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Financial Condition Report 2016Accident Compensation Corporation

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ACC Financial Condition Report 2016

Cover note

Dear ACC Board

This Financial Condition Report (FCR) enables the Appointed Actuary to provide advice to the Board in relation to the Accident

Compensation Corporation’s (ACC’s) operations, financial condition and liabilities, and to discuss the implications of any

material risks to ACC that have been identified in the report.

Section 278A of the Accident Compensation Act 2001 (AC Act) requires ACC to prepare an annual FCR in accordance with

generally accepted practice within the insurance sector in New Zealand. ACC must provide the report to the Minister for

ACC. The Minister for ACC must provide a copy of the report to the Minister of Finance and present the report to the House of

Representatives within five days of receiving it.

This is ACC’s seventh FCR that has been prepared to meet the AC Act’s requirements. As with past FCRs, it has been prepared in

line with general insurance industry practice, taking into consideration the risks inherent in ACC’s business model.

The term ‘financial condition’, in the case of an entity such as ACC that is a statutory monopoly with the right to raise levies,

needs to be considered in a different light from that of a commercial operation that is exposed to insolvency risk. For the

purposes of this report, we have considered ‘financial condition’ in relation to the funding policies of the ACC Accounts set by

the Government, and ACC’s ability to achieve the goals of these.

A number of recommendations are made in the report, or carried forward from previous reports. These are listed as part of

the executive summary. We have assigned each to members of ACC’s Executive who are responsible for responding to the

recommendation. The Executive has seen this list and supports both the recommendations and the allocation.

Yours sincerely

Herwig Raubal BEC FNZSA FIAA Nina Herries BSc (Hons) FNZSA FIA

Chief Risk and Actuarial Officer Head of Actuarial Services

Appointed Actuary

November 2016

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Contents

Cover note i

Executive summary 3

• Purpose of this report 3

• Key conclusions 3

• Key risks 6

• Key recommendations 7

1. Progress against previous recommendations 9

2. Business and operations 16

3. Summary of financial results 26

4. Claims experience 42

5. Pricing 58

6. Claims management 67

7. Liability valuation 72

8. Investments 78

9. Solvency 85

10. Risk management 95

Appendix A – Claim frequencies by Account 99

Appendix B – Additional background information 103

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Executive summary

Purpose of this report

The purpose of this report is to provide advice on the Accident Compensation Corporation’s (ACC’s) operations, financial

condition and liabilities, and to discuss the implications of any material risks to ACC that the report has identified.

This report has been prepared by Herwig Raubal BEC, FNZSA, FIAA, the Board’s Appointed Actuary, and Nina Herries BSc

(Hons), FNZSA, FIA, Head of Actuarial Services, and relates to the financial year ended 30 June 2016.

In preparing this report, we have generally complied with the provisions of Professional Standard No. 31 (Non-Life Insurers –

Financial Condition Report) issued by the New Zealand Society of Actuaries. While technically the standard does not cover ACC

or this report, we have chosen to use it to the extent that its requirements are applicable to ACC’s circumstances. The primary

areas of departure relate to solvency, as ACC does not have the requirements for minimum capital that private insurers have.

Key conclusions

The financial condition of New Zealand’s accident compensation scheme (the Scheme) must be examined in the context of the

core legislated functions of injury prevention, rehabilitation, and compensation.

The organisation continues to invest in improvements to its operational approach, and to risk management. In addition, the

approach to injury prevention is continuing to evolve, with increasing investment coupled with a strong governance structure.

The key conclusions of this report are as follows.

1. Financial condition is satisfactory

Overall, we are satisfied with ACC’s financial condition.

The levied Accounts (Motor Vehicle, Earners’ and Work Accounts) and Earners’ portion of the Treatment Injury Account are all

above their target funding position of 105%.

After building reserves in the levied Accounts since 1999 to reach a fully funded position, future levies will aim to maintain

the funding position close to the target. If the Accounts remain above target, future levy recommendations will include a

negative funding adjustment, to move the Accounts towards target over time. Even so, levies are projected to increase over

time due to the expected increase in the costs of new claims in future years.

The fully funded portions of both the Non-Earners’ Account and the Non-Earners’ portion of the Treatment Injury Account

have, however, fallen below their 88% target.

While the funding positions of the Non-Earners’ Account and the Non-Earners’ portion of the Treatment Injury Account are

below target, we believe the risk of not being able to meet future obligations in these Accounts is low.

2. 30 June 2016 financial result affected by economic factors

Investment performance has continued to be strong. In 2015/16, the Scheme’s investment return, at 10.22%, was 0.55%

above benchmark after adjusting for investment expenses and tax (10.35% gross).

Despite this, the Scheme posted a $3.51 billion deficit for the 2015/16 year. This figure includes the liability for incurred but

not yet reported (IBNR) work-related gradual process claims. This differs from the deficit reported in the Annual Report of

$3.37 billion because these IBNR claims are not included in the outstanding claims liability (OCL) in the annual accounts.

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Changes in discount and inflation rate assumptions increased the OCL by $5,103 million, including liability for IBNR work-

related gradual process claims ($4,806 million excluding), and these were only partially offset by asset movements.

Because of the nature of the liabilities, close matching of assets and liabilities is not achievable. Assets are allocated to

mitigate this mismatch risk, and to strike an appropriate balance between risk and expected future returns.

Overall, the OCL as at 30 June 2016, as reported in the Annual Report, was $36,663 million, an increase of $6,334 million from

the previous year. The expected increase was $1,236 million.

3. Increasing claims experience

In the last few years, there have been signs of increasing claims experience, largely driven by a combination of higher

volumes of new claims and the increasing durations of longer-term claims.

Management has developed a model that indicates there is a strong link between the volume of new claims and economic

growth. However, in recent months, experience has begun to diverge from that indicated by this model. Work is underway

to better understand the underlying drivers of this additional growth, and develop and implement appropriate responses.

The OCL increased by $666 million due to higher than expected claims experience and modelling changes made to reflect

this. This excludes legislative and policy changes. The biggest drivers of this increase were medical payments, weekly

compensation, and social rehabilitation care payments.

Lower discontinuance rates have affected a number of payment types. Weekly compensation and social rehabilitation have

seen payments increasing as clients are staying on the Scheme longer.

An investigation into the reduction in shorter-term discontinuance rates that we reported in the 2015 report has been

followed by some improvements during 2015/16. Initial investigations into long-term claims growth has involved file

reviews of claims management actions, and a review of elective services claims from old accident years. The establishment

of a cross-functional working group to undertake further investigation is planned.

Social rehabilitation non-capital payments for clients with serious injuries have increased in recent years. This is due to an

increase in both the number of claims profiled as serious injury claims, and in the usage of services designed to increase

independence. Social rehabilitation capital payments for both serious and non-serious injuries have also increased. This

primarily reflects an increase in the number of claims receiving support.

Where an investment is being made with the intention of improving client outcomes, as is the case with social

rehabilitation, it is important that measures are in place to determine the effectiveness of the investment. Stronger

discipline in this area is required. These considerations are consistent with the target operating model identified under

the organisation’s multi-year Shaping Our Future strategy. The strategy aims to put customers at the forefront of what

ACC does, in order to improve clients’ outcomes and experiences. Much of this will be delivered through the specific

Transformation programme, and this requires robust measurement of the benefits achieved.

Superimposed inflation for elective surgery and most medical treatments has been lower than expected. Payments for

counselling are the exception, due to increases in counselling for sensitive claims.

There will be significant risks to the OCL and Scheme solvency if growth in claims costs continues at the levels seen in

the past two years. Therefore, understanding and monitoring the financial impacts of providing services is important. A

greater level of focus needs to be brought to this work, and we have made a new recommendation relating to this. Earlier

recommendations relating to claims experience remain open, and need to be addressed.

Note that, although we believe that reinsurance is unlikely to prove necessary or cost-effective in managing claims

experience, we are recommending this year that a review be undertaken. This would reflect an update for recent

developments in catastrophe modelling, and consider if the Scheme would benefit from the introduction of a reinsurance

programme.

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4. Injury prevention investment is increasing

During the past two years, improvements have been made to the governance structure for approving and monitoring

investment in injury prevention. There has also been an increase in partnering with organisations that are better able to

deliver injury prevention initiatives, such as WorkSafe New Zealand, Sport New Zealand and St John.

While we have seen increasing injury prevention activity during 2015/16, in order for there to be a material impact on levies

and appropriations, both the level of investment and the return need to grow. Investment in injury prevention is planned

to continue to increase in the next four years, with an expected return through reductions in the incidence and severity

of injuries.

5. Operational initiatives are in development to improve customer experience, and to respond to claims growth

Following the discovery and diagnostic, and integrated design and planning phases, the delivery phase of the Shaping Our

Future Transformation programme began in 2015/16. Initiatives in the programme are designed to improve the outcomes

and experiences of clients, health and other service providers, business customers, and levy payers. We are satisfied that

the governance structure and risk management framework of this programme are appropriate.

Initiatives under the Transformation programme are being designed using an established framework for measuring

benefits and outcomes with a consideration of financial impacts. This framework supports an investment approach

discipline with the ongoing measurement of longer-term outcomes. In addition, an evidence-based framework will be used

to support continued development of the client and provider aspects of the target operating model.

Outside the Transformation programme, a range of initiatives have been put in place aimed at reallocating claims

management resources to improve efficiency, effectiveness, and outcomes for clients. This was in response to increases in

the volume of new claims and rising claims costs experienced in recent years.

To date, the ability to assess the performance of these initiatives from a financial point of view has been limited, due to

measures not being put in place. Without financial assessments, the organisation cannot be sure it is applying resources in

a way that optimises client outcomes and financial management.

6. Forecast funding positions and funding requirements

The combination of increases in new claims costs, and the funding adjustment for previously incurred claims, determines

future funding requirements.

The cost of new claims is projected to increase in line with inflation, superimposed inflation, and population growth. For

the levied Accounts, corresponding increases in liable earnings and the number of motor vehicles will offset some of this

growth. However, in addition, an allowance has been made for annual increases in entitlement claim frequency of between

1% and 2% in the next three years.

Deficits are projected for the next four years to reduce the funding positions of the levied Accounts towards their targets.

These deficits are expected to reduce over time as the funding positions of these Accounts get closer to target and the levy

rates are set closer to the costs of claims occurring during the year in line with the Government’s funding policy.

ACC has consulted on levy rates for the levied Accounts for 2017/18 and 2018/19, estimated to provide an overall reduction in

annual levy revenue of $76.7 million. This reduction reflects a decrease in levy rates from 2016/17 for the Motor Vehicle and

Work Accounts, and an increase for the Earners’ Account. The consultation rates allow for Cabinet’s decision that levies will

be set every two years, and for the Government’s funding policy.

Cabinet approved an amount lower than the requested 2016/17 appropriation for the Non-Earners’ Account and Non-

Earners’ contribution to the Treatment Injury Account. All else being equal, this will result in a lower funding position than

would be generated by the funding policy. Ultimately, claims costs need to be covered and higher appropriations will be

required in future years to meet these costs if experience is as expected. The longer the period of under-funding, the higher

the future appropriation amounts that will be needed to make up the shortfall. Any further deterioration in the funding

position or claims experience would put more pressure on future appropriations.

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Despite a 10-year funding horizon for levied Accounts, and a 15% cap on levy increases, there is a high level of variability

in the possible future funding positions and levy rates. The trade-off between levy and funding position variability is

determined by the length of the funding horizon, with a longer horizon expressing a preference for greater levy stability, at

the expense of funding stability.

The Non-Earners’ Account and the Non-Earners’ portion of the Treatment Injury Account have a shorter funding horizon,

which would tend to lead to greater variability in the funding requirements from year to year. For the Treatment Injury

Account, the average duration of discounted claim cash flows is also very long, which will exacerbate this. The funding

policy for the Non-Earners’ Account is under review.

Key risks

The following summarises the key risks affecting ACC’s financial condition.

1. Claims experience – in the past decade, rates of injury and recovery times have varied significantly. Changes in claims

experience are strongly affected by macroeconomic conditions as demonstrated by recent increases in claim numbers

following the recovery from the global financial crisis. Changes in Scheme management can also affect claims experience.

For example, the recent improvements in access to counselling have seen a much higher than expected number of sensitive

claims being reported. It can be difficult to separate and quantify unavoidable changes in experience from changes over

which management can, and should, exert influence.

It is important that the drivers of increases in claim volumes and costs are as well understood as possible, and that changes

in claims management approach are introduced with sound monitoring and the ability to measure the impacts. The

ultimate objective is to align client outcomes with appropriate financial management. Initiatives under the Transformation

programme are being designed with this in mind, and several open recommendations from this and previous Financial

Condition Reports are also relevant.

2. Stakeholder incentives – New Zealand operates different systems for injury and illness, which can provide an incentive

for all parties involved in a decision to have a given condition assessed as arising from an accident. This can lead to

upward pressure on the Scheme’s liabilities, as Scheme boundaries are tested. This is particularly relevant with an ageing

workforce increasing the number of clients with health comorbidities that affect their rates of recovery from injury.

Aligning the expectations of clients, health providers and business customers is a means of reducing this risk. The

Transformation programme and health provider strategy are important mitigants to this risk.

3. Scheme expansion – court rulings can extend the coverage of the Scheme and subsequently lead to increases in claims

liability, levies and appropriations. ACC operates within a framework that is open to interpretation due to a combination of

complex legislation and the complexities of clients’ medical conditions. Decisions and interpretations may be challenged

before the courts, and such challenges can result in expansions of the cover the Scheme provides. Current cases before the

courts demonstrate some common themes, primarily the determination of treatment injury cover and eligibility for long-

term support and compensation.

In addition, changes to legislation and broader social policy settings can affect the levels of cover provided, and the costs

of that cover. For example, the Government’s decision to fund GP visits for children under the age of 13 led to an increase in

these costs for ACC.

To manage this risk, ACC aims to be proactively involved in legislation and policy-setting as issues develop.

4. Delivering quality outcomes alongside transformational change – services provided through the Scheme are expected

to produce quality outcomes for clients, both initially and in the longer term. ACC has recognised the need for a greater

focus on outcomes and improving the customer experience. The substantive programme to deliver this carries significant

risk and opportunity.

The organisation has established governance and risk management processes to address this risk as understanding and

monitoring the impacts of changes on both client and financial outcomes is important.

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5. Economic conditions – ACC’s liabilities are long-term and subject to health sector inflation. Finding assets to fully match

these liabilities is not possible. As a result, ACC is exposed to changes in economic conditions, particularly interest and

inflation rates, but also other market variables such as equity prices. Levy rates and requested Government appropriations

are also affected by expected investment returns, so any deterioration in the long-term economic outlook carries risk for

levy payers and the Government.

Current interest rates on Government bonds are low. While this might lead to an expectation that further falls are unlikely,

a large part of the world’s economy has been experiencing negative interest rates for some time. The prospect of further

falls in interest rates should not be ruled out.

These risks are managed through funding policies set by the Government. The policy for the levied Accounts has a 10-year

funding horizon, while the policy for the fully funded non-earners’ liabilities has a three-year funding horizon. The Non-

Earners’ Account funding policy is being reviewed.

Key recommendations

We have made various recommendations in this and earlier reports, and the open recommendations are detailed below. We

consider that the Board and management should, to the extent possible, take action to support their resolution. We have noted

the roles responsible for each action.

Recommendations made in this report

Claims experience

1. Undertake work to fully understand the drivers of Scheme experience, in addition to the economic factors as currently

modelled. This work needs to encompass the drivers of both new claims volumes and increasing costs of existing claims.

[Responsibility: Chief Operating Officer/Chief Financial Officer/Chief Risk and Actuarial Officer]

This recommendation is discussed in more detail in 4.1.

Reinsurance modelling

2. The Board should review the need for reinsurance during the year. [Responsibility: Chief Risk and Actuarial Officer/Chief

Financial Officer]

This recommendation is discussed in more detail in 9.4.

Recommendations carried forward from earlier reports

In addition to the above, a number of the recommendations from the 2015 report remain in progress. The open

recommendations that will require action beyond 2016/17 are listed below. See Section 1 for more detail on the actions taken on

last year’s recommendations, and the reasons we have carried them forward to this report.

Injury prevention

3. Develop a medium- to long-term target for the intended overall impact on injury reduction as a result of ACC’s injury

prevention activities. Ensure measurement of impact appropriately allows for broader benefits of injury prevention

activities. [Responsibility: Chief Customer Officer]

This was recommendation 1 in the 2015 report (see 1.1.1).

Review cases and decisions

4. Undertake analysis to identify the appropriate level of reviews that ACC should receive, given the complexity of the

decisions made. Once this is established, appropriate actions should be identified to ensure that the number of reviews

lodged is, and remains, at this level. [Responsibility: Chief Operating Officer/Chief Customer Officer/General Counsel]

This is an amendment of recommendation 2 in the 2015 report (see 1.1.5).

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The amendment is to make it clear that the complexity of the decisions made by ACC needs to be taken into account when

considering the level of reviews received.

Claims experience

5. Adjust rehabilitation performance measures to take account of changes in case mix, such as the age of the client and

complexity of injury. [Responsibility: Chief Operating Officer/Chief Risk and Actuarial Officer]


6. Align reporting and management regimes in relation to claims performance with both operational and financial risks, in

particular those identified by movements and trends in the OCL. [Responsibility: Chief Operating Officer/Chief Risk and

Actuarial Officer/Chief Financial Officer]


7. Investigate the increases in long-term claims experience to identify an appropriate management response. [Responsibility:

Chief Operating Officer/Chief Risk and Actuarial Officer]


Claims management

8. Implement a formal regime, including the establishment of baselines, for monitoring and measuring the effectiveness of

claims management in improving client, operational, and financial outcomes. [Responsibility: Chief Operating Officer/

Chief Risk and Actuarial Officer/Chief Financial Officer]

This is an amendment of recommendation 5 in the 2015 report (see 1.1.20).

The amendment is to focus on measuring the impacts of all claims management decisions, rather than being limited to

change initiatives.

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1. Progress against previous recommendations

Summary

• The Financial Condition Report 2015 contained nine recommendations, of which:

− six remain open, with two being amended for the 2016 report

− one has been closed

− the remaining two are expected to be closed during 2016/17.

• Five recommendations from the Financial Condition Report 2014 were awaiting further action during 2015/16. Of these:

− two have been closed

− two are expected to be closed during 2016/17

− the remaining recommendation in regards to the Treatment Injury Account has been put on hold until the

initiatives for injury prevention and the public reporting of data have been completed.

1.0.1 This section details ACC’s progress on the open recommendations from earlier Financial Condition Reports.

Many of these recommendations will require more than a year to resolve.

1.0.2 The recommendations are presented in three categories as:

• remaining open

• expected to close during 2016/17 or on hold

• closed.

Those that remain open are included in the executive summary as key recommendations of this report.

1.0.3 Each recommendation is followed by management comment on actions that have been completed or are

underway in response. We then confirm the status of the recommendation.

1.0.4 Where further action is required on a recommendation that is not included in the management comment,

we provide our view on what additional actions are required.

1.1 Recommendations remaining open

Recommendation 1 in 2015:

1.1.1 Develop a medium- to long-term target for the intended overall impact on injury reduction as a result of

ACC’s injury prevention activities. Ensure measurement of impact appropriately allows for broader benefits

of injury prevention activities. [Responsibility: Chief Customer Officer]

Management comment:

1.1.2 As part of implementing the injury prevention strategy, there has been a focus on the set-up of the

portfolios and programmes, and the accuracy of the anticipated return on investment. Since April 2016,

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the sector targets for each of the portfolios have been reviewed. Work is underway to determine the

requirements needed to develop an appropriate set of targets (eg economic, social and health) that can be

monitored, tracked, and reported against.

1.1.3 This work includes looking at how the injury prevention programmes in each portfolio can contribute to

reductions in claims experience by Account, and for the overall Scheme. This approach will also assist in

directing injury prevention work where it is most needed, and where it will have the biggest impact.

This recommendation is still in progress, and has been held open as recommendation 3 for the coming year.

1.1.4 We expect that combining the injury prevention portfolio approach with the Account structure will help

identify the targets that are needed in the medium to long term. Further work on scope and reach is needed

before this recommendation can be closed.


1.1.5 Undertake analysis into the root causes of reviews, with a view to taking appropriate actions to sustainably

reduce the number of reviews lodged. [Responsibility: Chief Operating Officer/Chief Customer Officer]

Management comment:

1.1.6 Significant analysis of the root causes of reviews was previously completed and used to identify a number

of projects for review resolution that are ongoing. The reduction in review applications since 2012/13 (see

2.3.22) is a direct result of these interventions.

1.1.7 Review representatives are being established within the business to triage, use the alternative dispute

resolution process (where appropriate), represent ACC, and share knowledge and insights gained from

review decisions.

1.1.8 An independent review by Miriam Dean, CNZM QC, publicly released in September 2016, also made a

number of recommendations to improve dispute resolution for ACC clients. These recommendations

focused on ACC’s data collection and analytics, improving the settlement process, improving access to

medical evidence, and the lack of information or options for clients to guide them through the dispute

resolution process.

1.1.9 The Board has agreed to ACC implementing or further considering the recommendations from the

review. In addition, the review made some suggestions, generally consistent with the direction of its

recommendations, and ACC will act on all but one of these. One example is updating an advocacy training

manual to provide better support for clients during the review process.

This recommendation is still in progress, and has been amended and held open as recommendation 4 for the

coming year.

1.1.10 We expect the actions being taken in response to the independent review will improve both the dispute

resolution process and outcomes for clients.

1.1.11 We believe that analysis is needed to identify the level of reviews that ACC should expect to receive, given

the complexity of the decisions made. Once this is established, appropriate actions can be identified to

ensure that the number of reviews lodged is, and remains, at this level.


1.1.12 Adjust rehabilitation performance measures to take account of changes in case mix, such as the age of the

client and complexity of injury. [Responsibility: Chief Operating Officer/Chief Risk and Actuarial Officer]

Management comment:

1.1.13 The expected claims outcomes (ECO) tool is being used to develop and implement a new performance

objective for frontline network staff. Using a performance objective based on ECO allows the measure

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to adjust and respond to changes in case mix complexity. Targets can be set based on the type of work

allocated to the case owner.

1.1.14 In addition, the rehabilitation tracking tool (see 6.2.4) is being used by case owners to track claims that are

outside the expected timeframes for achieving independence.


1.1.15 We will need to see measurement and monitoring of how the ECO results are responding to changes in the

case mix before being satisfied that this recommendation has been addressed.


1.1.16 Align reporting and management regimes in relation to claims performance with both operational and

financial risks, in particular those identified by movements and trends in the outstanding claims liability

(OCL). [Responsibility: Chief Operating Officer/Chief Risk and Actuarial Officer/Chief Financial Officer]

Management comment:

1.1.17 A ‘balanced scorecard’ is being developed to provide a single view of more than 270 indicators to simplify

reporting and anticipate changes in claim trends and performance.

1.1.18 The scorecard is intended to be used to support decision-making. It will use new and existing reporting to

track the liability and costs of the Scheme in conjunction with other measures. Initially, eight indicators are

being considered for the appropriate integration of OCL impacts. The scorecard will be used as an indicator

to monitor operational risks.


1.1.19 The scorecard is still in development, and we would like to see integration of major drivers of the OCL in the

measures, and the results of using these measures before this recommendation can be closed. In particular,

we believe direct attention to OCL variance from expectations is required, along with the operational agility

to respond.


1.1.20 Implement a formal regime, including the establishment of baselines, for monitoring and measuring the

effectiveness of changes to claims management in improving operational, financial, and client outcomes.

[Responsibility: Chief Operating Officer/Chief Risk and Actuarial Officer/Chief Financial Officer]

Management comment:

1.1.21 The recently established business process management (BPM) team will ensure that the BPM framework

being developed includes steps to establish baseline metrics for expected benefits. These will then be

measured post-implementation to see if the benefits have been achieved. This will apply for any changes

coming through to the BPM team that are not being run as programmes through the Transformation

programme or strategic change portfolio. For changes managed through these latter two programmes, an

established benefits management framework is in place that has been regularly reviewed by both internal

and external parties.

This recommendation is still in progress, and has been amended and held open as recommendation 8 for the

coming year.

1.1.22 Where a change in the claims management process is being made with the intention of improving client

outcomes, it is important that appropriate targets and measures are in place to determine effectiveness.

Stronger discipline in this area is required.

1.1.23 In particular, we expect that all proposed future changes to claims management practices will go through

one of the BPM process, the Transformation programme or the strategic change portfolio. The BPM

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framework is still in development and we would like to see how this measures and tracks expected benefits

of changes in the coming year, particularly in relation to impacts on the OCL.

1.1.24 We consider that this approach should be applied to measure the impacts on client outcomes of claims

management more generally. As a result the recommendation has been amended for this report.


1.1.25 Investigate the increases in long-term claims experience to identify an appropriate management response.

[Responsibility: Chief Operating Officer/Chief Risk and Actuarial Officer]

Management comment:

1.1.26 There are a number of investigations in progress to understand the drivers of increases in long-term claims

experience.

1.1.27 Early in 2016, a case file review of 1,800 long-term claims was completed. Of these, 81% were determined

to be progressing as expected and receiving the appropriate services, while 19% were identified as needing

further action, which was consequently taken. These claims were, on the whole, more complex claims,

often with non-injury co-morbidities. The main issues identified were delayed actions on the claim and

rehabilitation activities not being completed concurrently. Some of the claims could have benefited from

earlier clinical advice and additional considerations of non-injury factors in the rehabilitation planning

process. These observations supported delivery of a number of initiatives already underway aimed at

reducing unnecessary processes and work, and improving the timeliness of actions on claims.

1.1.28 In May 2016, a subsequent review of the claims identified as needing further action and the status of the full

cohort was undertaken. From this second review, 29 claims were considered to still require further action,

while more than a third of the original sample of clients had returned to independence. The Clinical Services

team have also reviewed the original 19% of claims identified as needing further action to understand any

impediments that might be contributing, and any improvements available from a clinical perspective. As a

result, a number of initiatives have been identified regarding referrals for clinical advice and improvements

to workflow and capacity management.

1.1.29 A cross-functional working group is being established to investigate the wide range of factors contributing

to the long-term claims experience. The group will have representatives from research, finance, actuarial

services, client services delivery, analytics and reporting, and business process management teams.

1.1.30 In addition, a review is being undertaken of claims with accident dates 10 or more years ago that are either

accessing services for the first time, or needing repeat services some time after the original treatment.

Claims of this nature incur costs associated with surgery, rehabilitation, weekly compensation, and other

medical services. The purpose of this review is to identify what is driving the increased spending on claims

from older accident years and identify management actions.


1.1.31 There is still significant work in progress to identify the appropriate management response to the increases

in long-term claims experience and to understand, and embed, improvements that can be made to the

ongoing management of these claims.

1.2 Recommendations expected to close during 2016/17 or on hold


1.2.1 Undertake work to improve the consistency and objectivity of decision-making to clarify the boundary

between ACC coverage and that of the wider health sector. [Responsibility: Chief Governance and

Strategy Officer]

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Management comment:

1.2.2 A systems framework with policy options is being developed to help ACC better manage mixed-cause

conditions. These options are being considered through the following mechanisms:

• legislative settings

• claims management

• product development

• injury prevention initiatives

• funding models

• monitoring and reporting.

1.2.3 The Executive considered the framework in September 2016 and asked for the development of

detailed policy options and implementation planning, aligned with other changes proposed under the

Transformation programme.

This recommendation is ongoing with actions planned that will likely mean it is closed in the coming year.


1.2.4 Engage with the Ministry of Health and the district health boards with a view to gaining access to detailed

claim-level information in relation to services provided under the current bulk-billed arrangement for

funding public health acute services. [Responsibility: Chief Governance and Strategy Officer/Chief

Operating Officer]

Management comment:

1.2.5 While the Accident Compensation Act 2001 allows ACC to obtain this information, the individual clients

concerned have provided their personal information directly to the district health boards for the purposes of

receiving treatment. This means that it can only be disclosed in certain circumstances under the Privacy Act

1993 and the Health Information Privacy Code.

1.2.6 A Memorandum of Understanding (MOU) between the Ministry of Health and ACC will enable ACC to

obtain the information for use for such purposes as injury prevention, financial modelling, and resource

planning. This information will not be used for managing the individual claims, as ACC receives specific

permission from the individual clients to obtain such information when subsequent services are required.

The MOU is expected to be in place by the end of 2016, followed shortly afterwards by the provision of

the data.



1.2.7 That ACC requires Accredited Employers to provide information on the duration of weekly compensation

claims under their management. [Responsibility: Chief Customer Officer]

Management comment:

1.2.8 This recommendation aims to enable better and more consistent monitoring of the performance of the

Accredited Employers Programme (AEP). Weekly compensation duration is used as a key measure of

rehabilitation outcomes for claims that ACC manages directly, and would make a useful comparison for

AEP claims management performance.

1.2.9 The need to improve data from the AEP generally was identified under an internal assurance review in

June 2015. Subsequent actions identified were technology focused, and were deferred by management to

accommodate other competing priorities.

13

1.2.10 Since then, a plan to provide a monitoring framework and tools to improve the data quality for the AEP has

been developed for consideration by management.


1.2.11 It was expected that this recommendation would be closed during 2015/16, but the deferral by management

of technology changes to improve the data capture has meant there is still some work required.

Treatment injury


1.2.12 Develop a package of initiatives to help reduce treatment injuries, including increased investment in

injury prevention, clarifying coverage of the Scheme, and comparisons between providers to encourage

improvements. [Responsibility: Chief Customer Officer/Chief Governance and Strategy Officer]

Management comment:

1.2.13 Treatment injury prevention initiatives have commenced in partnership with relevant agencies and

providers. These are aimed at reducing the incidence and severity of injuries with either high average

costs or high numbers of claims, such as neonatal encephalopathy (birth brain injuries), pressure injuries,

surgical site infections, perioperative harm, and wound infections. Initiatives are at different stages, and

development will be ongoing.

1.2.14 ACC is working in partnership with district health boards and private hospitals to co-design treatment

injury information suitable for public reporting. This includes working together to develop stronger

treatment injury guidance, and to ensure the necessary information is provided to support ACC’s decision

on the claim.



1.2.15 With respect to treatment injury, investigate alternatives for levying providers ahead of recommending a

suitable course of action. [Responsibility: Chief Governance and Strategy Officer]

Management comment:

1.2.16 It is not appropriate to try to identify what and whether alternatives for levying providers should be

considered, while the initiatives occurring under the previous recommendation are being implemented.

This recommendation has been put on hold until the results of actions on recommendation 6 in 2014 can be

assessed.

1.2.17 We continue to believe that levying providers should be considered, because it is an important incentive for

reducing treatment injury claims. This recommendation will be revisited in future Financial Condition Reports.

1.3 Recommendations closed


1.3.1 Investigate reasons for high rates of decline of gradual process claims. Investigate reasons for low rates of

claiming for gradual process conditions. [Responsibility: Chief Operating Officer/Chief Governance and

Strategy Officer/Chief Clinical Advisor]

Management comment:

1.3.2 A report was presented to the Executive in September 2016 identifying the probable reasons for the high

rates of decline and the low rates of claiming for gradual process conditions, and actions that could be

14

taken to address these. The Executive agreed, in principle, to these actions and asked that implementation

be aligned with other changes proposed under the Transformation programme.

This recommendation has been closed.


1.3.3 Encourage case managers to consider unpaid volunteer work when measuring employment participation

outcomes for seriously injured clients. [Responsibility: Chief Operating Officer]

Management comment:

1.3.4 Since this recommendation was made, serious injury case owners have been directed to actively support

clients into unpaid work (where they have not returned to paid work) and record the outcomes. Data for

2015/16 shows 155 clients were supported into unpaid employment.

1.3.5 During 2016/17, monthly and quarterly updates will be sought from case owners to track the progress of

clients gaining unpaid employment, the impact on funded care, and progress towards paid employment.

This will help to ascertain the effects on the serious injury liability.



1.3.6 Develop a set of objective measures that can be used to monitor ACC’s adherence to its obligations. These

will most sensibly focus on client satisfaction with their medical treatment, quality of clinical outcomes,

return to work/independence and service experience. [Responsibility: Chief Customer Officer]

Management comment:

1.3.7 This recommendation was mostly complete as reported in the Financial Condition Report 2015, with some

measures also being covered through the responses to recommendations 1, 4 and 5 from that report (see

comments under 1.1.1, 1.1.16 and 1.1.20).

1.3.8 Measuring the quality of clinical outcomes is included in the wider provider services strategy (see 2.3.28).

In addition, since September 2015, the Clinical Services Directorate has been conducting monthly audits

on randomly selected claims of clinical advice against set standards. Reports are provided quarterly to

clinical advisors with the results of these audits and any identified areas for improvement. In addition,

management receives reports monthly on measures relating to the delivery of clinical advice.


15

2. Business and operations

Summary

• The financial condition of the Scheme cannot be viewed in isolation. It must be examined in the context of providing the

core legislated functions of injury prevention, rehabilitation and compensation.

• While we have seen increasing injury prevention activity during 2015/16, in order for there to be a material impact on

levies and appropriations, both the level of investment and the return need to grow.

• Rehabilitation is covered in more detail in later sections, but overall return-to-work rates continue to compare

favourably with those in Australia.

• Initiatives coming from the Transformation programme will be designed to provide improved outcomes for clients and

for the Scheme, aligning customer outcomes and financial management. We are satisfied that the governance structure

and risk management framework of this programme are appropriate.

2.0.1 ACC is the Crown entity set up under the Accident Compensation Act 2001 (the AC Act) that manages

and delivers New Zealand’s accident compensation scheme (the Scheme). The Scheme provides no-fault

personal injury cover to everyone in New Zealand, including overseas visitors. The AC Act sets out three

core functions for the Scheme: injury prevention, rehabilitation and compensation.

2.0.2 The majority of this report focuses on aspects of ACC’s financial performance and related risks. This section

provides some context around ACC’s operations and looks at:

• background on the governance and structure of ACC

• the nature of the cover provided and impacts from recent court cases

• some measures to assess whether, in delivering its financial results, ACC is meeting its AC Act

requirements

• upcoming changes in operations resulting from the Transformation programme, and the framework in

place for its governance and risk management.

2.1 Background on governance and structure

2.1.1 As a Crown entity of the New Zealand Government, ACC’s corporate governance structure is prescribed

under the Crown Entities Act 2004. The Minister for ACC appoints a Board responsible for the governance

of, and all decisions relating to, the operation of ACC. In turn, the Board delegates to the Chief Executive

the day-to-day management and leadership of ACC.

2.1.2 The AC Act is the governing legislation for operational requirements. Each year the Minister and the

Board agree the terms and performance targets of a Service Agreement. In achieving those targets, ACC

demonstrates that it has fulfilled its obligations under the Act.

2.1.3 Government oversight of ACC is shared by the Ministry of Business, Innovation and Employment (MBIE)

and the New Zealand Treasury. MBIE administers the AC Act and is responsible for policy, while the

Treasury is responsible for performance monitoring and managing Board relationships and appointments.

16

2.1.4 More detail on the governance and management structure can be found in ACC’s accountability

documents:

• Statement of Intent 2015-2019

• Service Agreement 2016/17

• Annual Report 2016.

These are publicly available on the ACC website www.acc.co.nz

Account structure

2.1.5 ACC is financially managed under five Accounts (see B.2 in Appendix B), with each designed to align the

source of funding with where the injury risk occurs. While not technically the case, each Account can be

thought of as a mutual insurer that is owned by those who fund the costs. Those providing the funding bear

the risks and rewards of each Account’s performance.

2.2 Nature of cover provided

2.2.1 Coverage under the Scheme is outlined in the AC Act and accompanying regulations which serve as the

insurance agreement. Insured events are generally death, physical injury and (to a lesser degree) mental

injury. The AC Act provides for a wide scope of services to clients.

2.2.2 Every year approximately one-third of New Zealanders suffer injuries that result in claims being lodged

with ACC. Approximately 90% of these claims are minor, requiring medical treatment only, and the clients

recover quickly. At the other end of the spectrum, a few hundred injuries each year result in extreme and

permanent impairment. These serious injury claims usually require social rehabilitation support in the form

of home or nursing care at various levels throughout the individuals’ lives.

2.2.3 ACC provides financial support for medical treatment and rehabilitation services to clients covered by

the Scheme. It also provides compensation support to wage earners during their recovery, or to their

dependants in the event of death. Compensation for loss of potential earnings is provided to injured

children who are still incapacitated when they turn 18, and in other specific circumstances. See B.1 in

Appendix B for details of the services provided.

2.2.4 Coverage when incapacity is not solely related to an accident can be unclear. For example, when a person

suffers a shoulder injury it is often unclear how much damage is due to the accident and how much is due

to the effects of ageing. This is important as entitlements provided under the AC Act are substantially

greater than otherwise available. Concerns about the boundaries of cover and the interactions with

health comorbidities have been raised in previous Financial Condition Reports. In response to a previous

recommendation, ACC is developing options for addressing the issues around mixed-cause coverage. This

is discussed in Section 1.

Recent court cases relating to coverage

2.2.5 Given the complexity of the legislation, the nature of entitlements available and the complex medical

conditions of some clients, it is not surprising that there are a number of challenges to ACC decisions in

the court system. The courts’ function is to clarify legal positions where there is uncertainty about cover or

entitlements.

2.2.6 In some cases this will lead to increased costs through widening cover, extending entitlements to current

and future clients, or backdating additional payments to past clients. Recent cases that have been brought

before the High Court that cause potential financial risk for the Scheme are discussed below. The cases

demonstrate some common themes, primarily the eligibility for long-term support and compensation, and

the determination of treatment injury cover.

17

http://www.acc.co.nz

Eligibility for long-term support and compensation

2.2.7 Social rehabilitation care for seriously injured clients is the largest component of ACC’s liability. In a recent

case, Algie and others v ACC, payments were sought for care provided by friends and family for which no

payment had been made. This case related to claims covered under earlier legislation and would have

involved estimating costs for services provided many years ago with little or no evidence. The case had

potential implications for the coverage of the Scheme, representing a risk that substantial backdated

payments would need to be made that had not been allowed for in the outstanding claims liability or levies

and appropriations. In April 2016, the Court of Appeal overturned a High Court decision, confirming that

historical provisions do not provide compensation for unpaid care in these clients’ situations.

2.2.8 Sometimes it will not be clear that a client receiving weekly compensation while off work due to injury has

reached the required level of rehabilitation to return to work. In these cases, once the client has completed

rehabilitation, and it is believed they are likely to be able to return fully to work, ACC can refer them for

a vocational independence assessment. Ritchie v ACC challenged the basis on which ACC determines

that a client is likely to achieve vocational independence, and Splite v ACC argued that the referral was a

reviewable decision.

2.2.9 Following decisions in favour of ACC, both cases were heard by the Court of Appeal in May 2016. The

outcome of Ritchie is not yet known, while the Court dismissed the Splite appeal on 3 July 2016, confirming

that a decision to refer a client for a vocational independence assessment is not a reviewable decision.

While these cases took different approaches to challenging ACC’s rehabilitation management process,

they both could have implications for liability in respect of long-term weekly compensation. The Court’s

confirmation of ACC’s position in Splite provides some certainty going forward.

Treatment injury cover

2.2.10 Cover decisions for treatment injury claims can be very complex. This is particularly true for birth injuries

when it may take some years before the full extent of the injury is known. The resulting injury often requires

lifelong support for the client and has significant financial impacts for all parties.

2.2.11 A recent case heard before the High Court, Adlam v ACC, was the result of a decision by the District Court

that implied that, irrespective of the clinical indicators at the time, if later medical evidence suggests

that an injury might have been prevented by alternative treatment, failure to provide treatment can be

established. ACC appealed this decision as it created significant uncertainty over the extent of treatment

injury cover. It seemed to be implying a widening of cover, especially for cases involving birth injury or

failure to diagnose conditions. The appeal was allowed by the High Court in July 2016, confirming ACC’s

approach in this case.

2.2.12 In another case, J. v ACC, treatment injury cover was accepted for a client who had become pregnant due to

a failed sterilisation process. At issue was whether the entitlements the client could receive were restricted

to a period ending shortly after the birth of the child or should extend to the costs of rearing that child.

ACC’s policy has been that entitlements are limited to the impacts of the pregnancy itself on the mother. A

High Court appeal by ACC on the District Court decision to extend entitlements beyond the pregnancy and

birth was heard in April 2016. The result of this case would apply in a situation where a client has become

pregnant due to treatment injury (in this case a failed sterilisation procedure), or as a result of sexual abuse.

This appeal was also allowed by the Court in July 2016, confirming that entitlements should be limited to

the impacts of the pregnancy itself.

Levy implications for work injury decisions

2.2.13 When a work injury claim is accepted or declined, both the worker and the employer have rights to review

that decision. The importance of an employer being involved in a decision regarding claim acceptance and

consequently the return-to-work process was highlighted in a recent case heard by the High Court. In

Vehicle Testing (NZ) Ltd v ACC the employer had not challenged the work injury decision at the time, but

18

attempted to do so much later when it received a levy invoice with the claim included in the experience

rating calculation. The employer appealed the original District Court ruling that there was no opportunity

for further challenges to the work injury decision. The appeal was dismissed in February 2016. Had the

appeal not been dismissed, the implications for levies would have been two-fold. There would have been

the risk that the full work levy as set could not be collected, and the additional administration required to

deal with disputes of past claims would have increased the administration costs.

2.3 Meeting the requirements of the AC Act

2.3.1 A variety of measures relating to the core legislated functions of injury prevention, rehabilitation and

compensation are regularly reported in ACC’s accountability documents. Here we discuss our view of how

each requirement is satisfied.

Injury prevention

2.3.2 Section 263 of the AC Act requires ACC to promote measures to reduce the incidence and severity of injury

in New Zealand. These measures are to be undertaken and funded through levy or appropriation income

only if they are likely to result in a cost-effective reduction in actual or projected levy rates or Non-Earners’

Account expenditure.

Cost-effectiveness of injury prevention programmes

2.3.3 To measure cost-effectiveness, the return on investment (ROI) for injury prevention programmes is

assessed. This measurement begins early in the development of a new programme, by comparing the

programme’s expected costs against its projected future benefits, generally over a 10-year period. Once a

programme is approved for delivery, performance is then monitored as it proceeds. The expectation is that

programmes that do not meet specific criteria relating to ROI, reach, and other operational requirements

will be stopped.

2.3.4 ACC has a clear governance structure for approving and monitoring investment in injury prevention.

The ROI projection for new initiatives and a model to monitor programme progress and success are key

components of this.

2.3.5 During 2015/16 a review was undertaken of the ROI model, evaluation methodology, and monthly reporting

to provide assurance that it was fit for purpose. Since this, improvements have been made to the model

with one of the key differences being a more consistent approach to discounting benefits and costs.

2.3.6 The impacts of the changes on the figures reported are expected to be small. Work is underway to

recalculate all measurements under the improved model. This will be included in next year’s Financial

Condition Report. All measures and targets reported in this section use the original model, consistent with

previous years.

2.3.7 The projected overall ROI for programmes in delivery as at 30 June 2016 was $1.60 for every $1 spent over the

duration of the programmes. This was an increase from $1.34 in 2014/15 and was well above the target for

the year of $1.20.

2.3.8 Table 1 shows the breakdown of the overall ROI by portfolio. Costs for programmes that are still in the

development phase are not included. However, all costs for programmes that are stopped at any time

before completion, including those that do not reach delivery, are included in the respective portfolios and

overall ROI.

19

Table 1 – Injury Prevention Portfolio Return on investment for all programmes in delivery as at Year Ending 30 June 2016

PortfolioInvestment

($M)

Estimated return

($M) ROI Portfolio description

Work 20.5 44.6 $2.18 In partnership with WorkSafe New Zealand these

programmes target reductions in workplace injuries

Falls 9.4 11.8 $1.25 Initiatives in partnership with district health boards

aimed at reducing falls in older populations

Road 34.8 49.0 $1.41 Programmes targeting a reduction in injuries to all

road users through a mixture of education and road

improvements. The National Road Safety Committee’s

road safety sector plan ‘Safer Journeys’ is a key

component

Sport and

recreation

26.9 73.5 $2.73 Programmes focused on the major sporting codes

of rugby, netball, football, and rugby league, and

on recreational activities such as cycling through a

partnership with Sport New Zealand

Violence (sexual

and family)

17.0 N/A N/A ROI is not yet measured for this portfolio as the interim

focus is on encouraging greater reporting that will

inevitably lead to an increase in claims. Longer-term

behavioural changes expected from the continuation of

these programmes should lead to lower incidence

Treatment

injury

9.0 12.7 $1.42 Partnering with the Ministry of Health and the Health

Quality & Safety Commission to identify programmes for

reducing harm in the health sector

Community 5.7 5.6 $0.97 Programmes designed to reduce injuries affecting

communities

Total 123.4 197.2 $1.60

2.3.9 While the ROI in the Community portfolio is below $1, it has improved significantly from the 2014/15 result

of $0.07. It can be hard to identify the full benefits of these programmes as many of them indirectly affect

claims across all portfolios. For example, the St John in Schools programme educates children in first aid

and injury prevention. If they share this knowledge with their families and wider communities, the resulting

injury reductions will be Scheme-wide.

2.3.10 The three programmes, included in Table 1, with the highest individual projected investment approved

during 2015/16 are:

• Manufacturing – led by WorkSafe New Zealand under the Reducing Harm in New Zealand Workplaces

Action Plan. It focuses on strengthening health and safety (H&S) leadership capability at all levels in

business, strengthening the H&S legal and risk management knowledge of workers and managers,

and improving the motivation for good H&S behaviours in the workplace. The total ACC investment is

projected to be $10 million over five years from January 2016 with an expected 10-year ROI of $3.33.

• SportSmart Warm-up – based on FIFA 11+, an injury prevention programme proven to reduce

significant knee, hamstring and ankle injuries in football players by up to 50%. ACC has tailored

FIFA 11+ to a range of New Zealand organised sports, including integrating it with existing sport

programmes for rugby, netball, football, and rugby league. It is being delivered by New Zealand

20

Football to secondary schools nationwide. Beginning in January 2016, this programme has a total

projected investment of $6.6 million over three years, and is expected to provide a 10-year ROI of $2.48.

• MORSim – a clinical simulation training project to address perioperative harm. It is being delivered by

district health boards in stages, over the next five years, to all multidisciplinary operating room teams.

Total investment for this programme is $6.4 million over five years, starting from June 2016, with an

expected 10-year ROI of $0.81. While the expected return is not satisfactory, this programme is part

of a planned package aimed at reducing perioperative harm, with supporting programmes expected

to provide higher returns, still in development. It is important that the total package does generate a

satisfactory return, particularly noting the general increase in treatment injury costs in recent years.

2.3.11 These programmes are all in the early stages of delivery and the ROIs are those that were presented in the

business cases for approval. It is expected that these will be adjusted in future years as actual benefits are

realised.

Reduction in overall injury costs

2.3.12 In order to achieve a meaningful reduction in overall injury rates and costs, both the reach and impacts of

injury prevention programmes must be sufficiently large. To achieve this, ACC partners with organisations

that are better able to deliver injury prevention initiatives, such as WorkSafe New Zealand, Sport

New Zealand and St John.

2.3.13 We recommended in the Financial Condition Report 2015 that medium- to long-term targets for the intended

overall impact of injury prevention activities be developed. The organisation is working with its partners

in each portfolio to develop these targets (see 1.1.1). In order for there to be a material impact on levies and

appropriations, both the level of investment and the returns need to grow. This recommendation is still

open.

Rehabilitation

2.3.14 Much of Section 4 of this report is concerned with measures of rehabilitation. These measures include

the durations of claims and the levels of support provided. Here we discuss some additional measures of

successful rehabilitation that cannot directly be identified through payment experience.

2.3.15 ACC benchmarks its return-to-work performance against Australian workers’ compensation schemes

via the Return to Work Survey produced for Safe Work Australia. Graph 1 shows the return-to-work rate

compared with the Australian schemes’ national trends since 2001. This is calculated from surveying clients

whose claims were submitted 7-9 months prior to the survey, so includes a component of the durability of

the clients’ return to work.

Graph 1 – Return-to-Work Rates

505560

65

70

758085

90

95

100

Retu

rn-t

o-w

ork

rate

(%)

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

Year of survey New Zealand Australia

2.3.16 Over time, New Zealand’s return-to-work rate has been generally higher than Australia’s, with the 2016

result of 79% being 2% higher than the Australian average of 77%.

21

2.3.17 Seriously injured clients generally require support for the rest of their lives. Measures of success here must

centre on the independence levels they are able to achieve. These clients set self-directed independence

goals every six months, and goal achievement is measured on a four-point scale (not achieved, partially

achieved, achieved, achieved beyond expectations). The figures in Table 2 show that goal achievement (the

top two categories) has trended steadily upward from 61% in 2010/11 to 80% in 2015/16.

Table 2 – Trends in Client Goal Achievement Since 2010/11

Clients with serious injuries managed by support coordinators

Year ending 30 June

2011 2012 2013 2014 2015 2016

Achieved beyond expectations 5% 5% 4% 5% 6% 6%

Achieved 56% 61% 65% 70% 71% 74%

Partially achieved 27% 20% 20% 16% 14% 12%

Not achieved 13% 13% 11% 9% 9% 8%

2.3.18 The overall trend continues to be positive, although the results, being based on qualitative measures, are

likely to be highly subjective.

Compensation

2.3.19 Important factors in providing compensation include making the right decision on entitlement, the

timeliness of making that decision, and the time taken to provide payment. Decision and payment

timeliness are organisational key performance indicators reported in ACC’s accountability documents, and

the targets for both were met in 2015/16 with improvements from the previous year. Here we discuss some

issues around when decisions are challenged.

Reviews of decisions

2.3.20 A client who is dissatisfied with a decision made by ACC has the option of seeking a review of that

decision. Where resolution cannot be achieved through other means, their case will be referred to FairWay

Resolution Limited, an independent body charged with assessing ACC decisions based on legislation and

medical evidence. ACC funds the cost of this service.

2.3.21 Table 3 shows the number of reviews lodged and the outcomes of reviews completed in the past five years.

Note that figures for previous years may differ slightly from those reported earlier as appeal processes

continue.

Table 3 – Review Outcomes

Year ending 30 June

2012 2013 2014 2015 2016

Number of reviews lodged 9,251 8,538 6,969 6,514 6,513

Number of reviews completed 9,136 9,121 6,841 6,719 6,285

Number withdrawn or settled 2,991 3,164 2,774 2,812 2,810

% withdrawn or settled 33% 35% 41% 42% 45%

Number found in favour of clients 1,775 1,562 1,062 1,069 989

% found in favour of clients 19% 17% 16% 16% 16%

2.3.22 Over the past few years, ACC has implemented a number of initiatives to support dispute management.

These contributed to a reduction in the number of reviews lodged from more than 8,500 in 2012/13 to 6,969

in 2013/14. These initiatives also led to an increase in the proportion of reviews that were withdrawn or

22

settled without having to go through formal review hearings. While this was good progress, we have not

seen further significant reductions since.

2.3.23 The compulsory nature of the Scheme makes it particularly important that correct cover decisions are made

as clients do not have a choice of provider for accident cover. In the context of 1.9 million claims registered

during 2015/16, the number of reviews lodged is low. However, out of all claims only around 8% have

interactions with ACC for more complex cover or entitlement decisions beyond receiving minor medical

treatment. Around 200,000 claims receive entitlement payments each year. For these claims, the review

rate is around 3%.

2.3.24 We recommended in the Financial Condition Report 2015 that further analysis into the root causes of reviews

be undertaken with a view to taking appropriate actions to sustainably reduce the number of reviews

lodged. As discussed in 1.1.5, we expect the actions being taken in response to an independent report on

ACC’s review process to improve both the processes and outcomes for clients.

Decisions on elective surgery

2.3.25 One key area of concern relates to decisions to fund elective surgery, with one in three review cases

related to these decisions. ACC receives just under 60,000 elective surgery requests a year. Graph 2 shows

decisions related to elective surgery requests since 2006/07. Cancelled surgery requests are those where

the client or health provider have withdrawn their applications before ACC has made a decision.

Graph 2 – Elective surgery applications

Num

ber o

f app

licat

ions

(´0

00

)

0

10

20

30

40

50

60

70

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Year ending 30 June

Declined Approved Cancelled Awaiting decision

2.3.26 ACC declines between 9,000 and 10,000 elective surgery requests every year. The number of declined

claims increased to a peak in 2009/10. Rates in recent years have been lower, and the number of

applications cancelled has also been reducing. The numbers for 2015/16 are likely to change as claims

awaiting decisions are settled.

2.3.27 While this decrease in declined and cancelled applications is encouraging, the levels still imply some

misalignment between ACC, the public, and the health sector when it comes to the expectation of receiving

elective surgery. In previous Financial Condition Reports, we referred to an Elective Services Pathway

Programme. This programme included activities expected to help reduce the number of elective surgery

reviews and decisions found against ACC, through providing clear expectations and consistent, evidence-

based decision-making. During 2015/16, this programme was integrated into the core business of the

provider services delivery team through a wider health sector strategy.

2.3.28 The components of the new elective services, and wider provider service delivery, models, will be developed

during 2016/17 through four streams of work:

• trialling proposed new models for elective services’ management and funding

• reviewing surgery prioritisation criteria and processes to ensure clients are effectively and consistently

prioritised for more urgent surgery where appropriate

23

• developing a client outcome measure that takes account of key inputs including time, cost, and quality

of service delivery

• assessing and defining the needs associated with provider education and outlier management to

better support a strategy based on high provider trust.

Decisions on cover for work-related gradual process injuries

2.3.29 In previous reports, we have highlighted work-related gradual process injuries as potentially being subject

to low claiming rates and high decline rates. In response to a previous recommendation continued in the

Financial Condition Report 2015 (see 1.3.1), initiatives have been identified to improve claim lodgement and

acceptance rates for gradual process claims. These include working with providers and other stakeholders

to improve understanding and expectations of the coverage and support available for clients with gradual

process conditions. The implementation of these initiatives will be aligned with other proposals coming

through the Transformation programme to ensure sound financial management.

2.4 Shaping Our Future

2.4.1 The Shaping Our Future strategy was established in late 2013 to improve the outcomes and experiences

of injured people, health and other service providers, business customers, and levy payers. As part of the

strategy, these six investment objectives were identified in the Transformation programme business case:

• improve customer confidence and trust in ACC

• improve the productivity of ACC

• reduce the number of productive days lost to injury that is attributable to ACC’s management of cases

• empower and engage ACC staff to deliver ACC’s core services more effectively

• increase operational resilience through improved data, technology, process and people changes

• improve levy collection through better quality information, reducing time to payment, and bad debt.

2.4.2 Through the Shaping Our Future strategy, a target operating model has been developed to identify how the

organisation will work in the future. The model is designed to put customers at the forefront of what ACC

does, and will lead to a focus on improving client outcomes through, for example:

• best practice clinical pathways

• provider incentives

• claims management disciplines.

These will be underpinned by an evidence-based framework and an improved analytics capability.

2.4.3 It is important that these aspects of the target operating model are delivered.

2.4.4 The Transformation programme is the means for delivery of a number of initiatives and projects in support

of Shaping Our Future. The focus of the Transformation programme is on changing and integrating

processes, systems, technology and information, based around the needs of customers. The 2015/16 year

saw the completion of the integrated design and planning phase. Over the next 12 months, a number

of large-scale changes will be delivered. The Board has governance oversight of the programme and,

additionally, high-level risks have been identified and are regularly monitored through the programme’s

governance board.

2.4.5 Early initiatives include:

• simplifying levy invoices, completed in time for the 2016/17 invoices sent from 1 July 2016

24

• making changes to the weekly compensation process, ensuring the ability to deliver faster and more

consistently for clients.

2.4.6 Every initiative under the programme is set up following established project management practices with

a benefit management strategy and framework (see 6.1). The framework is designed to align customer

outcomes and financial management, and supports an investment approach discipline through ongoing

measurement of longer-term outcomes. The programme is expected to have only marginal financial

impacts overall, with the objective being to deliver sufficient financial benefits to cover the costs.

2.4.7 We are satisfied that the programme has an appropriate risk management framework and governance

structure in place.

25

3. Summary of financial results

Summary

• The Scheme recorded a $3.51 billion deficit for the 2015/16 year, including liability for work-related gradual process claims

incurred but not yet reported ($3.37 billion excluding).

• Deficits are projected for the next four years to reduce the funding position of the levied Accounts towards their targets.

These deficits are expected to reduce over time as the funding positions of these Accounts get closer to target and the

levy rates are set closer to the costs of claims occurring during the year, in line with the funding policy.

• Changes in economic assumptions drove a large increase in liability over the year, only partially offset by asset

movements.

• Total claims costs have increased by more than expected, as discussed in Section 4. These are projected to increase by

between 4% and 6% per annum over the next four years due to inflation, superimposed inflation, population growth and

an allowance for future increases in claim frequency.

• Expenses in 2015/16 increased from 2014/15, but were below budget. The most significant increase was in injury

prevention which reflects an increasing investment in this area. This is planned to continue to increase over the next

four years, with an expected return through reductions in the incidence and severity of injuries.

3.0.1 This section discusses ACC’s financial performance in 2015/16 and compares it with budget and previous

years. The 2015/16 results are examined by Account for the claims incurred during the year (referred to as

‘current year’) and for claims incurred in previous years (referred to as ‘prior years’). Note that in this year’s

report we have included the discussion of expenses in this section rather than in a stand-alone section as in

previous years.

3.0.2 Following a discussion of actual results, we then consider projections of financial performance for the next

four years.

3.0.3 In discussing the financial results, it is important to understand that ACC is not a profit-making entity.

Levies and Government appropriations are collected, and invested, in order to meet claims and related

expenses. In the fullness of time, all levy and investment income must be:

• returned to the public in the form of claim payments, or

• used in administering the Scheme, or

• invested in injury prevention activities that reduce costs to the Scheme.

The movement of net assets upwards or downwards is not profit or loss as the terms would usually be

understood. For this reason the terms surplus and deficit are used throughout this section.

3.0.4 The focus of this section is on reviewing financial performance, by looking at income and expenditure for

the year. Section 9 examines the current and projected solvency of the Scheme by comparing assets to

liabilities.

26

3.1 Financial results at 30 June 2016

3.1.1 Table 4 shows the statement of comprehensive income for the year ended 30 June 2016, and compares this

to the results for the preceding two years. These results include the liability for incurred but not reported

(IBNR) work-related gradual process claims, and so differ from those presented in the statements in the

Annual Report. The outstanding claims liability (OCL) changes reported in Sections 4 and 7 both exclude this

liability. It is included here, as the Work Account levy is required to fund this amount.

27

Table 4 – statement of Comprehensive Income for the past three years

($M)

2015/16 2014/15 2013/14

Cash flow Liability Total

Cash flow Liability Total Total

Income

Levies and appropriations 3,926.8 0.0 3,926.8 4,315.1 0.0 4,315.1 4,731.4

Total income 3,926.8 0.0 3,926.8 4,315.1 0.0 4,315.1 4,731.4

Expenditure

Claims incurred

Medical costs 1,272.1 309.6 1,581.7 1,195.9 181.6 1,377.5 1,126.0

Elective surgery 322.5 (20.7) 301.8 311.1 44.4 355.5 303.4

Social rehabilitation 590.1 380.1 970.2 514.1 185.2 699.3 1,001.9

Compensation related 1,133.0 207.0 1,339.9 1,014.7 289.9 1,304.6 980.5

Other 184.4 (89.6) 94.8 183.6 (39.8) 143.8 129.4

Claims handling expenses 415.1 (28.8) 386.3 401.4 (50.9) 350.5 329.7

Total claims incurred 3,917.2 757.7 4,674.8 3,620.8 610.4 4,231.2 3,871.0

Change in claim assumptions

Decrease/(increase) in discontinuance rates 0.0 152.2 152.2 0.0 13.8 13.8 22.8

Growth in long-term active claims experience 0.0 (68.3) (68.3) 0.0 (11.4) (11.4) 15.9

Superimposed inflation 0.0 19.8 19.8 0.0 9.4 9.4 (8.8)

Mortality assumptions 0.0 0.0 0.0 0.0 (539.8) (539.8) 0.0

Legislative and policy changes 0.0 (373.5) (373.5) 0.0 0.0 0.0 117.9

Other 0.0 5.0 5.0 0.0 94.7 94.7 39.2

Change in risk margins 0.0 0.0 0.0 0.0 0.0 0.0 3.8

Total assumption changes 0.0 (264.9) (264.9) 0.0 (433.3) (433.3) 190.9

Administration expenses

Net operating costs 99.4 0.0 99.4 92.8 0.0 92.8 86.3

Injury prevention costs 50.4 0.0 50.4 30.0 0.0 30.0 34.0

Total expenses 149.8 0.0 149.8 122.9 0.0 122.9 120.3

Total expenditure 4,066.9 492.8 4,559.7 3,743.7 177.1 3,920.8 4,182.2

Surplus/(deficit) from underwriting activities (140.1) (492.8) (632.9) 571.4 (177.1) 394.3 549.2

Decrease/(increase) in unexpired risk liability 0.0 (103.3) (103.3) 0.0 (265.1) (265.1) (159.5)

Economic

Change in discount and inflation rate assumptions

0.0 (5,102.9) (5,102.9) 0.0 (1,519.6) (1,519.6) 568.1

Investment expenses (63.5) 0.0 (63.5) (60.9) 0.0 (60.9) (55.9)

Unwind of risk-free interest rate 0.0 (896.1) (896.1) 0.0 (1,014.5) (1,014.5) (733.5)

Investment income 3,286.0 0.0 3,286.0 3,997.7 0.0 3,997.7 1,618.5

Total economic 3,222.4 (5,999.0) (2,776.6) 3,936.8 (2,534.1) 1,402.7 1,397.1

Total surplus/(deficit) 3,082.3 (6,595.1) (3,512.8) 4,508.2 (2,976.3) 1,531.9 1,786.8

28

3.1.2 The results for 2014/15 and 2015/16 are separated into performance related to cash flows (consistent with

the statements in the Annual Report) and the liability movement during the year. The latter allows us to

examine overall financial performance on an incurred basis, which is consistent with the full-funding

requirements for the majority of the Scheme (see 5.2).

3.1.3 The overall result for 2015/16 is a deficit of $3,513 million, compared with a surplus in the previous year of

$1,532 million. This is due to the following:

• net discount and inflation rate assumptions fell further in 2015/16 than in 2014/15, contributing $5,103

million to the deficit

• investment income above risk-free interest rates, net of expenses, was $2,326 million, $596 million

lower than the 2014/15 result. This was predominantly due to lower global equity returns during

2015/16, following increases in the New Zealand dollar

• levy income in 2015/16 was $388 million lower than in 2014/15 due to decreases in the levy rates,

particularly for the Motor Vehicle Account (see Graph 24 in 5.1), and the removal of the residual levy

• the increase in the unexpired risk liability (URL) of $103 million was predominantly due to an increase in

claims costs for the Earners’ Account (see 3.2.25). This was $162 million lower than in 2014/15 because

there was a large increase in 2014/15 from ceasing collection of the residual levy

• administration expenses increased by $27 million to $150 million. This was primarily due to increases in

injury prevention investment, and operating costs from the Transformation programme moving into

delivery (see 3.1.12 and 3.1.14 respectively)

• cash flows for claims paid during the year increased by $296 million to $3,917 million. The main drivers

were increases in compensation, social rehabilitation, and medical payments

• the increase in the liability due to claims experience was $758 million in 2015/16, $147 million higher

than in 2014/15. Some of this was expected due to the addition of a new accident year, but increases

above expectations were primarily due to increases in the medical (counselling) costs for sensitive

claims, and social rehabilitation

• assumption changes, excluding legislative and policy changes, increased the 2015/16 liability by $109

million, most significantly due to lower assumed discontinuance rates

• a decrease of $374 million, due to legislative and policy changes, took the total liability increase to

$493 million. Of this, the increase above expectation, excluding IBNR gradual process claims, was $292

million (see 7.1.3).

3.1.4 Changes in the claims experience, and the impacts on the liability, are discussed in more detail in Section 4.

3.1.5 The 2015/16 deficit of $3,525 million was $3,628 million below the budget surplus of $115 million, including

IBNR gradual process claims. Table 5 shows the variances from budget.

29

Table 5 – Comparison of 2015/16 to Budget

($M) Actual Budget Difference

Income

Levies and appropriations 3,926.8 4,145.5 (218.7)

Total income 3,926.8 4,145.5 (218.7)

Expenditure

Claims incurred

Medical costs 1,581.7 1,322.0 259.7

Elective surgery 301.8 409.7 (108.0)

Social rehabilitation 970.2 834.7 135.5

Compensation related 1,339.9 1,249.5 90.4

Other 94.8 234.6 (139.7)

Claims handling expenses 386.3 446.8 (60.4)

Total claims incurred 4,674.8 4,497.3 177.5


Decrease/(increase) in discontinuance rates 152.2 0.0 152.2

Growth in long-term active claims experience (68.3) 0.0 (68.3)

Superimposed inflation 19.8 0.0 19.8

Mortality assumptions 0.0 0.0 0.0

Legislative and policy changes (373.5) 0.0 (373.5)

Other 5.0 0.0 5.0

Change in risk margins 0.0 0.0 0.0

Total assumption changes (264.9) 0.0 (264.9)


Net operating costs 99.4 104.0 (4.6)

Injury prevention costs 50.4 50.6 (0.2)

Total expenses 149.8 154.6 (4.8)

Total expenditure 4,559.7 4,651.9 (92.2)

Surplus/(deficit) from underwriting activities (632.9) (506.4) (126.5)

Decrease/(increase) in URL (103.3) (48.0) (55.3)

Economic

Change in discount and inflation rate assumption (5,102.9) 0.0 (5,102.9)

Investment expenses (63.5) (65.7) 2.2

Unwind of risk-free interest rate (896.1) (893.4) (2.7)

Investment income 3,286.0 1,628.2 1,657.8

Total economic (2,776.6) 669.1 (3,445.7)

Total surplus/(deficit) (3,512.8) 114.7 (3,627.5)

3.1.6 The main variance from budget is the $5,103 million increase in the liability due to the decrease in

assumptions for discount and inflation rates (see 7.1.4). This is partially offset by investment income being

$1,658 million higher than budget. However as explained in Section 8, there is an unavoidable mismatch

between ACC’s assets and liabilities, so that when liabilities move in response to economic drivers, asset

30

movements do not fully offset this. The total economic deficit of $2,777 million essentially represents the

financial impact of this mismatch during the year.

3.1.7 Claims incurred and claim assumptions combined, excluding legislative and policy changes, were $4,783

million, $286 million above budget. This was largely due to medical, social rehabilitation and compensation

costs being above budget, and increases in assumptions for discontinuance rates reflecting recent

experience. Despite this, total expenditure for the year was $92 million below budget. This was due to

expenses being slightly below budget, and legislative and policy changes.

3.1.8 Due to income from levies and appropriations being $219 million below budget, there was a deficit from

underwriting activities of $633 million, $126 million more than the budgeted deficit. Income being below

budget was primarily due to the 2015/16 budget being set before the Cabinet decision was made to cease

collection of the residual levy from 1 April 2016.

Expenses

3.1.9 Expenses comprise claims handling, injury prevention, investment, and net operating costs. Net operating

costs are the Scheme operating costs shown in the annual accounts, net of claims handling expenses.

3.1.10 Total expenses in 2015/16 increased by 7%, but were below budget. The largest increases, in dollar terms,

were in claims handling expenses paid during the year, from $401 million in 2014/15 to $415 million in 2015/16,

and injury prevention costs, from $30 million in 2014/15 to $50 million in 2015/16. To understand what is

driving changes in expenses, it is helpful to consider each expense as a percentage of the underlying service

it supports.

3.1.11 Graph 3 shows the percentages for the past three years alongside the 2015/16 budget for:

• claims handling expenses paid during the year compared to claim payments

• net operating costs compared to income (from levies and appropriations)

• injury prevention costs compared to income (from levies and appropriations)

• investment expenses compared to average assets under management.

Graph 3 – Expenses as percentages of underlying service

%

0

1

2

11

12

13

2013/14 2014/15 2015/16 2015/16 budget Claims handling expenses/claim payments Net operating costs/income Injury prevention costs/income Investment expenses/average assets

12.71

1.82

0.72

0.22

12.47

2.15

0.70

0.21

11.85

2.53

1.28

0.20

12.03 �

2.51 �

1.22 �

0.20 �

3.1.12 From this it can be seen that the expenses for 2015/16 were all comparable to budget. Injury prevention

costs as a percentage of income from levies and appropriations increased from 0.70% in 2014/15 to 1.28%

in 2015/16, in line with ACC’s increased investment in injury prevention. This investment is expected to

continue to increase as the focus on these activities expands, with returns expected through reductions in

the incidence and severity of injuries.

3.1.13 While claims handling expenses increased in absolute terms, they decreased as a percentage of claim

payments, from 12.5% in 2014/15 to 11.9% in 2015/16. Actual levels were consistent with the budgeted paid

expenses of $412 million. The increase in claims handling expenses, at 3.4%, is less than half the 8.8%

increase in claim payments.

31

3.1.14 Net operating costs as a percentage of income from levies and appropriations increased from 2.15% in

2014/15 to 2.53% in 2015/16. This increase is a combination of the reduction in income and a budgeted

increase in costs for Shaping Our Future due to the Transformation programme moving into delivery during

2015/16 (see 2.4). These costs, $22 million in 2014/15 and $28 million in 2015/16, are not included in levy rates

and Government appropriations as there is an expectation of offsetting reductions from future claim costs.

3.1.15 Investment expenses as a percentage of average assets under management remained relatively stable.

3.2 Results by current and prior years

3.2.1 This section looks at the financial performance split between current- and prior-year accidents. Note that

expenses and the URL experience are discussed separately (see 3.2.19 and 3.2.25 respectively).

3.2.2 The costs of claims incurred in the current year reflect the full estimated lifetime cost of new claims incurred

during the year. For prior years, the expenditure represents changes to the expected cash flows, and

estimates of lifetime costs of claims that existed at the start of the year.

3.2.3 A negative claims-incurred cost for prior years would mean that the cash flows during the year were

lower than expected and/or the OCL at the end of the year has been reduced below what was previously

assumed. This could be due to, for example, discontinuance rates being higher than allowed for in the

previous OCL assessment.

Current year results

3.2.4 Table 6 sets out the statement of comprehensive income for the year ending 30 June 2016 for claims that

occurred during the year, by Account.

32

Table 6 – Statement of Comprehensive Income For Current-Year Claims by Account

2015/16 2014/15

($M)

Motor Vehicle

Account

Non-Earners’ Account

Earners’ Account

Work Account

Treatment Injury

Account Total Total

Income

Levies and appropriations 428.5 1,062.4 1,426.1 810.1 265.3 3,992.2 3,934.3

Total income 428.5 1,062.4 1,426.1 810.1 265.3 3,992.2 3,934.3

Expenditure

Claims incurred

Medical costs 70.0 618.8 431.7 134.2 36.6 1,291.2 1,174.2

Elective surgery 55.5 96.1 236.3 60.4 56.6 505.0 429.7

Social rehabilitation 215.7 230.2 149.7 33.7 145.6 775.0 755.5

Compensation related 152.4 17.0 640.0 391.4 76.5 1,277.3 1,165.2

Other 32.6 29.8 30.7 50.7 13.9 157.7 150.1

Claims handling expenses 32.5 92.9 150.2 84.3 32.0 391.9 365.6

Total claims incurred 558.7 1,084.8 1,638.7 754.7 361.2 4,398.1 4,040.2


Decrease/(increase) in discontinuance rates (19.8) 2.3 2.8 1.0 5.1 (8.6) (5.3)

Growth in long-term active claims experience (0.6) (0.3) (1.4) (0.3) (2.7) (5.4) (3.5)

Superimposed inflation 0.2 0.2 0.6 0.1 0.3 1.5 0.4

Mortality assumptions 0.0 0.0 0.0 0.0 0.0 0.0 (29.6)

Legislative and policy changes 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other (0.5) 9.0 1.5 (0.2) (0.1) 9.7 17.3


Total assumption changes (20.7) 11.2 3.5 0.5 2.6 (2.8) (20.7)




Total expenses 20.1 17.3 35.7 60.3 5.2 138.5 113.6

Total expenditure 558.2 1,113.3 1,677.9 815.5 369.0 4,533.8 4,133.1

Surplus/(deficit) from underwriting activities (129.7) (50.9) (251.9) (5.4) (103.7) (541.6) (198.8)

URL (19.6) 0.0 (435.3) (115.0) 0.0 (569.9) (466.6)

Economic


(69.5) (54.8) (88.7) (38.7) (56.3) (307.9) (93.9)

Investment expenses (0.4) (0.2) (0.3) (0.4) (0.2) (1.5) (2.0)

Unwind of risk-free interest rate (6.9) (6.9) (15.2) (8.4) (5.2) (42.6) (47.7)

Investment income 20.5 11.5 12.1 20.0 11.7 75.8 121.7

Total economic (56.3) (50.4) (92.0) (27.5) (50.0) (276.2) (21.9)

Total surplus/(deficit) (205.6) (101.3) (779.2) (147.9) (153.7) (1,387.7) (687.3)

33

3.2.5 The overall positions of the Accounts have generally deteriorated since 2014/15, largely due to rising claim

volumes and increasing medical- and compensation-related costs. The result for the Earners’ Account was

significantly impacted by a high URL movement, an accounting requirement that has no impact on levy

rates (see 3.2.25 for further discussion).

3.2.6 Current-year claims produced an underwriting deficit of $541.6 million, 13.6% of levies and appropriations.

Some of this deficit was a result of the different assumptions used to calculate the year-end OCL and levies/

appropriations. While the levy rates for current-year claims are set assuming investment returns above risk-

free rates, and both levy rates and appropriation amounts are set without including a risk margin on the

cost of new claims, the OCL uses risk-free rates and risk margins.

3.2.7 This naturally means that the year-end OCL is higher than the liability assumed for levy rates. The resulting

current-year deficit will gradually be released, all else being equal, through lower costs of claims incurred in

subsequent periods for prior years.

3.2.8 Table 7 shows the underwriting result as a percentage of income from levies and appropriations for each

Account for the past three financial years, and compares the 2015/16 result to the expected deficit.

Table 7 – Comparison of Underwriting Result as a Percentage of income by Account

2015/16

Account 2013/14 2014/15 Actual Expected Adjusted

Motor Vehicle (9.5%) (6.6%) (30.3%) (16.0%) (14.3%)

Non-Earners’ (1.1%) (6.6%) (4.8%) (5.9%) 1.1%

Earners’ (10.1%) (17.6%) (17.7%) (12.5%) (5.2%)

Work (1.9%) (4.4%) 0.7% (7.6%) 6.9%

Treatment Injury (25.8%) (30.3%) (39.1%) (25.8%) (13.2 %)

Total (7.1%) (5.1%) (13.6%) (11.2%) (2.4%)

3.2.9 Taking into account the expected deficit of 11.2% of income, there has been an adjusted underwriting loss of

2.4% of levy and appropriation income.

3.2.10 The adjusted underwriting surplus for the Work Account is due to experience being slightly better than

expected. In particular, more than 50% of the current-year liability in the Work Account is for weekly

compensation, and increases assumed for the 2015/16 levy were higher than the actual increases that

occurred.

3.2.11 The Motor Vehicle Account result has deteriorated significantly since 2014/15. This was driven by higher

claims experience for social rehabilitation and compensation-related claims. For the Treatment Injury

Account, the underwriting deficit has been particularly high for the past two years, primarily due to

continued increases in claim volumes and costs above expectations. This Account, along with the Earners’

Account, had a significant increase above expectation in elective surgery for current-year claims.

3.2.12 This difference between the pricing assumptions and actual experience requires some attention. The

process of setting the assumptions includes examining recent history and identifying planned management

actions that will likely cause the future to differ from this. More work is required to understand the drivers

of increased claims experience above expectations. Responses to recommendations 1 and 6 should assist

with this.

3.2.13 In addition to the increased deficit from underwriting activities, the overall result for current-year claims is

lower due to the decrease in assumptions for discount and inflation rates, and lower investment income.

Prior-year results

3.2.14 Table 8 sets out the statement of comprehensive income for the year ending 30 June 2016 for prior-year

claims, by Account.

34

Table 8 – Statement of Comprehensive Income For Prior-Year Claims by Account

2015/16 2014/15

($M)

Motor Vehicle

Account


Earners’ Account

Work Account

Treatment Injury

Account Total Total

Income

Levies and appropriations 303.3 (106.8) (107.7) (172.2) 17.9 (65.5) 380.8

Total income 303.3 (106.8) (107.7) (172.2) 17.9 (65.5) 380.8

Expenditure

Claims incurred

Medical costs 37.9 171.0 54.9 21.3 5.4 290.5 203.3

Elective surgery (63.9) (21.1) (86.9) (35.2) 3.8 (203.2) (74.1)

Social rehabilitation 108.0 0.5 26.2 13.9 46.6 195.2 (56.1)

Compensation related 56.7 12.6 4.0 (39.6) 28.8 62.7 139.4

Other 1.4 3.2 8.1 (85.2) 9.6 (62.9) (6.4)

Claims handling expenses (5.6) 6.4 3.8 (5.9) (4.2) (5.6) (15.1)

Total claims incurred 134.6 172.5 10.2 (130.6) 90.1 276.7 191.0


Decrease/(increase) in discontinuance rates 55.7 10.3 69.5 20.9 4.3 160.8 19.2

Growth in long-term active claims experience (14.4) (3.6) (13.8) (10.4) (20.8) (62.9) (7.9)

Superimposed inflation 3.5 2.6 6.9 3.3 1.9 18.3 9.0

Mortality assumptions 0.0 0.0 0.0 0.0 0.0 0.0 (510.2)

Legislative and policy changes (105.4) (75.3) 0.0 (145.2) (47.7) (373.5) 0.0

Other (27.5) 32.7 3.0 (16.8) 3.9 (4.6) 77.3


Total assumption changes (88.0) (33.2) 65.7 (148.1) (58.3) (262.1) (412.6)


Net operating cost 1.0 0.7 3.4 5.9 0.2 11.3 9.3


Total expenses 1.0 0.7 3.4 5.9 0.2 11.3 9.3

Total expenditure 47.5 140.0 79.3 (272.8) 32.0 25.9 (212.3)

Surplus/(deficit) from underwriting activities 255.8 (246.8) (186.9) 100.6 (14.1) (91.4) 593.1

URL 0.0 0.0 256.1 210.6 0.0 466.6 201.5

Economic


(1,306.9) (1,118.5) (785.6) (802.7) (781.2) (4,795.1) (1,425.7)


Unwind of risk-free interest rate (235.9) (169.3) (162.3) (170.6) (115.4) (853.4) (966.8)

Investment income 1,029.2 329.6 763.8 757.1 330.4 3,210.1 3,876.0

Total economic (532.2) (964.4) (199.9) (231.3) (572.5) (2,500.4) 1,424.6

Total surplus/(deficit) (276.4) (1,211.1) (130.8) 79.9 (586.7) (2,125.1) 2,219.2

35

3.2.15 The income from levies and appropriations for prior-year claims is the funding adjustment (see 5.2). This is

particularly significant for the Motor Vehicle Account, which was below the required funding target at the

time the 2015/16 levy rates were set. The Earners’, Non-Earners’ and Work Accounts’ funding adjustments

are negative as they were above the funding target. In addition, the 2015/16 appropriation approved for the

Non-Earners’ Account was lower than the amount requested.

3.2.16 Similar to 2014/15, the experience for prior-year claims was higher than expected, with an increase (ignoring

the legislative and policy changes) of $388 million. Of this, $160.8 million was due to changes in assumptions

for discontinuance rates. This was mainly due to the number of claims from older accident years receiving

elective surgery being higher than expected (see 4.4.6). The overall elective surgery claims experience for

prior-year claims is lower than expected due to a lower cost per claim. Liabilities for medical and social

rehabilitation payments have also increased significantly. This is discussed further in Section 4.

3.2.17 The main points of interest in the prior-year underwriting results by Account are:

• the Non-Earners’ Account having the largest underwriting deficit of $246.8 million. A large part of this

was due to the increase in counselling services for sensitive claims (see 4.5.8)

• the Motor Vehicle Account having an underwriting surplus, although it had a sizeable increase in the

costs of claims incurred for both compensation and social rehabilitation services. This was a result of

the 2015/16 levy rate including a positive funding adjustment

• the Work Account posting an underwriting surplus for the year as a result of a reduction in costs of

claims incurred, as well as changes in assumptions. The relatively large reduction in both the costs of

claims incurred, and the assumptions in the ‘Other’ category, was mainly due to a lower than expected

number of hearing loss claims leading to a reduction in the liability for IBNR claims

• the Earners’ Account was the only one of the levied Accounts to have a deficit. This was predominantly

due to increases in medical costs, and decreases in discontinuance rate assumptions reflecting higher

than expected claims experience.

3.2.18 Updated discount rate and inflation rate assumptions decreased the prior-year surplus by $4,795 million.

This is discussed in more detail in Section 7.

Expenses by Account

3.2.19 Expenses paid during the financial year are allocated between current-year and prior-year claims in Table 6

and Table 8, depending on the expense category:

• injury prevention costs are allocated entirely to current-year claims

• claims handling expenses are allocated between current- and prior-year claims according to the costs

of claims paid, with an extra allocation to current-year claims for lodgement costs

• investment expenses are allocated according to the investment returns

• net operating costs are allocated between current- and prior-year claims according to the overall

allocation of the above three expense categories.

3.2.20 Claims handling expenses is the only expense category that has an impact on the liability. For the

statements of comprehensive income, the change in OCL for claims handling expenses is made up of an

increase for current-year claims, which do not form part of the previous year’s OCL, and a decrease for

prior-year claims due to payments made during the year.

3.2.21 Table 6 shows that injury prevention costs during 2015/16 were, at $14.1 million, highest in the Work Account

due to a strong focus on reducing workplace harm. This led to an increase in injury prevention investment in

partnership with WorkSafe New Zealand, particularly targeting the farming and forestry sectors.

36

3.2.22 The Motor Vehicle and Non-Earners’ Accounts have the next highest levels of injury prevention spend at

$12.2 million and $12.0 million respectively. The Motor Vehicle Account has a number of well established

programmes in place in partnership with other road agencies, while the Non-Earners’ Account contributes

to injury prevention across a number of portfolios including ‘falls’ and ‘community’, which have seen an

increase in investment since 2014/15 (see 2.3.8).

3.2.23 From Table 6 and Table 8, it can be seen that net operating costs are highest in the Work and Earners’

Accounts, at $52.0 million and $30.4 million respectively. For the Work Account, this is predominantly due to

the administration costs of invoicing businesses, as well as an increased focus on delivering better service

to business customers through the Transformation programme. Two-thirds of the net operating costs for

the Earners’ Account are for levy collection, which is a combination of direct invoicing for the self-employed,

and collection by Inland Revenue through PAYE for employees.

3.2.24 At 14%, claims handling expenses as a percentage of the costs of claims incurred are also highest in the

Work Account, predominantly due to the high proportion of weekly compensation claims requiring ongoing

management, and liaison with employers for returns to work.

Unexpired risk liability (URL)

3.2.25 The URL is the difference between the levy revenue and the expected cash flows and liability for claims that

are incurred during the levy period, but after the balance date. If levies are insufficient to cover the expected

future claims, plus a risk margin, then the deficiency is recorded in the statement of financial position as

a URL. The URL in Table 6 for current-year claims was $103 million higher than that for 2014/15. This is

predominantly due to an increase in claim costs in the Earners’ Account, with a small contribution due to

the decrease in levies for the Motor Vehicle Account.

3.2.26 The URL for prior-year claims in Table 8 is a reversal of the previous year’s URL for current-year claims. This

increased in 2015/16 because collection of the residual levy ceased during 2014/15, meaning the levy in the

Work Account was much lower in 2014/15 than in 2013/14.

3.2.27 The treatment of the URL is an accounting requirement, and does not reflect the economic substance of

the Scheme’s funding position. The stronger the balance sheet, the greater the likely URL required which

is somewhat counter-intuitive. This should be borne in mind when considering the Scheme’s financial

accounts.

3.3 Projections

3.3.1 This section provides financial projections for the next four years. These projections use:

• the levy rates and assumptions used for the 2017/19 levy consultation

• the assumptions and approved appropriation amounts from the 2016/17 Non-Earners’ Account

appropriation.

3.3.2 This means that all expenditure and economic assumptions are based on actual data to 31 March 2016 for

the levied Accounts, and 31 December 2015 for the Non-Earners’ Account and Non-Earners’ portion of the

Treatment Injury Account. However, not all the income from levies and appropriations is projected on the

same basis. The 2016/17 levy income for the levied Accounts reflects the levy rates decided by Cabinet in

December 2015.

3.3.3 Table 9 provides the projected statement of comprehensive income by Account for 2016/17 compared to the

total result for 2015/16.

37

Table 9 – Projected 2016/17 Statement of Comprehensive Income

2016/17 Projected 2015/16

($M)

Motor Vehicle

Account


Earners’ Account

Work Account

Treatment Injury

Account Total Total

Income

Levies and appropriations 446.6 1,088.4 1,333.6 678.7 278.9 3,826.2 3,926.8

Total income 446.6 1,088.4 1,333.6 678.7 278.9 3,826.2 3,926.8

Expenditure

Claims incurred

Medical costs 101.2 725.3 436.8 133.0 39.2 1,435.4 1,574.2

Elective surgery 36.8 107.3 245.5 67.0 63.2 519.8 472.6

Social rehabilitation 215.6 216.5 116.3 37.4 129.4 715.2 540.7

Compensation related 157.2 12.4 626.1 426.4 80.8 1,302.8 1,326.0

Other 28.3 16.3 28.6 48.5 13.5 135.3 105.8

Claims handling expenses 30.0 85.4 148.1 80.4 25.2 369.1 390.6

Total claims incurred 569.1 1,163.2 1,601.4 792.7 351.4 4,477.7 4,409.9




Total expenses 18.6 21.8 42.2 70.6 9.8 163.0 149.8

Total expenditure 587.6 1,185.0 1,643.6 863.3 361.2 4,640.8 4,559.7

Surplus/(deficit) from underwriting activities (141.0) (96.6) (310.0) (184.6) (82.3) (814.5) (632.9)

Decrease/(increase) in URL (22.1) 0.0 (19.4) (5.6) 0.0 (47.1) (103.3)

Economic

Changes to discount and inflation rate assumptions

0.0 0.0 0.0 0.0 0.0 0.0 (5,102.9)


Investment income (above risk free) 236.1 (5.5) 261.9 203.4 60.5 756.5 2,389.9

Total economic 214.9 (8.7) 242.5 186.5 55.1 690.4 (2,776.6)

Total surplus/(deficit) 51.8 (105.2) (87.0) (3.7) (27.2) (171.2) (3,512.8)

3.3.4 The 2016/17 Earners’, Work and Motor Vehicle Account levy rates were set lower than the expected new-

year costs to reduce the forecast funding position at the beginning of the 2016/17 levy year towards target.

All reductions were in line with those recommended by the Board in November 2015, and consistent with

the funding policy.

3.3.5 The actual funding positions of the Motor Vehicle and Work Accounts as at 31 March 2016 exceeded the

forecast positions, due to higher than expected investment returns during 2015/16. This resulted in higher

forecast investment income for 2016/17, which is projected to be sufficient to cover the expected increases

in claim costs for the Motor Vehicle and Work Accounts. For this reason, 2016/17 is projected to have a small

surplus of $51.8 million for the Motor Vehicle Account and a smaller than originally projected deficit of $3.7

million for the Work Account. Given this, future reductions in levies have been publicly consulted on in 2016

for 2017/18 and 2018/19 (see 5.1). Note that the actual funding positions at 30 June 2016 were lower than

those at 31 March (see 9.2.4).

38

3.3.6 This is not the case for the Earners’ Account which, compared with the projected result, had only a small

increase in the funding position at 31 March 2016. This was not enough to offset the projected increase in

the costs of claims following higher than expected claims experience during 2015/16. See 5.3.10 for more

information.

3.3.7 The Non-Earners’ and Treatment Injury Accounts are projected to produce deficits. This is because for both

the Non-Earners’ Account and the Non-Earners’ portion of the Treatment Injury Account, the post-2001

fully funded component was above its funding target when the modelling for the 2016/17 appropriations

was done. In line with the funding policy, the amount requested through appropriations included a

negative funding adjustment that resulted in it being less than the cost of the expected new claims

incurred. Additionally, the Government set the appropriations below the amount requested.

3.3.8 The pay-as-you-go funding policy for pre-2001 claims means that incurred costs for these claims will

continue to be funded through annual appropriations, rather than having the full amount held on ACC’s

balance sheet (see 5.2 for the funding policy and 9.1 for the funding positions).

3.3.9 Projections for the total costs of claims incurred in 2016/17 are made with reference to trends seen in

experience up to 31 March 2016. However, the increase in the projected total costs of claims incurred for

2016/17 is predominantly for new claims only. We do not generally project recent experience to continue

indefinitely. In particular:

• the assumed liability for medical costs was increased for higher than expected sensitive claim

payments in 2015/16, while 2016/17 is assumed not to have any additional growth

• there was a decrease in the liability for elective surgery for prior-year claims during 2015/16 due to

lower than expected overall experience (see 3.2.16). Projections for 2016/17 assume growth from this

level in line with population and health sector inflation

• the higher than expected experience for compensation-related costs during 2015/16 is not projected

to continue growing at this level in 2016/17 onwards, with projected growth reducing from the 2015/16

level over the next three years to be in line with population growth and inflation

• expectations of work-related gradual process hearing loss claims reported during 2015/16 were higher

than the actual numbers, resulting in a decrease in the liability for 2015/16. Projections for 2016/17 and

onwards have been based on decreased levels.

3.3.10 Table 10 provides the projected statement of comprehensive income for the total Scheme from 2016/17 to

2019/20.

39

Table 10 – Projected Statement of Comprehensive Income

($M) 2016/17 2017/18 2018/19 2019/20

Income

Levies and appropriations 3,826.2 3,922.8 4,149.8 4,373.8

Total income 3,826.2 3,922.8 4,149.8 4,378.8

Expenditure

Claims incurred

Medical costs 1,435.4 1,486.6 1,550.6 1,611.9

Elective surgery 519.8 558.4 609.0 651.8

Social rehabilitation 715.2 756.7 809.8 841.7

Compensation related 1,302.8 1,361.0 1,441.0 1,491.8

Other 135.3 138.9 150.0 146.6

Claims handling expenses 369.1 379.6 395.6 407.1

Total claims incurred 4,477.7 4,681.2 4,956.1 5,150.9


Net operating costs 98.6 99.8 101.2 101.8

Injury prevention costs 64.4 71.6 79.4 81.2

Total expenses 163.0 171.4 180.6 183.1

Total expenditure 4,640.8 4,852.6 5,136.7 5,334.0

Surplus/(deficit) from underwriting activities (814.5) (929.8) (986.8) (960.2)

Decrease/(increase) in URL (47.1) 62.6 (24.2) 142.6

Economic

Investment expenses (66.1) (69.7) (73.4) (77.3)

Investment income (above risk free) 756.5 800.6 848.3 805.3

Total economic 690.4 730.9 774.9 727.9

Total surplus/(deficit) (171.2) (136.3) (236.2) (89.6)

3.3.11 The major items of note from these projections are that, under these assumptions:

• levies and appropriations will increase gradually in line with inflation and population growth after

2018/19

• investment income above the risk-free rate will increase, as equity risk premiums are forecast to rise

until 2018/19 before decreasing again

• the total costs of claims incurred will increase by between 4% and 6% per annum due to inflation,

superimposed inflation, population growth and an allowance for future increases in claim frequency

(see Section 5 and Appendix A). This will be compounded by discount rates that are assumed to be low

in the short term before increasing from 2018/19 (see Graph 26 in Section 7). The result will be more levy

and appropriation income being required to offset claim growth

• expense increases will be largely driven by an increased investment in injury prevention activity,

expected to deliver a return in the form of lower future claims costs

• the change in URL will alternate between a decrease and an increase due to the move to biennial levy

setting (see 5.5.1). As the levy rates are set as a two-year average, the first year will have a slightly

40

higher levy rate than required to fund the costs of claims during that year, while the second year will

have a slightly lower rate

• the Scheme will produce deficits to reduce the funding positions towards their targets. Over time,

these deficits are expected to fall as the funding positions of the levied Accounts get closer to target,

and the levy rates are set closer to the costs of claims occurring during the year in line with the funding

policy (see Section 9). As for the URL, the move to biennial levy setting means that the size of the

deficit moves up and down every two years.

3.3.12 Financial projections are set assuming economic factors and claims experience move smoothly from year to

year. In reality, both can move in unexpected ways causing sudden changes in actual and future expected

results. An example of this is the decrease in discount and inflation rate assumptions seen in 2015/16.

Section 9 examines some of the variability in levy rates and funding positions due to changes in claims

experience and economic factors.

41

4. Claims experience

Summary

• Claims experience has continued to increase, driven by a combination of higher volumes of new claims and increasing

durations of longer-term claims.

• While the growth in the number of new weekly compensation claims during 2015/16 was lower than the previous year,

it was higher than the growth in the earner population. The recent excess does not appear to be fully explained by

economic factors, as currently modelled.

• Lower discontinuance rates for long-term claims have affected a number of payment types. Weekly compensation and

social rehabilitation have seen payments increasing as clients are staying on the Scheme longer.

• Social rehabilitation non-capital payments for clients with serious injuries have increased in recent years. This is due to

an increase in both the number of claims profiled as serious injury claims and the usage of services designed to increase

independence.

• Social rehabilitation capital payments have been increasing above expectations for the past few years for both serious

and non-serious injuries. This is primarily due to the number of claims receiving support.

• Greater discipline is needed to ensure we see an appropriate return on expenditure for social rehabilitation (both capital

and non-capital), and improved client outcomes.

• Superimposed inflation for elective surgery and most medical treatments was lower than expectations. Payments for

counselling were the exception, due to increases in the amount of counselling provided for sensitive claims.

• There will be significant risks to the outstanding claims liability (OCL) and Scheme solvency if growth continues at the

levels seen in the past two years, therefore understanding and monitoring the financial impacts of providing services is

important.

• We recommend that more work be undertaken to fully understand the drivers of Scheme experience in addition to

the economic factors as currently modelled, including drivers of both new claims volumes and of increasing costs for

existing claims.

4.0.1 In this section we discuss:

• the more material changes in claims experience, and the key drivers of these

• the likely impacts on the OCL, and consequently solvency, should these trends continue

• management actions that are being taken to investigate and address these, noting any areas requiring

investigation beyond the existing actions.

Note that the discussion here is in respect of the OCL as reported in the Annual Report. This excludes

incurred but not reported work-related gradual process claims.

4.0.2 Although this section focuses on the OCL, it is worth noting that changes in claims experience can have

different impacts on the OCL than on levy rates and Government appropriations. Claims that are fully paid

shortly after an accident will generally not be a major contributor to the OCL but can, where volumes are

high, form a material component of the funding required for claims incurred in a given year.

4.0.3 Graph 4 compares the contribution of each payment type to the 30 June 2016 OCL with the funding for

2016/17 new-year claims through levy rates and Government appropriations.

42

Graph 4 – Comparison of contribution of payment types to OCL and funding for new-year claims

Social rehabilitation Weekly compensation Elective surgery Medical Other Bulk-billed

OCL Funding for new-year claims

4.0.4 Together, the four largest payment types, social rehabilitation, weekly compensation, elective surgery, and

medical payments, make up 93% of the 30 June 2016 liability, and 82% of the funding for new-year claims,

excluding claims handling costs. For this reason, this section focuses on these four payment types.

4.0.5 Each year, the OCL will be expected to increase as the rate of liability growth from new claims is higher than

the reduction from existing claims. This is due to a number of factors:

• the Scheme is still maturing

• there are inflationary increases

• claims frequency is increasing

• population size and composition are changing.

4.0.6 In general, there are four key drivers of variation in claims experience from expected:

• the number of new claims relative to population growth

• the average amount paid per claim relative to the inflation rates

• discontinuance rates relative to expectation

• superimposed inflation relative to expectation.

4.0.7 The contribution of each of the four drivers to OCL movements varies in importance depending on the type

of claim.

4.1 Overall results

4.1.1 The OCL valuation for June 2015 projected a $1.2 billion increase in the 2015/16 year. The liability at 30 June

2016 increased by $666 million more than this. Growth in claims experience above expectations, an actuarial

strain, has occurred three years in succession, with increases of $110 million, $604 million and $666 million in

the June 2014, 2015 and 2016 valuations respectively. These amounts exclude the impacts of legislative and

policy changes.

4.1.2 Claims costs have been increasing in all major payment types, and over a period of several years now.

Taking weekly compensation as an example, there has been a strain of $169 million for the year, with $20

million of this from new claims volumes in excess of expectations. The remainder is driven by a combination

of increases in costs per claim, and claims staying on the Scheme for longer than expected.

4.1.3 It is essential that management understand the impact on client outcomes, and on Scheme financial

performance, of these increasing costs. To the extent that costs increase as a result of initiatives intended

43

to produce better client outcomes, the investment required to achieve this must be well understood.

Appropriate targets and monitoring must be put in place to allow management to evaluate the success

of such initiatives, and to allow for corrective action where necessary. We made a recommendation in the

Financial Condition Report 2015 regarding this that is still in progress (see 1.1.20).

4.1.4 In addition, increasing claim frequencies put upward pressure on levies and Government appropriations.

The upward trend needs management attention. Increased investment in injury prevention is expected to

improve claim incidence over time, but this is a long term process. Although it is generally accepted that

new claims volumes are linked to the economic cycle, experience in recent months has diverged from ACC’s

model which uses economic variables to forecast new claims volumes.

4.1.5 We recommend that more work be undertaken to fully understand the drivers of Scheme experience, in

addition to the economic factors as currently modelled. This work needs to encompass the drivers of both

new claims volumes and increasing costs of existing claims.

4.1.6 Graph 5 shows the split of the $666 million claims experience by payment type.

Graph 5 – COMPOSITION OF 2016 ACTUARIAL STRAIN BY PAYMENT TYPE

Social rehabilitation – serious injury Social rehabilitation – non-serious injury Weekly compensation Elective surgery Medical Other

$170m

$66m

$169m$24m

$177m

$59m

Experience by accident year

4.1.7 Graph 6 compares the projected total cost of all claims by accident year, the incurred cost from the 2016

valuation of the OCL, and the projections from each of the last two valuations. These costs exclude bulk-

billed medical costs, claims handling expenses, and risk margins, and are expressed in 2015/16 dollar values.

4.1.8 The OCL measures the outstanding liability for claims incurred up to the balance date and does not

consider future new claims. The projections below start with the OCL valuation, and accidents in future

years are modelled using simple assumptions allowing for:

• growth in the population

• short-term growth in claim frequency in line with recent history

• general price inflation

• superimposed inflation assumptions as used in the OCL.

More sophisticated modelling would allow for things like changes in case mix, so these projections may

understate future expectations. This is also the case for other graphs in this section.

44

Graph 6 – Incurred cost by accident year

0.0

Accident year ending 30 June

Outstanding Payments to date Projection from 2015 valuation Projection from 2014 valuation

Paym

ents

($b)

1996

1997

1998

1999

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

0.51.01.52.02.53.03.54.04.55.0

4.1.9 Claims experience showed a significant deterioration from accident years 2000 to 2008, followed by a

period of improvements coinciding with the economic downturn. Experience has again increased since 2013,

in part due to the economic recovery.

4.1.10 In the two most recent valuations, the estimated incurred costs for most accident years after 2000 were

increased. In addition, experience during 2015/16 was higher than expected in the 2015 valuation. The main

drivers continue to be higher new claim volumes and lower discontinuance rates for long-term claims,

leading to increased projections for historical and future incurred claims.

Claim frequency

4.1.11 Claim frequency measures the growth in claim numbers above, or below, the growth in population.

Graph 7 shows historical and projected claim frequencies for the Scheme for total claims and entitlement

claims. Entitlement claims are those that receive rehabilitation and/or compensation support in addition

to medical treatment. Projected frequencies are as assumed in the latest levy setting and Non-Earners’

appropriation calculations (see Section 5).

Graph 7 – Claim Frequency: Estimated Ultimate incurred Claims per 1,000 People

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

320300280260240220

340360380400420

323436384042

3028262422

Tota

l cla

im fr

eque

ncy

Entit

lem

ent c

laim

freq

uenc

y

Accident year ending 30 June Total claims Projection Entitlement claims Projection

4.1.12 Historical claim frequencies have exhibited a somewhat cyclic pattern with the experience since 2013

rising, and entitlement claim frequency growing relatively faster than total claim frequency. This pattern of

relatively long periods of high frequency, followed by similar periods of decreasing frequency, is not unusual

for the Scheme. The volatility is serial, rather than purely random, and is, to some extent, linked to the

economic cycle. This causes some degree of levy instability and changes in public expectations.

4.1.13 Claim frequencies by Account are shown in Appendix A. Generally they show a similar pattern. The

exception is the Treatment Injury Account, where volumes have steadily increased. Reported claim

numbers have increased further from when the projections for the 2017/19 levy rate consultation and the

2016/17 Non-Earners’ Account appropriation were done. This growth is projected to continue in the short

45

term, but there is uncertainty about where it might ultimately settle. Understanding the drivers of the

growth in new claims and identifying appropriate actions to limit it need to be part of the response to our

recommendation in 4.1.5.

Older accident year exit experience

4.1.14 Older accident year claims have been exiting the Scheme more slowly in the past few years. Graph 8 shows

that the number of pre-2000 accident year claims still receiving support (active claims) has not materially

decreased since 2012/13.

Graph 8 – Number of active claims from pre-2000 accident years by payment year

0

20

40

60

80

100

120

Num

ber o

f act

ive

clai

ms

(´00

0)

200

4

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

Payment year ending 30 June 1974–1984 1985–1994 1995–1999

4.1.15 This poses a significant risk to financial performance (see 7.4 for OCL sensitivities to continuance rates).

In response to this, and to a recommendation in the Financial Condition Report 2015, work is underway to

investigate the drivers of this experience and appropriate management actions (see 1.1.25). Because this is a

key risk for the Scheme, more focus is required on this work.

4.2 Social rehabilitation

4.2.1 Around 82% of the social rehabilitation liability at 30 June 2016 comprised non-capital payments to

seriously injured clients, so this section on social rehabilitation focuses on these payments. However,

capital payments to both seriously and non-seriously injured clients have increased markedly. These are

discussed briefly here, even though the amount is low in the context of the overall OCL.

Non-capital payments for serious injury

4.2.2 Social rehabilitation non-capital payments are categorised as care (attendant care, home help, child care,

and residential care) or non-care (active rehabilitation, training for independence, supported activities,

assessments, and travel). Around 60% of payments are for attendant care support.

4.2.3 Non-capital payments for serious injury have increased above expectation in two of the past three years.

In total, this experience has resulted in a $178 million increase in the liability, of which $128 million occurred

in the past year. Although this is fairly large in absolute terms, it represents only a small proportion of the

liability for this payment type. This is in addition to the expected increase from the 2015 to 2016 valuation of

$407 million.

4.2.4 The key drivers of non-capital payments for serious injury claims are:

• the number of claims accessing services, which is a combination of new claim numbers and

discontinuance rates

• the average amount paid per claim, dominated by older claims.

46

4.2.5 Each year, around 250 new serious injury claims are incurred. Owing to the nature of their injuries, the

majority of seriously injured clients are expected to require support for their lifetimes. The number of

serious injury claims that reach the level of independence that allows them to no longer need support is

small and subject to some volatility. For these reasons, discontinuance rates are fairly low.

4.2.6 In general, the average amount paid per claim is most sensitive to the number of hours of care received and

the rate at which the care is paid.

4.2.7 In 2015/16, growth in the number of claims contributed to approximately half the increase in total serious

injury payments. About one-quarter of the payment increase was due to a rate increase for family care

providers from May 2016 (see 4.2.20), with the average cost growth from other sources contributing the

balance.

4.2.8 Graph 9 shows that the most recent quarterly claim payments have exceeded the 2015 valuation

expectation.

Graph 9 – Social Rehabilitation – Serious Injury Non-Capital Payments

Jun

08

Jun

09

Jun

10

Jun

11

Jun

12

Jun

13

Jun

14

Jun

15

Jun

16

Jun

17

Jun

18

Jun

19

Jun

20

Dec

20

Dec

08

Dec

09

Dec

10

Dec

11

Dec

12

Dec

13

Dec

14

Dec

15

Dec

16

Dec

17

Dec

18

Dec

19

Payment quarter Actual Projection from 2016 valuation Projection from 2015 valuation Projection from 2014 valuation

Paym

ents

($m

)

40

60

80

100

120

4.2.9 The June 2015 valuation projection was lower than the 2014 valuation due to a one-off methodology change

for mortality assumptions. The June 2016 valuation projection was increased to reflect the recent payment

experience being higher than that projected from the June 2015 valuation, but nonetheless remains lower

than the projected position from the 2014 valuation.

4.2.10 The June quarter saw an increase in payments above that expected. The June 2016 valuation basis was not

adjusted to fully reflect this, as it is likely to be a short-term fluctuation.

Number of claims

4.2.11 The number of active claims is relatively small. However, due to the large average cost per claim, any

increase in numbers can result in a large increase in payments and the OCL. Graph 10 shows the trend in

the number of active serious injury claims receiving non-capital services by payment quarter.

Graph 10 – Active claims for sERIOUS INJURY non-capital payments

Jun

08

Jun

09

Jun

10

Jun

11

Jun

12

Jun

13

Jun

14

Jun

15

Jun

16

Dec

08

Dec

09

Dec

10

Dec

11

Dec

12

Dec

13

Dec

14

Dec

15

Payment quarter

Num

ber o

f act

ive

clai

ms

3,100

3,300

3,500

3,700

3,900

4,100

4,300

47

4.2.12 The majority of the overall claims growth has been from new accidents in the past two years, but there

have also been fewer deaths, net discontinuance rates have been much lower, and there have been more

non-serious injury claims being re-profiled as serious injuries than expected. Around 10% of the total claim

growth has been due to this re-profiling. In the 2015/16 year, re-profiling increased the serious injury OCL by

$124 million, offset by a reduction in the non-serious injury OCL of $13 million.

4.2.13 Profiling is usually undertaken during the acute phase of hospital treatment, but there may be a delay in

this process, particularly for a brain injury or treatment injury, or there may be a deterioration in an injury

after the initial assessment. This can lead to a claim, originally profiled as non-serious, being re-profiled

as a serious injury. Claims that are re-profiled as serious injuries are assumed to require higher levels and

durations of future care than they would have if they had remained in the non-serious injury cohort.

4.2.14 Further investigation is underway to determine the reasons for this increase in re-profiling. Re-profiling

should occur if and when the nature of clients’ injuries and care needs warrant that change. Consistent

with Recommendation 5 from the Financial Condition Report 2015 (see 1.1.20 and 6.4), it is also important

that management understand the impact on the OCL of changes in the way claims are managed. This

recommendation is still open.

Amount per claim

4.2.15 Most of the growth in the average non-capital amount per serious injury claim was due to an increase in

non-care payments. This was a combination of an increase in the number of serious injury claims accessing

non-care services, and more non-care being provided per claim.

4.2.16 Graph 11 shows that the growth in the number of claims accessing non-care services has been particularly

high during the last year compared with those receiving care. Note that, in many cases, clients receive both

at the same time.

Graph 11 – SERIOUS INJURY – ACTIVE CLAIMS CARE and NON-CARE

Jun

08

Jun

09

Jun

10

Jun

11

Jun

12

Jun

13

Jun

14

Jun

15

Jun

16

Dec

08

Dec

09

Dec

10

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4.2.17 This growth reflects an increased emphasis on training for independence and other programmes designed

to enable clients to reduce their need for care support. Valuation assumptions have not been adjusted for

this expected reduction due to the absence of sufficient evidence to date that it is occurring. It is important

with such initiatives that appropriate targets are set and performance is then monitored. In response,

Recommendation 5 from the Financial Condition Report 2015 (see 1.1.20 and 6.4) remains open.

4.2.18 Attendant care payments for seriously injured clients are the largest component of the OCL because of the

long-term nature of the support provided. As a result, growth in the average attendant care cost per claim

has a significant impact on the average cost. There are three sources of this growth:

• increases in the average hours of care provided per claim

• increases in the rates paid to carers

• claim transfers from family/private providers to contracted agency providers with higher hourly rates.

48

4.2.19 During 2015/16, both average attendant care hours and transfers between family and agency providers were

relatively stable.

4.2.20 There was a one-off rate increase of 6.8% for family care providers from May 2016. This was to allow for

employer obligations, such as KiwiSaver, that had not previously been included.

4.2.21 Discussions on the proposals made by the Joint Working Group on Pay Equity Principles are ongoing. The

valuation assumes that care rates will increase for some time at a rate higher than the Labour Cost Index

until they reach 80% of average weekly earnings. Any legislative changes that result would be expected to

bring forward some of the assumed future increases in care rates. While this is essentially a timing issue, it

could increase the expected OCL by an amount in the hundreds of millions, depending on the details of the

ultimate decision. To the extent that the rate is set above 80% of average weekly earnings, a large impact

would result.

Capital payments for serious injury

4.2.22 Social rehabilitation capital payments for seriously injured clients comprise payments for consumables,

equipment, artificial limbs, housing modifications, and motor vehicle purchases and modifications.

Approximately 45% of capital payments are for equipment.

4.2.23 Graph 12 shows that quarterly claim payments have been increasing in the past few years, which has led to

increases in valuation projections over time.

Graph 12 – Social Rehabilitation – Serious Injury Capital Payments

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4.2.24 This higher than expected experience has resulted in a $129 million increase in the liability in the past

three valuations, of which $43 million was included in the latest valuation. While this is in addition to the

expected increase from the 2015 to 2016 valuation of $32 million, it is relatively small compared with the

total OCL at 30 June 2016 of $1.7 billion for this payment type.

4.2.25 About half the overall growth experienced in the past few years has been for purchases of equipment, and

approximately one-third from housing modifications, both primarily driven by increases in the number of

claims paid. As well as an increase in new claims receiving capital, there has been growth in the number of

claims for housing modifications, the timings of which can be unpredictable.

4.2.26 As with non-care payments, understanding the financial impacts of the capital support provided to

seriously injured clients needs to be monitored continually for effectiveness. This needs to include an

understanding of the impact on the OCL, in line with Recommendation 5 from the Financial Condition Report

2015, which remains open (see 1.1.20 and 6.4).

Capital payments for clients with non-serious injuries

4.2.27 Capital payments for clients with non-serious injuries are predominantly for medical consumables and

equipment needed to assist with rehabilitation.

49

4.2.28 These payments have increased significantly in the past three years. In response, the past three valuations

of the OCL have increased the liability for this payment type by approximately $110 million, of which $37

million was in the June 2016 valuation. This is in addition to the expected increase from the 2015 to 2016

valuation of $13 million.

4.2.29 Graph 13 shows the quarterly capital payments for clients with non-serious injuries. Recent payments were

above the valuation expectation, despite the recent consecutive increases in the valuation projections.

Graph 13 – Non-Serious Injury Capital Payments

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4.2.30 The main driver of this increase in payments is an increase in the number of clients accessing services.

Higher average costs for medical consumables have also contributed to this growth. The June 2016

valuation has assumed that this level of growth in payments is temporary, and will revert to a level closer to

that expected from normal population growth and price inflation. Because the current level of payments is

high, this lower expected growth rate still results in expected payments at historically high levels.

4.2.31 To understand whether the process for purchasing equipment was operating appropriately, two separate

file reviews were completed in June 2016 to test if:

• appropriate purchase processes and consistency panels were being used

• client goals were achieved, and if care hours or return-to-work rates were improved.

4.2.32 The review found that the process for purchasing equipment was robust. Further, it confirmed that for

approximately 90% of the claims reviewed, the clients achieved their goals where equipment was also

purchased. Although the file review validated the process and its alignment with its goals, it did not create

a direct link to determine the financial impact on care costs or weekly compensation.

4.2.33 This is another example of where the work to understand the longer-term financial implications of

increasing spend is important. Actions against Recommendation 5 from the Financial Condition Report 2015

(see 1.1.20 and 6.4) should include a consideration of the provision of capital for both serious and non-

serious injuries, to ensure that decisions on purchasing equipment to provide for clients’ needs are resulting

in improved client outcomes, and are made in a financially responsible way.

4.3 Weekly compensation

4.3.1 Weekly compensation is paid to employees and self-employed people who are unable to work due to injury,

and to children who were injured before the age of 18 and are prevented from entering the workforce due

to their injury. The majority of clients who receive weekly compensation are off work for only a short period

while recovering, but for some clients the duration can extend to when they reach the age of eligibility for

superannuation.

50

4.3.2 Weekly compensation claim payments have increased above expectations in each of the past three years,

with growth in new claims and increases in payments for long-term claims. In total, this has resulted in a

$577 million increase in the liability above expectation, of which $169 million has happened in the past year.

This is in addition to the expected increase of $268 million from the 2015 to 2016 valuation.

4.3.3 The key drivers of experience for these payments are the number of new claims, the average amount paid

per claim, and discontinuance rates. The OCL is most sensitive to long-term discontinuance rates and

medium- to long-term average claims costs (see Graph 28 in Section 7).

4.3.4 Graph 14 shows the actual and projected quarterly claim payments in the June 2016 and two previous June

valuations.

Graph 14 – Non-fatal Weekly Compensation Claim Payments

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4.3.5 Claims experience has increased above valuation projections since December 2013, and it is not yet clear

where, and when, the level of claims experience is likely to settle. The recent increases appear higher than

can be explained solely by economic drivers, as currently modelled.

Number of claims

4.3.6 Graph 15 shows the number of new weekly compensation claims reported, and projections from the June

2016 and previous two valuations.

Graph 15 – Number of new weekly compensation claims by accident quarter

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Accident quarter Actual Projection from 2016 valuation Projection from 2015 valuation Projection from 2014 valuation

New

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(´0

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4.3.7 Since the economic recovery in 2013, the number of new claims has continued to increase, and it can be

seen from Graph 14 that this follows the same pattern as the trend in payments. While the overall annual

growth in 2015/16 of around 7% has reduced from the 14% growth seen in 2014/15, it is still above the 2% to

3% growth in the employed population in the same period.

51

Amount per claim

4.3.8 The amount of weekly compensation paid per claim remained relatively stable during 2015/16 for claims

within five years of an accident. However, for claims more than five years after accidents, the average

amount paid per claim has increased significantly in the past two years. This is due to a continuing high

number of claims receiving large backdated payments.

4.3.9 Weekly compensation backdated lump sum payments can be triggered by a number of things. Common triggers

include reviews of, and court judgements on, ACC claim decisions, delays in receiving claim lodgements, and the

late identification of claims eligible for a loss of potential earnings. Between 2010/11 and 2012/13, the number of

backdated claims, and the average amount paid per claim, were relatively low. Since then the number of large

backdated payments has doubled, with the average amount increasing by about 30%.

4.3.10 The increase has driven up the average cost per claim for medium- to long-term claims in recent periods.

The majority of the increase appears to be due to the clearing of a backlog of appeals built-up over

the period from 2010/11 to 2012/13. Due to the delay between court decisions and the actual payment

settlements, the experience is expected to take some 6-9 months to return to levels consistent with

previous experience.

4.3.11 More recently, backdated weekly compensation payments made for reasons other than court appeals have

also increased. For example, an increase in the number of sensitive claims seeking support as a result of the

contract changes (see 4.5.8) has resulted in higher backdated loss of potential earnings payments for these

claims. This might be expected to reduce if it is mainly related to historical claims coming to light on the

introduction of changes to the service. Due to the high level of volatility associated with the experience, it is

not clear if this is a concern as yet. The drivers of this increase in backdated weekly compensation are being

investigated to determine appropriate management action.

Discontinuance rates

4.3.12 Discontinuance and rehabilitation rates are two measures of the rate at which claims at a certain duration

stop receiving weekly compensation payments. Discontinuance rates are used to set assumptions for

the valuation of the OCL, while rehabilitation rates at various durations are used as key operational

performance indicators. Lower discontinuance and rehabilitation rates lead to higher numbers of longer-

term claims and a higher OCL.

4.3.13 Rehabilitation rates for key weekly compensation durations for the past 12 years are shown in Graph 16. The

rates at all durations have fallen from the relatively stable levels between June 2010 and June 2013. This is

particularly noticeable for the 70-day rate, although there has been a slight improvement during 2015/16.

Longer duration rates, although lower than the 2010 to 2013 averages, are holding fairly close to those

levels.

Graph 16 – Rehabilitation rates for different weekly compensation durations

Reha

bilit

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)

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70 days 182 days 273 days 365 days

4.3.14 Graph 17 shows historical annual discontinuance rates for weekly compensation claims compared to the

assumptions used for the June 2016 valuation projections. The rates are more volatile for injuries with

durations of more than five years due to the increasingly small claim volumes.

52

Graph 17 – Discontinuance rates for weekly compensation claims

Dis

cont

inua

nce

rate

(%)

Years since accident Actual 2015/16 Actual 2014/15 Actual 2013/14 Projection from 2016 valuation

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 31 32−5

0

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4.3.15 For durations of five years or less, discontinuance rates have improved in 2015/16 and largely follow the June

2016 valuation projections, which are based on experience over a longer period of time. This improvement

was also seen in rehabilitation rates (see Graph 16). For durations longer than five years, there is an

improvement in 2015/16 for very long durations, but the rates between six and 25 years from the accident

date continue to be lower than the valuation assumptions. The improvement at longer durations is mainly

a result of a lower number of one-off reactivations, rather than better rehabilitation outcomes.

4.3.16 Some durations have had negative discontinuance rates. This reflects an increase in late-reported new

claims and reactivations, and a decrease in claims exiting the Scheme. Both of these lead to the number of

active claims in a period being higher than in the previous period. The significantly negative rate for injury

durations of more than 31 years in 2014/15 was due to a small number of new surgery-related claims.

4.3.17 The discontinuance rate experience for 2015/16 was, on average, 0.7% below the valuation assumption.

There is insufficient evidence to consider the deterioration a systemic shift, and therefore requiring to be

reflected in the OCL. It remains, however, a risk to the Scheme and should be considered for action against

our recommendation in 4.1.5. See 7.4 for the sensitivity of the OCL to discontinuance rate experience.

Long-term weekly compensation pool

4.3.18 The long-term weekly compensation pool refers to claims that have received more than 365 days of

cumulative weekly compensation. These claims tend to be more complex than those with shorter

durations, and therefore require more focused management. Claims receiving weekly compensation more

than a year since accident dates account for approximately 89% of the weekly compensation OCL.

4.3.19 Graph 18 shows historical and projected numbers of long-term claims, and claims entering and exiting

the pool.

Graph 18 – Long-Term Weekly Compensation Claims

0

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53

4.3.20 The number of long-term claims is expected to grow gradually over time as the Scheme matures, and the

number of serious injury claims in the pool increases. This is allowed for in the OCL and levy assumptions.

4.3.21 In the past three years, the number of entries to the pool has exceeded the number of exits, partly due to a

natural flow-on effect from the sustained increase in new claims volume since 2012/13. The number of exits

has started to trend up since 2014/15, but is still significantly below the number of entries, as new claims

volume continues to increase.

4.3.22 A continued focus on improving the discontinuance rates is necessary to ensure that the growth in the

long-term claims pool remains in line with pricing assumptions. Work is underway to understand the

drivers of this growth and identify an appropriate management response (see 1.1.25).

4.4 Elective surgery

4.4.1 Unlike other payment types, elective surgery is, of itself, a one-off event. The timing of an elective surgery

procedure can vary from soon after the accident date to many years later, often because further surgery is

required.

4.4.2 Elective surgery is an important entry point to the Scheme as these clients often also require other support,

such as weekly compensation, social rehabilitation, and other medical services while recovering from

surgery.

4.4.3 Recent elective surgery experience has been as expected on an overall level, largely as a result of a higher

number of claims from older accident years offsetting lower than expected superimposed inflation. In the

medium term, the growth in surgery claims relating to older accident years is expected to continue as the

surgery portfolio continues to mature.

4.4.4 The OCL for this payment type is most sensitive to superimposed inflation, the number of subsequent

surgeries, and average cost per claim.

4.4.5 Graph 19 shows overall elective surgery payment experience has been generally in line with expectations for

the past three years and valuation projections have largely remained unchanged.

Graph 19 – Elective Surgery Claim Payments

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4.4.6 While the overall claims volume remained relatively flat in 2015/16, the number of claims receiving elective

surgery more than five years after accident dates has continued to trend upwards.

4.4.7 Claims with longer durations tend to be more expensive than others, as delays can make surgery

complicated, and older clients are more likely to have comorbidities. Investigations into the drivers of

increasing long-term claims experience confirm that the maturing of the Scheme is a significant driver of

the surgery portfolio, due to claims returning for further surgeries.

54

Superimposed inflation

4.4.8 Superimposed inflation has a significant effect on ACC’s payments for elective surgery. Graph 20 shows the

actual superimposed inflation in recent years has been lower than the levels assumed in the June 2016 and

the two previous June valuations.

Graph 20 – Elective Surgery Superimposed Inflation

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% in

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4.4.9 Superimposed inflation has generally been driven by increases in underlying surgical rates, and a general

shift towards more complex and therefore more expensive surgeries. Superimposed inflation in recent

years has been below the valuation assumption of 5% per annum for 10 years, then 4% per annum long

term. These assumptions reflect long-term historical trends. While recent experience is encouraging,

superimposed inflation remains a longer-term risk and, as such, close monitoring is ongoing.

4.4.10 The provider services strategy described in 2.3.28 represents a comprehensive approach to working within

the sector to manage ACC’s health sector costs, and is focused on greater collaboration and partnerships

with providers to improve client outcomes. This is an important potential mitigant to rising costs.

4.5 Medical payments

4.5.1 Medical payments are made to primary care providers in four categories:

• general practitioners (GPs)

• radiology

• physiotherapy

• other medical, which includes specialist consultations, acupuncture, dental treatment and counselling.

4.5.2 These are in addition to the services provided under bulk-funding to the Ministry of Health for public

health acute services. ACC has no visibility of these services, and previous Financial Condition Reports have

recommended obtaining access to this data. See 1.2.6 for progress.

4.5.3 Payments for medical services make up 20% of annual cash costs. These payments are typically short term

in nature, which means the impact on the OCL, although still material, is less significant than the impact on

levy rates and Government appropriations.

4.5.4 Valuations since June 2014 have increased the OCL by $225 million in total, of which $177 million was added

in June 2016 to reflect the experience seen to date. These increases are in addition to the expected increase

for medical payments from the 2015 to 2016 valuation of $204 million.

4.5.5 Graph 21 shows historical quarterly medical payments, and the projected payments in the June 2016 and

two previous June valuations, reflecting the increases described above.

55

Graph 21 – Medical Claim Payments


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4.5.6 Actual experience over the past two years has mainly been driven by changes in services provided for

sensitive claims (see 4.5.8 below), which contributed $127 million to the OCL increase in June 2016. This has

affected superimposed inflation, usually the main driver of the OCL for this payment type, and has also

resulted in an increased number of claims.

4.5.7 Graph 22 shows medical superimposed inflation, and highlights the effect of the sensitive claims experience

on other medical.

Graph 22 – Medical Payments’ Superimposed Inflation

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% in

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1015202530

Payment year ending 31 March GP Radiology Physiotherapy Other medical

4.5.8 Under the new sensitive claims service, clients receive access to higher service levels with reduced delays,

as well as no co-payment. As a result, the average cost per claim has increased significantly above standard

inflation.

4.5.9 A formal review of the sensitive claims service has concluded that, while it is too early to assess client

outcomes as data is still being collected, the service is well received and is meeting its aims for clients. The

current view of future trends is that the number of sensitive claims and the associated cost will continue to

increase until 2019/20, which could result in further OCL increases of between $100 million and $200 million

in total. This view is, however, subject to uncertainties, as only 18 months’ worth of data was available at

the time the 2016 valuation was completed.

4.6 Experience by Account

4.6.1 All Accounts have experienced growth in claim numbers and costs in recent years. The nature of claims and

the drivers of the experience differ by Account. Graph 23 shows the $666 million cost of claims in excess of

expectations, split by Account, and by main payment type.

56

Graph 23 – SPLIT OF 2016 actuarial strain BY ACCOUNT AND PAYMENT TYPE

Treatment Injury

Non-Earners’

Work

Earners’

Motor Vehicle

−$50m 0m $50m $100m $150m $200m $250m

Social rehabilitation Weekly compensation Elective surgery Medical Other

4.6.2 The Work Account has had a considerably lower year-on-year volume increase than other Accounts.

Overall, the Work Account was the only one with slightly favourable claims experience for the year.

4.6.3 While the Motor Vehicle Account had the highest percentage increase in the number of weekly

compensation claims during 2015/16, the OCL and levies are also strongly tied to social rehabilitation

payments, particularly for serious injuries. Experience in these two payment types has led to a strain for this

Account for the year.

4.6.4 Claims in the Non-Earners’ Account are a mixture of high-volume, low-liability medical-only claims, and

low-volume, high-liability serious injury claims. Costs for the first group are dominated by short-term

treatment bulk funded through the public health acute services payment to the Ministry of Health. It is

primarily growth in the volume of these short-term claims that has driven the increase in costs in the Non-

Earners’ Account. OCL increases for the year have been impacted by the increase in counselling costs for

sensitive claims (see 4.5.8), which have longer durations than other types of medical payment.

4.6.5 There has also been a strain in this Account from an increase in ‘other’ costs – almost entirely claims

handling expenses. This is a result of a reallocation away from the Work and Motor Vehicle Accounts,

toward the Non-Earners’ Account. The offsetting release in the graphs above is not apparent in the

other Accounts because of offsets from other payment types, in particular gradual process claims. The

main cause of this reallocation is an increased focus on rehabilitation-related activities. For example, the

sensitive claims contract means more resource is allocated to providing support for clients, rather than

making the cover decisions. The Non-Earners’ Account covers a high proportion of these claims.

4.6.6 The Earners’ Account is dominated by low-severity claims that require short-term support, and increases in

the volume of these claims have led to cost increases in this Account, particularly for weekly compensation,

which has led to a strain for the year. Medical costs have also driven an adverse OCL movement, largely

due to sensitive claims experience. This Account has also seen a strain from social rehabilitation for both

serious and non-serious injury claims.

4.6.7 Experience in the Treatment Injury Account in the past few years has resulted in increasing overall costs.

This can be seen in the particularly high underwriting losses in the past two years (see Table 7 in 3.2), and

the annual increases in claim frequency since 2012/13 (see Graph 43 in Appendix A). This continues to be an

area of concern.

4.6.8 In 2015/16, adverse experience in both weekly compensation and serious injury claims has largely driven the

experience in this Account.

4.6.9 In response, a portfolio of injury prevention programmes is underway (see 2.3.8). In addition, ACC has been

working with the health sector to increase the openness and transparency of treatment injury claims, and

to develop treatment injury information suitable for public reporting. This is aimed at enabling suitable

comparisons to encourage coordinated actions to reduce claim incidence and severity. More information

on this work is in 1.2.12. It is likely to take some time for these initiatives to achieve significant reductions in

treatment injury experience.

57

5. Pricing

Summary

• ACC has consulted on levy rates for the levied Accounts for 2017/18 and 2018/19, in line with Cabinet’s decision that levies

will be set every two years, and applying the Government’s funding policy.

• Cabinet approved an amount lower than the requested 2016/17 appropriation for the Non-Earners’ Account and Non-

Earners’ contribution to the Treatment Injury Account. All things being equal, this will increase the amount of future

funding requests.

5.0.1 In this section, the term ‘pricing’ refers to the process of recommending levy rates and requesting

Government appropriations to fund the various Accounts.

5.0.2 The Motor Vehicle, Earners’, and Work Accounts (the levied Accounts) are funded by levies. The Non-

Earners’ Account is funded through Government appropriations. The Treatment Injury Account is funded

through a combination of appropriations and a portion of the Earners’ Account levies (see Table 28 in

Appendix B).

5.0.3 In this section, we discuss the proposed levy rates consulted on during September and October 2016,

and the appropriation recommendations provided for Cabinet decisions at the beginning of 2016. We also

describe the funding policies for each Account, and the processes for proposing and recommending future

levy rates and appropriations.

5.1 Recently reviewed levy rates and appropriations

5.1.1 This subsection shows the results of the most recent calculations of levy rates and appropriations. Details

of the basis on which these calculations were determined are shown in the following subsections.

Levied Accounts – consultation levy rates for 2017/18 and 2018/19

5.1.2 Graph 24 shows the aggregate levy rates for the five years up to, and including, those for 2017/18 and

2018/19 proposed in the levy rate consultation held during September and October 2016. The Motor Vehicle

Account levies are expressed as a rate per motor vehicle, while the Earners’ and Work Account levies are a

rate per $100 of liable earnings.

5.1.3 Levy rates for the Work and Earners’ Accounts are effective from 1 April of the year in which they apply,

whereas the Motor Vehicle Account rates are effective from 1 July.

5.1.4 As discussed in 5.5, this year Cabinet determined that levies are to be consulted on and set every two years.

For that reason, the consultation rates are for a two-year period, and the rate is fixed for that period.

58

Graph 24 – Recent AND PROPOSED Levy Rates by account

2014

/15

2014

/15

2014

/15

2015

/16

2015

/16

2015

/16

2016

/17

2016

/17

2016

/17

2017

/18

2017

/18

2017

/18

2018

/19

2018

/19

2018

/19

$329.93

$194.25

$130.26Proposed$113.94

$1.26 $1.26 $1.21

Proposed$1.25

$0.95 $0.90$0.80 Proposed

$0.72

Levy year

Motor Vehicle Earners’ Work

5.1.5 The Earners’ Account levy includes the amount required to fund treatment injuries suffered by earners.

The rates shown for the Work and Motor Vehicle Accounts are averages, with different levies applying

by industry and vehicle type respectively. These rates are based on historical claims experience and, in

the case of car owners, the safety rating of the vehicle. The Earners’ and Work Account rates apply up to

a maximum salary level, which is consistent with the Scheme’s maximum weekly compensation amount

payable (which at 1 July 2016 was 80% of $124,053).

5.1.6 We are satisfied that the proposed 2017/19 levy rates for consultation are adequate to meet the costs of the

coming years’ claims, and are consistent with the funding policy.

Non-Earners’ Account appropriation for 2016/17

5.1.7 Graph 25 shows the Non-Earners’ Account appropriation amounts agreed by Cabinet for the three years up

to, and including, 2016/17. Also shown is the amount that was requested by ACC for 2016/17.

Graph 25 – Non-Earners’ account recent appropriation amounts

2014/15 2015/16 2016/17

Appr

opria

tion

amou

nt ($

b)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

$960m$1,091m

$1,231m

$1,363m

Agreed Requested

5.1.8 These amounts include the contribution to the Treatment Injury Account for treatment injuries suffered by

non-earners.

5.2 Funding policies

5.2.1 Recommendations on levies and appropriations are made in accordance with each Account’s agreed

funding policy. These are set by the Government. The funding policy establishes the target funding

position for each of the Accounts, and the expected time horizon over which these are to be achieved. The

funding policies applied for 2016/17 appropriations and 2017/19 levy rates are the same as those used in the

previous year.

59

Levied Accounts

5.2.2 When making levy recommendations, ACC applies the Government’s funding policy detailed in the

statement gazetted in May 2016. This policy is consistent with that determined by the Board for setting the

2015/16 levy rates during 2015. Under this policy:

• the average levy rate must be based on the estimated lifetime costs of claims expected to occur during

the levy period (new-year claim costs)

• Accounts will aim to hold assets between 100% and 110% of the outstanding claims liability (OCL), with

a midpoint target of 105%

• a funding adjustment must be included in the average levy rate that takes each Account’s funding

position to the 105% target smoothly over a 10-year horizon

• any increase to the average levy rate for each Account must not exceed 15%, in addition to inflation

adjustments for the Motor Vehicle Account only.

5.2.3 The 105% target funding level is set with reference to the OCL reported in the financial accounts, so

includes a risk margin (see 7.5).

5.2.4 By starting with the estimated lifetime costs of claims expected, the funding policy aims to set levies as

closely as possible to economic costs. This is desirable both for equity reasons and to send pricing signals

to levy payers. The other features of the funding policy express a risk preference between levy and balance

sheet volatility. In particular, the funding adjustment aims to return the funding position in respect of

already-incurred claims towards target, but in a 10-year period.


5.2.5 The funding policy for the Non-Earners’ Account, as agreed by Cabinet, is shown in Table 11.

Table 11 – Non-Earners’ Account funding policy

Pre-1 July 2001 claims Post-1 July 2001 claims

• Pay-as-you-go basis

• One-year funding horizon

• Funding position target of 0%.

• Fully funded basis

• Costs are discounted using investment forecasts for the first year and risk-free rates thereafter

• Three-year funding horizon

• The risk margin is not funded, but is included in ACC and Crown liabilities

• Funding position target of 100% of actual liabilities, excluding risk margin, or 88% including risk margin.

5.2.6 Fully funded claims are to be funded for their estimated lifetime cost in the year in which they are incurred.

This contrasts with pay-as-you-go claims, where costs are funded only in the year in which they are to

be paid. Any surplus or deficit at the start of the funding period, for already incurred claims, is funded or

returned in a three-year period. This can lead to moderate volatility in the appropriation amount.

5.2.7 Pre-2001 claims represent $3.7 billion of the $7.8 billion total Non-Earners’ Account liability. These claims

will take many decades to run off, and until then the Non-Earners’ Account will record a deficit for these

claims, in addition to the deficit for the unfunded risk margin on post-1 July 2001 claims.

Treatment Injury Account

5.2.8 The Treatment Injury Account is not directly funded. Instead it receives funds raised through the Earners’

Account levy and the Non-Earners’ Account appropriation. The proportion from each is set according to the

projected costs of treatment injury claims for earners and non-earners.

60

5.2.9 The Treatment Injury Account is funded in three parts:

• claims for earners – fully funded with a target of 105%, as for the Earners’ Account

• pre-1 July 2001 claims for non-earners – pay-as-you-go, as for the Non-Earners’ Account

• post-1 July 2001 claims for non-earners – fully funded, excluding risk margin, as for the Non-Earners’

Account.

5.2.10 As at 30 June 2016, the pre-2001 treatment injury claims for non-earners represent $1.3 billion of the total

$5.1 billion OCL for the Treatment Injury Account.

5.3 Application of the funding policy for pricing levy rates for 2017/19

5.3.1 In accordance with the levied Accounts’ funding policy, levy rates are made up of two components:

• the new-year levy to cover the expected cost of claims in the new levy period

• a funding adjustment to return excess funds or collect any deficit.

5.3.2 These components impact on each of the levied Accounts differently based on factors such as the nature of

claims in the Account and the funding position.

5.3.3 Changes in the expected costs of claims in future levy years can result in significant changes to levy rates as

they need to be funded immediately, in accordance with the funding policy. Changes in the funding position

in respect of previously incurred claims are spread over 10 years.

5.3.4 The move to biennial levy rounds (see 5.5.1) requires the levy rates for 2017/18 and 2018/19 to be the same.

This means that the funding adjustment described in 5.3.1 has been calculated to be applied to the average

of the 2017/18 and 2018/19 new-year levies.

5.3.5 The change in levy rates from 2016/17 to the consultation rates for 2017/19 is made up of a number of factors,

including changes in claims experience, and changes in inflation and discount rates. Table 12 shows the

drivers of the changes from the 2016/17 levy rates set last year to the proposed 2017/19 levy rates for each

levied Account.

Table 12 – Analysis of change in levy rates from 2016/17

Motor Vehicle Earners’ Work

Levy rate for 2016/17 $130.26 $1.21 $0.80

Expected increase for 2017/19 $6.68 $0.04 $0.02

Improved funding position -$22.67 -$0.03 -$0.08

Lower inflation forecasts -$5.33 -$0.05 -$0.07

Increase in claims experience $0.27 $0.08 $0.04

Updated discount rates $4.73 $0.00 $0.01

Total change -$16.32 $0.04 -$0.08

Levy rate for 2017/19 $113.94 $1.25 $0.72

5.3.6 The proposed levy rates for the levied Accounts for 2017/18 and 2018/19 are estimated to provide an overall

reduction in annual levy revenue of $76.7 million. Individual Accounts are examined in more detail below.

61

Motor Vehicle Account

5.3.7 The revised estimates of new-year costs for 2016/17 have decreased overall from the original estimates

made when pricing the 2016/17 levy rate. This is because higher claims experience for weekly compensation

claims has been more than offset by reductions in forecast inflation. Motor vehicle claims tend to require

long-term support, meaning inflation and investment returns have a large impact on the estimate of new-

year costs.

5.3.8 As shown in Table 13, the levy for the costs of new claims is projected to increase from the current 2016/17

estimate by 3% annually in 2017/18 and 2018/19. The increase in new-year claim costs, in addition to the

annual 1% increase in the number of motor vehicles, is made up of the following:

• a 0.6% increase due to assumed annual claim frequency growth, made up of 2% growth in the

frequency of weekly compensation claims, offset by other claim frequencies assumed to remain at

current levels

• annual increases in costs due to standard inflation of approximately 1.7%

• increases in costs above standard inflation in social rehabilitation care for serious injuries and elective

surgery, leading to an overall 1% superimposed inflation assumption.

Table 13 – Levy for New-year cost and funding adjustment for the Motor Vehicle Account

Original2016/17

Revised 2016/17 2017/18 2018/19

Average2017/19

Cost of new claims $149.95 $146.68 $151.46 $156.68 $154.08

Funding adjustment -$19.69 -$40.14

Average levy rate $130.26 $113.94

5.3.9 An improvement in the funding position from that projected when pricing the 2016/17 levy rate, due to

higher than expected investment returns, resulted in a larger negative funding adjustment, and therefore

a decrease in the average rate for motor vehicle levies for 2017/19. The resulting decrease in annual levy

income for this Account is estimated to be $56.6 million.

Earners’ Account

5.3.10 The revised estimates of new-year costs in the Earners’ Account for 2016/17 have increased from those

made when pricing the 2016/17 levy rate. This has been driven by a higher than expected number of weekly

compensation and medical claims, and claims remaining longer than projected. The Earners’ Account is

dominated by low severity claims that require short-term support, and it is the volume of these claims that

has continued to increase. In contrast to the other two levied Accounts, although the funding position

has increased slightly from that projected when the 2016/17 rate was set, economic factors have not been

sufficient to offset claims experience in the period. This is due to the largely short duration of liabilities.

5.3.11 As shown in Table 14, the drivers of the 2016/17 increase in the cost of new claims are projected to continue

for the next two years. Note that, because levy rates are rounded to the nearest cent, the increase from

2016/17 to 2017/18 looks higher than the increase from 2017/18 to 2018/19. Without rounding, the levies

increase by around 2% each year.

5.3.12 Both new-year claims costs and liable earnings are expected to grow in line with inflation and the earner

population. The 2% increase in the levy is due to the following:

• an increase of 1% for assumed annual claim frequency growth, driven by 2% growth in the frequency of

weekly compensation claims, slightly lower growth in medical claim frequency, and other claim types

assumed to remain at current frequency levels

• assumed growth in elective surgery and medical costs above inflation, leading to average

superimposed inflation of 1% on total new-year costs.

62

Table 14 – Levy for New-year cost and funding adjustment for the Earners’ Account

Original2016/17

Revised 2016/17 2017/18 2018/19

Average2017/19




5.3.13 The increase in annual levy income, as a result of the proposed increase in levy rate from 2016/17, is

estimated to be $49.5 million.

Work Account

5.3.14 The revised estimate of the levy for new-year costs for 2016/17 is consistent with that originally made

when pricing the 2016/17 levy rate. However, favourable investment returns have resulted in a significant

improvement in the funding position from that projected when the 2016/17 levy rate was set.

5.3.15 The annual 1% increase in the levy for new-year claims, shown in Table 15, is largely driven by assumed

growth in the number of new weekly compensation claims. As with the Earners’ Account, both new-year

claims costs and liable earnings are expected to grow in line with inflation and the earner population. The

increase in the levy is due to the following:

• an increase of 1.2% for assumed annual claim frequency growth, driven by 2% growth in the frequency

of weekly compensation claims and lower growth in other claim types

• elective surgery and medical costs making up a much smaller proportion of the levy than weekly

compensation, leading to an overall 0.1% growth due to superimposed inflation assumptions on health

costs.

5.3.16 The improved funding position means that a larger negative funding adjustment is required and, as such,

the average levy rate for 2017/19 can be reduced.

Table 15 – levy for New-year cost and funding adjustment for the Work Account

Original2016/17

Revised 2016/17 2017/18 2018/19

Average2017/19




5.3.17 This proposed decrease in levy rate from 2016/17 is estimated to result in an annual reduction in levy income

for this Account of $69.6 million.

5.4 Non-Earners’ Account appropriation for 2016/17

5.4.1 Table 16 shows the components of the Non-Earners’ Account appropriation amounts for 2016/17 compared

to those in the two previous years. Also shown is the amount requested for 2016/17, calculated in

accordance with Cabinet’s agreed funding policy.

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Table 16 – Non-Earners’ Account Appropriation

2016/17

Appropriation ($M) 2014/15 2015/16 Requested Approved

Cost of new claims 1,119 1,242 1,349 1,349

Pay-as-you-go 115 117 125 125

Funding adjustment -273 -267 -110 -242

Total 961 1,091 1,363 1,231

5.4.2 Cabinet did not approve the full requested appropriation for 2016/17, setting it $132 million lower. All else

being equal, this will result in a weaker funding position than would be generated by the funding policy.

Ultimately, claims costs need to be covered and higher appropriations will be required in future years to

meet these costs if experience is as expected.

5.4.3 The Non-Earners’ funding policy is designed to collect any under-funding over a relatively short three-year

funding horizon, leading to larger future increases than would be the case with a longer funding horizon.

If appropriation amounts continue to be approved below the amount required to meet the costs of new

claims, the additional amounts needed to make up the shortfall will grow. Any further deterioration in the

funding position or claims experience would put more pressure on future appropriations.

5.4.4 The estimated cost of new-year claims has increased, on average, by 10% per year since 2014/15. This

has largely been driven by increased claim volumes, in addition to increases in the assumed non-earner

population from 2014/15 to 2016/17. In particular, medical costs and costs for social rehabilitation for

non-serious injuries have increased as a result of more clients accessing these services. Also, while actual

superimposed inflation has been lower than expected over the last few years, the costs of these services have

increased above standard inflation. Additionally, the 2016/17 requested appropriation includes allowances for

increased volumes and services relating to the integrated services contract for sensitive claims (see 6.3.6).

5.5 Process for setting levy rates and appropriations

Biennial levy rounds

5.5.1 In May 2016, Cabinet agreed that levies will be consulted on, and set, every two years as opposed to the

previous practice of setting levies on an annual basis. A single rate is set and will apply for two consecutive

years.

5.5.2 Setting levies every two years is expected to give both levy payers and the Government greater certainty,

and reduce the overall consultation burden on levy payers. There is expected to be minimal impact on the

volatility of levies or funding positions of the levied Accounts under biennial levy rounds.

5.5.3 Under exceptional circumstances, ACC may recommend, or the Government may direct ACC to undertake,

consultation on levies in between biennial levy years.

5.5.4 The first consultation for biennial levies took place in September 2016 for the 2017/18 and 2018/19 levy rates.

Levy rate recommendations

5.5.5 In accordance with the Accident Compensation (Financial Responsibility and Transparency) Amendment

Act 2015, ACC follows the Government policy on fully funding the levied Accounts when making levy

recommendations (see 5.2).

5.5.6 The proposed 2017/19 levy rates were determined using the following assumptions:

• best estimate projections of claims experience in line with trends as at 31 March 2016

64

• estimates of future investment returns given current and expected future market conditions as at 31

March 2016

• risk-free interest rates as implied by the New Zealand Government bond yield curve.

The assumptions used for growth in claims experience are described for each Account in 5.3.

5.5.7 When recommending levies, ACC gives businesses, communities, and individuals throughout New Zealand

an opportunity to provide feedback. Once the proposed rates have been published and levy consultation

has opened, the public has at least 28 days to provide feedback by making submissions. When the

consultation period has ended, the submissions are presented to the Board. The Board then reviews the

feedback and makes final recommendations to the Minister for ACC.

5.5.8 The Minister may seek advice from the Ministry of Business, Innovation and Employment (MBIE), Treasury

and other agencies before making recommendations to Cabinet, which makes the final decision. The levies

for the Work Account and Earners’ Account come into effect each year from 1 April, and the Motor Vehicle

Account from 1 July.

5.5.9 Section 331 of the Accident Compensation Act 2001 requires ACC to publish a report on the final levy rates

for each Account at the same time as they are put into regulations. One of the purposes of this report is

to increase the transparency of the levy setting process and provide levy payers with the full implications

of levy decisions. This is particularly relevant when the final levy rates differ from those proposed in the

consultation. The report must include:

• the long-term projections of funding positions, levy rates, Account balances, and new-year claim costs

• the key assumptions used for these projections.

Non-Earners’ appropriation

5.5.10 ACC follows the Government funding policy for the Non-Earners’ Account when requesting the

appropriation amount (see 5.2).

5.5.11 Each year, Cabinet considers and sets appropriations for the next five years as part of the Budget process.

This takes account of requests made by the Board and advice from MBIE and Treasury.

5.5.12 The projections for the 2016/17 appropriation were based on:

• best estimate projections of claims experience in line with trends as at 31 December 2015

• estimates of future investment returns given current and expected future market conditions as at

31 December 2015

• risk-free interest rates as implied by the New Zealand Government bond yield curve at

31 December 2015.

The drivers of the assumed annual 10% growth in claims experience are described in 5.4.4.

5.5.13 In addition, the projections allowed for the following:

• the impact of free medical care for under-13s from 1 July 2015 (additional funding was not approved

last year)

• increased claims volumes and counselling sessions above those previously projected for

sensitive claims.

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5.6 Changes proposed to products

5.6.1 The discussion in this section focuses mostly on funding at an aggregate level. At a lower level, different

rates can apply to different groups of levy payers (see Appendix B). Changes to products can affect pricing

at this more granular level, so below we briefly outline some potential product changes that were included

in the 2017/19 levy consultation.

Work Account

Optional incentive programmes

5.6.2 The Health and Safety at Work Act 2015 (HSWA) came into effect on 4 April, 2016. It has implications for

some of the optional workplace incentive programmes described in Appendix B, particularly the audit tools

used for the Workplace Safety Management Practices (WSMP) programme, which no longer align with the

HSWA.

5.6.3 In addition, an analysis in the Financial Condition Report 2014 showed that there is no strong connection

between these incentive programmes and a reduction in claims incidence or severity. For these reasons the

WSMP and Workplace Safety Discounts programmes will no longer be offered from 31 March 2017. There

will be transition arrangements in place so that businesses accepted into the programmes before then can

receive levy discounts until 30 June 2019.

5.6.4 The 2017/19 levy consultation contained high-level proposals for enhancing the experience rating

programme in order to provide stronger incentives for businesses that reduce workplace accidents. These

will be further developed following an analysis of customer responses to the proposals.


Fleet Saver programme

5.6.5 Fleet Saver, described in Appendix B, is an optional incentive programme for commercial vehicle fleets

modelled on the principles of the WSMP. Proposed changes to the audit requirements to align Fleet Saver

with the HSWA were included in the 2017/19 levy consultation.

5.6.6 The uptake of the product is low, but it has now been in place for long enough to understand whether it is

incentivising change in claims incidence or severity. This evaluation is expected to occur during 2016/17.

Electric vehicles

5.6.7 The 2017/19 levy consultation included proposals for changing the way electric vehicles (EVs) are levied.

Currently EVs are classed as non-petrol vehicles for levy collection, and pay through vehicle licensing fees

along with diesel-powered vehicles. This includes plug-in hybrid electric vehicles (PHEVs), which operate

on electric batteries along with a petrol motor, and pay small additional levies when purchasing petrol.

Opportunities to improve the Motor Vehicle levy framework (including for EVs and dual-fuel vehicles such

as PHEVs), are being investigated, starting with public engagement through the 2017/19 levy consultation.

Any proposed changes as a result of this broader review will be consulted on, and considered by Cabinet, as

part of the next biennial levy round in respect of the 2019/20 and 2020/21 levy years.

66

6. Claims management

Summary

• ACC’s claims management process is designed to process large numbers of low-complexity claims efficiently, with

targeted rehabilitation management where needed for more complex cases.

• A range of initiatives has been put in place in the past few years aimed at reallocating claims management resources

to where they are most needed to improve efficiency and effectiveness. This is in response to recent increases in the

volume of new claims and rising claims costs.

• The ability to assess the performance of these initiatives has been limited due to measures not being put in place at the

design stage. This is especially true with regards to measuring financial impacts.

• Initiatives being designed under the Transformation programme use an established framework for measuring benefits

and outcomes with a consideration of financial impacts.

• In 2015, we recommended implementing a formal regime for measuring and monitoring the effectiveness of changes to

claims management practices. This is being addressed through the proposal to adopt a benefits framework for changes

occurring outside the Transformation programme.

• We consider that this approach should be applied to measure the impacts on client outcomes of claims management

more generally.

6.0.1 The ACC claims management process aims to deliver high-quality outcomes for injured people by

rehabilitating them back to work, and/or independent living where possible. When full rehabilitation is not

an option, ACC aims to provide ongoing support to allow clients to gain as much independence as possible.

6.0.2 Appendix B describes the claims management process for different client types. This section concentrates

on recent and planned future changes in the claims management approach. Some of these have been

designed to use claims management resources more efficiently in response to increasing claim volumes and

pressure on rehabilitation rates. Others are in response to new opportunities or identified risks.

6.1 Transformation programme initiatives

6.1.1 Through the Transformation programme, a number of initiatives are planned over the next few years to

improve client experience and outcomes. All initiatives under the programme follow a benefit management

strategy and framework. Under this, specific steps are taken to meet the objective of proving that the

planned outcomes and benefits are achieved and continue to be realised through delivery. Included are:

• setting clear targets

• identifying an accurate baseline

• cost/benefit and risk analysis

• monitoring benefits through, among other things, building measures into key performance indicators

(KPIs).

6.1.2 The framework supports an investment approach discipline with the ongoing measurement of longer-

term outcomes alongside considerations of the financial impacts. Initiatives are run as pilots before full

67

implementation, with measures calculated for the pilot and non-pilot groups for a period of time before the

start of the pilots, as baselines for measuring any improvements. In addition, an evidence-based framework

will be used to support continued development of the client and provider aspects of the target operating

model (see 2.4.2).

6.1.3 Improving client experience and outcomes can, and should, lead to improvements in financial performance,

and we expect to see continued measurement of this through the Transformation programme.

6.2 Update on initiatives discussed in the 2015 report

6.2.1 As discussed in 6.4 below, our ability to evaluate the return on investment from claims management

initiatives has, in the past, been somewhat limited. Here we comment on some key initiatives put in place

in recent times.

Claims management by Third-Party Administrators

6.2.2 ACC’s partnership with external claims management providers, known as Third-Party Administrators

(TPAs), was made available to all accredited employers from November 2015. Under the partnership,

TPAs are contracted to provide non-work injury claim services to accredited employers who already have

meaningful relationships with their TPAs for work injury claims management.

6.2.3 Sixty-six accredited employers are participating, with 40 more expected to join in the next 3-6 months. On

average, 70.5% of claims managed through this channel are rehabilitated within 70 days, compared with

67.6% of ACC-managed claims. We would expect experience for larger employers to be better than average,

as they have more opportunities to support injured workers with their return-to-work. Performance appears

satisfactory.

Client Service Optimisation

6.2.4 The rehabilitation tracking tool that was developed through the Client Service Optimisation project

estimates the likely durations of clients’ recoveries. This is a core tool, used on a daily basis, which enables

staff to ensure proactive management and introduce interventions where clients’ recoveries are not

progressing as expected. The tool is continuing to be developed to extend its use for specific cases such as

claims receiving elective surgery, and sensitive claims.

Enabling Independence

6.2.5 Clients who are non-earners at the time of their injuries tend to need different support to clients whose

focus is on getting back to work. The ‘Enabling Independence’ initiative was trialled successfully in

Christchurch in early 2014, and is now operating nationally. Enabling Independence is designed to improve

the client experience by centralising, within regional hubs, the management of clients who are not in the

workforce.

6.2.6 The aims of the regional hubs are to:

• deliver a nationally consistent service

• work collaboratively with community groups and district health boards to simplify the process,

and help clients receive coordinated services and access to the support they need to return to

independence.

6.2.7 A post-implementation review completed in January 2016 showed that overall the teams were functioning

well. There were some opportunities identified to improve administrative functions and processes within

the hubs, and work is ongoing to address this.

68

6.2.8 In general, measures of the success of claims management for non-earner claims include the proportion

returned to independence, and the amount spent to achieve this, particularly in social rehabilitation. Total

Scheme return to independence for those not in the workforce improved from 86.2% in July 2015 to 86.7% in

June 2016, during which time the service was rolled out.

6.2.9 Driven by increasing claims volumes, the total cost of social rehabilitation for all non-serious injury claims

increased by 17% in the year to March 2016, with the average cost increasing by 4%. For claims managed

under the Enabling Independence model, the increases were 14% and 3% respectively.

6.2.10 This may be a result of improved experience due to the new claims management model. However, it is

not possible to assess from this information alone whether the hubs have improved claims performance.

Although the cost increases are lower than the overall figures, we have no information on whether the

differences are statistically significant or whether there is a bias in the claims managed under the new

model that might lead to this result, whether or not the claims management approach has changed. It is

also not possible to tell from this what investment was required to achieve the result.

6.2.11 The following additional KPIs for the team have recently been implemented now that all hubs have been

operational for 12 months:

• average social rehabilitation cost

• claim duration – percentage of Enabling Independence claims with no entitlements 12 months after

registration.

These KPIs will be measured during 2016/17 against proposed targets.

Short-Term Claims Centre (STCC) weekly compensation pay and monitor

6.2.12 During 2015, the Wellington STCC conducted a trial that identified claims that were likely to require weekly

compensation for fewer than 35 days with no further rehabilitation support.

6.2.13 These claims, which account for approximately 20% of managed claims, have been classified as ‘pay and

monitor’, whereby a client is informed that weekly compensation will be paid to a certain date, at which

time the claim will be closed. The date of closure is determined by a general practitioner. Expectations are

set with the client that if their situation or need changes, they should make contact, otherwise they won’t

hear from ACC.

6.2.14 An evaluation of this trial was completed in December 2015. The results indicated that more development

was needed to integrate the approach with the broader Transformation programme activities before wider

implementation would be considered. Given the low-touch approach, the means by which expectations are

set with clients will be a critical step in achieving the desired client and financial outcomes.

Long Term Service Claims Unit

6.2.15 The centralised Long Term Service Claims Unit in Tauranga is now fully operational and manages

approximately 1,800 long-term clients who have been rehabilitated as far as possible and have stable

needs. As well as ensuring that clients receive the consistent support they need, the service frees other

claims management staff from day-to-day administrative work, which allows them to focus on other

clients’ treatment and rehabilitation. A post-implementation review of this initiative in October 2015

highlighted the successful transition from the previous model, and there was positive feedback from staff

and clients.

69

6.3 Recent initiatives

Vocational rehabilitation targeting framework

6.3.1 Following observed increases in the use and costs of vocational rehabilitation services, a review in 2015

identified the need for improved targeting of these services to ensure a sufficient return on investment in

the form of better client outcomes and lower weekly compensation costs. In response, a principles-based

targeting framework was piloted during April and May 2016 aimed at supporting staff to make appropriate

vocational rehabilitation service referrals.

6.3.2 Initial findings from the pilot showed that, generally, the levels of referral were appropriate but there were

opportunities to provide better guidance to staff on the services required to support returns to work. This

is particularly relevant where there are low to moderate work-related complexities. These results are being

considered for an appropriate management response.

6.3.3 In order to ensure appropriate client and financial outcomes are maintained, ongoing assessment is

required.

Elective surgery triaging

6.3.4 A trial in the southern region to centralise the decision-making of all surgery requests in the Treatment

Assessment Centre has been in place since September 2015. This initiative is aimed at improving the

timeliness of decisions for elective surgery.

6.3.5 The trial has resulted in a 31% improvement in the number of surgery decisions made within 48 hours for

branch-managed claims. Another benefit of the trial is that it has freed up time and resources for claims

managers and medical advisors, who are no longer required to assess surgery requests. Work is underway

to develop a wider implementation plan.

Integrated Services for Sensitive Claims

6.3.6 The Integrated Services for Sensitive Claims (ISSC) contract was introduced in November 2014 to provide

more support for sensitive claims. The resulting increase in services has been greater than expected. In

response, a review of the service was conducted in March 2016. The key findings from this review were:

• ISSC is client-centred, provides choice, and reduces barriers

• the www.findsupport.co.nz website has enabled ease of access and an increase in self-referrals to

the ISSC

• there are opportunities for ACC to improve the timeliness and effectiveness of communication with the

sector, and to continue to foster relationships with suppliers and providers

• through the removal of barriers, referrals into services have far exceeded expectations, and suppliers

are continuing to build and grow their provider bases.

6.3.7 The opportunities identified are included in current programmes of work. The outstanding claims liability

(OCL) and payments made are generally used as proxies for client outcomes. However, these are not

appropriate measures for sensitive claims at this stage, as we expect these measures to increase as access

to services improves.

6.3.8 Assessments of client outcomes under the ISSC will be through two indices that measure wellbeing

(Personal Wellbeing Index), and disability (World Health Organization Disability Assessment Schedule –

Second Edition WHODAS 2.0). This information is not yet available as data has only been collected since

December 2015.

70

http://www.findsupport.co.nz

6.4 Evaluating the effectiveness of the claims management approach

6.4.1 The ability to assess the performance of the approach to claims management in general, and to change

initiatives such as those in this section, has been limited due to measures not being put in place at the

outset. This is especially true with regards to financial measures. This does not mean that reductions in

levies, appropriations and OCL are necessarily the only appropriate outcomes as, in some cases, they are

not the best measures. For example, for sensitive claims, achieving the best outcome may require providing

more support. However, it is generally expected that financial outcomes should be able to be aligned with

client outcomes.

6.4.2 Our 2015 recommendation to implement a formal regime for measuring and monitoring the effectiveness

of changes to claims management practices has not yet been resolved (see 1.1.20). The work being done

under the Transformation programme aligns directly with this recommendation and, for proposed changes

that are not being implemented through the programme, a framework is being developed along the same

lines. This will include steps to establish baseline metrics for expected benefits, and measurement post-

implementation to ensure the benefits have been achieved.

6.4.3 We would like to see this approach used more generally outside the Transformation programme. An

example is the recent increases in the use of social rehabilitation capital and training services. Measuring

the impacts on the level of care required as a result of providing this support would be one way of

identifying whether this is an effective investment in improving client outcomes (see 4.1.3, 4.2.17, 4.2.26

and 4.2.33).

71

7. Liability valuation

Summary

• The outstanding claims liability (OCL) as at 30 June 2016 was $36,663 million, an increase of $6,334 million from the

previous year. The expected increase was $1,236 million.

• The OCL increased by $292 million due to higher than expected claims experience and modelling changes made in

response. Removing an adjustment made for legislative and policy change, the underlying increase was $666 million.

• As described in Sections 2 and 3, the biggest drivers of this increase were medical payments, weekly compensation and

social rehabilitation payments.

• Changes in discount and inflation rate assumptions increased the OCL by $4,806 million.

• We are satisfied that the assumptions adopted for the OCL are appropriate.

7.0.1 ACC undertakes a valuation of its OCL every six months. The OCL is calculated by forecasting the future

cash flows associated with accidents that occurred before the valuation date. These cash flows are then

discounted back to the valuation date using a ‘risk-free’ interest rate. Allowances for claims handling

expenses and risk margins are also included.

7.0.2 The OCL provides key information for recommending levy rates and appropriations (see 5.2). It also

identifies areas where changes in claims experience may represent a risk to the long-term sustainability of

the Scheme.

7.0.3 Note that the discussion here is in respect of the OCL as reported in the Annual Report. It excludes incurred

but not reported work-related gradual process claims.

7.1 Results

7.1.1 Table 17 shows the results of the liability valuation as at 30 June 2016, the OCL as at 30 June 2015, and the

main changes in liability.

Table 17 – Liability Valuation at 30 June 2016

($M)Liability at

30 June 2015Expected increase

Changes due to economic

assumptions

Changes due to experience

and modelling

changesLiability at

30 June 2016

Medical costs 2,450.4 204.0 438.3 177.5 3,270.2

Elective surgery 3,045.4 225.3 572.9 24.0 3,867.5

Social rehabilitation 13,198.0 511.7 2,498.2 (137.6) 16,070.3

Compensation related 7,639.3 279.5 859.1 180.9 8,958.8

Other 2,029.0 (17.0) 200.9 42.9 2,255.8

Claims handling expenses 1,966.5 32.2 237.1 4.3 2,240.0

Total liability 30,328.6 1,235.6 4,806.5 292.0 36,662.7

72

7.1.2 The OCL as at 30 June 2016 was $36,663 million, an increase of $6,334 million from the previous year. The

expected increase was $1,236 million. The expected increase reflects in part that the Scheme has yet to

mature, and we expect the rate of new claims to exceed that of claims exiting. The OCL is also expected to

grow with underlying population growth and inflation.

7.1.3 The OCL increased by $292 million due to higher than expected claims experience and modelling changes

made in response. As described in Sections 3 and 4, the biggest drivers of this increase were medical

payments, weekly compensation and social rehabilitation payments. These were partially offset by a $374

million reduction in social rehabilitation due to legislation and policy changes.

7.1.4 Changes due to economic assumptions and experience increased the OCL by $4,806 million. These changes

reflected:

• a decrease in discount rates, resulting in an increase of $6,355 million

• a decrease in inflation rates, resulting in a reduction of $1,466 million.

In addition, actual inflation during 2015/16 was lower than the assumption made for the 30 June 2015 OCL,

resulting in a reduction of $82 million.

7.2 Summary of approach

7.2.1 The valuation complies with:

• the New Zealand equivalent to International Financial Reporting Standard No. 4 – Insurance

Contracts (NZ IFRS 4 (PBE)) issued by the New Zealand Accounting Standards Board of the External

Reporting Board

• Professional Standard No. 30 – Valuations of General Insurance Claims issued by the New Zealand

Society of Actuaries (NZSA).

7.2.2 The calculation of the OCL is outsourced to independent actuary PwC. Its report, Accident Compensation

Corporation – Valuation of Outstanding Claims Liabilities as at 30 June 2016, dated August 2016, was prepared by

Paul Rhodes FNZSA FIA and Michael Playford FNZSA FIAA.

7.2.3 The calculation of projected cash flows is undertaken separately by payment type. Table 18 shows the main

payment types and their respective valuation methodologies.

Table 18 – Payment Types

Payment type Description Methodology

Non-fatal weekly compensation Income replacement Payment per active claim

Vocational rehabilitation Rehabilitation services provided to help clients return to work

Payment per active claim

Social rehabilitation – serious injury

Non-vocational rehabilitation provided to clients with serious injuries

Individual projection

Social rehabilitation – non-serious injury

Non-vocational rehabilitation services provided to clients whose injuries are not serious

Payment decay

Medical Medical services, including GPs, physiotherapy, imaging services and other medical services


Elective surgery Surgical procedures Payment per active claim

Fatal weekly compensation Income support provided to surviving dependants of fatally injured clients


Independence allowance Compensation for long-term impairment Payment decay (modified)

73

7.2.4 The methodologies are:

• payment per active claim – the number of future active claims is projected based on the number of

starting claims, and an assumed discontinuance rate. The future average claim size by duration is

determined based on the starting average size and assumed inflation. The average size and number of

claims are multiplied at each future point in order to calculate the projected cash flows

• individual projection – future cash flows are projected based on the individual characteristics of each

claim, such as the client’s age and the severity of their injury

• payment decay – future cash flows are projected based on the starting level of payments and an

assumed reduction rate over time.

7.3 Key assumptions

7.3.1 The assumptions used in establishing the OCL are required to be ‘best estimate’ (ie set with no deliberate

bias towards conservatism or optimism). The liability produced from these assumptions is considered to be

a ‘central estimate’.

7.3.2 The key assumptions used in determining the OCL comprise two broad groups:

• economic assumptions – these apply to all payment types, being discount and underlying

inflation rates

• claims experience assumptions – these underlie estimates of future cash flows, primarily

rehabilitation rates, average payments per claim, superimposed inflation and claims handling

expenses. They are set separately by Account.

Economic assumptions

7.3.3 NZ IFRS 4 (PBE) requires discount rates to be ‘risk free’. For this purpose, the New Zealand Treasury

prescribes the risk-free rates used in financial accounting for all Crown entities. Short-term discount rates

reflect the yields of New Zealand Government bonds. Long-term discount rates, which cannot be observed

from New Zealand Government bond yields, are based on long-term historical norms. The Treasury

approach applies a smoothing methodology to transition between the last observed short-term rate and

the assumed long-term rate.

7.3.4 Graph 26 shows the discount rates used in the liability valuation as at 30 June 2016, together with the rates

used in the two previous valuations.

Graph 26 – Discount Rates – Application of the Yield Curve to Liability

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

2047

2049

2051

2053

2055

Dis

coun

t rat

e (%

)

1.52.02.53.03.54.04.55.05.56.0

Year ending 30 June 2016 valuation 2015 valuation 2014 valuation

7.3.5 In the past year, short- and medium-term rates have reduced significantly, in line with market yields

available on Government bonds. The assumed long-term rate prescribed by the Treasury has also

decreased from 5.5% to 4.75% per annum.

74

7.3.6 The Treasury has refined the methodology for the short-term consumer price index (CPI) assumption.

Previously it was based purely on the rate implied by the New Zealand inflation-indexed bond market. Now

only 50% weighting is given to market data, with the other 50% weighting based on market forecasts of

inflation. The assumed long-term inflation rate has also decreased from 2.5% to 2.0% per annum.

7.3.7 The assumptions for future average weekly earnings rates and the Labour Cost Index have been set relative

to the CPI assumptions, based on historical differences between the relevant indices. Graph 27 shows the

CPI assumptions used in the past three valuations.

Graph 27 – Inflation rate Assumptions20

17

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

2047

2049

2051

2053

2055

Infla

tion

rate

(%)

0.0

0.5

1.0

2.0

1.5

2.5

3.0

Year ending 30 June 2016 valuation 2015 valuation 2014 valuation

7.3.8 Inflation rates have fallen significantly since 2014, with short-term rates reducing from 2.10% to 1.63%

in 2015, before reducing further to 1.47% in 2016. As a result, the smoothing period to the long-term rate

increased in 2015, with a further increase in 2016.

7.3.9 The change in the yield curve for discount rates contributed a $6,355 million increase to the OCL, offset by a

$1,466 million decrease due to the fall in the projected inflation rates.

7.3.10 The inflation indices are applied to payment types according to economic drivers of cost. Table 19 shows the

inflation type that is used for each payment type.

Table 19 – Application of Inflation Assumptions

Inflation type Payment type used

Average weekly earnings, 1.0% above CPI

The starting level of non-fatal weekly compensation for new claims, as the payment is based on income at the date of accident

Labour Cost Index, 0.2% above CPI Non-fatal weekly compensation for growth in payments for continuing claims, as the legislation indexes payments to the Labour Cost Index

Fatal weekly compensation, medical, elective surgery, vocational rehabilitation and social rehabilitation

CPI Independence allowance, lump sum and funeral grants/benefits

Claims experience assumptions

7.3.11 Claims experience assumptions are reviewed annually in light of actual experience.

7.3.12 Short-term assumptions are set to follow recent experience quite closely before transitioning to long-term

levels. Long-term assumptions are changed infrequently, and reflect historical averages as the rates tend to

be volatile, often due to small amounts of data. Changes to long-term assumptions can have large impacts

and are only made once a clear shift in long-term expectations is apparent.

7.3.13 The main effect of changes to the assumptions for the 30 June 2016 valuation was a $127 million increase

in medical liability. This was due to a significant increase in counselling costs following the introduction of

integrated services for the sensitive claims contract (see 4.5.8 and 6.3.6).

7.3.14 We are satisfied that the assumptions adopted are appropriate for the purpose.

75

7.4 Sensitivity analysis

7.4.1 Given that many of ACC’s claims are very long term, assessments of the OCL are highly sensitive to long-

term assumptions. Graph 28 shows the OCL’s sensitivity to changes in several key assumptions, including

the major claim risks.

Graph 28 – Sensitivity of OCL to long-term assumptions

Impact on liability ($b)

Decrease in rate Increase in rate

Impact on liability ($b)

Decrease in assumption Increase in assumption

28.7

28.7

32.7

32.7

36.7

36.7

40.7

40.7

44.7

44.7

Key claims experience assumptions

1% change in inflation rates

10% reduction in medium- to long-term payments per active claim (PPACs) for non-fatal weekly compensation

10% change in mortality rates for social rehabilitation for serious injury

1% change in long-term continuance rates for elective surgery

1% change in long-term continuance rates for non-fatal weekly compensation

1% change in superimposed inflation - medical and social rehabilitation non-serious

1% change in superimposed inflation - elective surgery

1% change in the growth of care packages - social rehabilitation for serious injury

10% reduction in long-term PPACs for elective surgery

1% change in discount rates

Key economic assumptions

7.4.2 Claims experience indicates that the long-term continuance rates for weekly compensation are most at risk.

Superimposed inflation and long-term continuance rates for elective surgery are in line with expectations,

but remain on watch. The average cost of non-capital social rehabilitation for longer duration seriously

injured clients has increased above expectation recently. This is discussed further in Section 4.

7.4.3 These sensitivities can be considered in the context of levy rates/appropriations. The underlying annual

claim costs are approximately $3.8 billion, so a $1 billion change in the OCL, assuming that the effect is

spread over 10 years, translates to roughly a 3% change in levy rates/appropriations. However, the actual

impacts depend on other factors, and will not necessarily be distributed evenly across the Accounts.

7.4.4 Graph 29 shows the distribution of potential estimates of the OCL, excluding the risk margin. It illustrates

the wide variability in ACC’s financial performance, with the majority of the potential estimates falling

between $25 billion and $40 billion.

76

Graph 29 – Estimated Distribution of OCL at 30 June 2016

12 15 18 21 24 27 30 33 36 39 42 45 48 51

Net central estimate = $32.456 b

Provision = $36.663 b(75% probability level)

0

1

2

3

4

5

6

7

8

Incr

emen

tal p

roba

bilit

y (%

)

OCL as at 30 June 2016 ($b)

7.5 Risk margins

7.5.1 As noted, applying the above assumptions produces a ‘central estimate’ of the OCL. By central estimate

we mean that it is intended to have an equal likelihood of being overstated or understated. NZ IFRS 4

(PBE) requires that a risk margin be added to the OCL to increase the likelihood that the final OCL will be

sufficient to meet the claims to which it relates. NZ IFRS 4 (PBE) does not specify the risk margin level, but

industry practice is to add a margin to increase the liability to the 75% ‘sufficiency’ level. This means that

the reported OCL should be sufficient to meet claim payments 75% of the time. ACC follows this industry

norm.

7.5.2 Table 20 shows the risk margins added to the central estimate to meet the 75% sufficiency requirement.

These were last changed in 2014, and are reviewed every two or three years, or when changes in experience

indicate a review may be necessary. The total risk margin is a weighted average of the individual Accounts,

so may differ from year to year according to the individual Account OCLs, even where the margins by

Account have not changed.

Table 20 – Risk Margins

Account 2015/16

Earners’ 11.6%

Work 11.6%

Treatment Injury 13.8%

Motor Vehicle 13.8%

Non-Earners’ 13.8%

Total risk margin 13.0%

7.6 Claims handling expenses

7.6.1 The OCL must include an allowance for future claims’ handling expenses, based on the assumed costs

per expense driver for each expense type drawn from budgeted expenses. The expenses are split into

rehabilitation, entitlement, medical treatment, serious injury and hearing loss, and by Account, using an

activity-based apportionment model.

7.6.2 The liability excludes significant one-off costs for the Transformation programme included in the 2016/17

budget, as the assumption is for present value cost neutrality due to the future expected savings.

77

8. Investments

Summary

• Because of the nature of the liabilities, close matching of assets and liabilities is not achievable. Assets are allocated to

mitigate this mismatch risk, and to strike an appropriate balance between risk and expected future returns.

• In 2015/16 the Scheme’s investment return was 0.55% above benchmark after adjusting for investment expenses

and tax.

• We are satisfied that the investment policy is appropriate in relation to the Scheme liabilities within the constraints

identified.

8.0.1 ACC has developed its investment management approach over a number of years. As it is mainly a long-

term investor, the fundamental driver of investment decisions is a consideration of the long-term trade-off

between risk and reward. This requires detailed assessments of the potential additional rewards available

for any additional risk assumed. Risk is considered in relation to the stability both of the net asset position

and of levies and Government appropriations.

8.0.2 This section outlines ACC’s investment:

• return performance

• management approach and governance

• asset allocation strategy and how this is realised

• risks and how these are mitigated.

8.1 Investment returns

8.1.1 Overall Scheme investment return, at 10.22% after adjusting for investment expenses and tax (10.35%

gross), was 0.55% above benchmark in 2015/16. Investment return varies by Account due to their different

allocations, as shown in Table 21 (see 8.3.9). Each Account’s return was satisfactory in 2015/16.

8.1.2 Graph 30 compares investment performance with the benchmark over the past 24 years. It shows that

actual returns have been higher than benchmark in all years since 1995. The benchmark figures represent

the returns that would have been achieved had assets been invested according to benchmarks set in

advance by the ACC Board’s Investment Committee.

78

Graph 30 – Comparison of returns with Benchmark

Annu

al re

turn

s (%

)

-5

0

5

10

15

20

25

1993

1994

1995

1996

1997

1998

1999

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

Actual return Benchmark return

8.2 Management

8.2.1 Investment management is governed by the Investment Committee, a sub-committee of the Board. The

Committee:

• sets risk tolerances

• approves asset allocation benchmarks and major transactions in unlisted markets

• reviews investment performance and compliance

• provides delegations to the investment team more generally, which are subject to specified restrictions

(such as investment types) and limits (such as maximum and minimum permitted exposures).

8.2.2 The Committee reviews the strategic asset allocation benchmarks annually. In addition, it has started

making an interim adjustment between the full annual reviews, based on recommendations from

management. The more frequent update is, in part, a reflection of the growth in the size of the funds.

Making more frequent, but smaller, changes makes the implementation of revised benchmarks easier by

reducing the average size of the transactions required.

8.2.3 ACC’s investment team can act with discretion on matters delegated by the Investment Committee. These

include the discretion to vary the asset allocation from the benchmark weights within tolerances set by the

Committee. Movements outside these tolerances require Committee approval.

8.2.4 The investment portfolios are all actively managed. Almost all the New Zealand investments, and most

of the investments in Australia, are managed internally. Since April 2011, most investments outside

Australasia have been managed by external fund management companies, but a portion of the investment

in global equities has been managed internally.

8.2.5 The governance of the investment function is robust, particularly as it separates the duties of investment

managers from the compliance and reporting functions.

8.2.6 Although ACC has not adopted a formal statement of investment philosophy, the investment team’s

approach is documented and used as the basis for discussions with the Investment Committee. This

emphasises the need to:

• understand the causes and characteristics of market inefficiency

• recognise that particular forms of market inefficiencies will tend to change over time.

8.2.7 An implication of the last point is that, while value may be gained by early adopters of a particular strategy,

value is often lost by those who are late to follow the trend. In some cases, previously successful strategies

can become effective again once they have become less widely used.

79

8.3 Asset allocation

8.3.1 The high-level objective of the asset allocation strategy is to manage the returns and risks associated with

ACC’s investments in relation to its outstanding claims liability (OCL). Levy payers and taxpayers ultimately

bear the risks associated with investment returns being inadequate to meet future claim payments. The

basic investment risk/return trade-off is between:

• higher, but more stable, levy rates and appropriations through investing in lower return and lower risk

assets, versus

• lower and more variable levy rates and appropriations due to investments in higher risk assets with

potentially higher returns.

8.3.2 Asset allocation is one factor that helps in managing this trade-off. ACC needs to consider simultaneously

changes to the values of assets and liabilities and the interactions between them. For example, an asset

that changes value with economic movements in the opposite direction to claims liabilities would likely

reduce overall Scheme risk. In the context of net asset/liability risk, this asset would be considered low risk,

even though its return in isolation might be volatile.

8.3.3 In shaping the asset allocation by Account, the size and nature of the claims liabilities must be considered

together with the assets available for funding them:

• most claims are short term and do not pose any significant investment issues

• a small proportion of claims are for very long-term injuries. For example, a serious birth injury can

result in ACC supporting the client for their entire life. The liability profile for these serious injuries

involves a very long duration, with payments being subject to both general price inflation and

superimposed inflation. The Motor Vehicle, Non-Earners’ and Treatment Injury Accounts have longer

duration liabilities on average, due to these claims

• weekly compensation claims tend to have intermediate durations with natural maximums

as payments cease at retirement age, and are subject to wage-related inflation. Most weekly

compensation claims are in the Work and Earners’ Accounts, with the Work Account liability

dominated by these claims

• elective surgery claims are often long term due to the deterioration of the injury as the client ages, and

there may be a need for repeat procedures. As such they are subject to high superimposed inflation

levels. The Earners’ Account has the highest elective surgery liability, making the duration in this

Account slightly longer than for that in the Work Account.

8.3.4 In a closely matched portfolio, asset and liability values would respond to economic stresses in such a way

as to more or less offset. Net assets would then be relatively immune to external pressures. In practice, it is

not possible to invest Scheme assets to match the claims liabilities completely, or even closely.

8.3.5 The claims liabilities have a long average duration of close to 17 years across the Scheme, and are subject

to both general price inflation and superimposed inflation. The average duration of the claims liabilities

is much longer than that available from readily available investments. In addition, there is no investment

asset whose returns will exactly mirror the claims experience or medical inflation costs.

8.3.6 Given the nature of the liabilities, cash is generally a poor match for long-term claims liabilities, and

introduces a high degree of mismatch risk, particularly where long-term interest rates may decline.

8.3.7 A key asset allocation decision is how much incremental net asset risk should be taken above the minimum

level. This involves evaluating the trade-offs between higher expected investment returns and higher

asset/liability risk. In order to help make this decision, the portfolio is analysed in two stages:

• first, identify those assets that most closely match, and hence hedge, the claims liability. This

hypothetical basket of assets is termed the minimum risk portfolio. It minimises, but does not

80

eliminate, the mismatch risk. The minimum risk portfolio is typically dominated by Government bonds,

including a weighting for index-linked bonds. It also contains relatively small allocations of equity and

other asset classes

• second, identify how much discretionary risk ACC is prepared to adopt over and above the minimum

risk portfolio. This usually consists of substituting equities and other higher-returning assets in lieu of

bonds.

8.3.8 Graph 31 shows the estimated risk and return across all Accounts, as defined in terms of the asset allocation

framework described above. Risk is expressed as the sum of net asset/liability volatility aggregated across

all Accounts. The graph shows the estimated one standard deviation of expected annual outcomes in

2015/16. It shows that the:

• minimum risk portfolio is estimated to return $1.27 billion, with a net asset/liability risk of $2.50 billion

• portfolio benchmarks adopted increase the expected annual investment income to $1.68 billion, but

also raise the total risk to $2.74 billion. The incremental risk associated with moving from the minimum

risk portfolio to the actual benchmarks adopted added $410 million to the annual expected return, at a

cost of $240 million incremental volatility.

Graph 31 – Total reserve Account – Risk Vs Return

2,200 2,700 3,200

Cash

Benchmark

Minimum risk portfolio

500

1,000

1,500

2,000

Expe

cted

inve

stm

ent i

ncom

e ($

m)

Standard deviation of net asset/liability risk ($m)

8.3.9 Table 21 sets out the strategic and actual asset allocations for each of the five Accounts as at 30 June 2016,

and the total strategic asset allocation as at 30 June 2015. The strategic asset allocations represent the

benchmark holdings. Actual allocations may differ at any time within limits prescribed by the Investment

Committee. The investment team uses professional judgement to weigh the benefits of correcting these

deviations from target weights against the transaction costs of doing so. Where possible, asset exposures

are reset to target levels using derivative, mainly futures, positions.

81

Table 21 – Strategic Asset Allocation by Account and Total actual

Strategic asset allocation June 2016

Asset class

Motor Vehicle

Account


Earners’ Account

Work Account

Treatment Injury

Account Total

Actual asset

allocation 2016

Strategic asset

allocation 2015

New Zealand cash 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 5.4% 2.0%

New Zealand long bonds

39.5% 28.5% 39.0% 43.5% 31.5% 38.5% 33.7% 44.1%

New Zealand index-linked bonds

24.0% 23.0% 16.5% 14.0% 23.0% 19.5% 20.5% 15.7%

Global bonds 1.5% 3.0% 7.0% 8.0% 3.0% 4.8% 4.4% 4.5%

New Zealand property and infrastructure

3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.9% 3.3%

New Zealand equities 9.5% 12.0% 7.5% 8.5% 12.0% 9.2% 9.0% 9.1%

Australian equities 4.5% 5.0% 4.5% 4.5% 5.0% 4.6% 4.0% 4.0%

Global equities 15.5% 23.0% 20.0% 16.0% 20.0% 17.9% 19.0% 17.3%

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Interest rate derivative asset allocation overlay

10.0% 12.5% 4.0% 1.0% 12.0% 6.7% 5.7% 6.4%

Total equity weight (treating New Zealand property and infrastructure as ‘half equities’)

31.3% 41.8% 33.8% 30.8% 38.8% 33.5% 34.0% 32.1%

8.3.10 The variation between Accounts reflects their differing liability profiles and funding positions. In general,

Accounts with lower funding positions, and with longer duration claims liabilities, will tend to have asset

allocations more highly weighted towards equities.

8.3.11 The strategic asset allocation percentages for the individual Accounts were updated at the end of October

2015 following a full annual review, and again at the end of April 2016 following an interim review. The main

combined changes were:

• a movement from New Zealand long bonds to New Zealand index-linked bonds in October, to reflect

an increase in the market availability of these bonds. This was followed by a slight reduction in index-

linked bonds in April, as the increase in new issue supply was less than projected

• a shift from unhedged to hedged global equities in October to reflect a decline that had occurred in the

New Zealand dollar. In April, the global equity allocation was increased slightly, reflecting a change in

the expected returns for global equities relative to bonds.

8.3.12 In recent years, levies have been set to grow the total investment assets at a faster rate than the

corresponding liabilities as part of the transition to reach full funding of each of the levied Accounts. Now

these Accounts are fully funded, total investment assets are projected to grow more in line with the liability

growth rate. This is expected to be similar to Treasury’s projections for the growth rate of New Zealand’s

economy as a whole (nominal gross domestic product).

82

8.4 Investment risks

8.4.1 The main economic and financial scenarios that could affect net assets, and consequently levy rates and

Government appropriations, are:

• a significant decline in real interest rates

• a significant deterioration in the inflation outlook

• a significant decline in equity markets

• widespread credit defaults.

Declines in long-term interest rates

8.4.2 The value of the OCL is calculated using risk-free interest rates for many years into the future. Hence

declines in long-term interest rates have the effect of raising the value of the OCL. When this occurs,

assets tend to rise, but not by enough to fully offset the rise in the OCL. This is because there are no bonds

available with long enough maturities to match the payment profile of the liabilities. Furthermore, a portion

of the portfolio is invested in assets such as shares that may, or may not, go up in value when long-term

real interest rates decline.

8.4.3 For this reason an interest rate derivative asset allocation overlay is used to mitigate declines in long-term

real interest rates. Despite this overlay, the net asset position remains exposed to interest rate declines.

8.4.4 A shift in the economic climate towards sustained low interest rates would mean that the liability for

the cost of new claims would increase. The long-term projected return from the investment portfolio is

expected to be 4.5%-5.0% based on the 30 June 2016 economic settings, assuming future yields as built in

to the forward yield curve (see Graph 26 in 7.3). However, if bond yields remain at or fall below the 30 June

levels, it is likely these projected returns will fall.

Rises in future inflation

8.4.5 The majority of long-term claims are inflationary. However, a significant proportion of the investment

assets are not protected from inflation. These include the interest rate derivative asset allocation overlay

and most of the bonds. The market values of these nominal assets tend to fall if inflation expectations rise.

8.4.6 So-called ‘real assets’, such as equities and property, may provide some protection for long horizons.

However, history suggests that their returns may be adversely affected by rising inflation in the short term.

8.4.7 As the Scheme continues to mature, more serious-injury claims are being added and these extend the

average duration of the claim obligations. This tends to increase the exposure to the risk of a decline in

bond yields or a deterioration in the inflation outlook.

Adverse movements in share markets

8.4.8 ACC invests a portion of its portfolio in shares, even though their returns tend to have little correlation with

the valuation of the liabilities. This lack of liability matching is accepted because shares are expected to

generate higher returns than bonds in the long term. If equity markets decline sharply this places upward

pressure on levy rates and Government appropriations.

Credit and other risks

8.4.9 For internally managed portfolios, the Investment Committee has approved a set of credit criteria

that includes credit limits and portfolio limits. These credit limits are designed to limit exposure to

counterparties with a high risk of defaulting, while at the same time allowing ACC to seek higher

investment returns.

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8.4.10 Movements in exchange rates alter investments’ market values. When assessing the overall asset/liability

risk, the investment team takes into account the relationship between currency movements and other

market movements. For example, the New Zealand dollar tends to fall when equity markets decline. Having

some foreign currency exposure in the portfolio helps to offset the risk of a decline in equity markets.

8.4.11 There are no issues with meeting liquidity needs because ACC’s investments have a high proportion of

liquid cash and bonds and a fairly steady payment profile.

8.4.12 ACC has considered various other investment risks that can be categorised as extreme because they:

• are generally unlikely to arise

• would have a material impact if they were to arise

• would arise with little warning.

8.4.13 Such risks include the potential for a natural disaster in New Zealand, insolvency by ACC’s financial

custodian, or an Australasian banking crisis. Through this broader focus on investment risk, ACC

has determined where further action is warranted. For example, it is about to introduce more formal

mechanisms for monitoring and evaluating the ongoing creditworthiness of the Australasian banking

system and custodians.

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9. Solvency

Summary

• The levied Accounts and Earners’ portion of the Treatment Injury Account are all above the target funding position of

105% as outlined in the funding policy.

• The fully funded portions of both the Non-Earners’ Account and the Non-Earners’ portion of the Treatment Injury

Account have fallen below the 88% target.

• The Non-Earners’ Account funding position for the fully funded liabilities is projected to fall further below target in the

future, implying that higher appropriations will be needed in future years.

• Despite a 10-year funding horizon for levied Accounts and a 15% cap on levy increases, there is a high level of variability

in the possible future funding positions and levy rates. The trade-off between levy and funding position variability is

determined by the length of the funding horizon, with a longer horizon expressing a preference for greater levy stability,

at the expense of funding stability.

• The Non-Earners’ Account and Non-Earners’ portion of the Treatment Injury Account have a shorter funding horizon,

which would tend to lead to greater variability in the funding requirements from year to year. For the Treatment Injury

Account, the average duration of discounted claim cash flows is also very long, which will exacerbate this.

• While we consider that reinsurance is unlikely to be required at present, we recommend that modelling should be

reviewed within the next year.

9.0.1 Solvency for a regulated insurance company is assessed based on maintaining sufficient regulatory capital

to meet minimum solvency requirements. This includes determining whether the insurer holds sufficient

capital and reinsurance cover to protect the solvency position from potential exposure to extreme events.

9.0.2 As ACC is a statutory monopoly with the right to raise levies, the concept of solvency in its case needs to

be considered in a different light from that of a commercial insurer that faces insolvency risk. The target

solvency levels for each Account have been determined by the Government through the funding policies,

described in 5.2.

9.0.3 This section examines each Account’s current and projected funding positions against its funding policy.

We also examine the factors that can contribute to variability in these funding positions as they have

implications for levies and appropriations. As reinsurance could, in theory, be used to mitigate variability,

we also discuss ACC’s approach to this.

9.1 Funding positions

9.1.1 Table 22 summarises the balance sheet of each Account at 30 June 2016 and from there derives the funding

positions. These figures are different from those shown in the 2016 Annual Report because:

• the Annual Report lists ‘derivative financial instruments’ in assets and liabilities, while Table 22 records

the net derivative position through the net investment assets line

• the Work Account liabilities have been adjusted to include a liability for expected future-reported

gradual process claims due to past exposure. Gradual process claims are reported on a ‘claims made’

85

basis in the balance sheet. Levies collected include allowances for these claims. The additional liability

was $1,243 million as at 30 June 2016.

Table 22 – Consolidated Statement of Financial Position

2015/16

($M)

Motor Vehicle

Account


Earners’ Account

Work Account

Treatment Injury

Account Total 2014/15

Assets

Cash and cash equivalents 143 17 12 143 -22 282 303

Receivables 67 32 128 116 16 358 1,096

Accrued levy revenue 75 0 1,199 753 0 2,027 1,716

Net investment assets 10,972 3,318 8,831 8,760 3,617 35,498 32,370

Net intangible and other assets 10 16 27 24 5 82 104

Property, plant, and equipment 4 6 10 8 2 29 31

Total assets [A] 11,272 3,389 10,206 9,804 3,616 38,275 35,620

Less liabilities

Payables, accrued liabilities, and provisions [B]

309 133 252 237 103 1,035 1,598

Unearned levy liability [C] 215 0 1,101 557 0 1,873 1,723

Unexpired risk liability [D] 20 0 435 115 0 570 467

Outstanding claims liability [E] 9,916 7,768 7,470 7,610 5,141 37,905 31,413

Total liabilities 10,460 7,901 9,258 8,520 5,245 41,383 35,201

Net assets 813 -4,511 948 1,285 -1,629 -3,108 419

Funding position ([A] − [B] − [C] − [D]) ÷ [E]

108.2% 41.9% 112.7% 116.9% 68.3% 91.8% 101.3%

9.1.2 For the levied Accounts, and the Earners’ portion of the Treatment Injury Account, the funding policy

targets a funding position of 105%. For the fully funded portions of both the Non-Earners’ Account and the

Non-Earners’ portion of the Treatment Injury Account, the target is 88%. These targets are lower than

100% because the funding policy excludes the risk margin (see 5.2.5). Both these Accounts also contain

liabilities that are funded on a pay-as-you-go (PAYG) basis, which effectively targets 0%, as costs are met

only in the year that they occur.

9.1.3 The total Scheme funding position has decreased from 2014/15. If each Account were funded at target,

based on the outstanding claims liability (OCL) at 30 June 2016, the overall target funding position would be

88.3%. The 30 June 2016 position of 91.8% is higher than that, but at an individual level some Accounts are

above target and some below. Note that each Account is managed with its own funding policy, and needs

to meet its own funding targets.

9.1.4 Table 23 shows the funding positions of each Account for the past three years. In addition, the funding

positions of the fully funded portion of the Non-Earners’ Account, and the Earners’ and Non-Earners’ fully

funded portions of the Treatment Injury Account, are shown to allow comparisons to those two Accounts’

funding policies.

86

Table 23 – Funding Positions in Past Three Years

As at 30 June

2014 2015 2016 Target

Motor Vehicle Account 100% 116% 108% 105%

Non-Earners’ Account 49% 49% 42%

Fully funded portion 107% 99% 80% 88%

Earners’ Account 132% 132% 113% 105%

Work Account 117% 119% 117% 105%

Treatment Injury Account 73% 78% 68%

Earners’ portion 108% 115% 111% 105%

Non-Earners’ fully funded portion 98% 99% 80% 88%

Total 96% 101% 92%

9.1.5 The funding positions for all Accounts have decreased during 2015/16 following increases for most Accounts

in 2014/15. Significant decreases in risk-free discount rates during the year drove increases in the OCL,

only partially offset by asset movements. In addition, claims experience has generally been higher than

assumed.

9.1.6 The levied Accounts and Earners’ portion of the Treatment Injury Account are all still above the target

funding position of 105% set by the funding policy.

9.1.7 The fully funded portions of both the Non-Earners’ Account and the Non-Earners’ portion of the

Treatment Injury Account have fallen below the 88% target. In the past two rounds, Cabinet has approved

appropriations at a level lower than required to fully fund the post-2001 non-earner claims, which has

contributed to this.

9.1.8 Because of the PAYG liabilities, the Non-Earners’ and Treatment Injury Accounts’ total solvency positions

appear low when viewed at the Account level.

9.1.9 The Treatment Injury Account’s total funding position is driven primarily by the Non-Earners’ portion,

which makes up 73% of the total liability. In the coming years, the Account’s funding position is expected to

increase relatively rapidly as the post-2001 claims, which are fully funded, will make up a larger proportion

of the Account’s total claims.

9.1.10 Note that the funding policy for the Non-Earners’ Account is under review. The existing policy has a

shorter funding horizon than for the levied Accounts, so movements in the funding position have larger

proportional impacts than would be the case if using a longer horizon.

9.2 Projections of future funding positions

9.2.1 This section presents projections of possible future funding positions for the levied Accounts and the Non-

Earners’ Account. The funding position for the Treatment Injury Account is shown in two parts, the Non-

Earners’ portion and the Earners’ portion, because of the different funding policies.

9.2.2 Levies used for these projections are as set by Cabinet for the 2016/17 year, and are taken from the 2017/19

consultation for future years. Assumed future appropriation amounts are those that were approved by

Cabinet as part of the 2016 Budget announced in May 2016.

87

Projections – levied Accounts

9.2.3 For the levied Accounts, ACC consulted on levies for the 2017/18 and 2018/19 years (the 2017/19 levy

consultation). Note that levies for the Work and Earners’ Accounts apply from 1 April of the year in which

they come into effect, whereas the Motor Vehicle levies apply from 1 July.

9.2.4 The consultation levy rates are based on projections from a balance date of 31 March 2016. Table 24

compares the funding positions used for the pricing projections to those at the end of the financial year (in

9.1). Levies are recommended, and eventually set, well in advance of the dates from which they apply. The

actual funding positions will fluctuate from those assumed between pricing and the eventual application

of levy rates, but the funding policies for these Accounts are designed to smooth the effects of these

fluctuations.

Table 24 – Comparison of Funding Positions at 31 March and 30 June 2016

Account31 March

201630 June

2016 Target

Motor Vehicle 111% 108% 105%

Earners’ 125% 113% 105%

Work 123% 117% 105%

9.2.5 Graph 32 sets out the future levy rates included in the consultation and the corresponding projected

funding positions.

Graph 32 – Levied Accounts’ Assumed Levy Rates and corresponding projected funding positions

2016

/17

2016

/17

2016

/17

2015

/16

2015

/16

2015

/16

2017

/18

2017

/18

2017

/18

2018

/19

2018

/19

2018

/19

2019

/20

2019

/20

2019

/20

2020

/21

2020

/21

2020

/21

$194.25$130.26 $113.94 $129.33

$1.26

111% 113% 113% 113% 112% 112% 125% 123% 122% 120% 120% 119% 123% 123% 122% 121% 120%124%

$1.21 $1.25 $1.31

$0.90 $0.80 $0.72 $0.77

Levy year

Motor Vehicle Account Projected funding position at end of levy year

Earners’ Account Target funding position at end of levy year

Work Account

9.2.6 For the Earners’ Account, the levy rates include a component to fund treatment injury claims for earners,

shown as the shaded region at the top of each bar. Without this, the Earners’ Account levy rates would be

approximately 8% lower.

9.2.7 For the Motor Vehicle and Work Accounts, the funding positions for the 2016/17 balance date are higher

than for the previous year. This is because their levy rates, set in the previous levy round, are higher than

proved necessary, given subsequent changes in economic conditions.

9.2.8 The funding positions are projected to decrease gradually towards the target of 105%. The funding policy

aims to move towards this target over a 10-year period. In each successive year, any remaining surplus or

deficit is set to be recovered in the subsequent 10 years, with the result that the target is approached in

smaller increments.

88

Projections – Non-Earners’ and Treatment Injury Accounts

9.2.9 As discussed in 5.2.5 and above, the Non-Earners’ Account is funded in two portions. The PAYG portion

applies to pre-2001 claims. The fully funded portion, for post-2001 claims, excludes risk margins, meaning

the funding target for post-2001 claims is 88%.

9.2.10 The PAYG liability, as a percentage of the total Non-Earners’ Account liability, is projected to reduce over

the projection period (see Graph 33). The funding position for the fully funded portion is projected to reduce

over the same period, as a result of the appropriations in the past two years being lower than requested.

Overall, the Account’s funding position is projected to remain below 50% (see Graph 34).

Graph 33 – Non-earners’ liability split by fully funded and pay-as-you-go

0

1

2

3

4

5

6

7

8

Non-Earners’ Account PAYG portion Treatment Injury Account Non-Earners’ PAYG portion

Non-Earners’ Account fully funded portion Treatment Injury Account Non-Earners’ fully funded portion

Liab

ility

($b)

2016/17 2017/18 2018/19 2019/20 2020/21

9.2.11 As described in 5.2.8, the Treatment Injury Account is funded in three parts:

• earners’ treatment injury claims are fully funded from a portion of the Earners’ levy, with a target

position of 105%, as for the Earners’ Account

• non-earners’ post-2001 treatment injury claims are fully funded with a target position of 88%

• non-earners’ pre-2001 treatment injury claims are funded on a PAYG basis.

9.2.12 The funding position for the Earners’ portion of the Treatment Injury Account is projected to reduce

towards the 105% funding target.

9.2.13 For non-earners’ treatment injury claims, the funding position is projected to increase in the period as the

PAYG liability reduces relative to the fully funded portion (as shown in Graph 33).

9.2.14 The total projected funding position for non-earners’ treatment injury claims remains below 70%

throughout the projection period.

9.2.15 Graph 34 illustrates the assumed appropriation amounts and levy rates for the Non-Earners’ and

Treatment Injury Accounts, and the resulting projected funding positions.

89

Graph 34 – Non-Earners’ and Treatment Injury Accounts’ Assumed appropriations, levy rates and corresponding projected funding Positions

2016

/17

2016

/17

2016

/17

2017

/18

2017

/18

2017

/18

2018

/19

2018

/19

2018

/19

2019

/20

2019

/20

2019

/20

2020

/21

2020

/21

2020

/21

$1.09b $1.15b $1.24b$1.24b $1.24b

$0.114 $0.110 $0.110

110%111%112%113%114%62%47% 48% 48% 48% 48% 63% 64% 66% 67%

$143m $158m $176m $176m $176m

Non-Earners’ Account appropriation Projected funding position

Treatment Injury Account appropriation for Non-Earners’ portion Target funding position

Treatment Injury Account levy rate for Earners’ portion

9.3 Variability in levy rates, appropriations, and funding positions

Projection method

9.3.1 Changes in economic assumptions and claims experience can lead to variability in levy rates and funding

positions.

9.3.2 To illustrate this, we have used ACC’s dynamic financial analysis tool to generate 500 simulations of

possible financial outcomes for the Earners’ Account.

9.3.3 Variability is modelled in both the assets and the liabilities by allowing for:

• variations in economic factors, including the earned rates of investment return, inflation rates, and

discount rates

• changes in the claims experience affecting the number of claims, continuance rates, average

payments, and superimposed inflation.

9.3.4 It is assumed that the 2017/18 and 2018/19 levy rates are the same as proposed in the 2017/19 levy

consultation. Although levies for 2019/20 and beyond are included in the levy path for consultation, there is

significant uncertainty around the rates that will eventually be consulted on in 2019/20 and beyond, due to

changes in economic factors and claims experience.

9.3.5 For each simulation, the assumptions are allowed to change in each future year and then the levies are

recalculated at those points by applying the funding policy.

Variability in levy paths

9.3.6 Graph 35 shows the consultation levy path as well as six of the 500 simulated paths for the Earners’

Account. These simulations have been selected to illustrate a range of possible future levy paths, but do

not represent the full distribution of possible results. For example, simulation 1 shows consistent year-on-

year increases in future levies, while simulation 3 shows a different levy path with future levies alternating

between increases and decreases.

9.3.7 The six scenarios are all centred on the consultation levy path. To give an idea of the range of the outcomes,

7% of the 500 scenarios resulted in a 2028 levy rate higher than the simulation 1 result, and 12% ended

below the simulation 6 result.

90

Graph 35 – Earners’ Account levy Rate VARIABILITY

35Le

vy ra

te

0.80

1.20

1.60

2.00

Levy year ending 31 March Historical rates Consultation rates Simulation 1 Simulation 2 Simulation 3 Simulation 4 Simulation 5 Simulation 6

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

9.3.8 The paths give an indication of the year-on-year variability in the levies due to changes in economic factors

and/or claims experience. This is despite the 10-year smoothing horizon in the funding policy. A shorter

horizon would exacerbate this variability, but would result in less variability in the funding position.

Variability in funding positions

9.3.9 Within the projections, levies are allowed to vary in accordance with the funding policy as the simulated

conditions unfold. The funding positions based on the recalculated levy rates are generated within the

simulations. Graph 36 shows the probabilities of the Earners’ Account’s funding position being below 100%,

between 100% and 110% (the target funding band), and above 110%.

Graph 36 – Projection of funding position probabilities for EARNERS’ Account

2016/17 2017/18 2018/19 2019/20 2020/21 2021/22

%

0

20

40

60

80

100

Below 100% Between 100% and 110% Above 110%

9.3.10 From this, it can be seen that for the Earners’ Account:

• the probability of reaching, and staying within, the target funding band is low over a five-year time

horizon

• there is a relatively low risk of the funding position falling below 100% in the short- to medium-term.

This is unsurprising given the high funding position at 31 March.

9.3.11 Although simulations have not been performed for the Work and Motor Vehicle Accounts:

• we would expect the Work Account results to be similar to those of the Earners’ Account. The 31 March

2016 funding position for the Earners’ Account is 125%, with the Work Account at 123% (see Table 24 in

9.2.4). The claims profiles for the Accounts are also similar

• there would be a higher risk of the funding position falling below 100% in the Motor Vehicle Account

than in the Earners’ and Work Accounts. This is due to the lower funding position, and greater

uncertainty arising from the longer duration claims in the Motor Vehicle Account.

91

9.3.12 Graph 37 shows the probability of the fully funded portion of the Non-Earners’ Account’s funding position

falling below the 88% funding target using the approved appropriation path. Note that this is done using

the projections carried out at 31 December 2015 when, in fact, the position had subsequently fallen below

target as at 30 June 2016.

9.3.13 While appropriations have been assumed to continue at the levels approved by Cabinet, Cabinet has yet to

consider the appropriation for 2021/22, so it is assumed to be at the level indicated by the funding policy for

the fully funded portion.

Graph 37 – Projection of funding position Probabilities for Non-Earners’ Account (Fully Funded Portion)

2016/17 2017/18 2018/19 2019/20 2020/21 2021/22

%

0

20

40

60

80

100

Below 88% Above 88%

9.3.14 The risk of the funding position falling below 88% is high, and increases through the projection period.

Higher-than-expected claims experience, partially offset by the higher risk-free discount rates over the

year, led to an increase in the appropriation requested. However, lower approved appropriations in the past

two years have resulted in lower projected funding positions.

9.3.15 The requested appropriations were based on best estimates of future experience. Although Cabinet has

not fully granted the requested amounts for the past two years, at the time of the last appropriation round,

there was still a roughly 20% probability that the approved appropriations might prove to be sufficient,

as represented by the green portion of each bar in Graph 37. In order for this to be the case, experience

in one or more key areas would need to prove better than what has been assumed. For example, future

claims volumes would need to improve relative to assumed levels, client outcomes would need to show

improvement through the cost-effective provision of social rehabilitation support, or interest rates would

need to be higher than assumed.

9.3.16 It should be noted that the next appropriation will be set with reference to the position as at 30 June 2016,

at which point the Account was underfunded, and interest rates had fallen further, than the position shown

in Graph 37.

9.3.17 With no competitive pressure on ACC, as a statutory monopoly, it is important that management holds

itself to account for claims experience where it has influence. ACC needs to understand what would

need to be true in order for the approved funding levels to prove sufficient, and ensure that requested

appropriations are not allowed to inflate beyond reasonable levels.

9.3.18 On the other hand, ACC must provide cover to clients as defined under legislation. To the extent that claims

experience responds to drivers that are genuinely beyond management’s influence, it needs to be able

to demonstrate this effectively to Government, to ensure that systematic under-funding does not have

unanticipated effects on future funding decisions.

Sources of variability

9.3.19 Graph 38 illustrates the variability of the potential 2019/20 consultation levy rates for the Earners’ Account,

and the starting funding positions at 31 March 2018, the next date from which levy pricing projections will

be carried out. Simulations assume that the 2017/19 levies are as proposed in the 2017/19 levy consultation.

92

We have measured the variability of the levy rates and funding positions as the standard deviation of the

distribution of each, generated by 500 simulated possible outcomes. A high standard deviation means the

results are more variable.

9.3.20 Both claims experience and economic factors can affect the 31 March 2018 funding position from which

the 2019/20 rates will be set, as can the expected cost of new claims for the 2019/20 levy period. Any

deterioration or improvement in the funding position will result in a requirement to collect more or less

funds through future levies. However, the funding policy requires that the levy adjustment for a deficit or

surplus in the starting funding position be spread over 10 years, which reduces the resulting levy variability.

Upward variability in levy rates is also dampened somewhat due to the 15% cap that applies to increases

from one period to the next.

Graph 38 – Variability of levy rates and funding positions for the Earners’ Account

0 5 10 15 20 25

A

BC

D

0.00

0.05

0.10

0.15

0.20

0.25

2019

/20

levy

rate

var

iabi

lity

($)

31 March 2018 funding position variability (%)

A – economic variability B – claims variability

C – claims and economic variability – no 15% cap D – claims and economic variability – with 15% cap

9.3.21 For the Earners’ Account, the variability from claims payments has a greater effect on levy and funding

outcomes than economic variability.

9.3.22 For example, data point A shows that due to economic variability, the spread of the funding positions and

levy rates is approximately 11% and $0.12 respectively. In this set of simulations, this means that roughly

two-thirds of the possible outcomes resulted in levy rates between $1.15 and $1.38, and the same proportion

gave funding positions between 107% and 129%.

9.3.23 Data point C shows the variability when economic factors and claims are both allowed to vary, assuming no

cap is applied to future possible levy increases.

9.3.24 The variability in levy rates from the combined scenarios is reduced once the 15% cap is applied (data point

D). There is no change to the 31 March 2018 funding position variability as the cap on the 2019/20 levy rate

does not affect the position at 31 March 2018.

9.3.25 The relative sensitivity of levy rates to claims experience and economic factors is likely to differ from this for

both the Work and Motor Vehicle Accounts. The Work Account is likely to show a similar relationship, but

because the discounted cash flows for new-year claims are of a slightly longer average duration (6.9 years

compared with 5.1 years for the Earners’ Account), economic variability will be somewhat greater relative to

claims variability. For the Motor Vehicle Account, with a significantly longer duration of 15 years, this will be

even more the case.

9.3.26 The average duration in the Treatment Injury Account, at around 20 years for non-earner claims, is longer

than that in the Motor Vehicle Account. For the Non-Earners’ Account, the discounted new-year claims

cash flow duration of 5.2 years is similar to that for the Earners’ Account. In addition, the funding horizon

for the policy for the fully funded Non-Earners’ portions is three years, as opposed to 10 years for the levied

Accounts. For these reasons, the variability in appropriations and funding positions for the Non-Earners’

Account will be greater than for the Earners’ Account, while the Treatment Injury Account will have greater

variability than all the levied Accounts.

93

9.3.27 From the above, the key message is that levy rates and appropriations are heavily influenced by claims

and economic drivers. The 10-year funding horizon of the levied Accounts’ funding policy reduces the

variability caused by movements in the funding position in respect of claims already incurred. The 15% cap

on increases to levies also acts to dampen variability. Despite this, over time, levies will move in response to

changes in experience, and these movements could be significant.

9.4 Reinsurance

9.4.1 Reinsurance cover is used in the insurance industry to protect the solvency position from potential exposure

to extreme events. This can take the form of cover for the risk of an individual high-cost claim, or for a large

number of claims from one insured event.

9.4.2 For ACC, given the large number of claims and the size of the balance sheet, even very long-term claims are

not large enough to affect the Scheme’s net assets to a material degree. This means that ACC has no need

to acquire reinsurance for individual claim risks.

9.4.3 From time-to-time, the Board reconsiders the need for reinsurance against a large number of claims arising

from a catastrophic event (primarily earthquakes, but also potentially tsunamis and volcanic eruptions).

Based on simulations provided by GNS Science, and the experience from the February 2011 Christchurch

earthquake, the Board concluded that the amounts involved did not warrant the purchase of catastrophe

reinsurance, particularly noting ACC’s ability to post-fund these costs and the high cost of securing

reinsurance cover. This decision was last reviewed in 2012.

9.4.4 In our opinion, there is unlikely to be a requirement for reinsurance cover against either individual risks

or catastrophic events, as the expected costs were not significant in terms of the total balance sheet

when last assessed. We also consider it unlikely that ACC could acquire reinsurance at a commercially

acceptable price.

9.4.5 However, the models for such risks are updated periodically and we recommend that the Board review the

need for reinsurance during the coming year.

94

10. Risk management

Summary

• While progress has been made, the implementation of the risk strategy is behind schedule.

• Management has revisited aspects of the implementation, the result being a greater immediate focus on assuring the

foundational elements are in place.

• It will likely take another two or three years for ACC to reach the desired level of risk maturity.

10.0.1 This section outlines the framework and performance of ACC’s risk management strategy, and describes

the organisational risks included in 2015/16 risk reporting.

10.0.2 A review of ACC’s risk framework will occur in 2016/17. This will include the development of an enterprise

risk appetite statement which will provide the basis for risk-based decision-making. It is expected that the

framework review will result in a new approach to reporting on the enterprise risk profile. Reports will be

more specific about the matters of most concern, the actions management has taken or is planning to take,

and any further gaps that ACC needs to address.

10.0.3 We expect the next Financial Condition Report to align with this approach.

10.1 Framework

10.1.1 ACC’s enterprise risk management framework, adopted in 2010, is based on the ‘three lines of defence’

model. Roles and responsibilities under this model are:

• first line – staff and management have primary responsibility for identifying and managing risks within

their business groups, and ensuring that risk management is fully integrated in everyday activities

• second line – the Risk and Compliance Office supports the first line in performing their role. Its risk

management monitoring extends to specialist functions such as health and safety, privacy, business

continuity, and data security

• third line – the Assurance Services function provides the third line of defence through independent

assurance to the Board and senior management of the effectiveness of risk management, control, and

governance processes.

10.1.2 Financial risks are managed through regular monitoring of, and reports on, the outstanding claims liability

valuation, the annual levy rate and Government appropriation calculations, asset and liability modelling,

and regular Scheme monitoring reports on changes in the claims experience. These are part of the day-to-

day functions of the finance, actuarial and investment teams.

10.2 Performance of the risk system

10.2.1 Overall, the implementation of the risk management strategy is behind schedule. However, progress has

been made, and work is ongoing to further develop and improve the performance of the risk system.

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10.2.2 Risk awareness and management practices are improving in most parts of the organisation. The risk

operating model is not yet working fully effectively, and management attention is required to ensure

effective risk-based decision-making. It will likely take another two or three years before the appropriate

attitudes, behaviours, practices, and tools align to demonstrate the desired level of risk maturity.

10.2.3 The risk system was audited in June 2014, and ACC’s risk maturity was assessed as being at the lower end of

the measured range.

10.2.4 As a result, and to increase ACC’s risk maturity, the Executive Risk and Compliance Committee (ERCC)

approved a risk management strategy in December 2014.

10.2.5 Assurance Services conducted quarterly reviews throughout 2015/16 of the actions raised from their 2014

review. The most recent review, in May 2016, found that:

• the risk management vision is well articulated, and agreed to, at the executive level

• the strategy is driving improvements to risk information that are informing the quality and depth of

executive risk discussions

• some key foundation elements of a clear and cohesive risk management system have yet to be

developed and embedded

• the work programme has been ambitious and should be reprioritised to focus on critical initiatives and

effective delivery.

10.2.6 Following this, the implementation approach was revised in June 2016 and now comprises four existing

and two new components, described in Table 25. A phased work programme has commenced to deliver

essential risk foundation elements quickly.

Table 25 – Components of Risk Management Strategy

Component Steps required

Risk fundamentals Revise the risk framework including refreshing the risk policy, revising risk categories, consequences matrices, registers, processes, and training

Implement a risk operating model Define and introduce clear risk roles and responsibilities within the first line of defence

Increase the number of full-time risk practitioners within the first line of defence

Implement an integrated risk management solution

Source and implement a governance, risk and compliance tool to support risk management practices

Improve legislative compliance monitoring and reporting

Identify all relevant Acts and obligations for ACC

Design and implement a risk-based approach to performing quarterly compliance reviews

Produce quarterly compliance review findings

Establish risk appetite Reset the risk appetite concept – a simpler approach

Develop an entity risk appetite statement

Describe risk thresholds and tolerances

Develop primary and secondary risk indicators

Produce risk appetite profiles

Change management Develop a change management plan to ensure that the risk management strategy is fully and effectively communicated, implemented, and embedded

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10.2.7 A full reassessment of the risk maturity is due during 2016/17. Based on the work done to date, it is expected

that the risk maturity will have increased from that reported in June 2014.

10.3 ACC’s organisational risks

10.3.1 The ERCC reviews organisational risks quarterly and informs the Board which then assesses the

appropriateness of the management actions. The Board Risk Assurance and Audit Committee, on behalf of

the Board, assesses the framework and the mechanisms by which the risk information is produced.

10.3.2 Table 26 describes seven high-level risk priorities that contribute to ACC’s organisational risk profile, and

management’s responses, as presented to the ERCC during 2015/16. Under the revised risk framework,

future reporting will focus on the top 10 to 15 risks the organisation faces.

Table 26 – Risk Priorities In Organisation Risk Profile

Profile Risk Management response

1. Operational performance

Achieving operational objectives alongside transformational change affects the ability to maintain performance, improve customer satisfaction, and contain privacy breaches

Business plans are aligned with strategic intentions, and performance is monitored monthly against organisational measures

An initial analysis of rehabilitation performance has been completed, and recommendations arising from this are being implemented

A privacy maturity plan has been approved, with the aim being to ensure that the Transformation programme’s privacy-by-design practices will manage privacy breaches sustainably

2. Change management

The size and scope of transformational change and demands on staff affect the ability to deliver and absorb sustainable change

The Board has approved ACC’s target operating model and the Transformation programme business case

A preferred Transformation partner is in place to increase ACC’s change capability and capacity

Initiatives are underway to increase organisational change maturity

A ‘Functional leadership of change’ model has been implemented to enhance the organisational change maturity through clear accountability and business ownership

3. Our people The organisation drives changes to processes and technology that are not aligned to the cultural change required for transformation

A survey of 50% of the organisation using the organisational culture index was conducted in May 2016 to assess the culture. This will inform the development of a culture strategy, and identify initiatives to support that strategy

A specific role, responsible for ensuring alignment and visibility of human resource activities between current processes and the Transformation programme, has been established

All initiatives that have a significant people impact are reviewed to ensure alignment with the target operating model. This includes ensuring proposed changes align with the desired culture

4. Financial performance

New claim volumes, long-term claims experience, and court decisions affect our financial performance

Investigations are underway to understand the drivers of experience for:

• long-term claims (see 1.1.25)

• social rehabilitation capital payments made to non-seriously injured clients (see 4.2.27)

A formal review of the integrated services for sensitive claims and the long-term outcomes was completed in August 2016 (see 6.3.6)

5. Strategic alignment Inadequate coordination and alignment of ACC’s operational and strategic activities affects the ability to achieve strategic objectives

Business planning is aligned with strategic intentions

The enterprise roadmap aligns operational and strategic activities

People consideration is being integrated into business planning processes to ensure alignment with the people strategy

Continued …

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Profile Risk Management response

6. Stakeholder relationships

Dependence on stakeholders, and the effectiveness of the way relationships are managed, affect customer experience and outcomes

A strategic enterprise stakeholder engagement plan has been developed. This will be the first of multiple phases to improve maturity in this area

A newly developed supplier management framework is being embedded across the organisation

Clinical Services has successfully implemented a health sector stakeholder clinician-to-clinician approach

The provider services strategy is developing stronger links between costs and health outcomes (see 2.3.28)

7. Quality of decision-making

Our data quality, tools, capability, and culture affect our ability to make informed decisions consistently

The effectiveness of the Operational Policy Committee has been reviewed, and options to strengthen the governance approach have been developed for implementation

Integrity Services is leading work to deploy a data analytics proof of value

The Risk and Compliance Office is leading the development of ACC’s organisational risk appetite

The enterprise business rules project is progressing, and aims to increase the consistency of decision-making

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APPENDIX A

Claim frequencies by Account

A.1 Claim frequency measures the growth in claim numbers above (or below) the growth in population. The

claim frequencies shown in this section are for the total number of claims for accidents that occur each

year. This includes an estimate of the number of claims that have not yet been reported. Entitlement claim

frequencies measure the growth in claims that receive funding for elective surgery, rehabilitation, and/or

compensation support in addition to medical treatment.

A.2 Claims for which it is expected that ACC will incur costs are measured. Where a claim is handled through

the bulk-funded public health acute services, with no further support from ACC, we are not able to

determine if a payment has been made. We therefore exclude these claims. Also excluded are work-related

claims from employers in the Accredited Employers Programme, as these are not covered by the levies set

for the Work Account.

A.3 Presented are the historical and projected frequencies that were used in the latest levy setting and Non-

Earners’ Account appropriation calculations. Section 4 of this report discusses recent trends in claim

frequencies, while Section 5 identifies how these have been projected for consulting on future levy rates,

and requesting Government appropriations.


A.4 The Motor Vehicle Account covers injuries where moving motor vehicles are involved, including injuries to

pedestrians and bicyclists hit by motor vehicles while on public roads (with a few exceptions). The Account

is funded by levies paid by motor vehicle owners and petrol users. The levy payers are both individuals and

commercial employers.

A.5 Graph 39 shows the annual historical and projected claim frequency rates for the Account.

Graph 39 – Motor Vehicle Account: Estimated Claim Frequency Rates per 1,000 Motor Vehicles

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A.6 Claim frequencies have recently started increasing after several years of decreases. This increase is

consistent with overall claims experience across all Accounts.

A.7 Around 20% of claims in this Account receive entitlement support. More than half the costs for new-year

motor vehicle claims are long-term costs such as weekly compensation and home help, which aid those

with long-term serious injuries. The entitlement claim frequency is dominated by weekly compensation

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claims, which increased during 2015/16. The projections for the 2017/19 levies have assumed no future

increase in entitlement claim frequency.

A.8 The outstanding claims liability (OCL) of this Account is most sensitive to assumptions for long-term

support for serious injuries.


A.9 The Non-Earners’ Account is funded through Government appropriations from general taxation to

cover personal injuries to people who are not employed. A large number of these clients are children or

superannuitants. The Account covers a wide range of injuries, including those that happen in the home,

during sport, in and on the water, and in public and commercial environments (eg schools and parks,

supermarkets and shopping malls). However, it excludes injuries covered by the Motor Vehicle and

Treatment Injury Accounts.

A.10 There has been a sizeable increase in claim frequencies in the past three years. Graph 40 shows annual

claim frequency rates for the Account.

Graph 40 – Non-Earners’ Account: Estimated Claim Frequency Rates per 1,000 Non-Earners

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A.11 Less than 5% of claims receive entitlement support, which is mostly for home care and assistance. The

remaining 95% of claims receive short-term medical treatment only, and the bulk-funded public health

acute services are a large portion of the new-year costs in this Account.

A.12 The increase in historical and projected entitlement claim frequency is driven by an increase in the number

of non-serious injury claims receiving social rehabilitation support.

Earners’ Account

A.13 The Earners’ Account is funded by levies paid by earners to cover personal injuries that are not related to

their employment, happening on, or after, 1 July 1992 when the Account was established. Prior to July 1992,

these injuries were funded through levies paid by employers and the self-employed. The Account covers

a wide range of injuries, including those that happen in the home, during sport, in and on the water, and

in public and commercial environments. It excludes injuries covered by the Motor Vehicle and Treatment

Injury Accounts.

A.14 Claim frequencies have been increasing over the past few years, particularly for entitlement claims, which

make up around 10% of claims. This Account was the first to exhibit increases in claim frequencies, which

are now one of the main drivers of the overall increase in claims experience discussed in Section 3. Graph 41

shows annual claim frequency rates for the Earners’ Account.

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Graph 41 – Earners’ Account: Estimated Claim Frequency Rates per 1,000 Earners

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A.15 The Earners’ Account is dominated by low severity claims that require short-term support, and it is the

volume of these claims that has continued to increase. As a consequence, the Earners’ Account levy tends

to be more susceptible to changes in short-term claims volume than levies for the other Accounts. The

projections for the 2017/19 levies have included a 2% per annum increase in the frequency of entitlement

claims for three years from 2015/16.

A.16 Around 45% of the cost of new-year claims in the Earners’ Account is for weekly compensation, and around

50% of the Scheme’s total weekly compensation costs come from this Account.

Work Account

A.17 The Work Account is funded by levies paid by employers and the self-employed to cover people who have

work-related personal injuries on or after 1 July 1974, and had non-work injuries between 1 July 1974 and

30 June 1992.

A.18 Total claim frequencies in this Account have been relatively flat for the past few years, but have just started

to increase. In contrast, entitlement claim frequencies have been increasing since 2011/12. Graph 42 shows

the annual claim frequency rates for the Account.

Graph 42 – Work Account: Estimated Claim Frequency Rates per 1,000 Employed People

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A.19 Almost 85% of claims in the Work Account are medical only, and around 50% of the costs of new-year

claims are for weekly compensation. The projections for the 2017/19 levies have included a 1% per annum

increase in the frequency of entitlement claims for three years from 2015/16.

A.20 The OCL for this Account is most sensitive to changes in the long-term rehabilitation rates for weekly

compensation claims.

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Treatment Injury Account

A.21 The Treatment Injury Account covers injuries that:

• happen to people when they are receiving medical treatment, and

• are not normal complications or risks arising from the treatment.

Treatment injuries to earners are funded by levies paid by earners, and treatment injuries to non-earners

are funded by Government appropriations. Health care providers do not directly pay levies for treatment

injury cover.

A.22 Before 2005, the Account was called the Medical Misadventure Account and mostly covered serious

treatment injuries. On 1 July 2005, the Account was renamed the Treatment Injury Account, and it became

no longer necessary to prove that an injury was both rare and severe, or caused by medical error, for a claim

to be accepted.

A.23 Since the treatment injury legislation was introduced in 2005, the number of claims has increased

considerably. Approximately 75% of claims are medical only. Graph 43 shows the annual claim frequency

rates for this Account.

Graph 43 – Treatment Injury Account: Estimated Claim Frequency Rates per 1,000 People

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A.24 Approximately 75% of the Treatment Injury Account’s OCL relates to non-earners and is funded by

Government appropriations.

A.25 Most earners’ treatment injuries result only in follow-up medical treatment. These claims have very short

durations, and the clients have usually recovered by the time the OCL is valued. This means that the claims

included in the liability are mainly those that receive weekly compensation or recovery support.

A.26 For the Non-Earners’ portion of the Account, serious injury claims drive most of the cost associated with

its OCL and appropriations. Each year more of these claims are added to the OCL. The most costly of these

claims are for birth-related treatment injuries, with injuries at birth making up 40-50% of the liability for

treatment injury claims for serious injuries. These claims may require advanced nursing care for decades

into the future. In addition, upon reaching the age of 18, a child experiencing a serious injury becomes

eligible for compensation for loss of potential earnings.

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APPENDIX B

Additional background information

Schedule of services

B.1 Table 27 provides a summary of the main services the Scheme provides for covered personal injuries.

Table 27 – Schedule of Services

Medical

Public health acute services

Accidental injury costs arising from acute inpatient care, emergency department, outpatient, complex burns, pharmaceuticals, and laboratories

General practitioners (GPs) Payments to GPs and accident and medical clinics

Radiology Payments for radiology services – low-tech (eg x-ray) and high-tech (eg magnetic resonance imaging (MRI))

Physiotherapy Payments to physiotherapists

Ambulance Emergency transportation to a medical facility, by road and/or air

Elective surgery Mainly orthopaedic-related surgery

Other medical All medical costs except those categorised above. These include counselling for claims requiring support beyond that for physical injuries

Compensation

Weekly compensation – non-fatal Loss of earnings and loss of potential earnings for minors

Death benefits Funeral grants and support for spouses and/or dependants

Rehabilitation

Lump sum Additional support to compensate for permanent impairment due to injury, including work-related gradual process claims arising from prolonged exposure to an element, eg asbestos

Vocational Programmes to support clients in their return to independence

Social rehabilitation

Serious injury Capital Mainly housing and motor vehicle modifications for those with serious injuries

Non-capital Care costs (such as attendant care and assessments) and other costs related to serious injury

Non-serious injury Capital Mainly equipment, orthotics for splints, medical consumables and residential modification costs for those with non-serious injuries. Included here is the provision of ongoing aids and appliances for hearing loss suffered through traumatic events or prolonged work exposure to loud noise

Non-capital Provision of care, assessments and other support-related social rehabilitation for those with non-serious injuries

Account structure

B.2 ACC is financially managed under five Accounts, each designed to align the source of funding with where

the risk of injury occurs. Table 28 summarises the coverage and levy mechanism of each of the Accounts.

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Table 28 – Account Description

AccountEnvironment where exposure to injury occurs Levy collection

Motor Vehicle Involving a motor vehicle on a public road Vehicle licensing charge plus levy on petrol (not diesel)

Work At work or work-related Charged to employers as a percentage of payroll and the self-employed as a percentage of taxable earnings

Treatment Injury When receiving medical treatment in the health care system

Levy paid from the Non-Earners’ and Earners’ Accounts

Non-Earners’All other locations and activities

Government appropriation

Earners’ Percentage of salary collected as part of PAYE tax

B.3 Given changes in the Scheme structure over time, the Accounts are not in all cases as neatly defined as

described in Table 28. In particular, the Work Account includes all injuries to earners, whether at work or

otherwise, that happened before 1 July 1992.

Products

Work Account

B.4 The Work Account provides a small range of products that allow varying degrees of risk-sharing by

employers.

Employers

B.5 Most employers are insured through WorkPlace Cover, which provides full insurance cover for accidents in

the workplace.

B.6 Large employers may choose to enter the Accredited Employers Programme (AEP). This allows them

to self-insure some of their risks in return for significantly lower levies. In effect, ACC subcontracts the

management of employees’ work-related claims to these employers in return for the opportunity to reduce

the cost of insurance.

B.7 The AEP’s goal is to improve workplace safety and rehabilitation performance by providing employers with

appropriate financial incentives. Entry is subject to the employers demonstrating satisfactory workplace

safety standards, claims management abilities, and the financial backing to carry the self-insurance risk.

Approximately 20% of the exposure to work-related injuries is self-insured to some extent by participants in

the AEP.

B.8 The AEP involves a level of credit risk to the Work Account because if a company fails, the claim costs revert

to the Work Account. ACC mitigates this risk by undertaking annual credit risk assessments and imposing

‘stop loss’ and ‘high-cost claims cover’ requirements. To date, there have been only two participant exits

from the AEP due to company failures (Feltex in 2006/07 and Mainzeal in 2013/14), which cost the Account

a total of approximately $2.1 million. Given that the total annual levies of the Work Account during 2015/16

were about $640 million, these failures represent a cost of approximately 0.3% of one year’s levies.

Self-employed

B.9 Most self-employed people are insured under CoverPlus, which covers work and non-work injuries, so

includes the risks that would otherwise arise in the Earners’ Account.

B.10 CoverPlus Extra provides agreed-value weekly compensation cover for the self-employed and non-PAYE

shareholder employees, providing those who have volatile incomes from year to year with some certainty in

their cover.

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Incentive programmes

B.11 ACC offers two incentive programmes to encourage safety in the workplace. Both offer levy discounts in

return for businesses meeting certain health and safety standards.

B.12 The Workplace Safety Management Practices programme is available to all employers. It offers three

levels of accreditation – primary, secondary and tertiary – which offer levy discounts of 10%, 15% and 20%

respectively. As inclusion in the programme depends on the employer meeting a safety audit, it tends to

attract only larger employers.

B.13 The Workplace Safety Discounts programme is targeted at businesses (including the self-employed) with 10

or fewer employees. It provides a 10% levy discount to participants, who are required to complete a training

course and undergo an audit.

B.14 These programmes no longer align with health and safety legislation and will be discontinued from 31

March 2017 (see 5.6.2).

Experience rating

B.15 Experience rating is a system for modifying an employer’s Work Account levy based on its claims history.

Both injury and return-to-work rates are considered in assessing the modification. Levies for large

employers can be increased by up to 75% and decreased by up to 50%.

B.16 A no-claims discount scheme applies for small employers (levies less than $10,000 per annum) and the self-

employed, with potential levy modifications of -10% and 10%.

B.17 Participation in experience rating is mandatory, although not all businesses have the three years of

experience to meet the eligibility requirements. ACC is actively working with employers that have loadings

greater than 15% to help improve their safety practices.

B.18 As a result of the discontinuance of the incentive programmes, a review of the experience rating

programme is planned to provide stronger incentives for businesses to reduce workplace accidents.


B.19 A fleet safety incentive programme for the Motor Vehicle Account, modelled on the Workplace Safety

Management Practices programme, was launched on 2 December 2013. Known as Fleet Saver, it was

designed to improve the safety performance of commercial vehicle fleets. In July 2014, Fleet Saver was

extended to businesses renting out heavy goods service vehicles. As at 30 June 2016, the programme had 92

members representing 7.4% of the heavy vehicle fleet.

B.20 Proposed changes to the audit requirements to align Fleet Saver with the new health and safety legislation

were included in the 2017/19 levy consultation.

Claims management process

Front-end claims management

B.21 ACC claims are lodged directly by GPs and certain other treatment providers such as physiotherapists and

chiropractors. Only specified health practitioners can certify that clients are unfit for work.

B.22 The Accident Compensation Act 2001 (AC Act) provides a low threshold to meet the criteria for cover.

However, the great majority of claims require only one or two treatments. ACC’s only involvement in these

claims is to make payments for the medical services provided.

B.23 The management approach to these high-volume claims is characterised by easy entry and quick recovery,

and is highly efficient from an administrative viewpoint. However, it does expose the Scheme to risks that

claims paid are not injury-related, and some may be over-serviced. These risks are mitigated by claim

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escalation processes and trigger points that allow for claims to be managed as they are identified as being

complex or potentially long term, or as treatments go beyond identified benchmarks given the particular

injuries.

Claim screening

B.24 All claims that continue beyond the initial treatment phase are screened for long-term risk and/or

complexity. ACC has established standard screening processes to determine:

• the risks of extended durations, for example, based on psychosocial screening that helps identify other

factors in clients’ lives that may impede their recovery, rehabilitation and return to independence

• the potential for clients to recover at work, if temporary adjustments to the work environment are

possible.

B.25 Claims determined to be complex and/or at significant risk of being long term are assigned case managers.

Those clients not assigned case managers are able to access support should they deem, and ACC agree,

that it is necessary. In these cases, the claims are transferred to short-term claim centres.

Low-complexity claims

B.26 Claims are managed by the Short-Term Claims Centres if full recovery is expected within 10 weeks, and

complexity indicators are low. The primary aim is to ensure a rapid return to work or independence.

Management focuses on medical treatment, early intervention, vocational support, rehabilitation progress

against injury benchmarks, and the monitoring of any developing psychosocial issues.

High-complexity claims

B.27 Typically claims are case managed if it is expected that the clients will need support for extended durations

(usually 10 weeks or more), or will need a range of support services.

B.28 For case-managed claims, the focus is on ensuring recovery within an optimum period given the specific

injuries. Case managers prepare rehabilitation plans based on medical advice and established best practice,

seek employer support for return to full or partial duties once the clients are ready, and organise vocational

rehabilitation. Where required, case managers can arrange for clients to access advice on alternative

employment opportunities.

B.29 Long-term claims are managed within certain legislative parameters of the AC Act:

• rehabilitation – needs assessments must consider only needs that are a consequence of the original

covered injuries

• incapacity – legislation allows for expert medical opinion as to whether a client continues to be

incapacitated, and if so, whether this is still due to the covered injury

• vocational independence assessment – once a client has received rehabilitation support, as agreed

in a formal rehabilitation plan, the legislation makes provision for an assessment of vocational

independence. The assessment considers whether the client has the capacity for full-time employment

in work to which they are suited by experience or training. If they do, their entitlement to weekly

compensation can end three months after this decision has been made.

Long-term weekly compensation claims

B.30 If a client receives weekly compensation for 52 weeks, a specialist case manager assesses their

rehabilitation prospects. Once someone has been out of work for a long time, it can be harder to reintegrate

them into work for a number of reasons. For example, their relationship with the original employer might

have been lost, and there is a risk that they will develop psychological and other conditions that can have

damaging long-term health impacts.

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Seriously injured clients – lifelong disability

B.31 ACC has approximately 5,800 clients with serious injuries. In many of these cases, lifelong support will be

required, and all of these claims are managed by specialised case owners.

B.32 The primary goal of claims management for these seriously injured clients is to, as far as possible, help

the clients to achieve independence goals within the allowances of their injuries (in some cases partial

employment options are achievable), and to ensure that the appropriate levels of support are available.

B.33 ACC also provides support to clients whose injuries are not severe enough to be profiled as serious injury

claims. Long-term care is provided to some of these individuals. Traumatic brain injury is one area where

claims often require similar services and support from ACC.

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