Published on February 27, 2014
Challenges facing self insurers in a rapidly evolving environment Robin Shaw Manager, Self Insurers of SA
Content 1. What does the change of Federal Govt mean for self insurance? 2. Self insurance v premium – the tough times 3. Economic effects on SI balance sheets 4. Insurance bonds as a means to reduce balance sheet pressure 5. Making the business case for SI
The Federal Govt and self insurance • 2/12/13 – announced the lifting of the moratorium on private sector SI under Comcare • No mention of lifting competition test (Hanks) • Reportedly renewed interest • Reduce ‘red tape’ – but can only do so in the Federal sphere • Might be some tweaks for Comcare scheme
About the Comcare option • For multi-jurisdiction operations – admin simplification may deliver savings • Cost of claims – is Comcare more expensive than local schemes in some places? • Examples: • Comcare v Queensland • Comcare v WA • Comcare v SA • What does this mean long term for the balance sheet?
About the Comcare option Comparative cost for a notional multi-state SI Source – Finity Consulting – general estimate only – will vary case by case
Primary economic influences – discount rate • Discount rate - self insurance liabilities can be discounted because investment income earned on the provision can be used to pay claims • Lower discount rate = higher estimated liabilities (all else being equal!) • Dropped due to GFC & again in 2012 • Increasing since Sept 2013 • Source – Finity Consulting
Economic trends in SI – discount rates Source – Finity Consulting 7.0% European debt crisis & reducing Aust interest rates 6.8% GFC 6.0% 5.3% 5.0% 5.3% 5.0% 3.9% 4.0% 3.3% 3.0% 3.0% 2.0% 1.0% 0.0% Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Dec-13
Primary economic influences – wage index • Major driver of claim inflation • Has been much more stable than discount rates • Source – Finity Consulting 7.0% 6.0% 5.0% 4.5% 3.8% 4.0% 4.0% 4.0% 4.0% 4.0% Jun-10 Jun-11 Jun-12 Jun-13 3.8% 3.0% 2.0% 1.0% 0.0% Jun-08 Jun-09 Dec-13
General outlook • • • • Discount rate to stabilise for 12 months Wage index may decrease slightly Outlook for SI liabilities stable short term Scheme changes in NSW, Qld may reduce liabilities • Likely major changes in SA certain to do the same (post March 2014) • SA changes may make Comcare more expensive again by comparison
Insurance bonds v bank guarantees • QBE & Assetinsure have developed surety bonds • Currently discussing with regulators – not generally available as yet • QBE approved only in SA so far but limited exposure permitted – under discussion • Amounts of AUD$10M to AUD$50M • Pricing 1.25% to 2.50% per annum • Assetinsure approved by Comcare but under APRA review – current status unknown
Insurance bonds v bank guarantees • Advantages of surety bonds: • Not having to utilise established credit lines for bonding/guarantee purposes • Generally no tangible/collateral security required • Better utilisation of the company balance sheet, enhancing working capital and liquidity • Fast turnaround issuing bonds • Contact: Ivan Radovnikovic, Relationship Executive – Surety, QBE Ltd (02) 9375 4795 firstname.lastname@example.org
Making the business case for SI • SI is at times challenged by Boards concerned with liabilities • For new applicants – business case needed • Especially so now that Comcare SI is again available • Tough economic times makes the case more important and tests its robustness • Ultimate test – if it was not a good proposition, why do so many do it and defend it?
In a nutshell Assume $1m PA premium $800,000 retained by scheme to fund worse performers $750,000 retained by employer to re-invest in OHS etc SI admin overheads @ 25% of claim costs Claim costs $200,000 Insured by WorkCover Claim costs will reduce over time Claim costs $200,000 Self Insured
Or put another way…SA as an example Proportions of total SA workers comp liabilities - WorkCover SA v self insurers 100% 22.3% 22.8% 23.6% 22.8% 21.5% 19.9% 19.6% 19.0% 18.2% 17.0% 15.1% 13.9% 81.8% 83.0% 84.9% 86.1% 90% 80% 70% 77.7% 77.2% 76.4% 77.2% 78.5% 80.1% 80.4% 81.0% 60% 50% 40% 30% 20% 10% 0% 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 % WorkCover SA liabilities % Self Insured liabilities % of scheme self insured
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