Actuarial assumptions for an Australian Compulsory Third Party (CTP) insurer are the key financial and demographic factors that actuaries use to estimate future claims costs. Because CTP claims can take many years to be finalized, these assumptions are crucial for ensuring the financial stability of the insurer and the CTP scheme as a whole. The CTP actuarial assumptions are heavily influenced by the specific rules and regulations of each Australian state and territory’s CTP scheme.
Key Actuarial Assumptions 📊
- Claims Frequency
This assumption relates to the number of new claims that will be reported for a given period. It’s a fundamental part of the ultimate cost calculation and is influenced by a range of factors:
- Road safety: Changes in road rules, vehicle technology, and road conditions.
- Driving behaviour: Trends in distracted driving, speed, and other risky behaviors.
- Economic conditions: Historically, claim frequency can sometimes be counter-cyclical with economic performance.
- Claims Severity and Inflation
Claims severity refers to the average cost of a claim. It’s a complex assumption that’s broken down into several sub-assumptions to capture the different components of a claim.
- Wage inflation: This is a significant factor as CTP claims often include compensation for lost earnings. Actuaries must project future wage growth to estimate the cost of these components.
- Medical and care costs: As a claim can involve long-term medical care, rehabilitation, and support services, actuaries must project the rate of inflation for these specific services.
- Superimposed inflation: This is the increase in claims costs over and above general inflation. It can be driven by a variety of factors, such as more complex and expensive medical treatments, or changes in legal interpretations and court precedents that lead to higher awards for damages.
- Claims Development and Run-off
CTP is a “long-tail” class of insurance, meaning it can take many years for a claim to be fully settled and paid out. Actuaries use historical data to model how claims will develop over time.
- Payment patterns: Actuaries project how quickly payments will be made over the life of a claim. This is crucial for determining the timing of cash flows and the need for discounting.
- Ultimate cost: For each year, actuaries must estimate the final, or “ultimate,” cost of all claims from that year, including those that haven’t even been reported yet (Incurred but not yet reported, or IBNR). Aggregate-level reserving is more commonly used than granular-level reserving. Payment-Based Methods are the most frequently employed techniques, followed by Bornhuetter-Ferguson (BF) and The Chain Ladder Method
Economic and Financial Assumptions 📈
- Investment Returns
Insurers hold large reserves of capital to pay for future claims. The returns they earn on these investments are a key part of their business model. Actuaries must assume a realistic rate of return on these investments. This rate is then used to “discount” future claims costs to their present value, as a dollar paid out in the future is less costly than a dollar paid today.
Sample Assumptions | |
---|---|
Average claim frequency (claims per 1000 registered vehicles) | 2.95 |
Average claim size | $110k |
- Average care compensation size | $15k |
- Average common law compensation size | $39k |
- Average all other payment size | $56k |
Expense rate | 0.07 |
Weighted average discount rate (0 to 20 years) | 0.0447 |
Weighted average discount rate (21+ years) | 0.0477 |
Weighted average discount rate | 0.0466 |
Weighted average AWE inflation rate (0 to 20 years) | 0.036 |
Weighted average AWE inflation rate (21+ years) | 0.0369 |
Weighted average CPI inflation rate (0 to 20 years) | 0.0271 |
Weighted average CPI inflation rate (21+ years) | 0.0272 |
Average weighted term to settlement from balance date | 14 years |
Risk Margin ( at 75% sufficiency) | 0.11 |
Sample Liability | |
Expected future claims payments (undiscounted) | 70M |
Discount to present value | -41M |
29M | |
Claims handling expenses | 2M |
Risk margin (75% confidence level) | 3M |
Outstanding claims liability | 34M |