Challenges facing self insurers in a rapidly evolving environmentRobin Shaw

Manager, Self Insurers of SA

Content

1. What does the change of Federal Govt mean for self insurance?

2. Self insurance v premium – the tough times

3. Economic effects on SI balance sheets

4. Insurance bonds as a means to reduce balance sheet pressure

5. Making the business case for SI

The Federal Govt and self insurance

• 2/12/13 – announced the lifting of the moratorium on private sector SI under Comcare

• No mention of lifting competition test (Hanks)

• Reportedly renewed interest

• Reduce ‘red tape’ – but can only do so in the Federal sphere

• Might be some tweaks for Comcare scheme

About the Comcare option

• For multi-jurisdiction operations – admin simplification may deliver savings

• Cost of claims – is Comcare more expensive than local schemes in some places?

• Examples:

• Comcare v Queensland

• Comcare v WA

• Comcare v SA

• What does this mean long term for the balance sheet?

About the Comcare option

Comparative cost for a notional multi-state SISource – Finity Consulting – general estimate only – will vary case by case

Primary economic influences – discount rate

• Discount rate - self insurance liabilities can be discounted because investment income earned on the provision can be used to pay claims

• Lower discount rate = higher estimated liabilities (all else being equal!)

• Dropped due to GFC & again in 2012

• Increasing since Sept 2013

• Source – Finity Consulting

Economic trends in SI – discount rates

6.8%

5.3%5.0%

5.3%

3.0%3.3%

3.9%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Dec-13

Source – Finity Consulting

GFCEuropean debt crisis &

reducing Aust interest rates

Primary economic influences – wage index

• Major driver of claim inflation

• Has been much more stable than discount rates

• Source – Finity Consulting

4.5%

3.8%4.0% 4.0% 4.0% 4.0%

3.8%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Dec-13

General outlook

• Discount rate to stabilise for 12 months

• Wage index may decrease slightly

• Outlook for SI liabilities stable short term

• Scheme changes in NSW, Qld may reduce liabilities

• Likely major changes in SA certain to do the same (post March 2014)

• SA changes may make Comcare more expensive again by comparison

Insurance bonds v bank guarantees

• QBE & Assetinsure have developed surety bonds

• Currently discussing with regulators – not generally available as yet

• QBE approved only in SA so far but limited exposure permitted – under discussion

• Amounts of AUD$10M to AUD$50M

• Pricing 1.25% to 2.50% per annum

• Assetinsure approved by Comcare but under APRA review – current status unknown

Insurance bonds v bank guarantees

• Advantages of surety bonds:

• Not having to utilise established credit lines for bonding/guarantee purposes

• Generally no tangible/collateral security required

• Better utilisation of the company balance sheet, enhancing working capital and liquidity

• Fast turnaround issuing bonds

• Contact: Ivan Radovnikovic, Relationship Executive – Surety, QBE Ltd (02) 9375 4795 ivan.radovnikovic@qbe.com

Making the business case for SI

• SI is at times challenged by Boards concerned with liabilities

• For new applicants – business case needed

• Especially so now that Comcare SI is again available

• Tough economic times makes the case more important and tests its robustness

• Ultimate test – if it was not a good proposition, why do so many do it and defend it?

In a nutshell

Insured by WorkCover Self Insured

$800,000 retained by scheme to fund worse performers

Claim costs $200,000

$750,000 retained by employer

to re-invest in OHS etc

Claim costs $200,000

SI admin overheads @ 25% of claim

costs

Claim costs will reduce over time

Assume $1m PA premium

Or put another way…SA as an example

77.7% 77.2% 76.4% 77.2% 78.5% 80.1% 80.4% 81.0% 81.8% 83.0% 84.9% 86.1%

22.3% 22.8% 23.6% 22.8% 21.5% 19.9% 19.6% 19.0% 18.2% 17.0% 15.1% 13.9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

Proportions of total SA workers comp liabilities - WorkCover SA v self insurers

% WorkCover SA liabilities % Self Insured liabilities

% of scheme self insured

Questions?