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Note 25: Insurance Liabilities (continued)

Analysis of Southern Response (formerly AMI insurance) liability

Southern Response Earthquake Services Limited (Southern Response) holds Canterbury earthquake related claims.

Colin Brigstock of Finity Consulting Pty Limited (the Appointed Actuary) has prepared the independent actuarial estimate of the Southern Response claims liability as at 30 June 2012. Mr Brigstock is a Fellow of the Institute of Actuaries of Australia and the New Zealand Society of Actuaries. The actuary is satisfied with the nature, sufficiency and accuracy of the data used to determine the outstanding claims liability.

Analysis of Southern Response (formerly AMI insurance) liability
Actual
30 June
2012
$m 		30 June
2011
$m
The Southern Response liability comprises:  
Southern Response outstanding claims liability 2,062 1,985
Southern Response unearned premium liability -  97
Southern Response unearned premium liability deficiency -  - 
Total Southern Response liability 2,062 2,082

By type

 
Property damage claims in relation to Canterbury earthquakes 2,062 1,937
Other insurance liabilities -  145
Total Southern Response liability 2,062 2,082

Analysis of Outstanding Southern Response Claims Liability

 
Undiscounted outstanding claims liability 1,874 1,846
Discount adjustment (56) (95)
Risk margin 244 234
Total outstanding Southern Response claims liability 2,062 1,985
Expected future claims payments - central estimate 1,729 1,715
Claims handling expenses 89 36
Outstanding claims liability before risk margin 1,818 1,751
Risk margin 244 234
Total outstanding Southern Response claims liability 2,062 1,985

Movement in Outstanding Southern Response Claims Liability

 
Opening balance 1,985 - 
Claims liability acquired/(sold) through business combination (189) 1,928
Claims incurred for the year - Canterbury earthquakes 449 95
Claims incurred for the year - other (discontinued operations) 143 42
Claims paid out in the year (326) (80)
Other movements -  - 
Closing outstanding Southern Response claims liability 2,062 1,985
Analysis of Southern Response (formerly AMI insurance) liability (continued)
Actual
30 June
2012
$m 		30 June
2011
$m

Movement in Southern Response Unearned Premium Liability

 
Opening balance 97 - 
Claims liability acquired through business combination -  96
Earning of premiums previously deferred   43
Deferral of premiums on current year contracts   (42)
Other (97) - 
Closing Southern Response unearned premium liability -  97

Key Assumptions

The valuation of the outstanding claims liability is based on detailed assumptions about the number of properties damaged, the mix and cost of rebuilds, repairs, and cash settlements, and the amount of damage which will be covered by EQC. In addition, the key assumptions made regarding future economic conditions are as follows:

(i) Average weighted term to settlement

Expected payment patterns have been used to determine the outstanding claims liability. The payment patterns adopted have been set based on the Actuary's best estimate of when the payments are likely to be made.

(ii) Inflation

The actuarial models adopted allows for any inflationary impact which is likely to affect future claims payments. An 8% inflation assumption (2011: 6%) has been made relating to building costs in Canterbury.

(iii) Discount rate

Where applicable, claims and recoveries have been discounted using a risk-free rate based on New Zealand government bonds and the payment profile of the underlying recovery payments.

(iv) Risk margin

The risk margin was determined at a line of business level, allowing for the uncertainty of the outstanding claims estimate for each line of business. Uncertainty was analysed for each portfolio, taking into account past volatility in general insurance claims, actuarial model and parameter error, and diversification between the lines of business. The risk margin is intended to achieve at least a 75% probability of adequacy for the outstanding claims.

Summary of assumptions
30 June 2012 30 June 2011

Summary of assumptions

 
Average weighted term to settlement from reporting date  
    Earthquake related claims 1.8 years 2.6 years
    Non-earthquake related claims n/a 0.4 years
Inflation (earthquake related claims)  
    Building costs 8.0% 6.0%
    Other cover types 3.0% 3.0%
Risk-free discount rate 2.2% to 3.0% 2.7% to 4.6%
Weighted average risk margin  
    Earthquake related claims 14.2% 14.2%
    Non-earthquake related claims n/a 9.0%
Probability of adequacy of liability 75.0% 75.0%
Risk margin for liability adequacy test n/a 9.0%
Probability of adequacy of liability to cover unearned premiums n/a 75.0%

Sensitivity Analysis

The value of the Southern Response claims liability is sensitive to underlying assumptions such as the discount rate, claims handling expense rate, and the risk margin.

If the assumptions described above were to change in isolation, this would impact the measurement of the Southern Response claims liability as per the table below:

Measurement of the Southern Response claims liability
Change Impact on liability
Actual
30 June
2012
$m 		30 June
2011
$m

Sensitivity of assumptions

 
Inflation (earthquake related claims) +1% 23 27
-1% (23) (26)
Risk-free discount rate +1% (19) (14)
-1% 20 14
Weighted average risk margin +1% 17 15
-1% (17) (15)
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