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 [email protected]
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?