UNSW Actuarial StudentsWork Overview

Daniel Tess

26 August, 2002

Sydney

Contents

Warmup

My favourite topic—me!

CAS info

Health Financing

NSW WCA Premium Analysis

What do we want from today?

– Free Pizza!

Career Summary

• 1987 BS Computer Science, Duke University, NC

• 1987-1990 High School Teacher, Salzburg & NC

• 1990-1991 Aetna Casualty, Hartford CT

• 1991-1996 Fireman’s Fund, San Francisco

National Accounts

• 1996-1998 Allianz International, Munich

International Casualty Underwriting

• 1998-2000 Allianz Australia (MMI), Sydney

Chief Actuary; Workers Compensation

• 2000-now PricewaterhouseCoopers, Sydney

CAS Key Facts

• Started in 1914 as a special interest group of the SOA

• Generally covers USA and Canada

• Initial Workers Compensation focus; now all “P&C”

• Only separate society dedicated to GI business

• Over 2,500 members

• 10 Exams in 14 parts

• Very little university training/preparation in US

• www.casact.org

CAS University Liaison Role

• Information point for interested students

• General promotion of GI Actuarial careers

• Information on CAS research calls & commissions

Is there a place for the CAS in Australia? What

can/should the CAS do to strengthen (establish!) its

role here?

Health Financing in Australia

Who funds healthcare?

– Government—Commonwealth, State & Local (AHCAs)

– Private Health Funds (PHI)

– Accident Compensation Schemes (e.g. NSW WCA)

– General Insurance Companies (for accident comp)

– Individuals (patients!)

Health Funding Overview (AIHW)

AIHW Australia's Health 2002Table S42: Total health services expenditure (current prices), 1998-99 ($m)

Government Non-governmentState Health

Health service type C'wlth &Local Subtotal Ins Funds Individ's Other Subtotal TOTALPublic hospitals 6,638 6,146 12,784 242 288 361 891 13,675Private hospitals 911 911 2,116 367 565 3,048 3,959Other institutions 3,055 935 3,990 105 977 86 1,168 5,158Subtotal institutions 10,604 7,081 17,685 2,463 1,632 1,012 5,107 22,792

Medical services 7,372 7,372 212 936 480 1,628 9,000Other professional services 232 232 197 1,191 240 1,628 1,860Pharmaceuticals 3,092 3,092 30 2,697 2,727 5,819Other 2,163 2,355 4,518 1,158 2,017 317 3,492 8,010Subtotal non-institutional 12,859 2,355 15,214 1,597 6,841 1,037 9,475 24,689

Total recurrent expenditure 23,463 9,436 32,899 4,060 8,473 2,049 14,582 47,481

Capital expenditure 104 2,416 40,271 1,009 41,280

TOTAL HEALTH 23,567 11,852 43,363 15,591 58,954

Actuaries in health funding

– New appointed actuary role—being developed by the HPC together with PHIAC

– Pricing of member contributions (premiums); estimation of reserves, certification of financial position

– Broader health arena—little involvement so far

– What makes actuaries special?

– Competition is health economists & epidemiologists

– Connection to operational drivers

– Projection of future values

– Risk pooling / insurance concepts

Basic economist’s modelling approach

Intergenerational Report 2002 (Australia):

– Demand model, cost as output

– Past commonwealth government health spending as % of

GDP, trended forward (adjusted for age & gender). A

simple high-level expenditure projection.

Intergenerational Report 2002

Tables 8 & 9: Projected Commonwealth health spending (% of GDP)

Component 2001-2 2006-7 2011-12 2021-22MBS subsidy 1.09 1.10 1.15 1.33PBS subsidy 0.60 0.63 0.79 1.31Hospital & health services 1.16 1.16 1.20 1.34Other 1.12 1.14 1.16 1.22All health 3.97 4.03 4.30 5.20

Alternate all health model Underlying growth rateAggregate Case A 3.0% 3.97 4.26 4.84 5.99Aggregate Case B 2.5% 3.97 4.14 4.55 5.36

All health excl. PBS 3.37 3.40 3.51 3.89

Alt model --implied ex PBS Underlying growth rateAggregate Case A 3.0% 3.37 3.59 3.74 3.98Aggregate Case B 2.5% 3.37 3.49 3.62 3.79

Intergenerational Report 2002

Table 7: Real growth rates for Commonwealth health spending (%)

1984/84 to 2000/01 1989/90 to 2000/01Non-demographic 2.1 3.2Population 1.2 1.2Age structure 0.5 0.5Total 3.8 4.9

IGR Points:

• Technological change is main driver of growth (not demographics)

• Government health spending (shown here) is growing faster than

total health spending (more indicative of workforce trends)

AHMC Workforce Modelling

– PwC recently asked to develop a framework for a model of Australia’s health workforce

– Want to analyse mismatch between supply & demand in the future

– High-level concept only (so far)

AHMC Workforce Modelling

(spreadsheet)

– Flowchart of modelling approach

– Public hospital admissions example

Demand example: hospital services

Components of Hospital Demand

0

5,000

10,000

15,000

20,000

25,000

30,000

1994

1996

1998

2000

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2020

Year

Po

pu

lati

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/ S

epar

atio

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/ Pat

ien

t D

ays

('0

00)

0.0

0.5

1.0

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5.0

Ave

rag

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eng

th o

f S

tay

per

Sep

arat

ion

(d

ays)

Population--ABS ('000)

TotalSeparations(’000)

Total Patientdays --Admittedservices(’000)

Total Averagelength of stay(days)

NSW WCA pricing analysis framework

Sequential pricing variance

– How can we form a simple measure of the relative accuracy of various pricing approaches?

– Basic concept is to minimise the variance of employer loss ratios under different pricing approaches

– Another concept is to measure “within class” vs. “between class” variance

– Both concepts will allow for objective evaluation and concise quantification of the relative performance of alternative options

Sample analysis output (not real #’s!)

NSW WorkCover AuthoritySAMPLE EXHIBIT--INDICATIVE ONLYPRYs 1990-1995Reported Loss Ratios--paid + case estimates(90% of estimated ultimate claims $ reported)Variance of employer loss ratios under various premium formulas

Employer Loss RatiosPremium calculation method coefficient of variation

Fixed scheme employer average premium ($6,000) 100Fixed scheme employer average rate per payroll (3.0%) 50Old ASIC tariffs only 30New ANZSIC tariffs (smoothed) 25New ANZSIC tariffs (raw) 23Experience rated premiums 15Experience premiums with 5 years claim history 13Exp prem with improved ANZSIC tariff structure 14Exp prem with PDS discount 13Exp prem with no-claims discount 12

NSW WorkCover Insurer Remuneration

Background:

• NSW Work Comp has been a managed fund since 1988

• Large scheme deficit ($2.0b?)

• Plans to privatise in 2000 have been delayed indefinitely

• Current claims manager (insurer) remuneration system will expire June 2001

• WorkCover and insurance industry want to devise a new system which provides as much incentive as possible to manage to better claims outcomes

“Loss Ratio measure” analysis framework

Pricing “fit” by insurer

– Loss ratio measure may require a more “correct” pricing approach than the actual premium calculation system ever uses

– We need to determine whether and to what extent any current insurer/agents are “out of the money” on the measure

– The L/R measure may provide no real incentive to some insurers unless a more appropriate risk-based premium calculation is used

– For example, an insurer may be significantly better than average in managing claims that arise, but that insurer’s employer portfolio could have a much higher than average claims frequency rate

Sample analysis output

12

34

56

1995

1996

1997

19981999

0

20

40

60

80

100

120

140

Accident Year

Age (years)

Insurer A Loss Ratio History

1995

1996

1997

1998

1999

Ult

ima

te L

os

s R

ati

o %

Sample analysis output

1

4

1995 1996 1997 1998 1999

0

20

40

60

80

100

120

140

Accident Year

Age (years)

Insurer A Loss Ratio History

1995

1996

1997

1998

1999

Ult

ima

te L

os

s R

ati

o %

Sample analysis output

NSW WorkCover Loss Ratios by Accident Year(SAMPLE DATA ONLY!)

Latest Evaluation @ June 2002

0

20

40

60

80

100

120

140

1995 1996 1997 1998 1999

Accident Year

Lo

ss

Ra

tio

% Insurer A

Insurer B

Insurer C

Scheme

“Business Card”Daniel Tess, FCAS

Director

PricewaterhouseCoopers

201 Sussex Street

GPO Box 2650

Sydney, NSW 1171

(p) 8266 2849

(f) 8286 2849

daniel.tess@au.pwcglobal.com