Following an unsuccessful attempt in 2013, the NSW government is back on the path of CTP reform. The latest discussion paper, “Reforming insurer profit in compulsory third party (CTP) vehicle insurance”, was released in November 2016. This time, it addresses the issue of insurer super-profits.
What is a super-profit?
The long-term average profit for CTP insurers is 19%. This is more than double the profit they submit each year to State Insurance Regulatory Authority (SIRA). The difference between the actual and submitted profit is called a “super-profit”. The reason why actual profits are higher is because insurers must manage the uncertainty of what claims will cost some 3-5 years later. It is a reflection of the existing common law scheme.
There are currently no limits on what is an acceptable profit margin in the CTP market. Chairman of the SIRA Board asserts 8% is an acceptable level. This offers a capital rate of return of about 12% and is comparable to other schemes.
The NSW government recognises it must balance the competing demands of private insurers for profit and claimant demands for early and effective treatment. The latest discussion paper sets out what is currently being done. It also addresses what might be done in the future to reduce insurer super-profits.
The latest discussion paper is not the first in the 2016 reform process. Insurers welcomed the first discussion paper, which recommended a hybrid scheme of lump sums for serious injuries and fixed benefits for minor injuries. Lawyers rejected this concept because they claimed most injured people would not get the proper treatment they needed.
Victor Dominello, Minister for Innovation and Better Regulation, then amended the Motor Accident Regulations 2015 to set a cap on legal fees from 1 November 2016. It is an interim measure and will help to address fraudulent minor claims. Insurers claim premiums could rise 20% this year because of the growing number of claims.
Ideas to limit super-profits
Insurer super-profits are addressed in the latest discussion paper, including ideas such as real-time data collection, risk pooling, profit normalisation and making more transparent the process of reviewing premiums.
Better data collection
It is proposed to have more frequent reporting to SIRA of injury types, claims and CTP policy data. This means SIRA will join the government’s Data Analytics Centre (DAC), increasing its ability to monitor trends and respond in real time. The DAC, created in 2015, compels state agencies, corporations and local councils to provide data to the government on request.
Using better data, SIRA will be able to identify super-profits much earlier, so it can require insurers to revise their assumptions and eliminate any super profits. SIRA is working to make administrative and regulatory changes with the aim of addressing insurer super-profits.
Risk equalisation mechanism (REM) or risk pooling
Currently insurers are understandably more interested in covering low-risk drivers and vehicles. SIRA proposes, from May 2017, to introduce REM or risk pooling for classes 1 (motor car) and 3c (goods vehicle under 4.5GVM). Premiums for these vehicles will be paid into the risk pool then distributed to insurers, spreading the risk among them.
Commercial vehicle rating
Even with a maximum discount for commercial vehicles, premiums do not reflect actual risk and these policies have become very profitable. SIRA proposes to expand the discount/loading range for commercial vehicles, especially for lower risk vehicles and fleets.
New class for new cars
Insurers make ongoing profits from long-term, exclusive contracts with new car dealers. SIRA proposes to create a new class of vehicle for new cars.
SIRA will also address all premium relativities for inadvertent cross-subsidies between vehicle classes and geographic zones.
Other proposals for reform
The discussion paper proposes more disclosure on insurer profit, creation of a profit normalisation framework, caps on expenses/commissions, a more transparent premium review process and abolition of the fully funded test.
More disclosure on profit – SIRA currently publishes aggregate insurer profits only, because of secrecy provisions in the legislation. The government is asking for more detailed disclosure on how each individual insurer is performing, as well as other scheme metrics.
Profit normalisation – A profit normalisation framework (PNF) is proposed to create a reserve for managing super-profits, at least during the scheme transition. It would aim to “clawback” the difference between what insurers predicted when they set prices and what actually occurred. How this might be done is a complex matter.
Caps on expenses – The government is considering caps on insurer expenses, including acquisition costs and intermediary commissions.
Abolition of fully funded test – Currently insurers have to be conservative to meet the fully funded test, even though failure of an insurer because of CTP policies only is unlikely. The fully funded test is proposed to be abolished.
Transparency of premium review – SIRA is currently allowed only to object to prices submitted by insurers, not to approve them. It is proposed that insurers wanting to increase prices must make a sound case for approval, rather than the regulator having to prove its objection to the price increase.
The discussion paper notes there is also a possibility of insurer losses and how they would be managed. As Chris McHugh of Suncorp noted earlier in 2016, insurer profits have recently been on the “right” side of claims volatility, but they could be on the “wrong” side tomorrow.
Paying back profits
SIRA must still address any excess profits when they do occur and where it will set the level for “clawback”. The paper offers four possible options for paying back any super-profits:
- Future premium decreases so there is a form of catch-up
- Paying refunds directly to vehicle owners
- Paying refunds to SIRA, which then reduces levies to road users
- Using the funds for public purposes.
Make a submission
Interested observers are invited to make a written submission to SIRA. They should try to address these relevant topics: profit normalisation, appropriate profits and tolerance levels, distribution of super-profits, reporting of insurer profit, transparency of premium setting and caps on acquisition expenses.
Email SIRA at
by close of business Friday 25 November 2016.