self-insurance,which is worthwhile emphasising as part of any viability assessment.

A note on new Self-insurers and their initial ‘honeymoon’ period

A special case of gradually increasing propensity for financial reporting outcomes to bevolatile as the outstanding claims provision gradually builds towards a mature level is thecase of a new self-insurer.

In the early years following a decision to self-insure it is common for a new self-insurer to behighly satisfied with its decision, particularly where the liability tail is long. The decision willhave been made after a viability assessment which (if the company did decide to self-insure)would have indicated worthwhile cost savings were likely. For the first few annualvaluations, the majority of the cost will be embedded in the outstanding claims liabilityestimate, which will most likely be made by the same actuary who was responsible for theviability assessment. With little additional claims experience to inform the valuation basis,the valuation will commonly apply projection assumptions that are not very different to thoseon which the viability assessment was based. Consequently, self-insurance cost outcomeswill appear to be quite close to those anticipated by the viability assessment.

A new self-insurer will experience expense outcome variations between years that primarilyreflect cost variations between accident years. It takes some years to build up an outstandingclaims provision big enough so that revisions to liability estimates for prior years, arisingfrom discount rate changes and valuation basis changes, emerge as the much greater long-term source of volatility.

It is important that new self-insurers are aware that the relatively low volatility in costoutcomes in the early self-insurance years does not reflect what is likely in the longer-term,once ‘prior-year effects’ become more significant. Similarly, in the early years aftertransition from a shorter-tail to a longer-tail scenario, it is highly likely that profit and lossvolatility will be at significantly lower levels than is likely to become the norm in the long-term.


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6. The Emergence of Paid Loss Retro Arrangements

Paid Loss Retro (PLR) arrangements have been available in New South Wales since 2009,they are proposed to be available in South Australia from July 2012. It may be nocoincidence that these jurisdictions are two for which we have drawn attention to as having aliability tail length that has increased over time.

PLR policies represent a mid-ground arrangement that sits partway between full acceptanceof all of the risks that accompany self-insurance, and the much lower risk that accompaniesconventional insurance.

This section of the paper provides a brief overview of the operation of PLR arrangements asthey apply in New South Wales. More detail can be found in Attachment E. However, for adefinitive description of how the policies operate, the Insurance Premiums Order coveringPaid Loss Retro policies should be consulted along with other material on the New SouthWales WorkCover website.

Principal Features

Under a PLR arrangement, premium for a policy year is paid by instalments over a five-yearperiod. Except for the first, the amount of the instalments is not known at the policy’scommencement. Subject to a minimum and maximum, they vary depending on the progressof claims costs that arise from injuries suffered during the policy period, up until the pointwhere the instalment is calculated.

In addition to the payment of premium, a PLR policyholder is required to lodge a financialguarantee with WorkCover. For each policy year for which the final instalment premium hasnot yet been determined, the amount of the guarantee is equal to the maximum total premiumthat might ultimately be paid under the policy, less the sum of instalments paid to date.

The initial instalment premium is a multiple of the tariff premium that would have appliedunder conventional insurance. At other instalment points, reported incurred cost from thepolicy year is determined (subject to certain exclusions and caps) and scaled by factors thatvary according to the time since the policy period commenced. Previous instalmentpremiums that have already been paid are deducted from the newly calculated premium todetermine the new instalment amount (which may be a refund)

Once the final instalment premium is paid, the employer carries no further liability in respectof the policy period.

The premium formula is calibrated so that the up-front premium is much lower than thepremium payable under a conventional insurance policy, and further premium amounts arelikely to be payable at each of the calculation points over the following five years.

PLR policies present a mechanism for employers to bear costs that are more reflective of theirworkers’ compensation claims experience than is the case for conventional policies, whilelimiting some of the more extreme effects associated with the lengthening payment tail.Compared to self-insurance, these policies should result in lower (but still significant)expense line volatility and a smaller financial guarantee requirement. However, funds are stillbuilt up within the firm, albeit to a lesser degree than under self-insurance.

Claims are managed by agents to the New South Wales WorkCover Scheme, as is the case forclaims under conventional insurance policies.


- 32 -

Key differences between PLR policies, self-insurance and conventional insurance

The following list draws out key differences between the characteristics of PLR policies,conventional policies, and self-insurance:

Initial deposit premium under a PLR policy is much lower than under a conventionalinsurance policy, but further premium instalments (some of which could potentially bepartial refunds) will continue for five years. Under self-insurance, payments willextend over a much longer period; possibly decades.

In a mature position, the total premium payments required of a PLR participant mightnot be noticeably different than under conventional insurance, since, in addition to aninstalment premium being required for the upcoming year, premium adjustments willbe required for five preceding policy periods.

Ultimately, for each policy year, the premium paid under a PLR arrangement is moreheavily dependent upon the claims experience from that policy year than is the case fora conventional insurance policy. In this sense, the premium is more responsive tofavourable or unfavourable experience. However, the premium is payable over anextended period of five years, so the full benefit (in the case of favourable experience)or strain (in the case of unfavourable experience) crystallises more slowly. Selfinsurance ultimately delivers the full financial effects of claims experience from theaccident year, but over a very extended period.

It can be well-argued that, compared with conventional insurance, PLR policies providegreater motivation for good occupational health and safety practices and better claimsmanagement efforts, as there is a closer link between claims costs and premiums. Thislink is less pronounced than under self-insurance where there is a direct relationship.

Outbound payments are slower under a PLR policy than they are under conventionalinsurance, but are much quicker than under self-insurance. Hence, compared to aconventional insurance policy, a PLR arrangement retains additional funds in thebusiness for a period, but the effect is considerably less extensive than under self-insurance.

PLR policies are likely to generate profit and loss charge outcomes that are significantlymore volatile across accounting years than conventional insurance policies (althoughthis is partly dependant on how future premium obligations in respect of past policyperiods is treated under the accounting standards). However the volatility will be muchless pronounced than under self-insurance.

Under a PLR arrangement, in addition to premium, a cost is incurred by theypolicyholder by virtue of the requirement to maintain a financial guarantee. No suchadditional cost accompanies a conventional policy.

Requirements that an employer must satisfy before the company can be admitted to aPLR arrangement are less stringent than the full requirements to be a self-insurer. Atthe time of writing, in New South Wales, PLR applicants must :

o Have a minimum basic tariff premium of $500ko Provide an annual written commitment from the CEO and/or Board. The

commitment is to set internal targets against key performance indicatorso Demonstrate to WorkCover –

- there is no undue volatility in the claims history- the existence of a satisfactory OH& S and workers’ compensation

compliance history- its return to work program is satisfactory.


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7. Conclusion

This paper has shown that longer tailed liabilities amplify both the expected benefits and therisks associated with self-insurance. The advantages of deferring cash outflows from thecompany are heightened, since the deferral is for a longer period. However, this comes at theprice of increased volatility in the workers’ compensation expenses, and increased risk ofliability mis-statement. Some on-costs increase non-trivially, and there are effects on thecompany’s financial statements that may not be obvious, but which ought to be appreciated.

Because a longer liability tail increases the risk associated with self-insurance, for someentities, it is possible that it could tip the balance in their assessment to the conclusion thatself-insurance is not the most suitable way of financing workers’ compensation obligations.In two jurisdictions that have experienced lengthened liability tails, paid loss retroarrangements have been introduced that may be attractive to such entities.


- 34 -

Bibliography

Cohen A & Grace E, (2002) “WorkCover Authority of NSW Actuarial Review of theOutstanding Liabilities of the WorkCover Scheme Statutory Funds at 31 December 2001”.

Marjoribanks, C & Woofe N (1998) “Current Issues for Self Insurers”, presented to theInstitute of Actuaries of Australia 7th Accident Compensation Seminar.

Hart, D (1998) “Assessing the viability of Workers’ Compensation Self-Insurance”, presentedto the Institute of Actuaries of Australia 7th Accident Compensation Seminar.

Playford M & Wright D, (2011) “WorkCover NSW Actuarial Valuation of OutstandingClaims for the NSW Nominal Insurer at 31 December 2010”.


Attachment A

A.1 Direct Claim Payments Profile

DevelopmentYear

ShorterProfile

LongerProfile

DevelopmentYear

ShorterProfile

LongerProfile

0 522 853 38 <0.1 49

1 824 986 39 <0.1 45

2 983 640 40 <0.1 42

3 1,180 563 41 0 39

4 959 472 42 0 36

5 506 370 43 0 33

6 284 300 44 0 30

7 191 254 45 0 28

8 136 225 46 0 25

9 99 190 47 23

10 78 162 48 21

11 66 142 49 19

12 56 132 50 18

13 52 124 51 17

14 61 116 52 16

15 37 109 53 14

16 22 105 54 13

17 16 101 55 12

18 12 97 56 11

19 8 94 57 10

20 5 91 58 8

21 3 89 59 4

22 2 87 60 0

23 1 85

24 0.8 83

25 0.6 82

26 0.4 80

27 0.3 79

28 0.3 77

29 0.2 75

30 0.2 73

31 0.2 70

32 0.19 68

33 0.17 65

34 0.14 62

35 0.12 59

36 0.10 55

37 <0.1 52

A.2 Risk Free Discount Rates

DevelopmentYear

Rate% pa

0 4.76

1 4.80

2 4.90

3 5.06

4 5.27

5 5.52

6 5.79

7 and later 5.83

To determine discounted provisions, risk free rates are taken to be static.That is, the yield curve is the same by duration at each balance date


A.3 Longer-Tail Scenario - Outstanding Claims Provision and its composition atthe end of each development year, for a single accident year

DevelopmentYear

Centralestimate

ClaimsHandlingExpense

Risk MarginTotal

Provision

TotalProvisionexcluding

CHE0 4,386 439 724 5,548 5,110

1 3,605 360 595 4,560 4,199

2 3,138 314 518 3,969 3,655

3 2,726 273 450 3,448 3,176

4 2,386 239 394 3,019 2,780

5 2,134 213 352 2,700 2,486

6 1,941 194 320 2,456 2,262

7 1,785 178 295 2,258 2,079

8 1,651 165 272 2,089 1,923

9 1,546 155 255 1,955 1,801

10 1,464 146 242 1,852 1,706

11 1,398 140 231 1,769 1,629

12 1,339 134 221 1,694 1,560

13 1,286 129 212 1,626 1,498

14 1,237 124 204 1,565 1,441

15 1,193 119 197 1,509 1,389

16 1,150 115 190 1,455 1,340

17 1,110 111 183 1,404 1,293

18 1,071 107 177 1,355 1,248

19 1,033 103 171 1,307 1,204

20 996 100 164 1,260 1,160

21 959 96 158 1,213 1,117

22 922 92 152 1,166 1,074

23 884 88 146 1,119 1,030

24 847 85 140 1,071 987

25 809 81 134 1,024 943

26 771 77 127 975 898

27 732 73 121 926 853

28 693 69 114 876 807

29 653 65 108 826 761

30 614 61 101 777 715

31 575 58 95 728 670

32 537 54 89 679 625

33 499 50 82 631 581

34 462 46 76 585 539

35 427 43 70 540 497

36 393 39 65 497 458

37 360 36 59 456 420

38 330 33 54 417 384

39 301 30 50 380 350

40 274 27 45 346 319

41 248 25 41 314 289

42 225 22 37 284 262

43 203 20 33 256 236

44 182 18 30 230 212

45 163 16 27 206 190

46 146 15 24 184 170

47 130 13 21 164 151

48 116 12 19 146 135

49 102 10 17 129 118

50 88 9 15 112 103

51 75 8 12 95 88


A.3 (cont.)

DevelopmentYear

Centralestimate


Risk MarginTotal

Provision


CHE52 63 6 10 80 73

53 51 5 8 65 60

54 41 4 7 51 47

55 30 3 5 38 35

56 21 2 3 26 24

57 12 1 2 15 14

58 4 0 1 5 5

59 0 0 0 0 0

60 0 0 0 0 0

* Discounting is at risk-free rates

A.4 Shorter-Tail Scenario - Outstanding Claims Provision and its composition atthe end of each development year, for a single accident year

DevelopmentYear

Centralestimate


Risk MarginTotal

Provision


CHE0 4,719 472 779 5,970 5,498

1 4,112 411 678 5,202 4,791

2 3,310 331 546 4,187 3,856

3 2,266 227 374 2,866 2,639

4 1,396 140 230 1,766 1,627

5 948 95 156 1,200 1,105

6 705 71 116 892 822

7 545 55 90 670 635

8 434 43 72 549 506

9 355 35 59 449 413

10 293 29 48 371 342

11 240 24 40 304 280

12 195 19 32 247 227

13 152 15 25 192 177

14 96 10 16 122 112

15 64 6 10 80 74

16 44 4 7 56 51

17 30 3 5 37 34

18 19 2 3 24 22

19 12 1 2 15 14

20 8 1 1 10 9

21 6 1 1 7 7

22 4 0 1 5 5

23 3 0 1 4 4

24 3 0 0 3 3

25 2 0 0 3 2

26 2 0 0 2 2

27 2 0 0 2 2

28 1 0 0 2 2

29 1 0 0 1 1

30 1 0 0 1 1


A.4 (cont.)

DevelopmentYear

Centralestimate


Risk MarginTotal

Provision


CHE31 1 0 0 1 1

32 1 0 0 1 1

33 1 0 0 1 1

ATTACHMENT B.1 - FINANCIAL GUARANTEE - Longer Tail Scenario in mature position

Projected Future Payments $'000 by Transaction Year Ending 30 June (excluding CHE)Accident Year excl incl

Ending CHE CHE

30-Jun 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 Undisc Disc

2012 853 986 640 563 472 370 300 254 225 190 162 142 132 124 116 109 105 101 97 94 91 89 87 85 83 82 80 79 77 75 73 70 68 65 62 59 55 52 49 45 42 39 36 33 30 28 25 23 21 19 18 17 16 14 13 12 11 10 8 4 7,880 5,5002011 913 593 521 437 343 278 236 208 176 150 132 122 115 108 101 97 93 90 87 85 83 81 79 77 76 74 73 71 69 67 65 63 60 57 54 51 48 45 42 39 36 33 31 28 26 23 21 19 18 17 16 15 13 12 11 10 9 8 4 6,506 4,4672010 549 483 405 317 257 218 193 163 139 122 113 106 100 94 90 86 83 80 78 77 75 73 71 70 69 67 66 64 62 60 58 56 53 50 47 45 42 39 36 33 31 28 26 24 22 20 18 17 16 15 13 12 11 10 9 8 7 3 5,179 3,3992009 447 375 294 238 202 178 151 129 113 105 98 92 87 83 80 77 75 73 71 69 68 66 65 64 62 61 59 58 56 54 51 49 47 44 41 39 36 33 31 28 26 24 22 20 18 16 15 14 13 12 11 10 9 8 8 7 3 4,287 2,7402008 347 272 220 187 165 140 119 105 97 91 85 80 77 74 71 69 67 66 64 63 61 60 59 58 56 55 53 52 50 48 45 43 41 38 36 33 31 29 26 24 22 21 19 17 15 14 13 12 12 11 10 9 8 7 6 3 3,556 2,2042007 252 204 173 153 129 110 97 90 84 79 74 71 69 66 64 62 61 59 58 57 56 54 53 52 51 49 48 46 44 42 40 38 35 33 31 29 26 24 22 21 19 17 16 14 13 12 12 11 10 9 8 7 7 6 3 2,971 1,7862006 189 160 142 120 102 90 83 78 73 69 66 64 61 59 58 56 55 54 53 51 50 50 48 47 46 44 43 41 39 37 35 33 31 29 26 24 23 21 19 18 16 14 13 12 11 11 10 9 8 7 7 6 5 2 2,517 1,4792005 148 131 111 94 83 77 72 68 64 61 59 57 55 53 52 51 50 49 48 47 46 45 44 42 41 39 38 36 34 32 30 28 26 25 23 21 19 18 16 15 13 12 11 11 10 9 8 8 7 6 6 5 2 2,156 1,2462004 121 103 87 77 71 67 63 59 57 55 52 51 49 48 47 46 45 44 43 42 42 40 39 38 36 35 33 32 30 28 26 24 23 21 19 18 16 15 14 12 11 10 10 9 8 8 7 6 6 5 5 2 1,859 1,0612003 95 81 71 66 62 58 55 52 50 48 47 46 45 44 43 42 41 40 39 38 37 36 35 34 32 31 29 28 26 24 23 21 19 18 17 15 14 13 11 10 10 9 8 8 7 7 6 5 5 4 2 1,609 9092002 75 66 61 57 54 51 48 47 45 43 42 41 40 39 39 38 37 36 36 35 34 32 31 30 29 27 26 24 23 21 19 18 17 15 14 13 12 11 10 9 8 8 7 7 6 5 5 4 4 2 1,401 7882001 61 56 53 50 47 45 43 42 40 39 38 37 37 36 35 34 34 33 32 31 30 29 28 27 25 24 22 21 19 18 17 15 14 13 12 11 10 9 8 8 7 7 6 6 5 5 4 4 2 1,228 6912000 52 49 46 43 42 40 38 37 36 35 35 34 33 32 32 31 31 30 29 28 27 26 25 23 22 21 19 18 17 15 14 13 12 11 10 9 8 8 7 7 6 6 5 5 4 4 3 2 1,081 6111999 45 43 40 38 37 36 35 34 33 32 31 31 30 29 29 28 27 27 26 25 24 23 22 20 19 18 17 15 14 13 12 11 10 9 8 8 7 7 6 6 5 5 4 4 4 3 1 952 5421998 40 37 36 34 33 32 31 30 30 29 28 28 27 27 26 25 25 24 23 22 21 20 19 18 17 15 14 13 12 11 10 10 9 8 7 7 6 6 5 5 4 4 4 3 3 1 840 4811997 34 33 32 31 30 29 28 27 27 26 26 25 25 24 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 10 9 8 7 6 6 6 5 5 5 4 4 3 3 3 1 741 4291996 31 29 28 27 27 26 25 25 24 24 23 23 22 22 21 20 20 19 18 17 16 15 14 13 12 11 10 10 9 8 7 7 6 6 5 5 5 4 4 3 3 3 2 1 654 3831995 27 26 25 25 24 24 23 23 22 22 21 21 20 20 19 18 18 17 16 15 14 13 12 11 10 10 9 8 8 7 6 6 5 5 5 4 4 4 3 3 3 2 1 577 3421994 24 23 23 22 22 21 21 20 20 20 19 19 18 18 17 16 15 15 14 13 12 11 11 10 9 8 8 7 6 6 5 5 5 4 4 4 3 3 3 2 2 1 509 3061993 22 21 21 20 20 19 19 19 18 18 17 17 16 16 15 14 14 13 12 11 10 10 9 8 8 7 6 6 5 5 4 4 4 4 3 3 3 2 2 2 1 449 2731992 20 19 19 18 18 18 17 17 16 16 16 15 14 14 13 13 12 11 10 10 9 8 8 7 7 6 5 5 4 4 4 4 3 3 3 3 2 2 2 1 396 2441991 18 17 17 17 16 16 16 15 15 14 14 13 13 12 12 11 10 10 9 8 8 7 7 6 6 5 5 4 4 4 3 3 3 3 2 2 2 2 1 348 2181990 16 16 15 15 15 14 14 14 13 13 12 12 11 11 10 10 9 8 8 7 7 6 6 5 5 4 4 4 3 3 3 3 2 2 2 2 2 1 306 1941989 15 14 14 14 13 13 13 12 12 12 11 11 10 9 9 8 8 7 7 6 6 5 5 4 4 3 3 3 3 3 2 2 2 2 2 1 1 268 1731988 13 13 13 12 12 12 11 11 11 10 10 9 9 8 8 7 7 6 6 5 5 4 4 4 3 3 3 3 2 2 2 2 2 2 1 1 235 1531987 12 12 11 11 11 11 10 10 9 9 9 8 8 7 7 6 6 5 5 4 4 4 3 3 3 3 2 2 2 2 2 2 1 1 1 206 1361986 11 11 10 10 10 9 9 9 8 8 7 7 7 6 6 5 5 4 4 4 3 3 3 3 2 2 2 2 2 2 1 1 1 1 179 1201985 10 10 9 9 9 8 8 8 7 7 7 6 6 5 5 4 4 4 3 3 3 3 2 2 2 2 2 2 1 1 1 1 0 156 1061984 9 9 8 8 8 8 7 7 6 6 6 5 5 5 4 4 4 3 3 3 2 2 2 2 2 2 2 1 1 1 1 0 135 931983 8 8 8 7 7 7 6 6 6 5 5 5 4 4 4 3 3 3 2 2 2 2 2 2 2 1 1 1 1 1 0 117 821982 7 7 7 6 6 6 6 5 5 5 4 4 4 3 3 3 3 2 2 2 2 2 2 1 1 1 1 1 1 0 101 711981 6 6 6 6 5 5 5 4 4 4 4 3 3 3 3 2 2 2 2 2 2 1 1 1 1 1 1 1 0 87 621980 6 6 5 5 5 4 4 4 4 3 3 3 3 2 2 2 2 2 2 1 1 1 1 1 1 1 1 0 74 541979 5 5 5 4 4 4 4 3 3 3 3 2 2 2 2 2 2 1 1 1 1 1 1 1 1 1 0 64 471978 5 4 4 4 4 3 3 3 3 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 0 54 401977 4 4 4 3 3 3 3 2 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 0 46 341976 3 3 3 3 3 2 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 0 39 291975 3 3 3 2 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 0 0 33 251974 3 2 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 28 211973 2 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 23 181972 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 19 151971 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 16 131970 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 13 111969 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 11 91968 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 9 81967 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 7 61966 1 1 1 1 1 0 0 0 0 0 0 0 0 0 6 51965 1 1 1 0 0 0 0 0 0 0 0 0 0 5 41964 1 0 0 0 0 0 0 0 0 0 0 0 4 41963 0 0 0 0 0 0 0 0 0 0 0 3 31962 0 0 0 0 0 0 0 0 0 0 3 21961 0 0 0 0 0 0 0 0 0 2 21960 0 0 0 0 0 0 0 0 2 21959 0 0 0 0 0 0 0 1 11958 0 0 0 0 0 0 1 11957 0 0 0 0 0 1 11956 0 0 0 0 0 01955 0 0 0 0 01954 0 0 0 01953 0 0 0

Projected Undiscounted payments - all accident years except 2012 49,953 31,645

3,661 2,968 2,565 2,207 1,911 1,694 1,530 1,398 1,285 1,197 1,131 1,080 1,034 993 956 924 893 864 836 809 782 755 728 701 674 646 618 589 559 529 499 469 439 409 380 352 325 299 274 251 229 208 189 171 154 139 124 111 100 88 77 66 56 46 37 28 19 11 4 0

Disc Factor 0.977 0.932 0.889 0.847 0.805 0.764 0.723 0.684 0.646 0.610 0.577 0.545 0.515 0.487 0.460 0.434 0.410 0.388 etc

Discounted 3,577 2,767 2,281 1,870 1,540 1,295 1,106 955 830 731 652 588 532 483 440 401 367 335 306 280 256 233 213 194 176 159 144 130 116 104 93 82 73 64 56 49 43 37 32 28 24 21 18 15 13 11 9 8 7 6 5 4 3 2 2 1 1 0 0 0

Total Outstanding Claims Liability Estimate at 30.6.11 (X)

Total Outstanding Claims Liability Estimate at 30.6.11 including claims handling Expenses(Y) = (X) x 1.1

Total Outstanding Claims Liability Estimate at 30.6.11 including claims handling Expenses and Risk Margin (Z) = (Y) x 1.15

Components of Financial Guarantee Calculation

central est @ 30.6.11 (A)

Expected Liability for claims expected to rise in next 12 months (B)

Expected payments 11/12 (C) sum of blue-shaded payments ; plus 10% to allow for claims handling expenses

(D) = (A) + (B) - (C)

Greater of A and D (E)

Margin (50%) (F) = 50% x (E)

Financial Guarantee Amount (G) = (E) + (F)

Totals

40,019

4,965

26,679

26,679

13,340

26,145

5,500

23,768

26,145

30,066

42,073

23,768

Attachment B.2 - Longer Tail Scenario Financial Guarantee Requirement at Mature Position - Breakdown by Accident Year

- Longer Tail Scenario Financial Guarantee Prospective cost for upcoming Accident Year

Total Development Total Contribution Risk-Free Present Value

Accident Year Central Estimate of Expected Margin Contribution Year Transaction Contribution to Cost of Discount of (O) at

Year Outstanding Claims Payment to Financial Year to Financial Financial Guarantee Factor Risk-Free

Ending at 30.6.11 in Guarantee Ending Guarantee for for 2011/12 Rates

30 June 2011/12 30 June 2011/12 Accident Year

Accident Year

(H) (I) (J) = (H) - (I) (L) = (J) + (K) (M) (N) = (L) x 1.08 ^ (M) (O) = 1% x (N) (P)

(K) = 50% x (G)

2012* 5,500 938 4,562 2,281 6,843 0 2012 6,843 68 1.0000 68

2011 4,467 1,004 3,463 1,732 5,195 1 2013 5,610 56 0.9545 54

2010 3,399 604 2,795 1,398 4,193 2 2014 4,891 49 0.9108 45

2009 2,740 492 2,248 1,124 3,372 3 2015 4,248 42 0.8682 37

2008 2,204 382 1,822 911 2,733 4 2016 3,718 37 0.8264 31

2007 1,786 277 1,509 755 2,264 5 2017 3,326 33 0.7851 26

2006 1,479 208 1,272 636 1,907 6 2018 3,027 30 0.7440 23

2005 1,246 163 1,083 541 1,624 7 2019 2,783 28 0.7033 20

2004 1,061 134 927 464 1,391 8 2020 2,574 26 0.6645 17

2003 909 105 804 402 1,206 9 2021 2,411 24 0.6279 15

2002 788 83 705 353 1,058 10 2022 2,283 23 0.5933 14

2001 691 67 624 312 935 11 2023 2,181 22 0.5606 12

2000 611 58 553 277 830 12 2024 2,089 21 0.5297 11

1999 542 50 492 246 738 13 2025 2,006 20 0.5005 10

1998 481 44 438 219 657 14 2026 1,930 19 0.4729 9

1997 429 38 391 196 587 15 2027 1,861 19 0.4469 8

1996 383 34 349 175 524 16 2028 1,795 18 0.4222 8

1995 342 30 312 156 468 17 2029 1,732 17 0.3990 7

1994 306 27 279 139 418 18 2030 1,671 17 0.3770 6

1993 273 24 249 125 374 19 2031 1,613 16 0.3562 6

1992 244 22 222 111 333 20 2032 1,554 16 0.3366 5

1991 218 20 198 99 297 21 2033 1,496 15 0.3180 5

1990 194 18 176 88 265 22 2034 1,438 14 0.3005 4

1989 173 16 157 78 235 23 2035 1,380 14 0.2839 4

1988 153 14 139 69 208 24 2036 1,322 13 0.2683 4

1987 136 13 123 61 184 25 2037 1,263 13 0.2535 3

1986 120 12 108 54 163 26 2038 1,203 12 0.2395 3

1985 106 11 95 48 143 27 2039 1,142 11 0.2263 3

1984 93 10 84 42 125 28 2040 1,081 11 0.2139 2

1983 82 9 73 36 109 29 2041 1,019 10 0.2021 2

1982 71 8 63 32 95 30 2042 958 10 0.1909 2

1981 62 7 55 28 83 31 2043 897 9 0.1804 2

1980 54 6 48 24 71 32 2044 838 8 0.1705 1

1979 47 6 41 20 61 33 2045 779 8 0.1611 1

1978 40 5 35 18 53 34 2046 721 7 0.1522 1

1977 34 4 30 15 45 35 2047 666 7 0.1438 1

1976 29 4 26 13 38 36 2048 613 6 0.1359 1

1975 25 3 22 11 33 37 2049 562 6 0.1284 1

1974 21 3 18 9 28 38 2050 514 5 0.1213 1

1973 18 2 16 8 23 39 2051 469 5 0.1146 1

1972 15 2 13 7 20 40 2052 427 4 0.1083 0

1971 13 2 11 6 17 41 2053 387 4 0.1024 0

1970 11 2 9 5 14 42 2054 351 4 0.0967 0

1969 9 1 8 4 12 43 2055 316 3 0.0914 0

1968 8 1 6 3 10 44 2056 284 3 0.0863 0

1967 6 1 5 3 8 45 2057 254 3 0.0816 0

1966 5 1 4 2 7 46 2058 227 2 0.0771 0

1965 4 1 4 2 5 47 2059 203 2 0.0728 0

1964 4 1 3 1 4 48 2060 180 2 0.0688 0

1963 3 0 2 1 4 49 2061 159 2 0.0650 0

1962 2 0 2 1 3 50 2062 138 1 0.0615 0

1961 2 0 2 1 2 51 2063 118 1 0.0581 0

1960 2 0 1 1 2 52 2064 98 1 0.0549 0

1959 1 0 1 0 1 53 2065 80 1 0.0518 0

1958 1 0 1 0 1 54 2066 63 1 0.0490 0

1957 1 0 0 0 1 55 2067 47 0 0.0463 0

1956 0 0 0 0 0 56 2068 32 0 0.0437 0

1955 0 0 0 0 0 57 2069 19 0 0.0413 0

1954 0 0 0 0 0 58 2070 6 0 0.0390 0

31,644 4,965 26,679 13,340 0 40,019 474

Column (N) is plotted in Diagram 2.3.

The total sum in Column (P) is quoted under diagram 2.3

Prospective Cost for Upcoming Accident YearContribution to Financial Guarantee Requirement by Accident Year - Mature Posn

ATTACHMENT B.3 - FINANCIAL GUARANTEE - Shorter Tail Scenario in mature position

Projected Future Payments $'000 by Transaction Year Ending 30 June (excluding CHE)Accident Year excl incl

Ending CHE CHE

30-Jun 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 Undisc Disc

2012 522 824 983 1,180 959 506 284 191 136 99 78 66 56 52 61 37 22 16 12 8 5 3 2 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 6,104 5,500

2011 763 910 1,092 888 468 263 177 125 91 72 61 52 48 57 34 20 15 11 7 4 3 2 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5,169 4,807

2010 842 1,012 822 434 244 164 116 85 67 57 48 44 53 31 19 14 10 7 4 2 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4,080 3,878

2009 937 761 402 226 152 108 78 62 53 44 41 49 29 17 13 9 6 4 2 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2,997 2,890

2008 705 372 209 141 100 73 57 49 41 38 45 27 16 12 9 6 3 2 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,908 1,832

2007 344 193 130 92 67 53 45 38 35 42 25 15 11 8 5 3 2 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,114 1,045

2006 179 121 85 62 49 42 35 33 39 23 14 10 7 5 3 2 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 713 657

2005 112 79 58 45 39 33 30 36 21 13 10 7 4 3 2 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 494 453

2004 73 53 42 36 30 28 33 20 12 9 6 4 2 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 354 324

2003 49 39 33 28 26 31 18 11 8 6 4 2 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 260 239

2002 36 31 26 24 28 17 10 8 5 4 2 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 195 181

2001 28 24 22 26 16 9 7 5 3 2 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 147 138

2000 22 21 24 15 9 7 5 3 2 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 110 105

1999 19 23 13 8 6 4 3 2 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 81 79

1998 21 12 7 6 4 3 2 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 58 57

1997 12 7 5 4 2 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 34 33

1996 6 5 3 2 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 21 20

1995 4 3 2 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 14 13

1994 3 2 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 8 8

1993 2 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5 5

1992 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3 3

1991 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2

1990 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1

1989 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1

1988 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1

1987 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1986 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1985 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1984 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1983 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1982 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1981 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1980 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1979 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1978 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1977 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1976 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1975 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1974 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1973 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1972 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1971 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1970 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1969 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1968 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1967 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1966 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1965 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1964 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1963 0 0 0 0 0 0 0 0 0 0 0 0 0

1962 0 0 0 0 0 0 0 0 0 0 0 0

1961 0 0 0 0 0 0 0 0 0 0 0

1960 0 0 0 0 0 0 0 0 0 0

1959 0 0 0 0 0 0 0 0 0

1958 0 0 0 0 0 0 0 0

1957 0 0 0 0 0 0 0

1956 0 0 0 0 0 0

1955 0 0 0 0 0

1954 0 0 0 0

1953 0 0 0

Projected Undiscounted payments - all accident years except 2012 23,878 22,273

4,161 3,669 2,980 2,039 1,243 837 620 478 380 312 259 214 175 137 87 57 40 27 17 11 7 5 4 3 2 2 2 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Disc Factor 0.977 0.932 0.889 0.847 0.805 0.764 0.723 0.684 0.646 0.610 0.577 0.545 0.515 0.487 0.460 0.434 0.410 0.388 etc

Discounted 4,065 3,421 2,650 1,727 1,001 640 448 327 246 190 150 116 90 67 40 25 16 10 6 4 2 2 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Total Outstanding Claims Liability Estimate at 30.6.11 (X)

Total Outstanding Claims Liability Estimate at 30.6.11 including claims handling Expenses (Y) = (X) x 1.1

Total Outstanding Claims Liability Estimate at 30.6.11 including claims handling Expenses and Risk Margin (Z) = (Y) x 1.15

Components of Financial Guarantee Calculation

central est @ 30.6.11 (A)

Expected Liability for claims expected to rise in next 12 months (B)

Expected payments 11/12 (C) sum of blue-shaded payments ; plus 10% to allow for claims handling expenses

(D) = (A) + (B) - (C)

Greater of A and D (E)

Margin (50%) (F) = 50% x (E)

Financial Guarantee Amount (G) = (E) + (F)

Totals

17,774

15,248

15,248

16,773

19,289

16,773

8,561

25,684

5,500

5,151

17,123

17,123

Attachment B.4 - Shorter Tail Scenario Financial Guarantee Requirement at Mature Position - Breakdown by Accident Year

- Shorter Tail Scenario Financial Guarantee Prospective cost for upcoming Accident Year

Total Development Total Contribution Risk-Free Present ValueAccident Year Central Estimate of Expected Margin Contribution Year Transaction Contribution to Cost of Discount of (O) at

Year Outstanding Claims Payment to Financial Year to Financial Financial Guarantee Factor Risk-FreeEnding at 30.6.11 in Guarantee Ending Guarantee for for 2011/12 Rates30 June 2011/12 30 June 2011/12 Accident Year

Accident Year(H) (I) (J) = (H) - (I) (L) = (J) + (K) (M) (N) = (L) x 1.08 ^ (M) (O) = 1% x (N) (P)

(K) = 50% x (G)2012* 5,500 574 4,926 2,463 7,389 0 2012 7,389 74 1.0000 742011 4,807 839 3,968 1,984 5,952 1 2013 6,428 64 0.9545 612010 3,878 927 2,951 1,476 4,427 2 2014 5,164 52 0.9108 472009 2,890 1,030 1,860 930 2,790 3 2015 3,515 35 0.8682 312008 1,832 775 1,057 528 1,585 4 2016 2,156 22 0.8264 182007 1,045 379 667 333 1,000 5 2017 1,469 15 0.7851 122006 657 197 460 230 691 6 2018 1,096 11 0.7440 82005 453 123 330 165 495 7 2019 848 8 0.7033 62004 324 81 243 122 365 8 2020 676 7 0.6645 42003 239 54 184 92 277 9 2021 553 6 0.6279 32002 181 40 141 71 212 10 2022 457 5 0.5933 32001 138 31 107 54 161 11 2023 375 4 0.5606 22000 105 24 80 40 121 12 2024 304 3 0.5297 21999 79 21 58 29 87 13 2025 236 2 0.5005 11998 57 23 34 17 51 14 2026 149 1 0.4729 11997 33 13 21 10 31 15 2027 98 1 0.4469 01996 20 7 13 7 20 16 2028 69 1 0.4222 01995 13 5 8 4 12 17 2029 46 0 0.3990 01994 8 3 5 2 7 18 2030 29 0 0.3770 01993 5 2 3 1 4 19 2031 19 0 0.3562 01992 3 1 2 1 3 20 2032 12 0 0.3366 01991 2 1 1 1 2 21 2033 9 0 0.3180 01990 1 0 1 0 1 22 2034 6 0 0.3005 01989 1 0 1 0 1 23 2035 5 0 0.2839 01988 1 0 0 0 1 24 2036 4 0 0.2683 01987 0 0 0 0 0 25 2037 3 0 0.2535 01986 0 0 0 0 0 26 2038 3 0 0.2395 01985 0 0 0 0 0 27 2039 2 0 0.2263 01984 0 0 0 0 0 28 2040 2 0 0.2139 01983 0 0 0 0 0 29 2041 2 0 0.2021 01982 0 0 0 0 0 30 2042 2 0 0.1909 01981 0 0 0 0 0 31 2043 1 0 0.1804 01980 0 0 0 0 0 32 2044 1 0 0.1705 01979 0 0 0 0 0 33 2045 1 0 0.1611 01978 0 0 0 0 0 34 2046 1 0 0.1522 01977 0 0 0 0 0 35 2047 0 0 0.1438 01976 0 0 0 0 0 36 2048 0 0 0.1359 01975 0 0 0 0 0 37 2049 0 0 0.1284 01974 0 0 0 0 0 38 2050 0 0 0.1213 01973 0 0 0 0 0 39 2051 0 0 0.1146 01972 0 0 0 0 0 40 2052 0 0 0.1083 01971 0 0 0 0 0 41 2053 0 0 0.1024 01970 0 0 0 0 0 42 2054 0 0 0.0967 01969 0 0 0 0 0 43 2055 0 0 0.0914 01968 0 0 0 0 0 44 2056 0 0 0.0863 01967 0 0 0 0 0 45 2057 0 0 0.0816 01966 0 0 0 0 0 46 2058 0 0 0.0771 01965 0 0 0 0 0 47 2059 0 0 0.0728 01964 0 0 0 0 0 48 2060 0 0 0.0688 01963 0 0 0 0 0 49 2061 0 0 0.0650 01962 0 0 0 0 0 50 2062 0 0 0.0615 01961 0 0 0 0 0 51 2063 0 0 0.0581 01960 0 0 0 0 0 52 2064 0 0 0.0549 01959 0 0 0 0 0 53 2065 0 0 0.0518 01958 0 0 0 0 0 54 2066 0 0 0.0490 01957 0 0 0 0 0 55 2067 0 0 0.0463 01956 0 0 0 0 0 56 2068 0 0 0.0437 01955 0 0 0 0 0 57 2069 0 0 0.0413 01954 0 0 0 0 0 58 2070 0 0 0.0390 0

22,273 5,151 17,123 8,561 0 25,684 274

Column (N) is plotted in Diagram 2.3.The total sum in Column (P) is quoted under diagram 2.3

Contribution to Financial Guarantee Requirement by Accident Year - Mature Posn Prospective Cost for Upcoming Accident Year

Attachment C.1

Self-Insurance Longer Tail Scenario

C.1.1 Claims Progress - to determine Tax Effect of Claims Expenses

Development Year0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

(1) Start outstanding claims central estimate 0 4,386 3,605 3,138 2,726 2,386 2,134 1,941 1,785 1,651 1,546 1,464 1,398 1,339 1,286 1,237 1,193 1,150 1,110 1,071 1,033 996 959 922 884 847 809 771 732 693 653

(2) Start claims handling expense provision 0 439 360 314 273 239 213 194 178 165 155 146 140 134 129 124 119 115 111 107 103 100 96 92 88 85 81 77 73 69 65

(3) Start risk margin 0 724 595 518 450 394 352 320 295 272 255 242 231 221 212 204 197 190 183 177 171 164 158 152 146 140 134 127 121 114 108

(4) Incurred claims cost for tax purposes 6,048 174 160 140 124 113 105 98 91 86 83 80 76 74 71 68 66 64 62 59 57 55 53 50 48 46 43 41 39 36 34

(5) Total expense to workers comp business unit for tax 6,647 230 209 182 161 147 135 126 117 111 106 101 97 94 90 87 84 81 78 75 73 70 67 64 61 58 55 53 50 47 44

(6) Tax effect of claims expense ** end of year -1,994 -69 -63 -55 -48 -44 -41 -38 -35 -33 -32 -30 -29 -28 -27 -26 -25 -24 -23 -23 -22 -21 -20 -19 -18 -18 -17 -16 -15 -14 -13

31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

(1) Start outstanding claims central estimate 614 575 537 499 462 427 393 360 330 301 274 248 225 203 182 163 146 130 116 102 88 75 63 51 41 30 21 12 4 0

(2) Start claims handling expense provision 61 58 54 50 46 43 39 36 33 30 27 25 22 20 18 16 15 13 12 10 9 8 6 5 4 3 2 1 0 0

(3) Start risk margin 101 95 89 82 76 70 65 59 54 50 45 41 37 33 30 27 24 21 19 17 15 12 10 8 7 5 3 2 1 0

(4) Incurred claims cost for tax purposes 32 30 27 25 23 21 19 18 16 15 13 12 11 10 9 8 7 6 5 4 4 3 2 2 1 1 0 0 0 0

(5) Total expense to workers comp business unit for tax 41 38 35 32 30 27 25 23 21 19 17 15 14 12 11 10 9 8 7 6 5 4 3 2 2 1 0 0 0 0

(6) Tax effect of claims expense ** end of year -12 -11 -11 -10 -9 -8 -8 -7 -6 -6 -5 -5 -4 -4 -3 -3 -3 -2 -2 -2 -1 -1 -1 -1 -1 0 0 0 0 0

(4) = (16) + [(1) from development year K+1 - (1) from development year K] + [(3) from development year K+1 - (3) from development year K]

(5) = (4) + (14) + (15)

(6) = 30% x (5)

C.1.2 Workers' Compensation Business Unit Costs

Development YearUndiscounted 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

(7) Payment to 'Additional Funds' Account beginning of yr 7,250 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(8) Tax Effect of claims expense ** end of year -1,994 -69 -63 -55 -48 -44 -41 -38 -35 -33 -32 -30 -29 -28 -27 -26 -25 -24 -23 -23 -22 -21 -20 -19 -18 -18 -17 -16 -15 -14 -13

(9) Receipt from 'Additional Funds' Account end of year 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

(7) Payment to 'Additional Funds' Account beginning of yr 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(8) Tax Effect of claims expense ** end of year -12 -11 -11 -10 -9 -8 -8 -7 -6 -6 -5 -5 -4 -4 -3 -3 -3 -2 -2 -2 -1 -1 -1 -1 -1 0 0 0 0 0

(9) Receipt from 'Additional Funds' Account end of year 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -34,534

(8) = (6)

(9) =(20)

Development YearDiscounted 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

(10) Payment to 'Additional Funds' Account 7,250 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(11) Tax Effect of claims expense -1,891 -62 -53 -44 -36 -31 -27 -23 -20 -18 -16 -15 -13 -12 -11 -10 -9 -8 -8 -7 -6 -6 -5 -5 -4 -4 -3 -3 -3 -2 -2

(12) Receipt from 'Additional Funds' Account 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Total Discounted Expense by Development Year 5,359 -62 -53 -44 -36 -31 -27 -23 -20 -18 -16 -15 -13 -12 -11 -10 -9 -8 -8 -7 -6 -6 -5 -5 -4 -4 -3 -3 -3 -2 -2

31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

(10) Payment to 'Additional Funds' Account 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(11) Tax Effect of claims expense -2 -2 -1 -1 -1 -1 -1 -1 -1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(12) Receipt from 'Additional Funds' Account 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -889

Total Discounted Expense by Development Year -2 -2 -1 -1 -1 -1 -1 -1 -1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -889

Aggregate Discounted expense 3,989

Discounted values = Undiscounted vales multiplied by appropriate discount factor

Attachment C.1

Development Year

C.1.3 Additional Funds Account' Progress 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

(13) Fund Value at Start of Year 7,250 6,050 5,207 4,720 4,305 3,980 3,764 3,623 3,529 3,466 3,439 3,444 3,472 3,516 3,571 3,640 3,722 3,814 3,917 4,032 4,157 4,294 4,443 4,603 4,777 4,963 5,164 5,380 5,612 5,860 6,127

(14) Draw downs to cover bank guarantee beginning of year -68 -56 -49 -42 -37 -33 -30 -28 -26 -24 -23 -22 -21 -20 -19 -19 -18 -17 -17 -16 -16 -15 -14 -14 -13 -13 -12 -11 -11 -10 -10

(15) Draw downs for WCA Contribution and Reinsurance beginning of year -530 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(16) Drawdowns to cover claim payments and CHE middle of year -938 -1,085 -704 -619 -520 -407 -330 -280 -247 -209 -178 -156 -145 -136 -128 -120 -115 -111 -107 -103 -101 -98 -96 -94 -92 -90 -88 -86 -84 -82 -80

(17) Fund Earnings end of year 481 426 380 353 332 319 314 305 299 295 294 295 299 303 308 315 322 331 340 350 361 374 387 401 417 433 451 470 491 513 537

(18) Tax on Fund Earnings end of year -144 -128 -114 -106 -100 -96 -94 -92 -90 -88 -88 -89 -90 -91 -92 -94 -97 -99 -102 -105 -108 -112 -116 -120 -125 -130 -135 -141 -147 -154 -161

(19) Fund Value at End of Year 7,250 6,050 5,207 4,720 4,305 3,980 3,764 3,623 3,529 3,466 3,439 3,444 3,472 3,516 3,571 3,640 3,722 3,814 3,917 4,032 4,157 4,294 4,443 4,603 4,777 4,963 5,164 5,380 5,612 5,860 6,127 6,413

(20) Return of Funds to Workers Comp Expense

Development Year31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

(13) Fund Value at Start of Year 6,413 6,721 7,051 7,405 7,785 8,193 8,630 9,099 9,601 10,138 10,713 11,327 11,983 12,683 13,429 14,225 15,074 15,978 16,940 17,964 19,052 20,210 21,440 22,749 24,140 25,618 27,190 28,860 30,634 32,524

(14) Draw downs to cover bank guarantee beginning of year -9 -8 -8 -7 -7 -6 -6 -5 -5 -4 -4 -4 -3 -3 -3 -2 -2 -2 -2 -1 -1 -1 -1 -1 0 0 0 0 0 0

(15) Draw downs for WCA Contribution and Reinsurance beginning of year 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(16) Drawdowns to cover claim payments and CHE middle of year -77 -74 -71 -68 -65 -61 -57 -54 -50 -46 -43 -39 -36 -34 -31 -28 -25 -23 -21 -20 -19 -17 -16 -14 -13 -12 -11 -9 -4 0

(17) Fund Earnings end of year 562 590 619 650 684 720 759 801 845 893 944 998 1,056 1,118 1,185 1,255 1,330 1,410 1,495 1,586 1,682 1,784 1,893 2,009 2,131 2,262 2,401 2,549 2,705 2,873

(18) Tax on Fund Earnings end of year -169 -177 -186 -195 -205 -216 -228 -240 -254 -268 -283 -300 -317 -336 -355 -377 -399 -423 -449 -476 -505 -535 -568 -603 -639 -679 -720 -765 -812 -862

(19) Fund Value at End of Year 6,721 7,051 7,405 7,785 8,193 8,630 9,099 9,601 10,138 10,713 11,327 11,983 12,683 13,429 14,225 15,074 15,978 16,940 17,964 19,052 20,210 21,440 22,749 24,140 25,618 27,190 28,860 30,634 32,524 34,534


(17) = [ (13) + (14) + (15) ] x (1 + interest rate) + (16) x (1+ interest rate) ^ 0.5 - [ (13) + (14) + (15) + (16)]

Attachment C.2

Self-Insurance Shorter Tail Scenario

C.2.1 Claims Progress - to determine Tax Effect of Claims Expenses

Development Year0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

(1) Start outstanding claims central estimate 0 4,719 4,112 3,310 2,266 1,396 948 705 545 434 355 293 240 195 152 96 64 44 30 19 12 8 6 4 3 3 2 2 2 1 1



(4) Incurred claims cost for tax purposes 6,072 199 146 81 42 35 29 24 20 17 14 11 9 6 3 2 2 1 1 0 0 0 0 0 0 0 0 0 0 0 0

(5) Total expense to workers comp business unit for tax 6,676 263 198 116 64 49 40 32 26 22 18 15 12 9 4 3 2 1 1 1 0 0 0 0 0 0 0 0 0 0 0

(6) Tax effect of claims expense ** end of year -2,003 -79 -59 -35 -19 -15 -12 -10 -8 -7 -5 -4 -4 -3 -1 -1 -1 0 0 0 0 0 0 0 0 0 0 0 0 0 0

31 32 33 34 35 36 37 38 39 40 41 42 43 44 45

(1) Start outstanding claims central estimate 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0

(2) Start claims handling expense provision 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(3) Start risk margin 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(4) Incurred claims cost for tax purposes 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(5) Total expense to workers comp business unit for tax 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(6) Tax effect of claims expense ** end of year 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(4) = (16) + [(1) from development year K+1 - (1) from development year K] + [(3) from development year K+1 - (3) from development year K]

(5) = (4) + (14) + (15)

(6) = 30% x (5)

C.2.2 Workers' Compensation Business Unit Costs

Development YearUndiscounted 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

(7) Payment to 'Additional Funds' Account beginning of yr 7,250 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(8) Tax Effect of claims expense ** end of year -2,003 -79 -59 -35 -19 -15 -12 -10 -8 -7 -5 -4 -4 -3 -1 -1 -1 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(9) Receipt from 'Additional Funds' Account end of year 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

31 32 33 34 35 36 37 38 39 40 41 42 43 44 45

(7) Payment to 'Additional Funds' Account beginning of yr 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(8) Tax Effect of claims expense ** end of year 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(9) Receipt from 'Additional Funds' Account end of year 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -16,328

(8) = (6)

(9) =(20)

Development YearDiscounted 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

(10) Payment to 'Additional Funds' Account 7,250 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(11) Tax Effect of claims expense -1,900 -71 -51 -28 -14 -10 -8 -6 -5 -4 -3 -2 -2 -1 -1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(12) Receipt from 'Additional Funds' Account 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Total Discounted Expense by Development Year 5,350 -71 -51 -28 -14 -10 -8 -6 -5 -4 -3 -2 -2 -1 -1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

31 32 33 34 35 36 37 38 39 40 41 42 43 44 45

(10) Payment to 'Additional Funds' Account 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(11) Tax Effect of claims expense 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(12) Receipt from 'Additional Funds' Account 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -1,034

Total Discounted Expense by Development Year 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -1,034

Aggregate Discounted expense 4,110

Discounted values = Undiscounted vales multiplied by appropriate discount factor

Attachment C.2

Development Year

C.2.3 Additional Funds Account' Progress 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

(13) Fund Value at Start of Year 7,250 6,418 5,770 4,924 3,831 2,945 2,533 2,355 2,275 2,255 2,276 2,324 2,389 2,470 2,561 2,648 2,770 2,915 3,077 3,253 3,445 3,653 3,876 4,113 4,366 4,635 4,921 5,225 5,548 5,890 6,254

(14) Draw downs to cover bank guarantee beginning of yr -74 -64 -52 -35 -22 -15 -11 -8 -7 -6 -5 -4 -3 -2 -1 -1 -1 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(15) Draw downs to cover WCA Contribution and Reinsurance Premiumbeginning of yr -530 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(16) Drawdowns to cover claim payments and CHE middle of year -574 -906 -1,081 -1,298 -1,055 -557 -313 -211 -149 -109 -86 -73 -61 -57 -67 -40 -24 -18 -13 -8 -5 -3 -2 -1 -1 -1 0 0 0 0 0

(17) Fund Earnings end of year 494 461 410 343 272 227 208 198 194 194 197 202 208 215 223 232 244 257 271 287 304 323 342 363 386 409 435 461 490 520 552

(18) Tax on Fund Earnings end of year -148 -138 -123 -103 -82 -68 -62 -59 -58 -58 -59 -61 -62 -65 -67 -70 -73 -77 -81 -86 -91 -97 -103 -109 -116 -123 -130 -138 -147 -156 -166

(19) Fund Value at End of Year 7,250 6,418 5,770 4,924 3,831 2,945 2,533 2,355 2,275 2,255 2,276 2,324 2,389 2,470 2,561 2,648 2,770 2,915 3,077 3,253 3,445 3,653 3,876 4,113 4,366 4,635 4,921 5,225 5,548 5,890 6,254 6,641


Development Year31 32 33 34 35 36 37 38 39 40 41 42 43 44 45

(13) Fund Value at Start of Year 6,641 7,051 7,487 7,949 8,441 8,962 9,516 10,105 10,729 11,393 12,097 12,845 13,639 14,482 15,378

(14) Draw downs to cover bank guarantee beginning of yr 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(15) Draw downs to cover WCA Contribution and Reinsurance Premiumbeginning of yr 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(16) Drawdowns to cover claim payments and CHE middle of year 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(17) Fund Earnings end of year 587 623 661 702 745 792 841 892 948 1,006 1,068 1,134 1,205 1,279 1,358

(18) Tax on Fund Earnings end of year -176 -187 -198 -211 -224 -237 -252 -268 -284 -302 -321 -340 -361 -384 -407

(19) Fund Value at End of Year 7,051 7,487 7,949 8,441 8,962 9,516 10,105 10,729 11,393 12,097 12,845 13,639 14,482 15,378 16,328


(17) = [ (13) + (14) + (15) ] x (1 + interest rate) + (16) x (1+ interest rate) ^ 0.5 - [ (13) + (14) + (15) + (16)]

ATTACHMENT D.1 - FINANCIAL STATEMENT INCURRED CLAIMS COST - Longer Tail Scenario - impact of a single accident year


Development Year

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

(1) Start outstanding claims central estimate 0 4,386 3,605 3,138 2,726 2,386 2,134 1,941 1,785 1,651 1,546 1,464 1,398 1,339 1,286 1,237 1,193 1,150 1,110 1,071 1,033 996 959 922 884 847 809 771 732 693 653



(4) Start outstanding Claims Provision 0 5,548 4,560 3,969 3,448 3,019 2,700 2,456 2,258 2,089 1,955 1,852 1,769 1,694 1,626 1,565 1,509 1,455 1,404 1,355 1,307 1,260 1,213 1,166 1,119 1,071 1,024 975 926 876 826

(5) Claim payments made in the year 853 986 640 563 472 370 300 254 225 190 162 142 132 124 116 109 105 101 97 94 91 89 87 85 83 82 80 79 77 75 73

(6) Claims Handling Expenses paid in the Year 85 99 64 56 47 37 30 25 22 19 16 14 13 12 12 11 10 10 10 9 9 9 9 9 8 8 8 8 8 7 7

(7) Reinsurance Premium Paid in the Year 240

(8) Workers Compensation Authority Contribution Paid in the Year 290

(9) Contribution to Financial Guarantee Paid in Year 68 56 49 42 37 33 30 28 26 24 23 22 21 20 19 19 18 17 17 16 16 15 14 14 13 13 12 11 11 10 10

(10) Incurred Claim Cost in Year 6,401 -3 50 42 43 51 56 57 55 57 58 59 57 56 54 53 51 50 48 46 44 42 40 38 36 34 32 29 27 25 23

(11) Paid Accompanying Expenses 684 155 113 99 84 70 60 53 48 43 39 36 34 32 31 30 28 27 26 26 25 24 23 22 22 21 20 19 18 18 17(12) Total Cost in Development Year 7,085 152 163 141 127 122 116 110 104 100 97 95 92 88 85 83 80 77 74 72 69 66 63 60 58 55 52 49 46 43 40

(13) Insurance Cost 7,250(14) Excess of Self-Insurance Cost over Insurance -165 152 163 141 127 122 116 110 104 100 97 95 92 88 85 83 80 77 74 72 69 66 63 60 58 55 52 49 46 43 40

Development Year

31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61

(1) Start outstanding claims central estimate 614 575 537 499 462 427 393 360 330 301 274 248 225 203 182 163 146 130 116 102 88 75 63 51 41 30 21 12 4 0 0



(4) Start outstanding Claims Provision 777 728 679 631 585 540 497 456 417 380 346 314 284 256 230 206 184 164 146 129 112 95 80 65 51 38 26 15 5 0 0

(5) Claim payments made in the year 70 68 65 62 59 55 52 49 45 42 39 36 33 30 28 25 23 21 19 18 17 16 14 13 12 11 10 8 4 0 0





(10) Incurred Claim Cost in Year 21 19 17 15 14 12 11 10 9 8 7 6 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -1 -2 -2 -1 0 0

(11) Paid Accompanying Expenses 16 15 14 13 13 12 11 10 9 8 8 7 6 6 5 5 4 4 4 3 3 3 2 2 2 1 1 1 0 0 0(12) Total Cost in Development Year 37 34 31 29 26 24 22 20 18 16 15 13 12 10 9 8 7 6 5 4 4 3 2 1 1 0 0 -1 -1 0 0

(13) Insurance Cost 0(14) Excess of Self-Insurance Cost over Insurance 37 34 31 29 26 24 22 20 18 16 15 13 12 10 9 8 7 6 5 4 4 3 2 1 1 0 0 -1 -1 0 0

(1) = projected future claim payments discounted at risk free rates (Attachment A - Table 3)

(2) = 10% x (1)

(3) = 15% x [ (1) + (2) ]

(4) =(1) + (2) + (3)

(5) Attachment A Table 1

(6) = 10% x (5)

(7) Discussion Section 2


(9) Attachment B - Table 2 Column (O)

(10) (4) from start of next year - (4) from start of current year + (5)

(11) = (6) + (7) + (8) + (9)

(12) = (10) + (11)

(14) = (12) - (13)

ATTACHMENT D.2 - FINANCIAL STATEMENT INCURRED CLAIMS COST- Longer Tail Scenario - Mature Position


Contribution Contribution

Development Start Claim End to Financial Deflation Start Claim End to Financial

Year Provision Payments Provision Guarantee Factor Provision Payments Provision Guarantee(1) (2) (3) (4) (5) (6) (7) (8) (9)

0 (Upcoming Year) 0 853 5,548 68 1.0000 0 853 5,548 68

1 5,548 986 4,560 56 0.9259 5,137 913 4,222 52

2 4,560 640 3,969 49 0.8573 3,909 549 3,403 42

3 3,969 563 3,448 42 0.7938 3,151 447 2,737 34

4 3,448 472 3,019 37 0.7350 2,535 347 2,219 27

5 3,019 370 2,700 33 0.6806 2,054 252 1,837 23

6 2,700 300 2,456 30 0.6302 1,701 189 1,547 19

7 2,456 254 2,258 28 0.5835 1,433 148 1,317 16

8 2,258 225 2,089 26 0.5403 1,220 121 1,128 14

9 2,089 190 1,955 24 0.5002 1,045 95 978 12

10 1,955 162 1,852 23 0.4632 906 75 858 11

11 1,852 142 1,769 22 0.4289 794 61 758 9

12 1,769 132 1,694 21 0.3971 702 52 673 8

13 1,694 124 1,626 20 0.3677 623 45 598 7

14 1,626 116 1,565 19 0.3405 554 40 533 7

15 1,565 109 1,509 19 0.3152 493 34 476 6

16 1,509 105 1,455 18 0.2919 440 31 425 5

17 1,455 101 1,404 17 0.2703 393 27 379 5

18 1,404 97 1,355 17 0.2502 351 24 339 4

19 1,355 94 1,307 16 0.2317 314 22 303 4

20 1,307 91 1,260 16 0.2145 280 20 270 3

21 1,260 89 1,213 15 0.1987 250 18 241 3

22 1,213 87 1,166 14 0.1839 223 16 214 3

23 1,166 85 1,119 14 0.1703 199 15 191 2

24 1,119 83 1,071 13 0.1577 176 13 169 2

25 1,071 82 1,024 13 0.1460 156 12 149 2

26 1,024 80 975 12 0.1352 138 11 132 2

27 975 79 926 11 0.1252 122 10 116 1

28 926 77 876 11 0.1159 107 9 102 1

29 876 75 826 10 0.1073 94 8 89 1

30 826 73 777 10 0.0994 82 7 77 1

31 777 70 728 9 0.0920 71 6 67 1

32 728 68 679 8 0.0852 62 6 58 1

33 679 65 631 8 0.0789 54 5 50 1

34 631 62 585 7 0.0730 46 5 43 1

35 585 59 540 7 0.0676 40 4 37 0

36 540 55 497 6 0.0626 34 3 31 0

37 497 52 456 6 0.0580 29 3 26 0

38 456 49 417 5 0.0537 24 3 22 0

39 417 45 380 5 0.0497 21 2 19 0

40 380 42 346 4 0.0460 18 2 16 0

41 346 39 314 4 0.0426 15 2 13 0

42 314 36 284 4 0.0395 12 1 11 0

43 284 33 256 3 0.0365 10 1 9 0

44 256 30 230 3 0.0338 9 1 8 0

45 230 28 206 3 0.0313 7 1 6 0

46 206 25 184 2 0.0290 6 1 5 0

47 184 23 164 2 0.0269 5 1 4 0

48 164 21 146 2 0.0249 4 1 4 0

49 146 19 129 2 0.0230 3 0 3 0

50 129 18 112 1 0.0213 3 0 2 0

51 112 17 95 1 0.0197 2 0 2 0

52 95 16 80 1 0.0183 2 0 1 0

53 80 14 65 1 0.0169 1 0 1 0

54 65 13 51 1 0.0157 1 0 1 0

55 51 12 38 0 0.0145 1 0 1 0

56 38 11 26 0 0.0134 1 0 0 0

57 26 10 15 0 0.0124 0 0 0 0

58 15 8 5 0 0.0115 0 0 0 0

59 5 4 0 0 0.0107 0 0 0 0

60 0 0 0 0 0.0099 0 0 0 0

30,066 4,514 32,471 400

Incurred Claim Cost in Year

(10) End Provision 32,471

(11) Start Provision 30,066

(12) Claim Payments 4,514(13) 6,919

Paid Accompanying Expenses

(14) Claims Handling Expenses 451

(15) Reinsurance Premium 240

(16) WorkCover Contribution 290

(17) Financial Guarantee 400

(18) Total Cost in Accounting Year 8,301

(19) Insurance Cost 7,250(20) Excess of Self-Insurance Cost over Insurance 1,051

(1); (3) Table 3 Attachment A (10) = Totals for (8)

(2) Table 1 Attachment A (11) = Totals for (6)

(4) Table 2 Attachment B (12) = Totals for (7)

(5) =1.08 ^ (- Development Year) (13) = (12) + (10) - (11)

(6) = (1) x (5) (14) = 10% x (12)

(7) = (2) x (5) (15) ; (16) = Section 2

(8) = (3) x (5) (17) = Totals for (9)

(9) = (4) x (5) (18) = (13) + (14) + (15) + (16) + (17)

For the Upcoming Year; for all Years appropriate for each past Accident Year

Using Exposure/Inflation Position Using Exposure/Inflation Position

ATTACHMENT D.3 - FINANCIAL STATEMENT INCURRED CLAIMS COST - Shorter Tail Scenario - impact of a single accident year


Development Year

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

(1) Start outstanding claims central estimate 0 4,719 4,112 3,310 2,266 1,396 948 705 545 434 355 293 240 195 152 96 64 44 30 19 12 8 6 4 3 3 2 2 2 1 1



(4) Start outstanding Claims Provision 0 5,970 5,202 4,187 2,866 1,766 1,200 892 690 549 449 371 304 247 192 122 80 56 37 24 15 10 7 5 4 3 3 2 2 2 1

(5) Claim payments made in the year 522 824 983 1,180 959 506 284 191 136 99 78 66 56 52 61 37 22 16 12 8 5 3 2 1 1 1 0 0 0 0 0





(10) Incurred Claim Cost in Year 6,492 56 -32 -141 -141 -61 -23 -11 -5 -1 0 -1 -1 -3 -9 -5 -3 -2 -2 -1 -1 0 0 0 0 0 0 0 0 0 0

(11) Paid Accompanying Expenses 656 147 150 153 117 65 39 28 20 15 12 10 9 8 8 5 3 2 1 1 1 0 0 0 0 0 0 0 0 0 0(12) Total Cost in Development Year 7,148 202 118 12 -23 4 16 16 15 14 12 9 7 4 -1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(13) Insurance Cost 7,250(14) Excess of Self-Insurance Cost over Insurance -102 202 118 12 -23 4 16 16 15 14 12 9 7 4 -1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Development Year

31 32 33 34 35 36 37 38 39 40 41 42 43 44 45

(1) Start outstanding claims central estimate 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0

(2) Start claims handling expense provision 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(3) Start risk margin 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(4) Start outstanding Claims Provision 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0

(5) Claim payments made in the year 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(6) Claims Handling Expenses paid in the Year 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0



(9) Contribution to Financial Guarantee Paid in Year 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(10) Incurred Claim Cost in Year 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(11) Paid Accompanying Expenses 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0(12) Total Cost in Development Year 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(13) Insurance Cost 0(14) Excess of Self-Insurance Cost over Insurance 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(1) = projected future claim payments discounted at risk free rates (Attachment A - Table 3)

(2) = 10% x (1)

(3) = 15% x [ (1) + (2) ]

(4) =(1) + (2) + (3)

(5) Attachment A Table 1

(6) = 10% x (5)



(9) Attachment B - Table 2 Column (O)

(10) (4) from start of next year - (4) from start of current year + (5)

(11) = (6) + (7) + (8) + (9)

(12) = (10) + (11)

(14) = (12) - (13)

ATTACHMENT D.4 - FINANCIAL STATEMENT INCURRED CLAIMS COST- Shorter Tail Scenario - Mature Position


Contribution Contribution

Development Start Claim End to Financial Deflation Start Claim End to Financial

Year Provision Payments Provision Guarantee Factor Provision Payments Provision Guarantee(1) (2) (3) (4) (5) (6) (7) (8) (9)

0 (Upcoming Year) 0 522 5,970 74 1.0000 0 522 5,970 74

1 5,970 824 5,202 64 0.9259 5,528 763 4,816 60

2 5,202 983 4,187 52 0.8573 4,460 842 3,590 44

3 4,187 1,180 2,866 35 0.7938 3,324 937 2,275 28

4 2,866 959 1,766 22 0.7350 2,107 705 1,298 16

5 1,766 506 1,200 15 0.6806 1,202 344 816 10

6 1,200 284 892 11 0.6302 756 179 562 7

7 892 191 690 8 0.5835 521 112 402 5

8 690 136 549 7 0.5403 373 73 297 4

9 549 99 449 6 0.5002 275 49 225 3

10 449 78 371 5 0.4632 208 36 172 2

11 371 66 304 4 0.4289 159 28 130 2

12 304 56 247 3 0.3971 121 22 98 1

13 247 52 192 2 0.3677 91 19 70 1

14 192 61 122 1 0.3405 65 21 41 1

15 122 37 80 1 0.3152 38 12 25 0

16 80 22 56 1 0.2919 23 6 16 0

17 56 16 37 0 0.2703 15 4 10 0

18 37 12 24 0 0.2502 9 3 6 0

19 24 8 15 0 0.2317 6 2 4 0

20 15 5 10 0 0.2145 3 1 2 0

21 10 3 7 0 0.1987 2 1 1 0

22 7 2 5 0 0.1839 1 0 1 0

23 5 1 4 0 0.1703 1 0 1 0

24 4 1 3 0 0.1577 1 0 1 0

25 3 1 3 0 0.1460 0 0 0 0

26 3 0 2 0 0.1352 0 0 0 0

27 2 0 2 0 0.1252 0 0 0 0

28 2 0 2 0 0.1159 0 0 0 0

29 2 0 1 0 0.1073 0 0 0 0

30 1 0 1 0 0.0994 0 0 0 0

31 1 0 1 0 0.0920 0 0 0 0

32 1 0 1 0 0.0852 0 0 0 0

33 1 0 1 0 0.0789 0 0 0 0

34 1 0 0 0 0.0730 0 0 0 0

35 0 0 0 0 0.0676 0 0 0 0

36 0 0 0 0 0.0626 0 0 0 0

37 0 0 0 0 0.0580 0 0 0 0

38 0 0 0 0 0.0537 0 0 0 0

39 0 0 0 0 0.0497 0 0 0 0

40 0 0 0 0 0.0460 0 0 0 0

41 0 0 0 0 0.0426 0 0 0 0

42 0 0 0 0 0.0395 0 0 0 0

43 0 0 0 0 0.0365 0 0 0 0

44 0 0 0 0 0.0338 0 0 0 0

45 0 0 0 0 0.0313 0 0 0 0

46 0 0 0 0 0.0290 0 0 0 0

47 0 0 0 0 0.0269 0 0 0 0

48 0 0 0 0 0.0249 0 0 0 0

49 0 0 0 0 0.0230 0 0 0 0

50 0 0 0 0 0.0213 0 0 0 0

51 0 0 0 0 0.0197 0 0 0 0

52 0 0 0 0 0.0183 0 0 0 0

53 0 0 0 0 0.0169 0 0 0 0

54 0 0 0 0 0.0157 0 0 0 0

55 0 0 0 0 0.0145 0 0 0 0

56 0 0 0 0 0.0134 0 0 0 0

57 0 0 0 0 0.0124 0 0 0 0

58 0 0 0 0 0.0115 0 0 0 0

59 0 0 0 0 0.0107 0 0 0 0

60 0 0 0 0 0.0099 0 0 0 0

19,289 4,683 20,832 257

Incurred Claim Cost in Year

(10) End Provision 20,832

(11) Start Provision 19,289

(12) Claim Payments 4,683(13) 6,226

Paid Accompanying Expenses

(14) Claims Handling Expenses 468

(15) Reinsurance Premium 240

(16) WorkCover Contribution 290

(17) Financial Guarantee 257

(18) Total Cost in Accounting Year 7,481

(19) Insurance Cost 7,250(20) Excess of Self-Insurance Cost over Insurance 231

(1); (3) Table 4 Attachment A (10) = Totals for (8)

(2) Table 1 Attachment A (11) = Totals for (6)

(4) Table 4 Attachment B (12) = Totals for (7)

(5) =1.08 ^ (- Development Year) (13) = (12) + (10) - (11)

(6) = (1) x (5) (14) = 10% x (12)

(7) = (2) x (5) (15) ; (16) = Section 2

(8) = (3) x (5) (17) = Totals for (9)

(9) = (4) x (5) (18) = (13) + (14) + (15) + (16) + (17)

Using Exposure/Inflation Position Using Exposure/Inflation Position

For the Upcoming Year; for all Years appropriate for each past Accident Year


Attachment E – Paid Loss Retro Arrangements

Premium:

This attachment summarises the operation of Paid Loss Retro policies as they operated inNew South Wales at the time the paper was written (2010/11 policy year).

Instalments are payable at:

Policy commencement 15 months after policy commencement 2 years after policy commencement 3 years after policy commencement 4 years after policy commencement 5 years after policy commencement

The premium formula is calibrated so that the initial up-front premium is much lower than thepremium payable under a conventional policy, and further premium amounts are likely to bepayable at each of the recalculation points over the next five years.

PLR policies operate independently for each policy renewal period. Accordingly, after fiveyears using a PLR policy, an employer would have one active PLR policy, but a total of sixinstalment premiums to pay in any given financial year.

An input to the premium formula is the sum of reported incurred cost across all claims fromthe policy year. Large claims are capped for this purpose. New South Wales WorkCoveroffers two PLR policy variants, from which an employer can select at its discretion. Thevariants differ in the amount at which individual large claims are capped.22 Employers canchoose an amount of $350k or $500k. The premium formula operates slightly differentlydepending on the choice.

Where it is helpful to distinguish between the two, in this paper we have applied thedesignations PLR(350) and PLR(500).

The initial instalment premium is a multiple of the tariff premium that would have appliedunder conventional insurance. At other calculation points, reported incurred claims cost fromthe policy year is determined and scaled by factors that vary according by calculation point.The result is subject to a maximum and a minimum. The scaling factors that are applieddepend on whether the policy variant is PLR(350) or PLR (500). The scaling can beconsidered to make allowance for expenses borne by the insurer, and for future claimsdevelopment. Previous instalment premiums that have already been paid are deducted fromthe scaled reported incurred cost to determine the new instalment amount.

22 In the event that multiple claims arise from a single incident, only the incurred claims cost associated with theincident up to twice the large claim limit will be counted in the determination of the adjustment premium.


Premium Determination

A description of how premium instalment amounts are determined under the two PLR optionsis set out below:

Each arrangement requires payment of an initial instalment premium which iscurrently (2010/11 policy year) set at :

Tariff Premium x (1 – Sizing Factor) x 1.75 x 1.25

Tariff Premium is determined in the same way as it is under the arrangements that applyto conventional insurance; being equal to declared salary x tariff premium rate.

Tariff premium rate is published each year by WorkCover in its Insurance PremiumsOrder. It is a rate that varies according to the industry that each subsidiary operates in.

The sizing factor is set equal to:

Sizing Factor = 90% x Tariff Premium / (Tariff Premium + 225,000)

Reported incurred claims cost is the main claims input to the premium formula at eachinstalment point (except the initial one). For this purpose, for each claim, the reportedincurred claims cost is subject to a cap. The employer can choose from a $350,000 and$500,000 cap, but once chosen it stays fixed for all calculations.

If a $500,000 cap is chosen, the formula for the initial instalment premium describedabove is modified slightly to:

Tariff Premium x (1 – Sizing Factor) x 1.67 x 1.25

A maximum premium is determined for the policy period equal to:

2.5 x initial instalment premium

A financial guarantee must be lodged with WorkCover for an amount equal to thedifference between the maximum premium and the initial instalment premium.

At later instalment points, capped reported incurred cost is determined. This value ismultiplied by a factor that depends on the cap selected by the policyholder, and theinstalment period. The factors that applied at the time this paper was written are set out inTable E.1. The resulting value is subject to a minimum and maximum amount. Theminimum amount is the initial deposit premium until the three-year point when it is theinitial instalment premium divided by 1.25. The maximum amount remains unchangedthroughout the adjustment calculations.

Table E.1 PLR Adjustment Factors

Adjustment Point $350k cap $500k cap

15 months 3.05 2.95

2 years 2.10 2.00

3 years 1.80 1.70

4 years 1.75 1.67

5 years 1.75 1.67


These factors are fixed for the policy period and allow for:

Future claims cost development Expenses associated with managing the policy and administering claims; a Other expenses incurred by Workcover

The adjustment premium payable is the capped reported incurred cost multiplied by the factorin the table (subject to the indicated maximum and minimum values) less the total instalmentpremiums paid beforehand.

The updated financial guarantee that must be lodged with WorkCover at the adjustment dateis the maximum premium amount less the sum of instalment premiums payable up to andincluding that date. At the final, five-year adjustment point, no financial guarantee isrequired.