WorkCoverWesternAustralia · 2018. 11. 8. · 1.3 Outstanding claim liabilities 4 1.4 Data 5 1.5...

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PricewaterhouseCoopersActuarial Pty LtdACN. 003 562 696

WorkCover Western Australia

Actuarial Assessment of the

RecommendedPremium Rates for

2008/09

Peter LurieFellow of the Institute of Actuaries of Australia

Fellow of the Institute of Actuaries (London)

30 April 2008

L:\FRM\Insurance\DOCS\PSL\1864report final.doc

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Contents

1 Key findings 1

1.1 Average premium rates 1

1.2 Recommended rates by class 4

1.3 Outstanding claim liabilities 4

1.4 Data 5

1.5 GST 6

1.6 Workers’ Compensation Reform Act 2004 6

1.7 Noise – induced hearing loss claims 6

2 Background and objectives 7

2.1 Background 7

2.2 Objectives 8

3 Statement of results 10

3.1 Overall premium rate variation 10

3.1.1 Incurred cost of claims in Inflated and discounted values 10

3.1.2 Impact on overall premium levels 11

3.1.3 Financial performance of WA workers’ compensation 13

3.2 Relative premium rates 16

3.3 Outstanding claim reserves 21

3.3.1 Central Estimate of outstanding liabilities 21

3.4 Actual vs Expected Claims Experience 24

3.5 Reconciliation of reserves 25

4 Analysis by type of payment 27

4.1 By financial year 27

4.2 PPCI by type of payment 29

5 Expense analysis 33

6 Terminology and limitations 35

6.1 Terminology 35

6.2 Limitations 35

6.3 Additional reliances on common law/election application costings 36


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7 Data and methods used 37

7.1 Data and assumptions 37

7.2 Types of estimates 37

7.3 Methods 37

7.4 Uncertainty in the estimates 38

7.5 Determination of provisions 38

7.5.1 Background 38

7.5.2 Levels of sufficiency 39

7.5.3 Sensitivity 40

A Relative premium rates – effective reduction of 14.4% 42

B Comparative statistics and trends 54

B1 Comparative statistics 54

B2 Statistical trends 57

B2.1 Aggregate incurred cost of claims in current values before 2004 Reform Act57

B2.2 Claim numbers and sizes and estimated incurred costs 58

B2.3 Reserving and loss ratios 59

B2.4 Case estimates, expenses and discount levels and margins 60

B2.5 Comparison of workers' compensation costs and wages by industry division

60

C Summary of Forms WC101 and WC20 62

D Data 75

D1 Data supplied 75

D2 Data used 76

D3 Asbestos-related claim data 80

D4 Data quality 80

D5 Data enhancements 81

D6 General data considerations 81

D6.1 Former insurers 81

D6.2 Mergers/takeovers 82

D6.3 Administrative issues 82

D6.4 Insurance Commission of Western Australia Data 82

D6.5 Self-Insurers 82

E Assumptions 83

E1 Financial assumptions 83

E2 Management and other expenses 87

E3 WA Legislative changes 89

E4 GST 90


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F Methods 91

F1 Methods used 91

F1.1 Conversion of prior years data 91

F1.2 Relative rates 91

F1.3 Weighted loss ratio 97

F2 Projection methods 97

F2.1 Payments per claim incurred method 97

F2.2 Payments per claim finalised method 97

F2.3 Payments per Claim Handled Method 97

F2.4 Projected case estimates method 97

G Outstanding claim valuation 98

G1 Claims experience and analysis 98

G1.1 Numbers of claims reported 98

G1.2 Cumulative claims reported 98

G1.3 Active claims 99

G1.4 Claim payments 99

G1.5 Case estimates outstanding 99

G1.6 Claim notification pattern 100

G1.7 Claim finalised per handled rate 100

G1.8 Development of Case estimates outstanding 101

G1.9 Payment factors for case estimates outstanding 101

G1.10 Average real payment per claim incurred 102

G1.11 Average real payment per claim closed 102

G1.12 Average real payment per claim handled 102

G1.13 Average real payment per claim incurred – statutory benefits plus legals

(used for 2000 to 2007 accident years only) 103

G1.14 Average real payment per claim incurred – Common law benefits only (used

for 2000 to 2007 accident years only) 103

G1.15 Numbers of claims incurred 104

G2 Actual and projected claims experience during 2006/07 105

G2.1 Numbers of claims reported 105

G2.2 Proportions of claims finalised 105

G2.3 Claim payments 106

G2.4 Changes in case estimates 106

G3 Projection models 107

G3.1 Payments per claim incurred model 107

G3.2 Payments per claim finalised model 108

G3.3 Payments per claim handled model 108

G3.4 Projected case estimates model 109

G4 Adopted estimates of outstanding claims 110

G4.1 Estimates from models 110

G4.2 Average claim sizes 110

G4.3 Relationship to case estimates 111

G4.4 Adopted estimates in 30/06/2007 values 111

G4.5 Gross of Reinsurance Estimates with allowance for AWE Inflation,

Discounting and Claims Expenses 112


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H Analysis of election option experience 113

H1 Data used 113

H2 Base analysis 113

H3 Election applications by accident year and lodgement month 120

H4 Analysis of new election applications 122

H5 Average common law claim size 130

H7 Summary 132

I Analysis of large claim data 134

I1 RPR returning entities and self-insurers 134

I1.1 Claims over $500,000 134

I1.2 Claims over $0.5M but not over $1.0M 134


I1.4 Claims over $2.0M 135

I2 RPR returning entities only (excluding self-insurers) 136

I2.1 Claims over $500,000 136



I2.4 Claims over $2.0M 137

J Claims experience 138

J1 Claims experience during 2006/07 138

J1.1 Aggregate trends 138

J1.2 Claims incurred in 2006/07 139

J1.3 Claims incurred in prior years (up to 30/06/2006) 139

J1.4 The 2006/07 experience 140

J2 Claims experience in the six months to 31/12/2007 142

J2.1 Claim reports 142

J2.2 Claims finalised 143

J2.3 Claim payments 143

J2.4 Case estimate development 145

J2.5 Summary of experience for the six months to 31/12/2007 145

J3 Analysis of large claim data 146

J4 Noise – induced hearing loss claims 147

J4.1 First election claims 147

J4.2 Second election claims 148

K Claim statistics 150

K1 Numbers of claims incurred 150

K2 Finalisation of claims 151

K3 Payment per claim incurred (PPCI) 152

K4 Average claim sizes – including allowance for the 2004 Reform Act 154

K5 Loss ratios including allowance for 2004 Reform Act 155

K6 Analysis of settlement costs 157


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L Analysis of the Number and Average Size of Common Law

Claims 160


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1

WorkCover Western Australia

Actuarial Assessment of theRecommended

Premium Rates for 2008/09

1 Key findings

1.1 Average premium rates

Based on the central estimate model presented in this report, the average premium ratehas decreased by 14.4% from 1.849% of wages for 2007/08 to 1.582% for 2008/09,excluding allowance for brokerage.

The average recommended premium rate was 2.117% for 2006/07, 2.317% for2005/06 and 2.252% for 2004/05. The chart below shows average rates from 1996onwards.

Recommended Premium Rates by underwriting year

1.50%

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

3.25%

3.50%

1996 1997 1998 1999 2000 2000 2001 2002 2002 2003 2004 2005 2006 2007 2008 2009

Gazette before 1999 Act change Gazette after 1999 Act changeGazette after 1999 Act change less brokerage

Notes: (a) the discontinuities at 2000 and 2002 are due to a second set of rates being Gazetted to take intoaccount the effect of the 1999 Act changes and the removal of allowance for brokerage respectively

(b) the 2006 and later rates include allowance for the impact of the 2004 Reform Actamendments.


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Key findings

2

The central estimate actuarial model is the same model as used last year and isintended to represent a realistic and unbiased estimate of the projected risk cost ofclaims plus the disclosed allowances for expenses, margins and contingencies.

The 2008/09 premium rating basis has reduced as a result of three major influences:

a 6.3% reduction from phasing out the 2004 Reform Act allowances as theactual post Act change claims experience emerges (discussed further in sectionE4)

a 6.5% decrease due to wages increasing by significantly more than wageinflation (see section E1) and

a 3.9% decrease due to the reduction in superimposed inflation (ie claim costinflation in excess of wage inflation – see section E1 for details)

The other influences are more minor and include smaller increases and decreases, thenet impact of which makes up the balance of the recommended change in premiumrates.

The following table shows the main drivers influencing the overall level of premiumrates since last year. It reconciles this year's recommended rate to last year's rate of1.849%.

Key driver change Estimated ave premium rate % % change

Recommended rate 1.582%

Adjusted Act change allowance 1.689% -6.3%

Decrease in Dec 07 halfyear claim numbers 1.707% -1.0%

Increase in 2006/07 claim numbers 1.678% 1.7%

Expense and other loadings 1.663% 0.9%

Excess growth in declared wages above AWE 1.778% -6.5%

Decrease in superimposed inflation 1.851% -3.9%

Common law frequency 1.862% -0.6%

Common law average claim size 1.850% 0.7%

Change in market interest rates 1.862% -0.7%

Increase in inflation rates 1.854% 0.5%

Balance due to other sources 1.849% 0.2%

Total % change -14.4%

Note that the percentages are calculated as the multiplicative impact on the riskpremium rate. The additive sum of the individual components do not add up to-14.4%, but it is the total of all the percentages when applied multiplicatively.


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Key findings

3

The key drivers of premium rates over the most recent three premium rating years areshown below:

2009 2008 2007Key Driver (a) (b) (c) (a) / (b) -1 (b) / (c) -1

Number of claims incurred (d) 37,213 36,966 37,960 0.7% -2.6%Average claim size $ (e) 14,204 14,644 13,609 -3.0% 7.6%Expense and margin loading (f) 0.26974 0.25863 0.29148 4.3% -11.3%Wageroll returned $M (g) 42,407 36,821 31,527 15.2% 16.8%Estimated incurred cost of claims $M (h) 670.759 680.942 667.422 -1.5% 2.0%Average premium rate (i) 1.582% 1.849% 2.117% -14.4% -12.7%

Notes : (a) from 3.1.1 and 3.1.2 of this report

(b) & (c) from 1.1 of our 24/04/2007 RPR report

(d) includes allowance for IBNR's

(e) in inflated and discounted values

(f) for grossing up the estimated risk cost of claims for expenses and margins, net of interest credit

(g) adjusted to include final wage adjustments

(h) = (d) x (e) x (1 + (f))

(i) = (h) / (g) %

% difference

Premium rating year ending 30 June :

The average premium rates are not intended to include any allowance forconservatism. They are based on an unbiased estimate of future incurred risk cost ofclaims from our actuarial projection model. They do allow for incurred but notreported (IBNR) claim numbers to be reported in future, based on current reportingdelay trends of both statutory and common law claims.

A target loss ratio of 78.8% is adopted to calculate premium rates gross of expensesand margins excluding brokerage. Last year's loss ratio was 79.5% excludingbrokerage. The loss ratio decreases because insurers’ expense margins excludingbrokerage have increased. Target loss ratio is the inflated and discounted estimatedincurred cost of claims before expenses, divided by the premium charged.

The allowance for expenses, contingencies and interest does not include theSupplementation Fund Levy for the HIH run-off or the GST payable on the premium.

Insurer total expense levels varied between 11.4% to 30.7% of premiums, with anaverage of 17.8% (16.9%), excluding the Supplementation Fund Levy. All insurers’expenses changed by less than 4.0% since last year.

The total expense level of 17.8% is made up of 3.3% (3.2%) brokerage, 1.9% (1.9%)statutory charges and 12.6% (11.8%) management expenses. The figures in bracketsare from last year. If insurers not paying brokerage are removed, the brokerage rateincreases to 3.6% (3.4%).

The actuarial projection basis implies a common law portion of 23% for the 2006/07accident year, excluding legal costs.


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Key findings

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Prior to the October 1999 amendments, the common law portion was estimated as36%.

However, if claimants do not utilise common law, we would expect the use ofstatutory benefits to increase, leading to a net saving of only around half or less of theestimated common law cost component.

1.2 Recommended rates by class

Relative premium rates per industry class have been calculated using an experience-based partial credibility method. The method used is also referred to as hierarchicalcredibility. The movement in relative premium for an unchanged premium pool isslightly lower than last year with 70% of classes within a 10% range of last year’srates. This compares to 68% last year and 73% the year before. Once again, this yearlarge claims were capped at $3M when calculating the raw relative premium rates byclass. Five claims were capped in different rating classes (see F1.2.3 for detailedmethod). Last year six large claims were capped and six the year before. Also tworating classes excluded the 2007 year from the premium rate calculation due todeclared wages being zero as the insurance cover was for greater than 12 months.

The Recommended Minimum Policy Premiums are as follows:

2008/09 2007/08 2006/07 2005/2006 2004/2005 2003/2004

Householders

Policies

$65.00 $65.00 $60.00 $60.00 $55.00 $55.00

All Other Policies $200.00 $195.00 $185.00 $180.00 $170.00 $170.00

Minimum premiums are indexed to CPI and increase in multiples of $5. This yearthere is no increase to the minimum for the householders policy but all other policiesare recommended to increase by $5.

1.3 Outstanding claim liabilities

Our actuarial assessment of the outstanding claim liabilities (inflated but notdiscounted) as at 30 June 2007 is $1,284M. This compares to aggregate reservesreturned by applicable insurers of $1,356M. Both insurers’ and our liabilities allowfor the impact of the 2004 Reform Act.

The insurers reserves are $72M or 5% higher than our estimates. Last year the marketwas $85M or 6% lower.

Insurers reserving is higher in aggregate than the results of our projections. Note thatdue to the more detailed allowance for asbestos reserves, insurer’s reserves exceededour reserves in the oldest accident years.

The reserves of most insurers lie within an acceptable range. Generally reserves havereduced relative to claim payments from 322% last year to 306% now.

The results in section 3.3.1 shows the detail of this by accident year and insurer.


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Key findings

5

A detailed reconciliation of the build-up of reserves over the year is shown in section3.5. This shows a net release of reserves of $237M (20%) on our projections and$113M (10%) on insurer’s reserves over 2006/07 on claims incurred to 30 June 2006.All years except the 1999 & earlier accident years experienced a release of reserves.

1.4 Data

The form of the data supplied for the 2006/07 year is similar to the data supplied lastyear. The 2008/09 recommended premium rates are established using the 2006/07returns together with the quarterly returns to December 2007.

This is the thirteenth year that the data collected is based on the new industry classes.The quality of the data and the efficiency of its collection has improved. There aresome remaining areas of inaccuracy and issues which need to be considered, asdiscussed below.

Data for Government Insurance Fund and Municipal WorkCare WALGA wasincluded for the first time in 1997/98. The 1998/1999 average rate was adjusted toallow for the inclusion of these two funds. In 2004, at the request of the formerPremium Rates Committee, we removed all WALGA data from our analysis andpricing models.

Note that, as a result, the claims experience for ANZSIC code 81130 – LocalGovernment Administration is based predominantly on historical data collected fromprivate insurers and does not reflect the current experience of the Local Governmentself-insurance scheme.

There is always room for improvement in the data quality and accuracy and in thedata collection process. This year once again a number of insurers had difficultypresenting accurate returns.

The number of revisions required for the 2006/07 premium rating returns was asfollows:

5 returning entities had clear initial returns 5 returning entities were clear after a first revision 9 returning entities required two revisions 1 third revision was required 1 fourth revision was required.

The quality of the data and the revisions done by insurers was of a similar quality tolast year.

It was identified this year that the additional data (civil proceedings, large claims andnoise induced hearing loss (NIHL) claims) included data from self-insurers. Self-insurance claims were removed from the civil proceedings and large claims datahowever due to the coding were unable to be removed from the NIHL data. Weestimate these claims to be about 10% of the total cost of NIHL data.


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Key findings

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The data requirements to best monitor the impact of the staged implementation of the2004 Reform Act amendments, have already commenced being supplied. This mayneed to be refined in future.

The planned future move to using the ANZSIC 2006 classification will extend thenumber of premium rating classes and affect the data required.

1.5 GST

Our adopted projection bases use claim payments data which includes GST andtherefore appropriate GST allowance is included in the results obtained. The 10%GST on the workers’ compensation premium itself (which employers will generallybe able to recover via an input tax credit) is not included in our analysis or therecommended premium rates.

1.6 Workers’ Compensation Reform Act 2004

We have made allowance for stage 1 and stage 2 of the 2004 Reform Act whenprojecting future claim payments. See attachment E3 for details.

The Act change allowance has been scaled down at this valuation to reflect the extentthat post Act change claims experience forms part of our adopted projection basis.

1.7 Noise – induced hearing loss claims

The noise-induced hearing loss claim (NIHL) data supplied by WorkCover WAshows increasing trends in the confirmed assessment of first election claims over thepast 11 years, and also in the number and cost of claims with a formalisedMemorandum of Agreement (MOA).

At current levels, first-election NIHL claims appear to be costing $1.3M per year(0.26%) of the estimated total cost of claims. Second-election NIHL claims appear tobe costing $0.1M per year (0.02%) of the estimated total cost of claims. These costshave been reduced by 10% to approximate the removal of self-insurers NIHL claims.


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Background and objectives

7

2 Background and objectives

2.1 Background

In June 2003 we were re-appointed to provide actuarial services to WorkCoverWestern Australia and the former Premium Rates Committee, in accordance with theterms of RFT503 issued by the Western Australia Department of Treasury andFinance. The actuarial services required are specified in detail in the tender documentand the letters of notification and this report is prepared in accordance with thoserequirements. We were initially appointed to this role in October 1995 and in May1998 the actuarial services to the former Premium Rates Committee were publiclytendered again and our services were retained.

Amendments to the then Workers’ Compensation and Rehabilitation Act 1981, whichcame into effect on 4 January 2005 abolished the Premium Rates Committee andestablished the WorkCover WA Authority, which is governed by a Board, asresponsible for the determination of recommended premium rates. The amendmentsalso renamed the legislation to the Workers’ Compensation and Injury ManagementAct 1981. Section 4 of the Employers’ Indemnity Policies (Premium Rates) Act 1980broadens the scope of an employer indemnity policy to include common law claims.Insurers may discount the recommended rate by any amount, or surcharge within thelimit imposed by Section 152 of the Workers' Compensation and Injury ManagementAct 1981. The surcharge limit to 30 June 2005 was 100% of the applicable rate. Asof 14 November 2005 an amendment to this section reduced the permissible surchargelimit to 75% of the applicable rate. Subject to the approval of the WorkCover WABoard, an insurer may surcharge the recommended premium rate beyond by therelevant percentage.

On 4 January 2005 stage 1 of the 2004 Reform Act was assented to, with Stage 2following on 14 November 2005. The Act amendments were intended to restorebalance to the WA workers’ compensation system. The Act amendments include:

enhanced statutory benefits altered access to common law based on impairment rather than disability enhanced medical benefits and enhanced processes for injury management and dispute resolution.

Consistent with instructions from WorkCover WA, we have incorporated the impactof the 2004 Reform Act in this report. The initial estimate of the impact on therecommended rates is detailed in a special actuarial assessment report dated 13 April2005.

The actuarial assessment in this report is based on claim data supplied by allapplicable approved private insurers as well the Insurance Commission of WesternAustralia (Insurance Commission), in respect of RiskCover and for the pre - 1987private sector risks. From 1997/98 onwards, data was also supplied by MunicipalWorkCare WALGA (to ensure accurate premium rating for local government) and bythe Government Insurance Fund (Unfunded). In 2002/03 the requirement to include


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8

WALGA was removed and hence, all the data for this self-insurance fund wasremoved.

In this report we use the term “Premium Rates returning entities” to mean approvedprivate insurers, RiskCover and the Insurance Commission Funded, Unfunded andICGF. We note that all self-insurers (other than RiskCover) are excluded from thisactuarial assessment.

This investigation is based on the 2006/07 data supplied together with the data forprior years. This is the thirteenth year that data is supplied on the new industryclasses introduced with the 1994/95 Gazetted Premium Rates and hence the transitionfrom the occupational to the ANZSIC industry classification was practicallycompleted several years ago. Previously the data on the old occupation codes had tobe converted to the new industry classes.

The current 2006/07 data was validated and aggregated. We then calculated anupdated set of relative premium rates and normalised them to produce the sameaggregate notional premium pool as this year’s recommended premium rates appliedto the current returned wages. Relative premium rates are calculated using ahierarchical credibility experience rating method based on a ten year weightedaverage. This method is sensitive to the claims experience of each class and theextent of this sensitivity increases with the size/exposure of the class. Large claimsare capped at $3M. There were seven such claims (not including self-insuranceclaims) this year of which five were capped. The others were outside this year’saccident year range or were below $3M at 30 June 2007.

The incurred cost of workers' compensation is estimated using actuarial projectionmethods. This includes the projection of future claim payments. The calculationslead to the suggested overall premium amount required and the overall increase ordecrease in premium rates.

The adequacy of aggregate outstanding claim reserves for the total industry isexamined as well as that of individual insurers. Expense levels are analysed and dataquality and accuracy is commented on.

2.2 Objectives

We have been asked to give advice on the recommended rates that should apply forpremium rating classes by industry. The main aims of this exercise are:

to calculate the total amount of premium income required to meet the cost ofclaims plus expenses and margins with anticipated investment income

to recommend rates that are broadly equitable across different industry classeswith no intentional cross subsidy of rates

to suggest an appropriate overall increase or decrease in relative premiumrates

to use methods which give relative stability in the rate structure.

A further objective of WorkCover WA is to examine the adequacy of outstandingclaims reserves both in aggregate and by insurer.


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After an initial transition period from occupation to industry based classes in the mid1990’s, relative stability was achieved and: the maximum increase/decrease limits were removed a greater level of stability in the relativities was achieved and the minimum premium rate was reduced to $0.40 to reduce the level of cross

subsidies.

Note that the phasing in of the 2004 Reform Act over the 2005 to 2007 calendaryears, impacts claim costs and has the potential to produce future volatility in overallincurred costs and relative premium rates in an environment of increased uncertainty,while the financial impact of the Act amendments emerge over the next few years.


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Statement of results

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3 Statement of results

3.1 Overall premium rate variation

3.1.1 Incurred cost of claims in Inflated and discounted values

Our estimates show the following adopted average claim size for the 2008/09premium rating year including the 2004 Reform Act allowance:

Basis Average Claim Size (a)

current values (b) 14,151CV + Act change (c) 15,130ACS inflated/discounted (d) 14,204

Assumed claims incurred (e) 37,603

Notes: (a) the average claim size for the 2006/07 accident year from our actuarial projections x (1.029)^1.75 to allow for future superimposed inflation at 2.9% pa from 30 June 2007 (data date) tothe mid point of the claims incurred period, to which the premium rates apply.

(b) as per the adopted actuarial assessment model

(c) as for (b) but including the 2004 Reform Act allowance

(d) = (c) x inflation and discount factor

= the inflated and discounted average claim size net of expenses and margins

The inflation and discount factor used is 0.9388 (0.9391 last year). This allows for projectedfuture cashflow to be inflated and discounted using the financial assumptions stated inAttachment E1

(e) the number of incurred claims assumed is equal to the 2006/07 accident year.

Average claim size calculated in this way includes allowance for the current claimsexperience and trends and an analysis of the election option experience to 31/01/2008.

The estimated incurred cost of claims, including the 2004 Reform Act allowance, isthen calculated as:

number of claims x average claim size

Estimated Incurred Cost = number incurred x average claim size

37,603 x 14,392.08 x 0.9388 = 508,056,770 for 2006/07 accident year

37,213 x 14,771.43 x 0.9388 = 516,038,796 for 2007/08 accident year

37,213 x 14,203.62 = 528,558,127 for 2008/09 underwriting year

The 2008/09 underwriting year assumes claim numbers incurred to decrease by 1.0%as indicated by the experience in the half year to 31 December 2007.


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3.1.2 Impact on overall premium levels

Loadings for expenses and contingency margins are required as follows:

Total expenses = 17.80% of premium (16.90% last year)Total expense less brokerage = 14.51% of premium (13.75% last year)Contingency margins = 8% of premium (unchanged from last

year)

Total expenses increase due to an increase in insurers management expenses andbrokerage, while statutory charges remain unchanged.

Premiums are received on average three months before the point to which claim costshave been discounted, therefore assuming 6.7% pa, a credit of 1.63% of premium ismade for interest earnings. Last year 6.3% pa was used as the risk-free market rate ofinterest.

A combination of these loadings excluding brokerage gives:

Gross Premium = Risk Premium(1 - 0.1451 – 0.08) x 1.067^0.25

= Risk premium x 1.2690 (calculated as 1 / rounded loss

ratio as below)

This is equivalent to a loss ratio of:

Risk Premium / Gross Premium = 78.8% excluding brokerage (rounded to 3decimal places)

The loss ratio used last year was 79.5%. The 0.7% decrease is due mainly to thehigher management expense charge percentages.

The estimated incurred cost gross of expenses, and contingency margins, butexcluding brokerage, is obtained by grossing-up the results from 3.1.1 above asfollows:

Gross Estimated Incurred Cost including expenses and margins

508,056,770 x 1.2690 = 644,742,093 for 2006/07 accident year

516,038,796 x 1.2690 = 654,871,568 for 2007/08 accident year

528,558,127 x 1.2690 = 670,759,044 for 2008/09 underwriting year

The 2008/09 estimate of incurred cost, including allowance for the 2004 Reform Act,is equivalent to 1.582% of the $42,407M adjusted returned wages (see AttachmentB1), compared to 1.849% last year. This is a real reduction of 14.4% in aggregate.


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The weighted average credibility rates are normalised to $803.1M, which is thenotional premium on 2006/07 returned wages, using 2007/08 Gazette rates. Theadjusted comparative figure on 2006/07 Gazette rates was $910.0M i.e. 11.7% higherwhich is reasonable since the 2007/08 Gazette rates were reduced by 12.7%.

The analysis of recent claim experience in the six months to 31/12/2007 is shown inAttachment J and suggests that claim costs are fairly consistent with, but lower thanexpectations.

The above analyses and discussion suggest that the weighted average Gazettepremium rate, including allowance for the 2004 Reform Act, should decrease by14.4% based on the actuarial projection model excluding brokerage. This conclusionincludes allowance for the October 1999 amendments and the estimated impact of the2004 Reform Act. It is based on the election option experience to 31/01/2008, andstatutory claims experience to 31/12/2007. The premium rates do not includeallowance for the 10% GST on premiums which is generally recoverable byemployers.


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3.1.3 Financial performance of WA workers’ compensation

The tables below show performance of the WA workers’ compensation system on twodifferent bases :

accident year basis

financial year basis.

(a) Accident year performance table including allowance for the 2004 ReformAct

Estimated

2001 2002 2003 2004 2005 2006 2007 2008$M $M $M $M $M $M $M $M

Gross earned premium (a) 621.614 585.164 587.328 575.865 617.083 701.619 734.888 769.353

Cumulative claim payments (b) 333.067 300.879 309.903 326.563 307.630 241.411 111.017 111.724Outstanding estimate (c) 23.926 43.410 72.963 111.176 179.093 250.819 479.404 508.963Net claims incurred (d) 356.993 344.289 382.866 437.739 486.723 492.231 590.422 620.687

Underwriting profit/loss (e) 264.621 240.875 204.462 138.125 130.360 209.389 144.467 148.666

Commission (f) 18.648 17.555 17.620 17.276 18.512 21.049 22.047 23.081Other expenses (g) 78.323 76.071 88.148 90.130 98.541 97.559 108.768 113.869Estimated investment income (h) 44.755 43.167 53.086 57.306 64.070 75.225 82.365 86.587

Estimated profit/loss - $ (i) 212.405 190.416 151.780 88.025 77.376 166.007 96.017 98.304- % of gross EP (i) 34% 33% 26% 15% 13% 24% 13% 13%

Loss ratio (j) 57% 59% 65% 76% 79% 70% 80% 81%

Total profit/loss (k) 886.009 982.026 1,080.329Tot profit/loss % of EP(l) 24% 22% 21%

GWP on Gazette Rates (m) 659.351 628.268 634.805 673.513 734.187 853.804 909.983 831.203Est EP on Gazette Rates (n) 659.351 637.593 632.844 661.901 715.985 817.919 893.130 854.837

Difference in EP (o) 37.737 52.429 45.516 86.036 98.902 116.300 158.241 85.484

Estimated profit/loss on Gazette rates (p) 250.142 242.845 197.296 174.061 176.278 282.307 254.258 183.78738% 38% 31% 26% 25% 35% 28% 21%

Total profit/loss (q) 1,322.928 1,577.186 1,760.973Tot profit/loss % of EP(r) 32% 31% 30%

Number of active claims by accident year (s) 243 358 530 914 1,645 3,488 12,357

Notes : (a), (b) from section K5 of this report, estimated for the 2008 accident year. Assumed a 10% discount on Gazette rates in 2008.

(c) = PwC reserves from section 3.3.1of this report. The 2008 accident year estimated as inflated average claim size x number incurred with 18%

assumed paid in DY0. Excludes 5% claim management expense allowance and risk margins.

(d) = (b) + (c)

(e) = (a) - (d)

(f) = 0.03 x (a) estimated

(g) = {total expense % from B2.4 in this report x (a)} - (f)

(h) = This is a theorectical allowance.

(i) = (e) - (f) - (g) + (h), where the % in the row below is of (a). Estimated profit/loss is after allowance for superimposed inflation and the rate change in

previous years. It is before allowance for (ie does not include) risk margins on outstanding claim reserves and the 8% profit margin adopted by the RPR.

(j) = (d) / (a) %

(k) = sum of (i) in $M

(l) = (k) / sum of (a) %

(m) = gross written premium on the Gazette rates which applied for the year

(n) = estimated earned premium on Gazette rates allowing for 30% of GWP to be unearned at each 30 June. (n) = (m) for 1997

(o) = (n) - (a) ie Gazette earned premium minus insurer earned premium

(p) = (o) +(i) ie estimated profit on Gazette rates, where % in row below is of (n)

(q), (r) = defined as for (k) and (l) with reference to (p) and (n)

(s) = the number of open claims from the consolidated Form WC20s supplied by returning enitities.

Accident Year ending 30 June

Estimated Profit and Loss in the WA Workers' Compensation System


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14

In the table above note that:

the results are indicative of actual past and expected future claim trends

the benefit of hindsight is included in using 30 June 2007 reserves for allaccident years in the post October 1999 amendments and post 2004 ReformAct environment

the outstanding claim reserves contain no allowance for claims managementexpenses or risk margin

the estimated profit/loss includes allowance for superimposed inflation, therate change from previous years, expenses and commission/brokerage

the estimated costs for the more recent years (2006 and 2007) comprise mainlyuncertain future estimates. For example, only 19% of 2007 has actually beenpaid and 81% is the uncertain future estimate

the whole of 2008 is an uncertain future estimate. The gross earned premiumis subject to external market forces. Claims costs are also influenced bymarket forces, uncertain future claim events and economic, legislative andsocial conditions.

The estimated investment income credit in the above table is a theoretical allowancebased on the forward rates implied by the Commonwealth Government Bond yieldcurve applicable in each year.

The profit levels attained in recent years are generally well in excess of the 8% profitmargin in the recommended premium rates.


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15

(b) Financial year performance table excluding allowance for the 2004 ReformAct

Estimated Profit and Loss in the WA Workers' Compensation System

2001 2002 2003 2004 2005 2006 2007 Total$M $M $M $M $M $M $M $M

Gross earned premium (a) 621.614 585.164 587.328 575.865 617.083 701.619 734.888 4,423.562

Claim payments (b) 373.679 357.649 357.266 348.556 387.858 412.304 442.301 2,679.612Change in o/s estimate (c) 45.005 (38.896) 29.417 53.865 97.858 (34.888) 29.497 181.860Net claims incurred (d) 418.684 318.753 386.683 402.421 485.717 377.416 471.798 2,861.472

Commission (e) 18.648 17.555 17.620 17.276 18.512 21.049 22.047 132.707Other expenses (f) 78.323 76.071 88.148 90.130 98.541 97.559 108.768 637.541

Underwriting result (g) 105.959 172.785 94.877 66.038 14.313 205.596 132.275 791.842

Underwriting result % (h) 17% 30% 16% 11% 2% 29% 18% 18%

Number of active claims (i) 26,171 20,969 20,870 21,918 21,647 20,501 20,528

Notes : (a) = from section 5.5 of this report

(b) = from Form WC20 returns for 2006/07 and prior years

(c) = from Form WC20 returns for 2006/07 and prior years

(d) = (b) + (c)

(e) = 0.03 x (a) estimated

(f) = {total expense % from B2.4 in this report x (a)} - (e)

(g) = (a) - (d) - (e) - (f)

(h) = (g) / (a) %

(i) = the number of open claims from the consolidated Form WC20s supplied by returning enitities.

Financial Year ending 30 June

The inclusion of investment income would have improved the underwriting result formost years. In aggregate, over 2001 to 2007, investment return of $587.9M isestimated using the average funds available for investment and the one year forwardCommonwealth Bond rate.

The above table is different from the accident year table in many respects as it:

does not include investment income (as this data is not returned by insurers)

does not use the benefit of hindsight for reserving

is based purely on data supplied by premium rates returning entities

shows the financial year results aggregated across accident years.

The outstanding claim reserves reflect market knowledge and conditions at the end ofeach year.


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16

The financial year results show a very different picture to the accident year table withlarge underwriting losses arising up to 1999 (as shown in prior years’ reports),followed by a generally increasing profit trend, and an overall profit equal to 18% ofgross earned premium over the seven year period.

3.2 Relative premium rates

The experience rating method adopted, results in premium rates for an unchangedpremium pool which compare as follows to the current 2007/08 Gazette rates :

Table of movement in Recommended Premium Rates

Movement in Number of Recommended Rates which :

RecommendedPremium Rates Decrease Increase Unchanged Total

5% or less 95 77 29 201

more than 5% but less than or equal to 10% 86 48 0 134



more than 20% 13 21 0 34

Total 251 200 29 480

Last year 196 rates decreased, 183 changed by less than 5% and 144 changed bybetween 5% and 10%. Relative premium rates are fairly robust this year in spite of:

the 7.7% increase in the self-rating point from $680M to $733M

any artificiality introduced by normalising rates to an unchanged premium poolwhich is differently distributed by rating class

Note that the claims experience for ANZSIC code 81130 – Local GovernmentAdministration is based predominantly on historical data collected from privateinsurers and does not reflect the current experience of the Local Government self-insurance scheme.

70% of classes have rates which change by less than 10% up from 68% last year butdown from 73% the year before.


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17

After the aggregate 14.4% decrease in rates, inclusive of the 2004 Reform Act, thedistribution of the percentage movement in recommended rates is shown below:

Table of movement in Recommended Premium Rates

Movement in Number of Recommended Rates which :

RecommendedPremium Rates Decrease Increase Unchanged Total

5% or less 32 18 29 79




more than 20% 136 4 0 140

Total 418 33 29 480

The rates for 0 (0) class increase by more than 50% while the rates for 9 (5) classesdecrease by more than 33%. Figures in brackets are last years.

The table below shows the distribution of credibility level achieved by rating classeson their own claims experience:

Credibility No. of % No. of %Level Classes Classes

Up to 25% 144 30.0% 136 28.3%

> 25% but 50% 154 32.1% 155 32.3%

> 50% but 75% 77 16.0% 78 16.3%

> 75% but < 100% 39 8.1% 47 9.8%

100% 66 13.8% 64 13.3%

Total 480 100.0% 480 100.0%

This year Last year

The number of classes with less than 25% credibility increased by 8 and as a result theother bands are slightly less than last year, except that 2 additional classes achievedfull credibility.

The resulting relative rates indicate the strength of the method in producingappropriate rates and minimising cross subsidies.

These relative rates are normalised to produce an unchanged aggregate notionalpremium, using the 2007/08 Gazette rates.


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18

The Gazetted Recommended rates have been varied as follows since 30 June 1994:

Premium rating year Overall adjustmentending 30 June to rates

2009 -14.4% {recommended}2008 -12.7%2007 -8.6%2006 2.9% {post 2004 Reforms}2005 -3.8%2004 -5.1%2003 -6.0%2002 -11.6% {-8.2% + -3.4%}2001 -3.9%2000 21.8% {35.3% before1999 13.6% Act change}1998 -9.5%1997 -10.5%1996 -2.5%1995 -12.5%1994 5.0%

Aggregate -62.8%

Variation in premium rates

-9.5%-11.6%

-6.0%

-12.7%

-3.9%

-14.4%

2.9%

-5.1%

13.6%

21.8%

-8.6%

-3.8%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Year

%

The 1999/2000 Gazette rates were reduced by 10% from 1/11/99 in response to theOctober 1999 amendments. Premium rates have decreased by 44.9% from 2002 to2008 allowing for the 2002 removal of brokerage and the 2004 Reform Act.

The rate increase of 2.9% in 2006 is the combined impact of relatively stable claimcosts and high wages being more than offset by the allowance for the 2004 ReformAct. The large decreases of 8.6% in 2007, 12.7% in 2008 and 14.4% (recommended)in 2009 premium rates is the combined impact of relatively stable claim numbers andslight real decreases in claim costs combined with wageroll increases far in excess ofAWE growth, due to the continuing buoyant state of the WA economy.


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19

Revised minimum premiums are calculated each year based on movements in thePerth CPI index, but changes are only made in $5 multiples. This indexing producesthe following results:

Recommended Minimum Premium

Last Year's

Gazette

Indexed since last

change

2008/09

Recommended

Householder Policies 65.00 69.05 65.00

All other Policies 195.00 203.17 200.00

Indexing is cumulative irrespective of when recommended minimum premiums werelast revised.

The table below compares the 2006/07 gross written premium returned by insurers tonotional premiums on Gazette rates:

% Difference fromGazette rates No. of % of % of No. of % of % of

Classes Classes GWP Classes Classes GWP

0% but < 5% 92 19.5% 14.8% 70 14.9% 9.5%

5% but < 10% 40 8.5% 4.8% 30 6.4% 4.7%

10% but < 15% 34 7.2% 14.5% 16 3.4% 1.4%

15% but < 25% 39 8.3% 12.9% 26 5.5% 2.3%

25% but < 50% 65 13.8% 27.6% 19 4.0% 1.3%

50% but < 100% 31 6.6% 6.1% 5 1.1% 0.1%

>100% 4 0.8% 0.1%

Total 301 63.9% 80.7% 170 36.1% 19.3%

Analysis of Level of Discount / Surcharge to Gazette 2006/07 (a)

Classes with discounted premiums Classes with surcharged premiums

This table shows that 64% of classes and 81% premium are discounted. The overallimpact is a 22.6% aggregate discount against Gazette rates for all classes. This is thesame as 22.6% calculated in aggregate for the premium pool in B2.4 which includesallowance for wage and premium adjustments.

Note that 47% (41%) of premium is discounted by 15% or more and 4 (2) classes aresurcharged by over 100%. Figures in brackets are last years.


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20

The table below analyses the number of policies per rating class:

% ofClasses Classes

0 but 5 68 14.2%

> 5 but 15 79 16.5%

> 15 but 30 66 13.8%

> 30 but 50 51 10.6%

> 50 but 100 66 13.8%

> 100 but 500 106 22.1%

> 500 but 1000 28 5.8%

> 1000 but 2000 10 2.1%

> 2000 but 5000 5 1.0%

> 5000 1 0.2%

Total Classes 480 100.0%

Policy range

Analysis of Policies for 2006/07 reporting year

Here we see that 14% of classes have 5 or less Policies while 45% have more than 50Policies. There are 8 classes without any 2006/07 Policies issued, 18 with 1, 11 with2, 11 with 3, and 11 with 4 policies issued.


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21

3.3 Outstanding claim reserves

3.3.1 Central Estimate of outstanding liabilities

The actuarial assessment of outstanding claim reserves since 30/06/95 are comparedto insurers reserves in the table below:

Inflated/Undiscounted Reserves ($M)Year ending

30 JuneActuarial

(a)

Aggregate Insurers

(b)

% Difference from

Insurers Reserves

(c)

2007 (e)

2006 (e)

2005 (e)

2004 (e)

2003 (e)

2002 (d)

2001 (d)

1,283.5

1,411.4

1,303.2

1,145.5

1,217.5

1,186.9

1,101.6

1,355.7

1,326.2

1,361.1

1,263.2

1,209.4

1,192.4

1,231.0

-5.3%

+6.4%

-4.3%

-9.3%

0.7%

-0.5%

-10.5%

2000 (d) 1,197.0 1,184.0 1.1%

1999 (d) 1,195.4 1,143.9 4.5%

1998 (d) 1,117.5 938.2 19.1%

1997 738.2 641.9 15.0%

1996 608.9 604.1 0.8%

1995 600.0 542.7 10.6%

Notes: (a) = item (b) from Attachment G4.5 divided by 1.05 to remove claims expenses and from our prior

reports

(b) = col(d) + col(e) from Form WC20 data supplied by insurers (see Attachment C for 2007 and

prior reports for previous years)

(c) = (a) / (b) - 1

(d) includes Government Insurance Fund Unfunded (GIFU) and Municipal WorkCare from 1998

year onwards

(e) excludes Municipal WorkCare/WALGA from 2003.

Inflated insurer reserves are 5.3% ($72.2M) higher than our actuarial estimatescompared to 6.4% lower last year.

This year’s analysis includes two and half years of post 2004 Reform Act change dataand separate explicit allowance is made for the estimated increase costs of the Actchanges (see Attachment E3) scaled down to reflect the extent that the actual post Actchange experience forms part of our adopted projection basis.


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22

The adopted actuarial central estimate results are based on a blend of the methodsused. The detail can be found in Attachment G.

The inflated and discounted actuarial reserve at 30/06/2007 is $1,129M compared to$1,217M at 30 June 2006, $1,146M at 30 June 2005 and $1,011M at 30 June 2004.

This year the actuarial reserves decreased by 7.3%.

Individual insurer reserves were broadly tested for adequacy, using a reserving rangeof 160% to 400% of claim payments as a benchmark. The average reserves to claimpayments is 305% (343%) for all insurers combined using inflated actuarial estimatesand 306% (322%) using insurer reserves. The figures in brackets are as at last year.

This shows that actuarial reserves decreased by 38% of claim payments since lastyear, and that insurer reserves have decreased by 16% of claim payments.

The table below shows the reserves to payments ratio and prudential margin perinsurer:

Insurer reserves / claim Prudential

payments (a) Margin (b)

Inflated o/s

1 607.8% 42.7%2 423.9% 9.1%3 380.3% 31.0%4 351.1% 31.0%5 338.1% 8.5%

6 323.4% 22.5%7 264.1% 17.3%8 243.0% 12.3%9 229.4% 14.1%

10 203.5% 14.0%11 202.9% 14.3%

Total 306.5% 20.9%

Notes : (a) = (case est o/s + IBNR+Dev est) /claim payments from Form WC20for 2005/06

(b) = prudential margin % as supplied

by insurers on Form WC20 for 2006/07

Last year, one insurer had a ratio of less than 200%. Five (five) of eleven (eleven)returning insurers have ratios less than the 306% (322%) average. The figures inbrackets are as at last year.


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23

The four largest insurers have 15% market share or more each and represent 77% ofthe 2006/07 gross written premium. Two of these four insurers have reserves wellbelow the 306% average, the other two had reserving ratios just above the average.One of the large insurers with low reserves also has a prudential margin much lowerthan the 20.9% weighted average. We note that when setting prudential margins incompliance with the APRA standards, insurers can make allowances fordiversification across their book of business by geographical location and class ofbusiness. It must be appreciated that this reserving ratio is a broad approximatemeasure, affected by the state of maturity and rate of growth of an individualinsurance portfolio. Nonetheless the combination of low benchmark reserves andprudential margins should be taken as an early warning alert and may prompt theneed for further action eg seek explanation, require investigation, independentreports etc.

A prudential margin is commonly held in liability provisions to increase theprobability that the central estimate will be sufficient. The prudential marginsdeclared by insurers were in the range 8.5% to 42.7% (9.0% to 29.8% last year) withan average of 20.9% (20.1% last year).

We believe a 10% level of prudential margin is appropriate in times of stable claimexperience in aggregate for the whole system. In times of adverse claim trends eitherstronger prudential margins are required to obtain the same level of sufficiency inreserving or strong allowance for adverse trends is required in the valuation basis.

Research done by the Institute of Actuaries on APRA’s current standards, produced a10.5% risk margin at 75% level of sufficiency for a $1.5bn workers’ compensationoutstanding claim provision.

Note that the insurer number in the above table does not concord with that in theexpense analysis table in section 5 of this report.

The table below shows an accident year comparison of our actuarial and insurers’reserving as at 30 June 2007:

Comparison of reserves as at 30 June 2007Inflated Insurers

Accident actuarial outstandingyear outstanding claim

ending claim reserves reserves Difference Difference30 June $M (a) $M (b) $M (c) % (d)

2007 479.404 501.682 -22.277 -4%2006 250.819 285.890 -35.070 -12%2005 179.093 159.518 19.575 12%2004 111.176 108.326 2.850 3%2003 72.963 56.242 16.721 30%2002 43.410 36.153 7.256 20%2001 23.926 23.633 0.293 1%2000 20.581 18.757 1.824 10%

earlier 102.168 165.515 -63.347 -38%

Total 1,283.541 1,355.717 -72.176 -5%

Notes : (a) = item (b) from Attachment G4.5 divided by 1.05 to removeclaim expenses

(b) = from consolidated Form WC20 columns (d) + (e)

(c) = (a) - (b)

(d) = {(a) / (b) - 1} x 100


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24

Note that insurer reserves are stronger than ours for 2006/, 2007 and ‘earlier’ years.In values and percentage, major differences are shown for most years except 2001,2004 and 2007 (percentage only). The ‘earlier’ years are the major source ofdifference due to reserving for asbestos related claims.

Specialised data and methods are required to reserve IBNR dust-disease claims andour reserves do not include a full asbestos claim valuation. While this may be amaterial reserving issue, it should not directly affect the level of recommendedpremium rates, which depends on the more recent accident years. We adoptedstronger tail factors to make some allowance for these claims and the shortfalldecreased from 44% last year to 38% this year.

Some overall market reserving ratios which may assist insurers assess the relativestrength of their reserves are as follows :

Total case Ultimate UltimateAccident estimates incurred incurred

year to claim costs/claim costs/totalending payments payments case ests30 June (a) (b) (c)

2007 303% 532% 176%2006 155% 204% 131%2005 128% 158% 124%2004 118% 134% 113%2003 109% 124% 113%2002 106% 114% 108%2001 104% 107% 103%2000 103% 106% 103%

Notes: (a) from Attachment B2.3 item (d)

(b) from Attachment B2.3 item (e)

(c) from Attachment B2.3 item (f)

By applying the ratios in columns (a) and (c) above, insurers can obtain a measure ofthe strength of their own case estimates and total provisions, relative to overall marketlevels (see attachment B2.3 for details).

3.4 Actual vs Expected Claims Experience

The experience in 2006/07 on claims incurred in prior years is on balance favourablecompared to expected, with claim reports and claim payments below expected butclaim closure slightly slower than expected and case estimate development slightlyhigher than expected.

During 2005/06, the experience of claims incurred in prior years showed favourabletrends compared with our 30 June 2006 projections.

The experience in the six months to 31 December 2007 is also favourable comparedto expected, with claim reports, claim payments and case estimates below expected,but claim closure slower than expected.

See Attachment J for full details.


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25

3.5 Reconciliation of reserves

The tables below show the build-up of outstanding claim reserves over 2006/07 forclaims incurred to 30 June 2006 for:

our actuarial projections and

insurers outstanding claim reserves

(a) reconciliation actuarial

Accident year ending 30-June 2006 2005 2004 2003 2002 2001 2000

1999 &

earlier Total

$m $m $m $m $m $m $m $m $m

A. Estimates at 30/06/2006 (a) 448.002 270.099 162.907 101.492 78.892 45.736 21.364 88.717 1217.209

B. Gross payments 1/07/2006 to 30/06/2007 139.369 77.220 42.362 23.512 13.920 11.997 5.865 17.040 331.284

C. Expenses (b) 6.968 3.861 2.118 1.176 0.696 0.600 0.293 0.852 16.564

D. Assumed investment return (c) 23.685 14.501 8.883 5.628 4.517 2.491 1.155 5.034 65.894

E. = A-B-C+D 325.349 203.519 127.311 82.433 68.793 35.629 16.361 75.860 935.255

Updated estimates at 30/06/2007

F. Revised estimates at 30/06/2007 (d) 225.076 157.410 98.195 65.332 38.434 18.968 15.856 78.814 698.084

G. = F-E -100.273 -46.109 -29.116 -17.101 -30.359 -16.661 -0.505 2.954 -237.171

Change 1/07/2006 to 30/06/2007

H. Proportion of change attributable to -0.244 -0.215 -0.145 -0.092 -0.034 0.043 0.046 0.226 -0.414

changes in real rates of return assumed

I. = G-H -100.029 -45.894 -28.972 -17.009 -30.325 -16.704 -0.551 2.728 -236.756

Balance of change attributable to

changes in underlying actuarial estimates

J. Amount incurred and outstanding for 430.631

2006/07 accident year (d)

K. = F + J

Total outstanding liability at 30/06/2007 1128.715

Notes : (a) from G4.5 of our 24/04/2007 report

(b) assumed to be 5% of claim payments in 2006/07

(c) calculated using 6.3% pa being the one year forward rate from E1 of our 24/04/2007 report

(d) from G4.5 of this report.

The table shows that:

overall estimates decreased by $237M which is 19.5% of the opening30/06/2006 estimates,

all accident years except ‘1999 and earlier’ had a release of reserves with 2006experiencing the largest release, accounting for 42% of the total release

this release is mainly due to lower than expected claim payments and reducedcommon law claim numbers.

The outcome of this reconciliation is regarded as reasonable and satisfactory and isindicative of reserving strength at 30 June 2006.


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26

(b) reconciliation insurers

Accident year ending 30-June 2006 2005 2004 2003 2002 2001 2000

1999 &

earlier Total

$m $m $m $m $m $m $m $m $m

A. Estimates at 30/06/2006 (a) 413.036 238.820 140.449 87.513 51.602 38.297 22.864 143.488 1136.068

B. Gross payments 1/07/2006 to 30/06/2007 139.369 77.220 42.362 23.512 13.920 11.997 5.865 17.040 331.284

C. Expenses (b) 6.968 3.861 2.118 1.176 0.696 0.600 0.293 0.852 16.564

D. Assumed investment return (c) 21.482 12.531 7.469 4.748 2.798 2.022 1.249 8.485 60.782

E. = A-B-C+D 288.180 170.269 103.438 67.573 39.784 27.722 17.955 134.081 849.003

Updated estimates at 30/06/2007

F. Revised estimates at 30/06/2007 (d) 256.547 140.205 95.678 50.360 32.009 18.736 14.451 127.680 735.666

G. = F-E -31.634 -30.064 -7.760 -17.214 -7.775 -8.986 -3.504 -6.401 -113.337

Change 1/07/2006 to 30/06/2007

H. Proportion of change attributable to -1.946 -1.212 -0.817 -0.399 -0.258 -0.194 -0.158 -1.395 -6.380

changes in real rates of return assumed

I. = G-H -29.688 -28.852 -6.943 -16.815 -7.517 -8.792 -3.346 -5.005 -106.957

Balance of change attributable to

changes in underlying actuarial estimates

J. Amount incurred and outstanding for 450.642

2006/07 accident year (d)

K. = F + J

Total outstanding liability at 30/06/2007 1186.308

Notes : (a) from columns (d) + (e) on insurers consolidated Form WC20 for 30/06/2006 (see our

24/04/2007 report Attachment C) adjusted for future interest, future inflation and 5% claim

management expenses

(b) assumed to be 5% of claim payments in 2006/07

(c) calculated using 6.3% pa being the one year forward rate from E1 of our 24/04/2007 report

(d) from columns (d) + (e) on insurers consolidated Form WC20 for 30/06/2007 (as per

Attachment C) adjusted as per notes (a).

This table shows that:

overall estimates declined by $113M which is 10% of the opening estimates

the major declines for all years in percentage terms

no reserve strengthening for any years.

The drivers for the reserve changes mentioned in the actuarial reconciliation above,apply to the build-up of insurer reserves also, except that insurers reserves havereduced by less than actuarial reserves.

We have made allowance for the impact of the 2004 Reform Act in the opening andclosing reserve estimates in the actuarial reconciliation tables above and we wouldexpect that insurers’ reserving are also adjusted for this. The 2004 Reform Actallowance in the PwC reserves is being phased out to reflect the extent that actual postAct change experience forms part of our adopted projection basis.


27/05/2008 3:55 PM

Analysis by type of payment

27

4 Analysis by type of payment

4.1 By financial year

The table below shows how the composition of claim payments from Form WC101has changed for all applicable returning insurers. Figures are taken from a summaryof the Form WC101 returns.

2007/08 2006/07 2005/06 2004/05 2003/04 2002/03 2001/02 2000/01

Type of Payment 6 months

(a) (a) (a) (a) (a) (a)

% % % % % % % %

Weekly benefits 33.8% 33.8% 32.9% 32.0% 32.9% 30.4% 31.1% 31.1%Redemptions 12.7% 13.1% 14.1% 13.9% 14.0% 15.1% 14.6% 8.6%Schedule 2 3.5% 3.6% 3.8% 3.9% 4.4% 4.2% 4.4% 4.2%Medical 10.6% 10.7% 10.8% 10.9% 10.8% 10.8% 11.2% 10.5%Hospital & other treatment 10.4% 10.3% 10.8% 10.9% 11.4% 9.5% 9.0% 8.5%Rehabilitation 3.1% 3.5% 3.8% 3.9% 4.4% 3.8% 3.8% 3.7%Legal 4.3% 5.4% 5.9% 6.4% 6.3% 7.1% 7.9% 8.0%Common law 16.6% 14.4% 13.5% 13.8% 11.0% 15.3% 13.3% 20.3%Other 4.9% 5.1% 4.3% 4.3% 4.8% 3.8% 4.7% 5.0%Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Amount ($000's) 235,856 442,526 412,379 388,275 348,649 357,250 358,096 374,294% change 4.8% 7.3% 6.2% 11.4% -2.4% -0.2% -4.3%WC20 Amount ($000's) 235,542 442,301 412,297 387,867 348,180 357,153 357,970 374,047% difference from WC101 -0.1% -0.1% 0.0% -0.1% -0.1% 0.0% 0.0% -0.1%

Note : (a) from 1/7/99 onwards, the above figures include GIFU.

The percentage change for the six months to 31/12/2007 is against the comparableperiod of the previous year. Note Municipal WorkCare has been excluded in allaccident years, in the above table.

The following trends are apparent:

weekly benefits declined to 1999/2000 (refer prior reports), increased in2000/01, and has been stable to increasing since

there were steady increases each year in common law, leading up to the Actchanges in 1999/2000 (refer prior reports). There was a very significantdecline in common law in 2000/01 and 2001/02. 2002/03 increased slightly,followed by a material decrease in 2003/04. The common law percentage wasfairly stable at around 14% from 2004/05 to 2006/07. However, this hasincreased to 16.6% in the 6 months to 31 December 2007 which might be anindication of the emerging impact of the 2004 reform Act changes

very low redemptions up to 1998/99 (refer prior reports) and a rapid increase to8.6% in 2000/01. 2001/02 had a further significant increase to 14.6% and2002/03 increased slightly to 15.1% and has been stable to reducing since then.The October 1999 amendments removed the previous redemption restrictions

Schedule 2 payments have been slowly declining over the last four years

since 2000/01 medical payments have been relatively stable at 10-11% of totalpayments

since 2000/01 hospital payments have steadily increased from 8.5% to a newlevel of around 10.5%


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28

rehabilitation has been declining since 2003/04 (4.4%) and was 3.1% of totalpayments in the six months to December 2007

the trend in legal shows steady decreases, from a high of 8.0% in 2000/01, ithas declined to around 4.5% since then

other payments comprise miscellaneous and fatals and have remained relativelystable at 4% to 5%, with the six months to December 2007 at 4.9%.

Assumptions to allow for these trends have been made in our projections of futureclaim costs. The trends are generally close to what was expected from the 1993 Actchanges and the escalation of common law costs prior to the Act changes in both 1993and 1999. The response to the October 1999 amendments is reflected not only by theincrease in weekly benefits and the rapid increase in Schedule 1 redemptions, but alsothe sharp decline in common law payments. This decline in the common law portionhas lead to stronger apparent increases in other pay type portions, notably weekly andlegal. However over the recent years common law payments have started to increasefollowing the introduction of the 2004 Reform Act.

The most significant features of the distribution by type of payment during 2006/07and the six months to 31/12/2007 are:

the stable level of weekly benefits,

the increase in common law levels from 13.5% to 16.6% some of which maybe seasonal effects, and

the six months claim payment data to 31/12/2007 shows an 5% increase fromthe same time last year in actual dollar terms.


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29

4.2 PPCI by type of payment

An analysis by development year of the payments per claim incurred (PPCI) in realterms enables a different perspective on trends and helps identify areas ofsuperimposed inflation (real growth after adjusting prior payments for normal/AWEinflation). The trends are shown in the charts below with brief commentary.

Weekly Benefit

Weekly benefit PPCIs

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

$

DY0 DY1 DY2 DY3DY4 DY5 DY6->

Real growth is apparent for development years zero and one since 2001. The rate ofgrowth has accelerated in 2007. The remaining development years are relativelyflat/stable in real terms.

Redemptions and Schedule 2

Redemption and Sch 2 PPCIs

-

100

200

300

400

500

600

700

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

$


Redemptions and Schedule 2 payments grew strongly in real terms from 2000 to 2003across all development years, due to the October 1999 amendments removingredemption restrictions. The growth is most marked for development years 1, 2 and3. Since 2003, the PPCIs have been relatively stable with yearly variations.


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Vocational rehabilitation

Vocational rehab PPCIs

-

50

100

150

200

250

300

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

$


Vocational rehabilitation shows some real growth trends in recent years acrossdevelopment years 0 to 2 but have been stable to somewhat declining since 2004.

Medical, hospital and all other treatment

Medical, hosp & all other treatment PPCI

-

200

400

600

800

1,000

1,200

1,400

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

$


The combination of medical, hospital and all other treatment show material realincreases since 2001 in development years 0 and 1. All other development years arerelatively stable.


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31

Miscellaneous and fatals

Miscellaneous and fatals PPCI

-

40

80

120

160

200

240

280

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

$


Miscellaneous and fatals combined is a fairly minor payment type (4.9% of total)which has a declining overall trend over the start of the period shown with a level ofstability from 2004 to 2006. Sharp increases for development years 0 and 1 haveoccurred in 2007 caused mainly by increases in miscellaneous payments.

Common law and legals

Common law and legals PPCIs

-

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

$


Common law and legals combined declined significantly from 2000 to 2002,increased in 2003 with a relatively stable trend thereafter, not withstanding the yearon year variability.


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32

Total of all paytypes

Total of all paytypes : PPCIs

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

$


All payment types combined show some real growth in development years 0, 1 and 2since 2001. The later development years are stable to declining.

In summary we have evidence of:

superimposed inflation in the early development years probably due tolengthening claim durations for statutory benefit claims in particular weeklybenefits, combined with

some neutral to negative superimposed inflation experience in the middle toolder development years due to the reduction in common law costs net ofheavier but now stable redemption experience together with

some recent increase in weekly benefits and combined medical payment rates.


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Expense analysis

33

5 Expense analysis

The expenses are analysed from the Statement of Premium and Expenses. The resultsobtained are summarised below:

2006/07 2005/06 2004/05 2003/04 2002/03 2001/02 2000/01

Commission / Brokerage 3.3% 3.2% 3.4% 3.5% 3.2% 3.4% 3.1%Statutory Charges / Levy 1.9% 1.9% 1.7% 1.9% 1.9% 1.8% 1.9%Management Expenses 12.6% 11.8% 13.8% 13.2% 12.9% 10.8% 10.6%Total 17.8% 16.9% 19.0% 18.7% 18.0% 16.0% 15.6%

Expense Ratios

The expense ratios are used directly in deriving the loss ratio used to quantify thegross incurred cost of WA workers' compensation claims. The 0.9% increase sincelast year is due to an increase in management expenses and small increases incommission and statutory charges. Note that from 2002/03, insurers suppliedstatutory charge information broken down into General Fund, Supplementation Fundand ‘other’. Only General Fund contributions have been used for statutory chargesfrom 2002/03 in this analysis.

Detail by insurer for 2006/07 is as follows:

Brokerage General Fund Management Total Supp Fund

Insurer % (a) Charges % Expenses % Expenses Charges %

(b) (c) (d) (e)

1 3.8% 2.2% 24.7% 30.7% 1.0%2 0.0% 2.7% 25.7% 28.4% 1.0%3 3.0% 1.9% 17.9% 22.7% 1.0%4 3.2% 2.2% 16.1% 21.6% 1.0%5 3.8% 1.8% 14.1% 19.7% 0.9%6 0.0% 1.9% 15.8% 17.6% 1.0%7 4.0% 1.9% 9.4% 15.3% 1.0%8 3.3% 1.9% 8.6% 13.8% 0.9%

9 4.0% 1.5% 5.9% 11.4% 0.9%

10 0.0% 0.0% 0.0% 0.0% 0.0%

11 0.0% 0.0% 0.0% 0.0% 0.0%

Total (f) 3.3% 1.9% 12.6% 17.8% 0.9%

Notes : (a) = Commission and Brokerage / Gross Written Premium

(b) = General Fund Charges / Gross Written Premium

(c) = Management Expenses / Earned Premium

(d) = (a) + (b) + (c)

(e) = Supplementation Fund Charges / Gross Written Premium.

(f) = includes ICGF which has expenses but no premium.ICGF not shown in table as all expenses % are zero.

The 2006/07 expense levels are adopted for 2008/09 recommended rates.

If brokerage is spread over only those insurers paying brokerage, the percentageincreases from 3.3% to 3.6%.

Note that we have shown the Supplementation Fund percentage for illustrativepurposes only. The insurer number in the above table does not concord with that inthe reserving strength table in section 3.3.1.


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Expense analysis

34

Insurers 10 and 11 have 0% values in the above table as they are in run-off havingbeen taken over by other insurers and :

they have no expenses allocated to them

they do have claim data, and

they have not consolidated their premium rating returns with those of thetakeover insurer.


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Terminology and limitations

35

6 Terminology and limitations

6.1 Terminology

The following terminology is used in this report:

Accident Year

The financial year ending 30 June, in which the accident event leading to aclaim occurs, irrespective of when the claim is reported, paid and finalised.

Development Year

The number of completed years since end of the accident year. Developmentyear zero refers to the financial year ending 30 June in which the accidentevent occurs. Development year also abbreviated to DY in this report.

6.2 Limitations

The actuarial advice contained in this report is provided in the context of the briefreceived, the data provided, the analysis conducted and the assumptions and methodsadopted and is for the sole use and benefit of WorkCover WA Board. Judgementsbased on the contents of this report should be made only after studying the reportand the attachments in their entirety, as conclusions reached by a review of anaspect or section in isolation may be misleading.

We have taken every care in the preparation of this report. However, the conclusionsreached in this report are reliant on the completeness and accuracy of informationcompiled and provided by insurers to WorkCover WA. Other than preliminary datachecks, we have not conducted an independent review of this information. We do notaccept any liability or responsibility for errors or omissions arising from the provisionof inaccurate or incomplete information to us.

This report has been prepared on the instructions of WorkCover WA in accordancewith the detailed terms of reference in the tender document referred to in section 2.1above.

Unless required by law no copy of or extract from this report is to be distributed tothird parties (or the public) without our prior written consent.

No oral or written reference to the content of this report may be made by WorkCoverWA to any third parties without our prior written consent.

No third party recipients may distribute this report to anyone else under anycircumstances.


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Terminology and limitations

36

We may at our discretion, grant our written consent to the above subject to thefollowing conditions:

the report is to be released in its entirety in response to a request, including allappendices and attachments

we accept no responsibility to any other person or entity in relation to thisreport.

no one other than WorkCover WA should rely on this report for any purpose.

6.3 Additional reliances on common law/election application costings

The common law projections in Attachment H and L involve assumptions aboutfuture uncertain claim events, the impact of legislative change and economicconditions and hence the actual outcome may well be different from the results in thisreport.

The actuarial valuation of workers' compensation risks is subject to a high level ofuncertainty (see section 3.3.2 of this report).

This uncertainty is even greater when trying to project the common law component onits own. This is because the cost of common law claims by their nature are moredifficult to predict since they are the larger claims, they tend to have longer reportingand payment delays than the statutory benefit claims and a greater dispersion of claimsize.

It is also important to note that the status of the pre-Act change to common law is stillsomewhat uncertain.

The uncertainty is also influenced by the response of system participants to theOctober 1999 and the 2004 Reform Act amendments. The robustness of the changesis unpredictable but depends on:

the frequency of use of lump sum redemptions

the effectiveness of the election option

the trends in late lodgements of common law claims with 30% or moredisability /25% or more impairment after the 6/12 month limit for electionoption expires

the use of psychological overlays to access common law (October 1999amendments only).

However the emerging post-amendment claims experience is mainly better thanexpected and the common law costs for 2000 to 2002 accident events have maturedand are below the assumptions in our earlier reports. However, common law couldstill experience adverse trends over the next three to five years. Also, it is somewhatearly to reliably assess the common law impact of the 2004 Reform Act amendments.


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Data and methods used

37

7 Data and methods used

7.1 Data and assumptions

The data used and the assumptions adopted are detailed fully in Attachment D and E.

The data quality was similar to last year. This was the seventh year involving twonew data items in Form WC11 being number of Policies and gross written premium.These fields were generally better completed than last year.

This is the twelfth time the enhanced data forms have been completed. Some insurersare still finding it difficult to provide accurate and consistent data. We find variancesbetween claim numbers, claim payments and case estimates on Form WC11 and FormWC20 for the some insurers. This means that the aggregation of claim data bypremium rating class is not equal to the total data. This calls into question both thecompleteness and accuracy of the allocation of rating classes to policies and their linkto the claims which emanate from those policies.

The data for the election application and large claim analyses are described inAttachment D2.

7.2 Types of estimates

The estimated liability for outstanding claims has been calculated as the present valueof the liability allowing for:

(a) future increases prior to payment, due to claims inflation

(b) discounting to take into account investment return attributable to the assetsbacking the provisions during the run-off period

(c) expenses associated with administering claims during the run-off period.

This approach is consistent with that required by the Accounting Standards for privateand State Government general insurers (AASB1023), and APRA’s prudentialstandard GPS310 for liability valuations for general insurance. It also complies withthe Institute of Actuaries of Australia's Professional Standard PS300 to the extentpossible given the data available. We note in section 3.3 that we have not performed afull review of asbestos liabilities due to lack of available data.

The question of uncertainty in the actuarial estimates and the determination ofprovisions is discussed in Sections 7.4 and 7.5.

7.3 Methods

The methods used are fully described in Attachment F.

The methods for the election application analysis are fully described in Attachment H.


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7.4 Uncertainty in the estimates

Actuarial estimates are obtained after analysis of past claims experience. From theseanalyses, models of the claim payment process can be established and used to projectfuture payments on claims outstanding at the balance date.

The estimates of outstanding claims obtained in this manner are indeed estimates inthe sense that there is a degree of uncertainty as to the difference which willultimately arise between the estimates and the final result of the experience. Thisuncertainty arises from four sources:

(a) because the nature of the claims process is not fully understood, it might bethat none of the various models used is an entirely accurate representation ofreality

(b) because there are components of randomness in the claims process, it is notpossible to estimate the parameters of that process with complete precisioneven if complete confidence were felt in the nature of the model

(c) any erroneous data will similarly have introduced uncertainties into theestimates of those parameters

(d) even if the parameters could be estimated with precision, it would not bepossible to predict outstanding claims with the same precision because of therandom component in future experience.

Errors associated with (b) and (d) above can, for some portfolios, be quantified in aformal way (estimation and statistical errors). However a large part of theuncertainty is associated with (a) (model specification error), and unfortunately it isnot possible to quantify this component.

The investigation and application of different models to the data is intended to reducethe model specification error, although the extent to which this is achieved isunknown.

The initial estimates obtained from the calculations are "central" estimates in thesense that they incorporate no deliberate bias towards over or under estimation. Bydefinition, the estimates are intended to have about an even chance of ultimatelyturning out to be sufficient.

7.5 Determination of provisions

7.5.1 Background

Because of the uncertainty described above, provisions which are somewhat greaterthan the actuarial "central" estimates are often adopted. A 50% probability ofprovisions being too low, is seen as involving a higher than desirable risk.

This is intended to provide security for stakeholders.


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However, security is not the only reason to adopt provisions which are greater thanthe statistical central estimates. It may be to ensure as far as possible that reserves arenot released until it is reasonably certain that they are not required. A 50% chancethat the reserves will eventually not be required is generally not seen as sufficient.

Any decision to adopt provisions for outstanding claims which are greater than thecentral estimates, together with the extent of any margin, is in my view a decisionwhich should properly be taken by the Boards of insurers. In making this decisionthey may take into account various matters (both objective and subjective) whichinfluence their view of future experience.

It should be realised that, by definition, any margins over central estimates areintended to have a better than even chance of falling into future surplus, provided thatfuture experience is consistent with that of the recent past. This should be consideredin making management decisions.

7.5.2 Levels of sufficiency

The nature of insurance claims is such that the actual value of the liabilities isunknown because claims experience is subject to random fluctuations. The amount ofthe claim liability cannot be estimated with certainty. Also it is very difficult todetermine the central estimate with a reasonable degree of precision. For this reasonthe inherent uncertainty in the central estimate must also be considered.

It is common practice for the actuary to provide a central estimate of the liabilities.Such an estimate should contain no deliberate or conscious over or under estimation.

The provision adopted in the accounts should usually be greater than the centralestimate, the difference is referred to as a prudential margin. As explained above, theprudential margin allows for some part of the uncertainties in the claim process andalso it ensures as far as possible that surplus is not released until it is reasonablycertain that the surplus is real.

The adopted method was tested for its sensitivity to changes in the claim ratesassumed and a measure of the variation in the results was obtained. This analysisindicated that the distribution of likely results was skewed to the right. This meansthat the variation upwards in the provision is expected to be greater than the variationdownwards.

The dispersion of expected results is added to by :

the variable nature of the claim experience

very large common law claims ($350,000 or more) can sometimes occur.


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The variation analysed together with benchmarking against reports published byAPRA and the Institute of Actuaries leads to the assumption of a 20% standarddeviation of the distribution of results which allows for the skew distribution andsystemic variation. The lognormal distribution was then assumed to apply whencalculating the prudential margin required to increase the level of sufficiency above50%.

The coefficient of variation calculated as described above is taken as 17%. Thisleads to the following prudential margins.

60% 70% 75% 80%RPR provision 2.89% 7.71% 10.47% 13.63%

Level of sufficiency

7.5.3 Sensitivity

The adopted method was tested for its sensitivity to changes in the assumptions aboutfuture interest and inflation rates, adopted reporting rates, the adopted coefficient ofvariation and superimposed inflation and a measure of the variation in the results wasobtained. The results of this analysis are shown below:

% ChangeAssumption Varied Variation in total provision

Future interest rates: 1% increase -2.39%1% decrease 2.54%

Future inflation rates: 1% increase 2.56%1% decrease -2.45%

Adopted reporting DY0 rate decreasedrates from 9.63% to 4.82% -1.96%

Coefficient of variation increased from 17% to25% 3.68%

Superimposed inflation 1% increase 2.15%

Common law frequency 20% increase 4.35%20% decrease -4.35%

2004 Reform Act 25% increase 1.25%

25% decrease -1.25%

Recommended Premium Rates Provisions - Sensitivity Analysis

Notes: (a) the change in coefficient of variation only impacts the risk margin and hence the provision

while the control estimate does not change.


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The percentage change in the outstanding claim provision as at 30/06/2007 is shownin the table above. The inherent robustness of the various assumptions in the tableabove means that the variations shown are not necessarily cumulative. Hence careneeds to be exercised in developing any best or worst case scenario.

The relative change in the required premium pool would be similar to the provisionvariations shown abo

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