Pricing ACC Work Cover
Tim Spicer
Stephen Jeffery
Gavin Pearce
Overview
• Work Cover Products and Coverage
•
•
•
Standard employer
Self-employed
Partnership programme (PP)
• Pricing Philosophy
• Top-Down/Bottom-Up
• Stop-Loss + Individual XOL for PP
• Residual Account
Product Coverage and Expenditure
•
First 7 days covered by employer/self-employed
•
Chart shows standard employers breakdown of
$308m ultimate claim expenditure expected from
2003/04 accident year
Non-economic loss
4.1%
Death
1.6%
Bulk billed
5.3%
Medical
9.7%
Rehab
24.7%
Weekly Comp
54.6%
Standard Employer and Self-Employed
Levies - 2003/04 accident year
•
Rates are per $100 of liable earnings (i.e. % of liable
earnings)
•
Liable earnings are the lesser of actual earnings and
$87,000 (the current maximum annual compensation
rate)
•
Self-employed has separate income and non-income
benefit rates. The non-income rate is applied to the
lesser of liable earnings and $15,000 (with the result
being at least $32)
Pricing Philosophy
•
ACC is non-profit, non-tax-paying, nationalised
monopoly provider of accident cover…therefore…
•
Pricing philosophy is largely “cost-plus”
•
Overall price levels directly linked to the annual
liability valuation PPCIs
•
Exception to pure “cost-plus” philosophy is that we
have a prudential margin (15%) in the rates to guard
against adverse claims experience and investment
returns
Pricing Process
•
Marriage of “Top-Down” (i.e. we develop an overall
average levy rate for each account using aggregate
data) and “Bottom-Up” (i.e. we build up risk group
rates using individual claim data)
•
Liable earnings weighted average of risk group rates
must regenerate the overall average rate
Overall Average Levy Components
“ Risk
Pr emium”
(incl udes
any new
benef it s)
Expenses
Reser ves
Adjust ment
Ful l Funded Levy
Risk Premium
For each claim payment type* calculate:
Exposure (projected liable earnings)

Projected Incurred Claim Frequency
= Number of Incurred Claims

Payments Per Claim Incurred (PPCIs)
= Payment Run-Off Pattern
with discounting and summation gives
Incurred Claim Cost = Risk Premium
*Entitlement, Social Rehab and Total
Reserve Adjustment
•
Targeted funding position for all accident years post1999 is 115% of liabilities (3 years hence)
•
Reserve adjustment in two parts
•
•
Adjustment for all past accident years (1999/00 2002/03) - can be negative (i.e. a “refund”) if opening
fund position is sufficiently favourable
•
Adjustment for new accident year (2003/04) - always
positive
Overall reserve adjustment can be negative
Reserve Adjustment (cont’d)
•
Reserve adjustment mechanism is such that it is
always aiming for 115% funding in 3 years from start
of new accident year
e.g. for 2003/04 year, the reserve adjustment will be
aiming for 115% funding by 31 March 2006
•
At the end of the 2003/04 year, the 2003/04 liabilities
fall into the past accidents “pot”, 2004/05 is the new
year, and we will now be aiming for 115% funding by
31 March 2007
Summary of “Top-Down” Process
Recommended Rates
STD EMPLOYERS
SELF-EMPLOYED
“Risk Premium” = 0.73%
Full Funded Rate* = 0.84%
“Risk Premium” = 1.28%
Full Funded Rate = 1.75%
Loss Ratio = 73/84 = 87%
Loss Ratio = 128/175 = 73%
*excludes WSMP loading
Final rates approved by Cabinet may be different to these !!
Bottom-Up Process
•
Each work-related claim is allocated to an ANZSICbased Classification Unit (“CU”) and accident year
•
CUs are collections of workers engaged in the same
or very similar business activities
•
The Bottom-Up process starts with the allocation of
claims, and hence incurred claim costs, to the
various CUs (There are currently over 550 CUs)
Incurred Claim Costs
•
Each claim in the claim file has two components:
1. Claim payments made to date
2. Claim payments outstanding (zero for closed)
•
The PV of all outstanding claim payments across all
incurred cases should, theoretically, give the
outstanding claims liability from the valuation - want
results broken down by accident year
•
Only difference is the date to which payments are
discounted (for valuation - to 31/03/2002, for pricing to start of accident year)
Allocating Costs to CUs
•
Each open (reported) claim is given an individual
case estimate (serious or statistical) equalling PV of
outstanding claim payments
•
Summing across all such cases from a given
accident year gives a result typically less than the
valuation result (allowance for IBNR and re-opening)
•
To allocate IBNR costs to CUs (and accident year)
we “calibrate” the case estimates so that
sum of calibrated case estimates = o/s claims liability
for each accident year
Allocating Costs to CUs (cont’d)
•
Final step is to combine all the claim payments made
to date with the calibrated case estimates (gives the
“lifetime” claim cost) and then summarise costs in
CU/accident-year “cells”
•
Our risk measure is the “lifetime claims/earnings
ratio” so it is now a matter of dividing the lifetime
claim costs in each CU/accident-year cell by the
corresponding liable earnings in the cell
•
For each CU we can now produce a claims/earnings
(“c/e”) ratio history
Forming Levy Risk Groups
•
Many CUs have too little claims experience from
which to develop a reliable rate - we pool the 550+
CUs together into 130 credible sized risk groups
•
By examining the c/e ratio histories, we formed the
“Pricing Hierarchy”
•
Each Levy Risk Group (130 for 2003/04) should have
CUs from the same industry and with a similar c/e
ratio history (i.e. same industry and similar risk level)
•
Hierarchical structure adopted is similar to British
Columbia scheme but based on ANZSIC rather than
North American industry classification
Example c/e history and projection
Farmers - LRG 120 (9 CUs pooled)
Cl aims/ Earnings Rat io Histor y and Projected Risk and FF Levy Rat es
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
96/97
EM c/e hist
97/98
S E cre dible c/e his t
98/99
P P c/e hist (e st)
99/00
00/01
EM RIS K RATE
01/02
S E RIS K RATE
02/03
EM F F RATE
03/04
S E F F RATE
Setting risk premiums for risk
groups using the Hierarchy
PRICING HIERARCHY
Bas ed on A NZS IC
ACCO UNT
. . . . . . . . . . . . . . . . . . . . . . . .
IND US TRY D IVI SI ON
IND US TRY R ISK G ROU P
LEV Y RIS K GRO UP
CLA SS IFI CA TIO N UNI T
A10
110
122
130
A20
A
B
C
A30
A40
A50
120
145
D
E
140
2 130 220 0 3030
F
G
150
170
H
I
J
K
L
M
N
O
P
Q
Credibility Adjustment
•
The 130 risk rates thus far were found by working
down the Hierarchy
•
Work back up the hierarchy using credibility
weighting until you strike a fully credible base
•
Full credibility is either E = $400m in earnings or
N = 250 entitlement claims (per annum)
•
Partial credibility weight (Z) is:
Z = MAX{ sqrt(E/400m), sqrt(N/250) }
Full Funded Rates (1)
•
From the 130 credibility adjusted risk rates form a set
of claim cost relativities (and normalise so that
earnings weighted average relativity is 100%) for
both employers and self-employed
•
As ACC management elected to risk rate all
expenses the full funded rate (net of WSM) is found
by applying the relativity to the 0.84% average rate
•
Next step is to apply the risk group WSM loading (so
that after WSM discounts the total levy received is
unchanged) - this gives us the “A” rates.
Full Funded Rates (2)
•
The self-employed rate is split into an income and
non-income rate (based on historic expenditure on
these two classes of benefits)
•
Both employer and self-employed rates are further
subjected to
1. A minimum invoice loading (giving “B” rates)
2. A 25% increase cap loading (giving “C” rates)
•
The costs of providing these “commercial”
constraints are shared by ALL other workers and
NOT contained just within their risk group
Partnership Programmes
•
These are risk sharing arrangements available to
employers of sufficient size after a successful
Workplace Safety Evaluation
•
Full Self Cover (FSC) and Partnership Discount Plan
(PDP)
•
FSC employers manage claims for the first 4-5 years
after which claims revert to ACC for a charge based
on actual claims - up-front levy is for admin only
•
PDP employers manage claims for first 2-3 years
with reversion to ACC at no extra cost - std employer
levy is discounted for costs in first 2-3 years
Stop Loss and Individual XOL
•
All FSC employers must purchase Stop Loss cover
(150% and 200% options). Individual XOL is optional
($250K, $500K, $750K and $1M)
•
Stop Loss losses for FSC employers include the
liability reversion at the end of 4-5 years of claim
management
•
Stop Loss and XOL levy rates vary by standard levy
that would otherwise have been payable
•
PDP employers have optional Stop Loss (150% and
200% options) but no XOL options
Pricing FSC Stop Loss / XOL
•
Assume a Compound Poisson aggregate claims
distribution for each of 3 risk bands
•
Individual claim sizes based on most recent 6 years
of individual claim size data (empirical distribution)
calibrated to 2003/04 level
•
“Tail” of empirical claim size distribution modelled
using a Pareto density for “smoothness”
•
We built a SAS program to do the zillions of
simulations required to get smooth rate curves
•
Final rates were capped at 25% with those below the
cap sharing the loss from capping
Residual Account Levies
•
The Residual Account is for pre-July 1999 work
claims and pre-July 1992 non-work claims by
workers
•
The Residual Account has a significant unfunded
liability (only 36% funded as at 30 June 2002)
•
Residual levies are set so that the account is 115%
funded by 31 March 2014 (i.e. assets equal 115% of
liabilities at that time)
Aggregate Residual Levy Rate
•
As for other accounts a “Top-Down/Bottom-Up”
approach is used
•
Aggregate rate (0.31%) is found by projecting
earnings, claim payments, liabilities, expenses and
investment earnings out to 2014 and “goal-seeking”
the flat % of earnings that will achieve 115% funding
by 2014
•
Split aggregate rate into a work (0.21%) and nonwork component (0.10%) - pro-rata to outstanding
claims liability for work and non-work accidents
Risk Group Residual Levies
•
A similar process is followed here as for the standard
cover pricing:
1. Form risk based groups
2. Allocate outstanding work-related claims liability
across risk groups
3. Calculate a work-related o/s c/e ratio relativity
4. Apply relativity to aggregate work rate and add flat
non-work rate to give risk group rate