Public vs. Private Underwriting & Administration of personal Injury

Statutory Insurance Schemes

Dr Andrew Fronsko & Alan Woodroffe

After 100 years of debate; the anwser is....

Agenda

1. Evolution of the current state of underwriting models

2.  Public vs. Competitive Private Underwriting •  Arguments used in Public Policy Debate •  Economic Theory •  Research Evidence 

3. Governance & Overall Economic Efficiency

Evolution

Workers’ Compensation

Motor Accidents

1920 1940 1960 1980 2000 2020

Qld

Vic 1974

TAS 1974

NT 1975

NSW

1987-89

SA

2016

WA

1987

SA 1978

1908

1900

Cth

1917

Vic 1985

SA 1986

NSW 1986

Privately Underwritten Public Monopoly WA

1949 MVI Trust

Motor Accidents 1970s: Crisis Events led to transition to Public Underwriting Victoria (1974) •  Withdrawal of private insurers due to profitability concerns •  Rapidly increasing claims costs impacting Premium Affordability •  Lengthy delays in claims settlement Tasmania (1974) •  Withdrawal of private insurers due to profitability concerns: … ‘cherry picking’ acceptable risks •  High transactional costs •  Inadequate payments and delays in payments for some victims Northern Territory (1978) -  Unsustainable premium increases needed ensure viability South Australia (1975) -  Withdrawal of private insurers due to profitability concerns -  Unsustainable premium increases needed ensure viability

Transition saw introduction of No-Fault benefits

Workers’ Compensation 1980s: Crisis Events led to transition to Public Underwriting Victoria (1985) •  Significant underwriting losses by private insurers •  High administration costs & lack of focus in rehabilitation •  Highest premiums in Australia South Australia (1986) •  Increase in lost time claims > 8 weeks & settlement delays •  Lack of focus on rehabilitation & coordination (55 insurers) NSW (1986) -  Rapid increases in premiums (2.65% - 4.3% wages in ten years) -  Increases compensation payments despite reducing injuries -  Lack of focus on prevention and rehabilitation

Transition saw introduction of outsourced claims administration

Motor Accidents (1989-presesnt) Transitions from Public to Private Underwriting NSW (1989) •  Removal of TransCover (introduced1987) •  Unpopular benefit design

South Australia (2016) •  Minimise residual risk to the government •  Realise value

* Claims administration, ** Case Coordination insourced, Case Management outsourced

Competitive Monopoly

Private Private & Public

Private Public

Insourced Outsourced

Workers’ Compensation WA,TAS, ACT, NT, Seacare Motor Accidents NSW, QLD, ACT, SA (2016)

Specialized Insurers (NSW)

QLD, Comcare(a) WA, VIC, TAS NIIS (b)

NSW, VIC, SA NT

None currently in operation

until early 1990s, government owned insurers existed in every jurisdiction

except ACT

Claims Admin

(a) From September 2017, Commonwealth Agencies may elect to outsource Claims Administration to third parties (b) Jurisdictions with dedicated National Injury Insurance Schemes (NIIS) are all publicly underwritten.

Underwriting Structure

Current State

Common Themes in Transition •  Schemes started with private underwriting often in competition with

government owned insurance offices

•  Bulk Transition to public underwriting at time of crisis (mid 1970s -1980s)

•  Outsourced claims administration a feature in Workers’ Compensation schemes that transitioned (unique to Australia) – current trend is fewer competing agents and centralized design of the customer experience

•  Transitions tend to be durable - schemes focus on benefit design and administration change to contain costs before changing underwriting

•  Little appetite for private underwriting NIIS (no-fault long-tail liabilities)

Synthesising Pros and Cons - Private Underwriting Advantages Disadvantages•  Mitigates the risk of imprudent

government action/intervention

•  Financial risk retained by private sector not Government

•  Consumers have choice of provider

•  Economies of scope

•  Competitive tension ensures efficient pricing and focus on innovation.

 

•  Profit/cost minimisation focus detracts from a focus on claimant outcomes

•  Mitigating adverse selection and preferred-risk selection introduces frictional costs

•  Lack of investment in collective activities (such as accident prevention) for broader public good

Advantages Disadvantages•  Lower premiums: êcapital and more

aggressive investment objectives

•  Lower administrative costs due to less frictional costs & economies of scale

•  Greater flexibility in applying Community-rating

•  Consistent service standards

•  > Flexibility up-front investments to achieve LT outcomes

•  Financial (and reputational) risk remains with the Government

•  Risk of government or ministerial interference in premium setting and claims decisions

•  Limits customer choice

 

Synthesising Pros and Cons - Public Underwriting

Economic Theory

Competitive Markets •  Competitive tension leads

to better focus on efficiency & innovation

•  Economies of scope?

… hence lower costs

State (Public) Monopoly •  Lower transaction costs

(marketing & acquisition)

•  Economy of scale

•  Lower profit loadings? … hence lower costs

Assumes willingness and capacity of private insurers to participate

Research Evidence

•  Paucity of research analysis … much research now aged and North American based

•  Limitations of analysis … e.g. adjusting for differences in scheme design

•  ‘Cause:Effect’ relationships unclear

•  Most research focused on technical efficiency (cost/price)

•  Ignores the impact of good management INCONCLUSIVE

Where to From Here?

•  Ensure a robust governance framework to manage risks inherent within underwriting model

•  Transparent monitoring of ‘overall economic efficiency’ to aid insight on accountability for performance outcomes

Governance: Managing Intrinsic Risks

Public Monopoly Competitive Private Underwriting•  Lack of competitive tension dulling

incentives for efficiency & innovation

•  Political influence; suboptimal

o  Pricing

o  Funding (Capital Management)

o  Claims decisions

•  Insurer insolvency

•  Inconsistent service standards or frictional costs to preferentially target ‘good risks’

•  Focus bias on [short term] profits compromising customer outcomes

•  Excessive profits

•  Collective inefficiencies

Components of ‘Overall Economic Efficiency’

Source: Productivity Commission (2013)

Governance: Monitoring Overall Economic Efficiency Efficiency Segment

Focus Vector Examination (Quantitative)

Technical (Productive)

Transaction Cost Low • Acquisition • Claims Handling • Claims Leakage

Frictional Cost Low • Profit Margins (excessive) • Legal and Investigation • Fraud & Unmeritorious claiming

Allocative Accident Prevention High • Incidence and Severity Service Delivery High • Satisfaction (survey) Rehabilitation Outcomes Improve • Return to work/usual activity Health Outcomes Improve • Return to health

Dynamic Wellbeing Outcomes Improve • Self-reported wellbeing Service Effectiveness & Coordination

Improve

Social Capital Build

Conclusion •  Schemes privately underwritten when conceived (except Qld/Cth WC)

… often in competition with goverment owned insurers until mid 1990s •  Bulk transition to public underwriting in 1970s-1980s

... crisis driven rather than ideologically driven

•  Transition has tended to be durable –  Focus of benefit & administrative change to address emerging issues –  Outsourced Claims Administration: fewer agents and centralised design

•  Arguments and Economic theory on which model is better is mixed … research evidence inconclusive

•  Good [system] management a key determinate of quality outcomes

With a given underwriting model … manage intrinsic risks and monitor ‘overall economic efficiency’

Questions

Appendices

Current State (diagram)

Claims Administration Outsourced

Stand alone LifetimeCare & Support Schemes (Catastrophic Injury) – are all Publicly Underwritten

1

Privately Underwritten Public Monopoly

2

11

1

1

2

2

22

Common Scheme Objectives Workers’ Compensation & Motor Accidents Compensation