Page 714 - Week 02 - Thursday, 20 February 2020
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motorists in respect of passenger vehicles under the MAI scheme and (b) what are the main savings and expenses that contribute to the overall estimated saving.
Mr Barr: The answer to the member’s question is as follows:
(a) Each premium filing lodged by an insurer is subject to extensive analysis by the scheme actuary, who is required, amongst other things, to determine whether the premium ‘fully funds’ the scheme and ‘is not excessive’ (the two tests).
Each premium filing is based on a range of forecast assumptions with regard to the underlying variables that include, for example, claims frequency; average claim cost; and economic assumptions such as superimposed inflation.
In determining whether the premium meets the two tests, due regard is given to the proposed profit margin outlined by the insurer, in combination with the examination of the other underpinning data provided in the filing.
Following on from the scheme actuary’s analysis, the CTP Regulator then determines whether or not to approve the premium filing.
The premium filing will not be approved if the proposed profit margin filed as part of the premium, is excessive. As part of that process, consideration is given to ensuring that profits made by insurers are based on an adequate return of capital invested and compensation for the risks being underwritten, and taking into account the significant regulatory requirements that must be followed.
(b) Compulsory third-party (CTP) insurer proposed profit margins are reported in the CTP Regulator’s annual report each year.
For the CTP scheme actual profit margins have not been calculated given the constraints on information available and the long-tailed nature of CTP claims. An assessment of an insurer’s actual profit margin requires a comparison of premiums earned in an accident year with the expenses related to that accident year.
Key components of the determination of actual profit are commercial-in-confidence and are known only to each individual insurer, including information such as actual expenses incurred, actual investment returns, and reinsurance recoveries. CTP schemes are long tailed insurance schemes and it can take a considerable number of years for all claims in an accident year to be finalised.
In the 2019 Section 275 Review Report (Section 275 report) of the operation of the Road Transport (Third-Party Insurance) Act 2008, the scheme actuary used the following process to assess insurers’ estimated achieved profits:
• estimate the ultimate claim costs 1 for each year based on the historical claims performance captured in the data to 30 June 2018 (excluding the nominal defendant fund claims and LTCSS claims);
• apply the insurers’ expected other margins as set out in their premium filings, which includes allowances for items such as claims handling costs, acquisition expenses, net reinsurance costs, at-fault driver cover etc; and
• divide the combined costs by the premium received for each year, excluding GST and the Nominal Defendant Levy.
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