Note 25: Insurance Liabilities (continued)
Key Assumptions
The key assumptions and the methodology applied in the valuation of the outstanding ACC claims obligation are as follows:
(i) Risk-free discount rates
The projected cash flows were discounted using a series of forward discount rates at the balance date derived from the yield curve for New Zealand government bonds. The equivalent single effective discount rate taking into account ACC's projected future cash flow patterns is a short term discount rate of 4.52% (2011: 5.61%) and a long term discount rate of 6.00% beyond 23 years (2011: 6.00% beyond 17 years).
(ii) Risk margin
The outstanding claims liability includes a risk margin that relates to the inherent uncertainty in the central estimate of the present value of expected future payments. The overall risk margin is intended to achieve a 75% probability of sufficiency in meeting the actual amount of liability to which it relates.
(iii) Inflation and indexation
ACC claims and costs are subject to inflation. Some costs are assumed to increase faster than the general rate of inflation (referred to as superimposed inflation) due to factors such as innovation in medical treatment.
(iv) Case management and the ‘tail' of claims
Assumptions for the incidence of settlements and claims closures are primarily based on investigations of previous experience and other factors including expectations of future events that are believed to be reasonable under the circumstances.
(v) Liability adequacy test
An unearned premium liability deficiency is recognised when the amount of the present value of expected future claim cash outflows, plus a risk margin, exceeds the unearned premium liability.
| Summary of assumptions |
30 June 2012 Next Year |
30 June 2012 Beyond Next Year |
30 June 2011 Next Year |
30 June 2011 Beyond Next Year |
|---|---|---|---|---|
| Average weighted term to settlement from reporting date | 15 years | 14 years | ||
| 10 months | 7 months | |||
| Weighted average risk margin | 12.9% | 12.8% | ||
| Probability of adequacy of liability | 75.0% | 75.0% | ||
| Risk margin for liability adequacy test | 18.0% | 18.0% | ||
| Probability of adequacy of liability to cover unearned premiums | 75.0% | 75.0% | ||
| Risk-free discount rate1 | 2.4% | 2.5% to 6.0% | 2.8% | 3.8% to 6.2% |
| Inflation rates (excluding superimposed inflation): | ||||
| Weekly compensation | 3.0% | 3.3% to 3.5% | 3.8% | 3.5% |
| Impairment benefits | 1.1% | 2.1% to 2.5% | 4.5% | 2.5% to 2.9% |
| Social rehabilitation benefits (serious and non serious injury) | 2.2% | 2.5% to 2.7% | 3.0% | 2.7% |
| Hospital rehabilitation benefits | 2.2% | 2.5% to 2.7% | 3.0% | 2.7% |
| Medical costs | 2.2% | 2.5% to 2.7% | 3.0% | 2.7% |
| Superimposed inflation: | ||||
| Social rehabilitation benefits (serious injury) | 2.0% | 2.3% to 5.3% | 1.7% | 2.9% to 4.9% |
| Social rehabilitation benefits (non-serious injury) | 3.3% | 2.0% to 3.3% | 2.5% | 2.0% to 2.5% |
| Hospital rehabilitation benefits | 5.0% | 4.0% to 5.0% | 5.0% | 4.0% to 5.0% |
| Medical costs (GP's & physiotherapists) | 1.7% to 2.0% | 1.7% to 5.0% | 2.0% | 2.0% to 3.0% |
| Medical costs others (specialists) | 1.8% | 1.8% to 4.0% | 1.8% | 1.8% to 2.5% |
- The risk-free discount rate beyond 23 years is 6.0% (2011: the rate beyond 17 years was 6.0%).
Sensitivity Analysis
The present value of the ACC claims obligation is sensitive to underlying assumptions such as the discount rate, inflation rates and expected medical costs. These assumptions are closely linked. For example, a change to the discount rate may have implications on the inflation rate used. Therefore, when calculating the present value of claims it is unlikely that an assumption will change in isolation.
If the assumptions described above were to change in isolation, this would impact the measurement of the ACC claims obligation as per the table below:
| Sensitivity of assumptions | Change |
Impact on liability Actual |
|
|---|---|---|---|
|
30 June 2012 $m |
30 June 2011 $m |
||
| Average weighted term to settlement from reporting date | +1 year | (855) | (735) |
| -1 year | 882 | 758 | |
| Risk-free discount rate | +1% | (3,792) | (3,005) |
| -1% | 5,000 | 3,937 | |
| Inflation rates (including superimposed inflation) | +1% | 5,131 | 4,085 |
| -1% | (3,946) | (3,163) | |
| Social rehabilitation benefits - superimposed inflation for non-serious injury claims | +1% | 1,055 | 741 |
| -1% | (800) | (719) | |
| Social rehabilitation benefits - superimposed inflation after four years for serious injury claims |
+1% | 2,554 | 1,904 |
| -1% | (1,883) | (1,415) | |
Undiscounted outstanding claims liability
The reported outstanding claims liability (before risk margin) of $25,154 million (2011: $21,721 million) represents the net present value of estimated cash flows associated with this obligation. The following table represents the timing of future undiscounted cash flows for claims to 30 June 2012. These estimated cash flows include the effects of assumed future inflation.
| Actual | ||
|---|---|---|
|
30 June 2012 $m |
30 June 2011 $m |
|
| No later than 1 year | 1,793 | 1,834 |
| Later than 1 year and no later than 2 years | 1,366 | 1,378 |
| Later than 2 years and no later than 5 years | 3,629 | 3,728 |
| Later than 5 years and no later than 10 years | 5,745 | 5,884 |
| Later than 10 years and no later than 15 years | 5,648 | 5,800 |
| Later than 15 years and no later than 20 years | 5,695 | 5,842 |
| Later than 20 years and no later than 25 years | 5,807 | 5,952 |
| Later than 25 years and no later than 30 years | 5,893 | 6,034 |
| Later than 30 years and no later than 35 years | 5,871 | 5,996 |
| Later than 35 years and no later than 40 years | 5,738 | 5,845 |
| Later than 40 years and no later than 45 years | 5,464 | 5,567 |
| Later than 45 years and no later than 50 years | 5,042 | 5,136 |
| Later than 50 years | 15,460 | 15,899 |
| Undiscounted outstanding claims liability | 73,151 | 74,895 |
