Estimated cost per policy of the new NSW CTP Green Slip Scheme under the Motor Accident Injuries Act 2017 (NSW)

Transcription

1 Estimated cost per policy of the new NSW CTP Green Slip Scheme under the Motor Accident Injuries Act 2017 (NSW) State Insurance Regulatory Authority 24 July 2017

2 Table of contents 1. Executive Summary Purpose Nature of costs and premiums presented in this report Scheme objectives and results Structure of this report Risks and uncertainties Reliance and limitations... 7 Glossary Background and benefit design Purpose Nature of costs and premiums presented in this report Structure of this report Benefit design Risks and uncertainties Reliance and limitations Data, approach and key assumptions Current Scheme New Scheme Results Estimated cost per policy result Proportion of claims costs by major claims segments Honeymoon impact sensitivity estimate Ultimate number of claims Scheme affordability Scheme efficiency Payments made in each year Detailed scheme cost movements Premium system Introduction Directing insurer premiums Profit normalisation Refund of premiums to existing policyholders from unearned premium surplus SIRA Board ongoing powers to regulate insurer premiums Risk equalisation mechanism Risks and uncertainty Key assumptions for costing of the new Scheme Uncertainty Reliance and limitations Appendix Estimated cost per policy, with re-allocation of contracted out legal fees... 45

3 1. Executive Summary 1.1 Purpose On 4 April 2017 the Motor Accidents Injuries Act 2017 (MAIA or new Act) received assent. The MAIA introduces major reforms to the NSW Compulsory Third Party (CTP) Green Slip Insurance Scheme (NSW CTP Scheme). In this report we refer to the CTP Scheme under MAIA as the new Scheme which the responsible Minister in his second reading speech noted will commence from 1 December 2017 and apply to all accidents from that date. The existing CTP Scheme under the Motor Accidents Compensation Act 1999 (MACA) is referred to as the current Scheme in this report. This report reflects the work performed prior to and upon assent of the Motor Accident Injuries Act 2017 (NSW) and takes no account of any developments since. The State Insurance Regulatory Authority (SIRA) has requested Ernst & Young (EY) to provide: An estimate of the cost per policy (i.e. Green Slip average premium) for the new Scheme in the year beginning 1 December 2017 assuming the Scheme is in a mature position. This includes an estimate of the number of claims expected to be reported in the new Scheme An estimate of the cost per policy (i.e. average premium) of the current Scheme for policies written in the year beginning 1 December 2017, and the difference between the estimated cost per policy of the current and new Schemes, assuming both Schemes are in a mature position An estimate of the affordability (discussed and defined in Section 4.5) for the current and new Schemes for the year beginning 1 December 2017 for all NSW vehicles An estimate of the efficiency (discussed and defined in Section 4.6) of both Schemes in the year beginning 1 December 2017 An estimate of the proportion of claims costs going to seriously injured claimants (discussed and defined in Section 4.2.1) under both Schemes in the year beginning 1 December 2017 An estimate of the proportion of claim payments made in the first and second years under both Schemes in the year beginning 1 December 2017 (discussed in Section 0) A brief description of the premium system mechanisms that will operate under the new Scheme to ensure insurers do not make excess profits or losses, to increase competition between insurers and to reduce the extent of anti-selection by insurers (discussed in Section 5). 1.2 Nature of costs and premiums presented in this report The cost per policy results presented in this report: Represent all NSW vehicles (there are approximately 5.4 million registered vehicles) Are based on a mature scheme (in respect of the current and new Scheme designs) where motorists and the general public are fully aware of their rights under the Scheme, relationships between the service providers are well established and the infrastructure of the regulator is fully operative. This means that the estimated cost of the new Scheme in the first few years

4 may be different (i.e. likely lower) than our cost estimates (as discussed below and described in detail in Section and Section 5) Do not represent the premium that will actually be charged in the new Scheme since: Premiums are set by licensed insurers who operate in the NSW CTP Scheme within the guidelines set by SIRA; these guidelines aim to ensure that premiums are affordable and fund the reasonable cost of claims, expenses and a reasonable insurer profit margin (i.e. premiums are not excessive). In NSW, insurers operate competitively and are allowed to offer different prices within limits, depending on a vehicle s risk factors The estimated cost is the average for all NSW vehicles (or within each class/geographical region) which by definition means the actual cost for some vehicle owners will be higher than the average cost and the actual cost for others will be lower than the average cost The estimated cost in the new Scheme does not allow for the treatment of the unearned premium surplus arising for insurers following the transition to the new Scheme. The MAIA enables any unearned premium surplus to be returned to existing vehicle owners as a refund based on premiums paid before the new Scheme commences and any amount not claimed by policyholders is to be paid into the SIRA fund by insurers CTP premiums vary by vehicle class and region and are also subject to the application of loadings/discounts to premiums (i.e. malus/bonus) by insurers within the Motor Accident Guidelines issued by the Board of SIRA. Therefore, actual savings for individual vehicles will vary by vehicle class, geographical region and risk factor, and could be more or less for some vehicle owners since the new Scheme will impact different groups of vehicle owners differently. For example some groups will have more/less at-fault claims than other groups of vehicle owners and consequently the premium rates for those groups will reduce by less/more than the average premium for all vehicle owners There may be other factors that SIRA will take into account in guiding insurer premiums during the first few years of the new Scheme. The SIRA Board will consider what changes, if any, will be made to the SIRA premium guidelines at a later date and these decisions will impact the premiums individual vehicles owners pay in the new Scheme In the first few years of the new Scheme it is possible the volume of claims will be lower than assumed for both not at-fault and at-fault drivers; this could mean that the cost of the Scheme in the first few years is lower than the estimated cost (this is discussed further below and later in this report) Premiums to be paid by vehicles owners will depend on the details of the regulations and guidelines that will be issued under the new Act, for both benefits and premium system. Any differences in the assumed details of the content of the regulations and guidelines on which the costings in this report are based will result in changes to the estimates of the cost per policy and ultimately the premiums vehicle owners pay The existing Lifetime Care and Support Scheme (LTCS Scheme) is excluded from the reforms. The most seriously injured road users will continue to be supported by the LTCS Scheme in its current form. We do not expect the actual average cost per policy in the first few years of the new Scheme to be higher than our estimated average cost per policy excluding the impact of factors extraneous to the reforms (e.g. changes in interest rates, changes in state/federal government taxes, changes in NSW road accident crash rates, etc).

5 EY is the NSW CTP Scheme s independent actuary. This report sets out the results of our work. 1.3 Scheme objectives and results The Government has been reviewing the NSW CTP Scheme (the Scheme) as there is broad consensus that the current Scheme needs significant reform. It has become increasingly clear in recent times, particularly over the last two years, that the system is not serving injured road users as well as it could. Injured road users get less than half of their Green Slip premium paid as benefits (with the rest going to Scheme costs and provider fees). Most claimants have to wait more than two years to receive their benefits while large claims are typically not resolved until about four years after the motor vehicle accident. Fraudulent and exaggerated claims are also on the rise, putting pressure on Green Slip prices which are now the most expensive in Australia. In March 2016 the NSW Government released a paper titled On the road to a better CTP scheme CTP reform position paper (the Position Paper) which described four key objectives for the NSW CTP Scheme and options for reforming the Scheme to best meet those objectives. The government reforms to the NSW CTP Scheme are outlined in the new Act. Detailed descriptions of the new Scheme benefit design are outlined in Section Based on our analysis of the current Scheme and our costing of the new Scheme we have compared the performance of both Schemes against each objective set out in the Government s Position Paper below. Increase the proportion of benefits provided to the most seriously injured road users Under the current Scheme we estimate that for the year beginning 1 December 2017, about 50% of claim payments will be paid to seriously injured claimants, where seriously injured is defined as those claimants who have been assessed to have a Whole Person Impairment (WPI) over 10%. In the new Scheme we estimate that seriously injured claimants will receive about 65% of claim payments As noted in the Position Paper, approximately 45% of total premiums (excluding the LTCS levy and GST) are estimated to have gone to injured claimants as benefits under the current Scheme. This is a hindsight view of what is commonly referred to as the efficiency of the Scheme. On a prospective basis under the new Scheme design, we estimate that 57% of total premium (excluding levies and GST) will go to injured claimants in benefits. The higher prospective view is based on expected efficiencies in the benefit design and the various mechanisms SIRA plans to use to control premiums and insurer profits (see Section 5) Reduce the time it takes to resolve a claim Compared to similar Schemes, the current Scheme takes a longer time to pay out benefits to claimants, with the majority of payments being made between three and five years after the accident. This is largely due to the common law fault-based nature of the Scheme, with payment delays arising from the need to establish fault, negotiate entitlement and agree on a settlement amount The new Scheme provides defined benefits for all claimants immediately after a claim is made irrespective of fault, hence providing claimants with the benefits they need when they need it. About two thirds of defined benefits are expected to be paid to not-at-fault claimants by two years after their accident (all at-fault benefits cease after 26 weeks and not at-fault benefits also cease at 26 weeks for claimants with minor injuries, as defined in the new Act)

6 Under the current Scheme, about 6% of benefits are paid by the end of year one and 23% paid by the end of year two. Under the new Scheme for not at-fault claimants, including defined benefits and common law benefits 22% of total benefits are expected to be paid by the end of year one and 35% of total benefits are expected to be paid by the end of year two Reduce opportunities for claims fraud and exaggeration Lump sum systems (like the current Scheme) can create a greater incentive for exaggeration and fraudulent behaviour than systems which incorporate defined benefits (such as the new Scheme). There is well documented evidence over many decades of this behaviour in the NSW CTP Scheme since 1989, in workers compensation schemes in Australia (e.g. NSW workers compensation up to 1987 and again prior to the 2001 legislative changes) and internationally (e.g. United Kingdom and Canada) From September 2008 to September 2015, claim numbers in the NSW CTP Scheme increased by 88% despite a fall in the number of casualties by about 20% over the same period. The vast majority of this rise was driven by minor severity legally represented claims, particularly in the Sydney metropolitan region. To address this issue the government has formed a CTP Fraud Taskforce The new Scheme benefit design limits lump sums at common law to loss of past and future earning capacity (for all not at-fault claimants who do not only have a minor injury) and general damages (only for seriously injured claimants with a WPI over 10%). In contrast, the current Scheme pays lump sums for all not at-fault claims (excluding Accident Notification Forms - ANFs) Reduce the cost of Green Slip premiums Green Slip prices for all vehicles across NSW have increased dramatically and without Scheme reform are expected to continue rising. By 1 December 2017 the average premium under the current Scheme design is estimated to be about $652 for all NSW vehicles Under the new Scheme design, we estimate that the average premium for all NSW vehicles would be around $551 on 1 December 2017 assuming mature Scheme behaviours. This is a reduction of $101 compared to the current Scheme premium outlook Prior reforms to the NSW CTP Scheme have resulted in significant reductions in claim numbers (e.g legislative reforms) which were far in excess of the reduction in road casualties. There are similar international examples of significant reductions in claims numbers and claims costs arising from reforms to common law schemes (e.g. several Canadian state Schemes). We have referred to this behaviour as a honeymoon period in the new Scheme which we expect could last for a number of years. See Section and Section 5 for more details on the possible impact of the expected honeymoon period. Actuaries and insurers did not anticipate such a large reduction in claims numbers and Scheme claims costs arising from the 1999 reforms and consequently insurers achieved profits of nearly 30% of premiums in the first four years of the Scheme or nearly four times insurer s average filed profit margin of 8%. In the new Scheme we expect: A lower number of not at-fault claims for a number of years than we have assumed in our costings of a mature Scheme

7 A significantly lower number of at-fault claims, relative to our assumed number in our costings of a mature Scheme in the early years of the new Scheme due to a lack of awareness of at-fault claimants entitlement to defined benefits under the new Scheme Overall, lower claims costs in the new Scheme in the first few years of its operation As a result of the high profits achieved by insurers in the current Scheme we understand the SIRA Board plans to: Require insurers to reduce premiums for the first few years of the new Scheme to allow for lower claims costs than we have estimated due to the honeymoon impact behaviour. For example 5% or 10% lower Scheme claims costs is estimated to reduce Scheme premiums commencing 1 December 2017 from our estimate of $551 to about $532 or $514 respectively. Relative to the experience of the reforms in 1999 and similar reforms in various Canadian states, a 5% and to a lesser extent a 10% reduction may be considered to be a reasonable reduction in premiums Introduce a mechanism to adjust for excess insurer profits and losses (refer to section 2.25 of MAIA) which we refer to in this report as the profit normalisation mechanism. This mechanism is designed to claw back excessive profits or losses actuarially assessed on a hindsight basis from insurers and use those funds to reduce or increase future premiums (see Section 5.3 for more details) It is assumed that SIRA will require insurers to reduce current premiums in line with the reductions in average premium for the Scheme for all vehicles including a honeymoon impact (the example average scheme premium of $528 is for the underwriting year commencing 1 December 2017, including an allowance for an expected honeymoon impact during the initial years post implementation of the new Scheme). 1.4 Structure of this report This report consists of the following sections: Benefit design a high level summary of the benefit design for both the current and new Schemes (see Section 2) Data, approach and key assumptions adopted to estimate the cost per policy for the current and new Schemes in the year beginning 1 December 2017, including an estimate of the number of claims, Scheme affordability, Scheme efficiency and other metrics (see Section 3) Results of the costing of benefits under the current and new Scheme designs a discussion of the key results from the above analysis, including discussion of the future affordability and efficiency of both Schemes and other metrics (see Section 4) A summary of changes to the current Scheme premium system including a Profit Normalisation Mechanism and a Risk Equalisation Mechanism, plus details of the transition of premiums from the current Scheme to the new Scheme (see Section 5) Risks and uncertainty a discussion of the sources of uncertainty in the costing results (see Section 6) Reliance and limitations (see Section 7).

8 1.5 Risks and uncertainties There is significant uncertainty associated with actuarial estimates. Estimates of future claims experience (claim numbers and payments) are always inherently uncertain because they depend on the outcome of future events which cannot be forecast precisely. Examples of claims experience that are particularly challenging to forecast include changes to social, economic and legal environments. Therefore, actual claims experience may emerge at levels higher or lower than the actuarial estimates. This report contains results relating to the current Scheme and the new Scheme. Given that there is no actual claims experience for the new Scheme, the results relating to it have been estimated based on relevant claims experience in the current NSW CTP Scheme, the Victorian Scheme and the NSW workers compensation Scheme. As there is no actual claims experience for the new Scheme the uncertainty associated with results relating to the new Scheme is greater than for the current Scheme results. Premiums to be paid by vehicles owners will depend on the details of the regulations and guidelines that will be issued under the new Act, for both benefits and premium system. Any differences in the assumed details of the content of the regulations and guidelines on which the costings in this report are based will result in changes to the estimates of the cost per policy and ultimately the premiums vehicle owners pay. Further comments on uncertainty are included throughout the report; however the most important are outlined in Section Reliance and limitations In undertaking this costing analysis, reliance has been placed upon the data provided to us by SIRA in respect of the current Scheme and the NSW workers compensation scheme, the Victorian Scheme, Roads and Maritime Services (RMS) and VicRoads. With regards to SIRA data we are specifically relying on the accuracy of the data insurers have provided to SIRA. It is essential that any reader of this report understand its associated qualifications and limitations. These are described throughout this report; however the most important are outlined in Sections 6 and 7. Judgements regarding the data, methods and assumptions contained in this report should be made only after studying the entire report, as conclusions reached by a review of a section or sections on an isolated basis may be incorrect.

9 Glossary Term Accident Notification Forms (ANFs) Accident year Acquisition expenses Affordability Agents commission Bonus malus level/structure Bulk Billing Casualty Centre for Road Safety ( CRS ) Claims Assessment and Resolution Service ( CARS ) Claims Cost Disclosure ( CCD ) data Claim frequency Claims handling expenses Claim type Claimant benefits Definition The form provides for the early payment of reasonable and necessary medical expenses and/or lost earnings up to a maximum of $5,000 and for a period of up to six months. ANFs can be lodged by at-fault and not atfault injured parties. Denotes the year in which the vehicle accident giving rise to the claim occurred. Accident years generally run from 1 July to 30 June. All expenses insurers incur to acquire and retain CTP business. These expenses include personnel costs and associated costs (e.g. rent, insurance premiums, etc.), IT costs, finance costs (e.g. accounting, audit, actuarial, etc.), stationery, marketing and advertising costs, commissions and other costs including allocated overhead costs. Average premium (including levies but excluding GST) charged in the quarter divided by NSW Average Weekly Ordinary Time Earnings for full time adults in the quarter. This is consistent with the definition presented in SIRA s annual report and that adopted by other schemes. The higher this ratio the less affordable the premium. Refers to payments made to agents/brokers by insurers for writing CTP insurance on behalf of the insurer. The maximum commission payable for CTP insurance is 5 per cent of the insurance premium. A system which defines the maximum loading (malus) applied to the premiums of poorer risks and the maximum discounts (bonus) applied to better risks compared to the base premium. Under the Bulk Billing Arrangement, SIRA collects a levy and pays quarterly payments to the NSW Ministry of Health for public hospital and public ambulance services associated with motor vehicle accidents in NSW. Any person killed or injured as a result of an accident attributable to the movement of a road vehicle on a road, as recorded by the Centre for Road Safety, based on police reporting. The organisation which promotes road safety on NSW roads and collates road casualty data. An independent dispute resolution service provided by SIRA for disputes between an injured person and an insurer related to the claims process or compensation (not a medical dispute). Data received by SIRA from plaintiff lawyers on total legal costs inclusive of contracted-out legal costs and others amounts paid including to claimants, Centrelink and Medicare. Ultimate number of claims divided by the number of vehicles. Refers to insurer expenses related to managing and administering CTP claims. These expenses include costs of claims staff managing claims, rehabilitation staff, managers and support staff. The claims in the NSW CTP scheme are split into full claims, ANFs and workers compensation recovery claims. Loss of earnings and earning capacity, treatment and care, rehabilitation, allied health, general damages and other payments made to the claimant (i.e. excluding legal and investigation costs).

10 Term Contracted-out legal costs Cost per policy Fitness for work assessment Gratuitous care Green slips Head of damage Honeymoon impact Lifetime Care and Support (LTCS) scheme Motor Accidents Compensation Act 1999 ( MACA ) Motor Accident Injuries Act 2017 (MAIA) Medical Care and Injury Services (MCIS) levy Minor injuries Motor Accident Guidelines Motor Accident Injuries Treatment and Care (MAITC) Benefit Fund Net reinsurance cost No-fault Definition Costs payable to the legal practitioner representing the claimant, by the claimant, under an agreed private arrangement i.e. those costs in excess of those specified in the SIRA Cost Regulation. These costs are not recoverable from CTP insurers and are not transparent in the insurer or Scheme data held by SIRA. Defined in this report as the sum of the cost of claims, insurer expenses, insurer profit margin, GST and MCIS levy divided by the number of insured motor vehicles in NSW. An assessment on an injured worker s fitness to work in employment. Refers to services which are provided to a claimant without payment and include services of a domestic nature, services relating to nursing and services that aim to alleviate the consequences of an injury. Green Slip dates back to the start of the NSW CTP scheme in 1989 where the CTP insurance invoice was a detachable green coloured slip. Another term for a benefit type that can form a claim payment to an injured person e.g. economic loss. In the first few years following the implementation of personal injury scheme reforms there can tend to be lower claim numbers and claims costs than expected in the costing of the scheme benefits on a mature basis. This effect has been observed in several past personal injury scheme reforms in Australia and other jurisdictions internationally. We refer to this as a honeymoon impact and it can result in lower than expected costs per policy in the initial years of the scheme following reform. This scheme provides treatment, rehabilitation and attendant care services to people severely injured in motor accidents in NSW, regardless of who was at fault in the accident. The primary legislation governing the regulation of CTP insurance in NSW for claims where the accident occurred on or after 5 October The primary legislation governing the regulation of CTP insurance in NSW for claims where the accident occurred on or 1 December Refers to a levy applied to the CTP insurance premium to fund the cover provided by the Lifetime Care and Support scheme, to fund the relevant SIRA allocation and to fund the Bulk Billing Arrangement for ambulance and hospital services. Minor injuries are defined in Section 1.6 of the Act. They are soft tissue injuries, or psychological or psychiatric injuries that are assessed in accordance with the Motor Accident Guidelines as being only of a minor nature under the new Act. The Guidelines will supersede previous Claims Handling Guidelines, Treatment, Rehabilitation and Attendant Care (TRAC) Guidelines, Premium Determination Guidelines and Market Practice Guidelines issued by SIRA. The MAITC benefit fund belongs to and is vested in the Lifetime Care and Support Authority (LTCSA). It is established for the purposed of taking over and managing the liability of future treatment and care expenses after 5 years since a claim has occurred. Refers to the net cost of reinsurance after allowing for recoveries (i.e. reinsurance claim payments). The insured is covered against losses, regardless of fault in the incident generating the loss.

11 Term Permanent impairment or Whole person impairment (WPI) Personal Injury Register (PIR) Position paper Premium relativities Profit margin Profit Normalisation Mechanism (PNM) Propensity to claim Risk Equalisation Mechanism ( REM ) Risk premium Scheme efficiency Definition An assessment of the degree of impairment to a body part, system or function, based on the American Medical Association s (AMA) Guides to the Evaluation of Permanent Impairment. The current and new Scheme use the 4 th edition of those guidelines as amended by SIRA guidelines. A database maintained by SIRA which collates and records CTP claims related data provided by the licensed insurers. A NSW government document issued for public discussion for reforms to the NSW CTP scheme regarding scheme delivery and benefit design by presenting a number of different options for a future scheme. The report was issued in March 2016 and its title was On the road to a better CTP scheme CTP reform position paper Values by vehicle class and geographical region that SIRA publishes for an upcoming policy period which insurers must apply in determining the range of premiums charged. Refers to the proportion of premium in excess of all insurer claims and expenses. Levies and GST are excluded when assessing the profit margin. The PNM provides protection to policyholders (from excessive profits made by insurers) while ensuring the insurers are not adversely impacted by excessive losses beyond a threshold as a result of the new Scheme (refer to section 2.25 of MAIA and also Schedule 4 (Savings, transitional and other provisions) Part 2 (special provisions for premiums during the transition period). Ultimate number of claims divided by the number of road casualties. The REM sits behind the scheme that transfers money between insurers based on the risk characteristics of their vehicle owner policyholders. This transfer aims to minimise the impact on insurers of obtaining a risk profile different to industry average caused by the cross-subsidisation inherent in the premiums charged to vehicle owners. Expected claim payout before insurer expenses, profit margin, levies and GST. The amount of each premium dollar that is returned (or expected to be returned) to injured people. cccccccccc pppppppppppppppp rrrrrrrrrrrrrrrr bbbb cccccccccccccccc { 1(aa) } SSSSheeeeee eeeeeeeeeeeeeeeeeeee = PPPPPPPPPPPPPP { 1(aa)+ 1(bb) } where: 1. Claims payments: a. All claim costs excluding those in 1 (b). Claims costs include bulk billed payments for public hospital and ambulance services b. Legal, investigation and medico legal costs including contracted out legal costs 2. Insurer expenses 3. Scheme expenses (SIRA administration costs and Roads and Maritime Services (RMS) levy) 4. Insurer profits. Serious driving offence A serious driving offence is an offence that is a major offence under the Road Transport Act 2013 or an offence under Section 115 or 116 (2) (a) (e) of that Act Seriously injured claimants Claimants with a permanent impairment assessed to be more than 10% whole person impairment Statutory benefits A schedule of benefits prescribed in the legislation, with limits on some benefits.

12 Term Superimposed inflation Transport Accident Commission ( TAC ) Underwriting year Uninsured vehicle Definition The increase in claim costs over time, over and above wage inflation. Victorian Government-owned organisation who manages the Victorian transport accident scheme for the benefit of the general public. The year the CTP policy was sold. A motor vehicle is an uninsured vehicle if no CTP policy has been taken out

13 2. Background and benefit design 2.1 Purpose On 4 April 2017 the Motor Accidents Injuries Act 2017 (MAIA or new Act) received assent. The MAIA introduces major reforms to the NSW Compulsory Third Party (CTP) Green Slip Insurance Scheme (NSW CTP Scheme). In this report we refer to the CTP Scheme under MAIA as the new Scheme which the responsible Minister in his second reading speech noted will commence from 1 December 2017 and apply to all accidents from that date. The existing CTP Scheme under the Motor Accidents Compensation Act 1999 (MACA) is referred to as the current Scheme in this report. This report reflects the work performed prior to and upon assent of the Motor Accident Injuries Act 2017 (NSW) and takes no account of any developments since. The State Insurance Regulatory Authority (SIRA) has requested Ernst & Young (EY) to provide: An estimate of the cost per policy (i.e. Green Slip average premium) for the new Scheme in the year beginning 1 December 2017 assuming the Scheme is in a mature position. This includes an estimate of the number of claims expected to be reported in the new Scheme An estimate of the cost per policy (i.e. average premium) of the current Scheme for policies written in the year beginning 1 December 2017, and the difference between the estimated cost per policy of the current and new Schemes, assuming both Schemes are in a mature position An estimate of the cost per policy affordability (discussed and defined in Section 4.5) for the current and new Schemes for the year beginning 1 December 2017 for all NSW vehicles An estimate of the efficiency (discussed and defined in Section 4.6) of both Schemes in the year beginning 1 December 2017 An estimate of the proportion of claims costs going to seriously injured claimants (discussed and defined in Section 4.2.1) under both Schemes in the year beginning 1 December 2017 An estimate of the proportion of claim payments made in the first and second years under both Schemes in the year beginning 1 December 2017 (discussed in Section 0) A brief description of the premium system mechanisms that will operate under the new Scheme to ensure insurers do not make excess profits or losses, to increase competition between insurers and to reduce the extent of anti-selection by insurers (discussed in Section 5). 2.2 Nature of costs and premiums presented in this report The cost per policy results presented in this report: Represent all NSW vehicles (there are approximately 5.4 million registered vehicles) Are based on a mature scheme (in respect of the current and new Scheme designs) where motorists and the general public are fully aware of their rights under the Scheme, relationships between the service providers are well established and the infrastructure of the regulator is fully operative. This means that the estimated cost of the new Scheme in the first few years

14 may be different (i.e. likely lower) than our cost estimates (as discussed below and described in detail in Section and Section 5) Do not represent the premium that will actually be charged in the new Scheme since: Premiums are set by licensed insurers who operate in the NSW CTP Scheme within the guidelines set by SIRA; these guidelines aim to ensure that premiums are affordable and fund the reasonable cost of claims, expenses and a reasonable insurer profit margin (i.e. premiums are not excessive). In NSW, insurers operate competitively and are allowed to offer different prices within limits, depending on a vehicle s risk factors The estimated cost is the average for all NSW vehicles (or within each class/geographical region) which by definition means the actual cost for some vehicle owners will be higher than the average cost and the actual cost for others will be lower than the average cost The estimated cost in the new Scheme does not allow for the treatment of the unearned premium surplus arising for insurers following the transition to the new Scheme. The MAIA enables any unearned premium surplus to be returned to existing vehicle owners as a refund based on premiums paid before the new Scheme commences and any amount not claimed by policyholders is to be paid into the SIRA fund by insurers CTP premiums vary by vehicle class and region and are also subject to the application of loadings/discounts to premiums (i.e. malus/bonus) by insurers within guidelines established by SIRA. Therefore, actual savings for individual vehicles will vary by vehicle class, geographical region and risk factor, and could be more or less for some vehicle owners since the new Scheme will impact different groups of vehicle owners differently. For example some groups will have more/less at-fault claims than other groups of vehicle owners and consequently the premium rates for those groups will reduce by less/more than the average premium for all vehicle owners There may be other factors that SIRA will take into account in guiding insurer premiums during the first few years of the new Scheme. The SIRA Board will consider what changes, if any, will be made to the SIRA premium guidelines at a later date and these decisions will impact the premiums individual vehicle owners pay in the new Scheme In the first few years of the new Scheme it is possible the volume of claims will be lower than assumed for both not at-fault and at-fault drivers; this could mean that the cost of the Scheme in the first few years is lower than the estimated cost (this is discussed further below and later in this report) Premiums to be paid by vehicles owners will depend on the details of the regulations and guidelines that will be issued under the new Act, for both benefits and premium system. Any differences in the assumed details of the content of the regulations and guidelines on which the costings in this report are based will result in changes to the estimates of the cost per policy and ultimately the premiums vehicle owners pay The existing Lifetime Care and Support Scheme (LTCS Scheme) is excluded from the reforms. The most seriously injured road users will continue to be supported by the LTCS Scheme in its current form. We do not expect the actual average cost per policy in the first few years of the new Scheme to be higher than our estimated average cost per policy excluding the impact of factors extraneous to the NSW CTP reforms (e.g. changes in interest rates, changes in state/federal government taxes, changes in NSW road accident crash rates, etc).

15 EY is the NSW CTP Scheme s independent actuary. This report sets out the results of our work. 2.3 Structure of this report This report consists of the following sections: Benefit design a high level summary of the benefit design for both the current and new Schemes (see Section 2.4) Data, approach and key assumptions adopted to estimate the cost per policy for the current and new Schemes in the year beginning 1 December 2017, including an estimate of the number of claims, Scheme affordability, Scheme efficiency and other metrics (see Section 3) Results of the costing of benefits under the current and new Scheme designs a discussion of the key results from the above analysis, including discussion of the future affordability and efficiency of both Schemes and other metrics (see Section 4) A summary of changes to the current Scheme premium system including a Profit Normalisation Mechanism and a Risk Equalisation Mechanism, plus details of the transition of premiums from the current Scheme to the new Scheme (see Section 5) Risks and uncertainty a discussion of the sources of uncertainty in the costing results (see Section 6) Reliance and limitations (see Section 7). 2.4 Benefit design The analysis and results shown in this report reflect the following benefit design elements for the current and new Schemes as summarised below Current Scheme design The current Scheme is essentially fault based (i.e. primarily only not at-fault people receive benefits), but reforms since 2006 have extended access to all, regardless of fault, to recover up to $5,000 of treatment expenses and/or lost income (i.e. through Accident Notification Forms (ANFs)), and to access the LTCS Scheme if catastrophically injured. There are also special conditions for claims arising from blameless accidents and where claimants are children. Other than that, an injured person must establish that their injuries were caused by the fault of another vehicle owner or driver, before they can claim benefits. In the current Scheme for full claims (excluding ANFs) claim settlement amounts are determined under modified common law provisions defined in the Motor Accidents Compensation Act 1999 (the MACA), and paid as a lump sum either following negotiation between the injured party and the insurer (representing the at-fault party), or by a decision of an independent claims assessor appointed by SIRA or in court proceedings. Treatment and care costs are paid as and when they are incurred until the date of settlement at which point in time the future costs relating to these benefits are paid as part of the lump sum settlement once liability for a claim is accepted.

16 Table 1: Current scheme benefit design Benefit type Overview Economic loss lump sum benefits (i.e. loss of earnings) Treatment (medical, rehabilitation and allied health) and care benefits Non-economic loss benefits /impairment benefits Legal service fees Death benefits Payments for Section 151z of the Workers Compensation Act Summary of Current Scheme design All benefits (excluding ANF s) are accessed through modified common law. Contributory negligence (not prescribed) may apply to awards (not ANF s) if the claimant partly contributed to the cause of the accident For not-at-fault claimants, 100% of past and future economic loss or the deprivation or impairment of earning capacity up to a maximum of $4,688 1 net (i.e. after tax) per week For at-fault claims only available via ANFs (Accident Notification Forms) and only up to a maximum of $5,000 including any treatment costs (ANFs) All past and future costs are recoverable Costs of gratuitous care are compensable Domestic care provided in line with S15B of the Civil Liability Act Public hospital costs are covered via the MCIS levy Only available to at-fault claimants up to a maximum of $5,000 including any loss of income (i.e. ANFs) Available for not-at-fault claimants with Whole Person Impairment (WPI) greater than 10% only (based on American Medical Association edition (AMA 4) as amended by SIRA guidelines Maximum amount a court may award is $521,000 (indexed) Not available to at-fault claimants Recoverable from insurers by legal practitioners up to the caps specified in Schedule 1 of Motor Accidents Compensation Regulation 2015 Effective from 1 November 2016, contracting-out practitioner and client costs are only recoverable if the settlement or an award of damage is more than $50,000 Maximum provision of legal service fees for claimants under age of 18 years is $5,000 if settlement or an award of damage is less than $25,000, or $10,000 otherwise Compensation to Relatives Act applies including funeral expenses for notat-fault claimants Funeral expenses are not available to at-fault claimants NSW workers compensation scheme, the workers compensation Scheme provider, may seek recovery of benefits paid to not-at-fault workers injured in a motor accident during the course of work (excluding journeys to/from work and recess journeys) from the CTP insurer of the at-fault party New Scheme design The new Scheme will retain access to (modified) common law for not at-fault claimants but restricted to specified economic, including past and future loss of earnings/earning capacity (accessible to all persons) and non-economic loss (NEL) damages (only for injured persons who are not-at-fault and assessed as having greater than 10% Whole Person impairment (WPI)). In addition those not at-fault claimants with only a minor injury 2 will not have access to common law remedies. 1 As at 30 June A minor injury is a soft tissue injury or a minor psychological or psychiatric injury as defined in the Act and regulations.

17 Payments for lost income, past and future treatment and care will be provided in the form of regular defined benefits as they are needed. In contrast to the current Scheme, defined statutory benefits are available to almost all injured parties regardless of fault except for those drivers charged with a serious driving offence 3 or driving an unregistered vehicle (i.e. with no CTP policy in force at the time of the accident). These defined benefits and eligibility conditions are set out in the new Act. At-fault claimants and/or not at-fault claimants presented with only a minor injury have access to defined benefits for up to six months after their accident with no specified maximum amount, in comparison to ANFs in the current Scheme. The new Scheme will not change the eligibility criteria or nature of benefits available under the LTCS Scheme as the LTCS Scheme is not subject to review by the Government. The analysis and results shown in this report reflect the following benefit design elements for the new Scheme. Table 2: New Scheme benefit design Benefit type Overview Summary of New Scheme design Defined benefits for all claimants regardless of fault for at least 26 weeks; eligibility requirements and cut-offs apply thereafter. All at-fault benefits cease after 26 weeks (no benefits payable following conviction for serious driving offences). Damages available at common law for past and future loss of earning capacity for all not-at-fault claimants (except for minor injury claims) and NEL for seriously injured not-at-fault claimants. Defined treatment and care benefits payable based on needs for life except for minor injury claims. Defined benefits: Loss of earnings Weekly payments are made as a proportion of pre-injury earnings 95% of pre-injury earnings for the first 13 weeks, and thereafter 80% in the case of total loss of earning capacity or 85% 4 in the case of partial loss of earning capacity, in the following time periods: First 26 weeks weekly payments are available, regardless of fault. No benefits paid to at-fault drivers if charged with a serious driving offence or if vehicle is uninsured No further benefits after 26 weeks for at-fault drivers and not at-fault claimants with a minor injury only as defined in MAIA 26 weeks to 104 weeks weekly payments are available to not-at-fault claimants except soft tissue and minor psychological injuries, subject to ongoing fitness for work assessments and reductions for contributory negligence (applied according to a set percentage) 104 weeks to 156 weeks weekly payments are available only if the person s injury (except soft tissue and minor psychological injuries) is the subject of a pending claim for common law damages and reductions for contributory negligence (applied according to a set percentage) 156 weeks to 260 weeks weekly payments are available only if the person s injury (except soft tissue and minor psychological injuries) is the subject of a pending claim for common law damages and the level of WPI is exceeding 10% and reductions for contributory negligence (applied according to a set percentage) 3 A serious driving offence is an offence that is a major offence under the Road Transport Act 2013 or an offence under Section 115 or 116 (2) (a) (e) of that Act 4 Payments to claimants with partial loss of earning capacity are based on the difference between the levels of the person s current earning and pre-accident earning

18 Maximum weekly amount of $3,853 gross per week (indexed at 2.5 times NSW Average Weekly Ordinary Time Earnings for full time adults) Defined benefits: Treatment (medical, rehabilitation and allied health) Defined benefits: Commercial Attendant Care (including personal and domestic care) Common law: Future loss of earnings capacity Common law: Past loss of earnings capacity Common law: Non-economic loss Legal service fees First 26 weeks all reasonable and necessary treatment provided to all claimants, regardless of fault. No benefits paid to at-fault drivers if charged with a serious driving offence or if vehicle is uninsured 27 weeks to 5 years - reasonable and necessary treatment paid as incurred for those able to prove fault and not most at fault, except for claimants with only soft tissue and minor psychological injuries Post 5 years Liability for future treatment expenses is a liability of the LTCS Authority in its capacity as the relevant insurer Payments are not reduced for contributory negligence No benefits beyond 26 weeks for those at-fault and not at-fault claimants with minor injuries only No commutations or redemptions allowed First 26 weeks all reasonable and necessary commercial care provided to all claimants (including to dependents where required), regardless of fault. No benefits paid to at-fault drivers charged with a serious driving offence or if vehicle is uninsured 27 weeks to 5 years - reasonable and necessary commercial care for those able to prove fault and not most at fault, except for claimants with only soft tissue and minor psychological injuries Post 5 years Liability for future treatment expenses is a liability of the LTCS Authority No benefits beyond 26 weeks for at-fault claimants and not at-fault claimants with minor injuries only Payments are not reduced for contributory negligence No commutations or redemptions allowed No gratuitous care Available for not-at-fault claimants only except for those with soft tissue or minor psychological injuries only No impairment threshold Cap on maximum weekly earnings of $3,853 per week, applied on a net basis (indexed at 2.5 times NSW Average Weekly Ordinary Time Earnings for full time adults) Contributory negligence applies For past loss of earnings claims progressing to common law are able to claim the gap between 100% of earnings available at common law and the applicable caps of 95%, 80% and 85% for defined benefits loss of earnings Available for not-at-fault claimants with WPI greater than 10% (WPI based on American Medical Association edition (AMA 4) as amended by SIRA guidelines) The lump sum payment is subject to a maximum of $521,000 (indexed annually) Contributory negligence applies Fees for dispute resolution services in relation to statutory benefits Recoverable from insurers by legal practitioners in line with the Regulation Fees for settlements of common law damages: Recoverable from insurers by legal practitioners up to the caps specified in line with the Regulation Contracting-out practitioner and client costs are only recoverable if the settlement or an award of damage is more than $75,000

19 Death benefits Payments for Section 151z of the Workers Compensation Act Reasonable funeral expenses reimbursed as statutory benefits, regardless of fault Compensation to relatives as per current scheme for not at-fault claimants only NSW workers compensation scheme the workers compensation Scheme provider may seek recovery of benefits paid to not-at-fault workers injured in a motor accident during the course of work (excluding journeys to/from work and recess journeys) from the CTP insurer of the at-fault party The amount of recovery is limited to the extent that a direct claimant would have received from the CTP insurer Details of the new Scheme can be found in the new Act. Guidelines and regulations will be issued by the government and SIRA in due course. 2.5 Risks and uncertainties There is significant uncertainty associated with actuarial estimates. Estimates of future claims experience (claim numbers and payments) are always inherently uncertain because they depend on the outcome of future events which cannot be forecast precisely. Examples of claims experience that are particularly challenging to forecast include changes to social, economic and legal environments. Therefore, actual claims experience may emerge at levels higher or lower than the actuarial estimates. This report contains results relating to the current Scheme and the new Scheme. Given that there is no actual claims experience for the new Scheme, the results relating to it have been estimated based on relevant claims experience in the current NSW CTP Scheme, the Victorian Scheme and the NSW workers compensation Scheme. As there is no actual claims experience for the new Scheme the uncertainty associated with results relating to the new Scheme is greater than for the current Scheme results. Premiums to be paid by vehicles owners will depend on the details of the regulations and guidelines that will be issued under the new Act, for both benefits and premium system. Any differences in the assumed details of the content of the regulations and guidelines on which the costings in this report are based will result in changes to the estimates of the cost per policy and ultimately the premiums vehicle owners pay. Further comments on uncertainty are included throughout the report; however the most important are outlined in Section Reliance and limitations In undertaking this costing analysis, reliance has been placed upon the data provided to us by SIRA in respect of the current Scheme and the NSW workers compensation scheme, the Victorian Scheme, Roads and Maritime Services (RMS) and VicRoads. With regards to SIRA data we are specifically relying on the accuracy of the data insurers have provided to SIRA. It is essential that any reader of this report understand its associated qualifications and limitations. These are described throughout this report; however the most important are outlined in Sections 6 and 7. Judgements regarding the data, methods and assumptions contained in this report should be made only after studying the entire report, as conclusions reached by a review of a section or sections on an isolated basis may be incorrect.