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Note 11: Insurance

Insurance expense by entity
2017 Forecast Actual
Budget
2016
$m
Budget
2017
$m
30 June
2017
$m
30 June
2016
$m
4,251 4,574 Accident Compensation Corporation (ACC) 4,587 4,166
34 573 Earthquake Commission (EQC) 332 337
(56) 300 Southern Response 325 200
10 11 Other 174 22
4,239 5,458 Total insurance expenses 5,418 4,725

EQC insurance expenses include $550 million in relation to the Kaikōura earthquakes.

Insurance
2017 Forecast Actual
Budget
2016
$m
Budget
2017
$m
30 June
2017
$m
30 June
2016
$m
Insurance liability by entity  
38,250 39,379 ACC liability 40,288 39,106
750 1,644 EQC property damage liability 1,853 2,485
215 622 Southern Response liability 668 807
66 49 Other insurance liabilities 57 57
(330) Inter-segment eliminations (80) (329)
39,281 41,364 Total insurance liabilities 42,786 42,126
By component  
Outstanding claims liability 39,998 39,466
Unearned premium liability 2,019 2,019
Unearned premium liability deficiency 769 641
Total insurance liabilities 42,786 42,126
By maturity  
Expected to be settled within one year 7,256 8,004
Expected to be outstanding for more than one year 35,530 34,122
Total insurance liabilities 42,786 42,126
Assets arising from insurance obligations are:  
Receivables for premiums 2,280 2,253
Reinsurance claim recoveries 222 534

Premiums paid to reinsurers are recognised as reinsurance expense in the statement of financial performance.  Premiums are measured from the attachment date over the period of indemnity of the reinsurance contract, in accordance with the expected pattern of the incidence of risk.  Prepaid reinsurance premiums are included in prepayments in the statement of financial position.

The future cost of outstanding insurance claims liabilities are valued based on the latest actuarial information.  The liability includes estimated payments associated with claims reported and accepted, claims incurred but not reported, claims that may be re-opened, and the costs of managing these claims.  Movements of the claims liabilities are reflected in the statement of financial performance.  Financial assets backing these liabilities are designated at fair value through the operating balance.

Further information on these liabilities may also be found in the annual reports of each of these entities and on their respective websites. The objectives, policies and procedures for managing these risks are set out in the governing statutes and policy documents of each entity.

All assets held by the three insurance entities are considered available to back present and future claims obligations. There are no deferred acquisition costs (eg, marketing costs) in respect of insurance obligations at the reporting date. In addition each of these entities is backed by a guarantee from the Crown.

The outstanding claims liability is the present value of the central estimate of expected payments for claims incurred plus a risk margin. The unearned premium liability represents premiums received to provide insurance cover after 30 June 2017. The unearned premium liability deficiency is the extent that the unearned premium liability is insufficient to cover expected future claims (ie, payments for future accidents within the period covered by the premiums received).

The remainder of this note provides detailed analysis of the ACC insurance expense and liability. ACC's insurance obligations arise primarily from the accident compensation scheme provision of no fault personal injury cover for all New Zealand citizens, residents and temporary visitors to New Zealand.

Analysis of ACC Insurance Expense
  Actual
  30 June
2017
$m
30 June
2016
$m
By type  
Claims expense 4,524 9,577
Movement in unearned premium deficiency liability 109 103
Other underwriting expenses 160 129
Total ACC claims and other expenses 4,793 9,809
Less expenses reported elsewhere in the statement of financial performance  
Actuarial gain/(loss) - (refer note 10) 387 (5,099)
Operating costs relating to claims (593) (544)
Total ACC insurance expenses (excluding gains/(losses) and operations) 4,587 4,166

Net claims incurred in the table below refers to the adjustment in the liability arising from claims incurred in the current financial year and reassessment of claims incurred in previous years. This reassessment results from new information on these claims (including new claims relating to incidents incurred in previous years) and changes in assumptions.

ACC Claims Incurred
  Actual
  30 June
2017
$m
30 June
2016
$m
Current year net ACC claims incurred  
Gross claims incurred and related expenses - undiscounted 8,117 7,017
Discount and discount movement (3,902) (3,072)
Total current year net claims incurred 4,215 3,945
Previous years' net ACC claims incurred  
Reassessment of gross claims and expenses - undiscounted 7,113 (8,187)
Discount and discount movement (6,804) 13,819
Total previous years' net claims incurred 309 5,632
ACC claims expense 4,524 9,577

The underwriting surplus / (deficit) below represents the net effect on the statement of financial performance from

Underwriting
  Actual
  30 June
2017
$m
30 June
2016
$m
Net ACC Underwriting Result  
Premium revenue (refer to note 3) 2,882 2,819
ACC underwriting revenue 2,882 2,819
Less claims and other expenses (4,793) (9,809)
Net ACC underwriting surplus/(deficit) (1,911) (6,990)
ACC operating cash flows associated with the underwriting result are:  
Cash receipts 2,820 3,137
Cash payments (3,590) (3,385)
Net ACC operating cash flows (770) (248)

Analysis of ACC insurance liability

An independent actuarial estimate by PricewaterhouseCoopers, consulting actuaries, has been made of the future expenditure relating to accidents that occurred prior to balance date, whether or not the claims have been reported to or accepted by ACC. The PricewaterhouseCoopers actuarial report is signed by Mr Paul Rhodes, Fellow of the Institute and Faculty of Actuaries (UK), and Mr Michael Playford, Fellow of the Institute of Actuaries of Australia. Mr Paul Rhodes and Mr Michael Playford are also Fellows of the New Zealand Society of Actuaries. The actuaries are satisfied with the nature, sufficiency and accuracy of the data used to determine the outstanding claims liability.

ACC insurance liability
  Actual
  30 June
2017
$m
30 June
2016
$m
The ACC liability comprises:  
ACC outstanding claims liability 37,739 36,663
ACC unearned premium liability 1,870 1,873
ACC unearned premium liability deficiency 679 570
Total ACC liability 40,288 39,106
ACC insurance liability
  Actual
  30 June
2017
$m
30 June
2016
$m
Analysis of Outstanding ACC Claims Liability  
Undiscounted outstanding claims liability 78,259 67,827
Discount adjustment (44,854) (35,370)
Risk margin 4,334 4,206
Total outstanding ACC claims liability 37,739 36,663
Discounted central estimate of future payments for outstanding claims 31,466 30,471
Claims handling expenses 1,939 1,986
Outstanding claims liability before risk margin 33,405 32,457
Risk margin 4,334 4,206
Total outstanding ACC claims liability 37,739 36,663
Movement in Outstanding ACC Claims Liability  
Opening balance 36,663 30,328
Claims incurred for the year 4,849 4,272
Claims paid out in the year (4,138) (3,917)
Discount rate unwind 752 881
Experience adjustments (actuarial gains and losses):  
- actual and assumed claim experience 1,849 210
- change in discount rate (3,452) 6,355
- change in inflation rate 1,216 (1,466)
Closing outstanding ACC claims liability 37,739 36,663
Movement in ACC Unearned Premium Liability  
Opening balance 1,873 1,723
Earning of premiums previously deferred (1,873) (1,723)
Deferral of premiums on current year contracts 1,870 1,873
Closing ACC unearned premium liability 1,870 1,873
Analysis of ACC unearned premium liability deficiency  
Unearned premium liability 1,870 1,873
Adjusted for unearned premium relating to claims arising from medical misadventure premium liabilities without deficiency (107) (118)
Adjusted ACC unearned premium liability 1,763 1,755
Discounted central estimate of payments for insured future claims 2,194 2,089
Risk margin 248 236
Present value of expected cash flows for future accident claims 2,442 2,325
Total ACC unearned premium liability deficiency 679 570

Claims development historical analysis

The following table shows the development of ACC's undiscounted claims cost estimates for the seven most recent accident years.

ACC's undiscounted claims cost estimates
2011
$m
2012
$m
2013
$m
2014
$m
2015
$m
2016
$m
2017
$m
30 June
2016
$m
Estimate of ultimate claims costs:      
At the end of the accident year 7,517 6,877 6,794 7,264 7,192 6,884 7,914  
One year later 6,288 6,118 6,608 6,547 6,682 7,272  
Two years later 5,890 5,546 5,762 5,823 7,062  
Three years later 5,310 4,979 5,007 6,252  
Four years later 5,070 4,458 5,180  
Five years later 4,596 4,780  
Six years later 4,865              
Current estimate of cumulative claim costs 4,865 4,780 5,180 6,252 7,062 7,272 7,914 43,325
Cumulative payments (1,551) (1,540) (1,618) (1,739) (1,800) (1,667) (1,030) (10,944)
Outstanding claims undiscounted 3,314 3,240 3,562 4,513 5,262 5,605 6,884 32,381
Discount (19,587)
Claims handling costs 2,188
2010 and prior claims (net present value) 22,702
Short tail outstanding claims 55
Total outstanding ACC claims liability 37,739
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