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MOTOR ACCIDENT COMMISSION

 

 

FUNCTIONAL RESPONSIBILITY AND STRUCTURE

 

Establishment

 

The Motor Accident Commission (the Commission) is a statutory authority established pursuant to the Motor Accident Commission Act 1992.

 

Functions

 

The functions of the Motor Accident Commission are as follows:

 

·                     To provide policies of compulsory third party insurance under Part 4 of the Motor Vehicles Act 1959, and to be the sole approved insurer under that Part until such time as the Minister responsible for the administration of that Act forms the view that it would be in the best interests of the State to invite and approve other persons or bodies of persons to be insurers under that Part.

·                     To maintain the Compulsory Third Party Fund.

·                     To perform the functions of the nominal defendant while the Commission holds that office under Part 4 of the Motor Vehicles Act 1959.

·                     To provide financial or other support for and promote programs designed to reduce the incidence or impact of road accidents and road accident injuries.

·                     To carry on any other residual insurance business arising from its earlier operations as the State Government Insurance Commission (but only in order to wind up that business).

·                     To perform any functions of a kind prescribed by regulation.

·                     To perform any functions that are necessary or convenient for or incidental to the performance of functions referred to above.

 

The principal objectives of the Commission in providing compulsory third party insurance are to:

 

·                     achieve and maintain a sufficient level of solvency in the Compulsory Third Party Fund;

·                     minimise premium charges having regard to the Commission’s objective of achieving and maintaining a sufficient level of solvency in the Fund;

·                     deal with claims for compensation in accordance with law as expeditiously as possible.

 

Pursuant to section 18 of the Motor Accident Commission Act 1992, the Minister must prepare, in consultation with the Commission, a Charter, which may limit the functions or powers of the Commission.

 

The Commission’s Charter specifies that the Commission is empowered to undertake the following classes of insurance:

 

·                     Compulsory third party (CTP) insurance (in accordance with the Motor Vehicles Act 1959).

·                     Mortgage insurance, credit enhancements, and guarantees insurance.

·                     Financial risk insurance.

 

The latter two classes of insurance are in ‘run-off’ mode.

 

Structure

 

The structure of the Motor Accident Commission is illustrated in the following organisation chart.

 

 

With the exception of the CTP insurance business, no new policies were underwritten by the Commission for all other insurance activities.  These activities are in ‘run-off’ mode and will cease once the Commission’s obligations under the existing policies have expired or have been settled.

 

The administration and management of the CTP claims insurance business is undertaken on the Commission’s behalf by Allianz Australia Insurance Limited (Allianz).  Investments are managed by a number of external fund managers with the exception of the direct property portfolio which is managed ‘in house’.

 

AUDIT MANDATE AND COVERAGE

 

Audit Authority

 

Audit of the Financial Report

 

Subsection 28(3) of the Motor Accident Commission Act 1992 and subsection 31(1)(b) of the Public Finance and Audit Act 1987 provide for the Auditor-General to audit the accounts and financial statements of the Commission in respect of each financial year.

 

Assessment of Controls

 

Subsection 36(1)(a)(iii) of the Public Finance and Audit Act 1987 provides for the Auditor-General to assess the controls exercised by the Motor Accident Commission in relation to the receipt, expenditure and investment of money, the acquisition and disposal of property and the incurring of liabilities.

 

Scope of Audit

 

The audit program covered major financial systems and was directed primarily to obtaining sufficient evidence to enable an audit opinion to be formed with respect to the financial statements and internal controls.

 

During 2005-06, specific areas of audit attention included:

 

·                     investment assets

·                     investment income

·                     claims payable

·                     premiums

·                     management agreements (CTP)

·                     provisions for outstanding claims

·                     accounts payable

·                     receivables.

 

 

AUDIT FINDINGS AND COMMENTS

 

Audit Opinions

 

Audit of the Financial Report

 

In my opinion, the financial report presents fairly in accordance with the Treasurer's Instructions promulgated under the provisions of the Public Finance and Audit Act 1987, applicable Accounting Standards and other mandatory professional reporting requirements in Australia, the financial position of the Motor Accident Commission as at 30 June 2006, the results of its operations and its cash flows for the year then ended.

Assessment of Controls

 

Audit formed the opinion that the controls exercised by the Motor Accident Commission in relation to the receipt, expenditure and investment of money, the acquisition and disposal of property and the incurring of liabilities are sufficient to provide reasonable assurance that the financial transactions of the Motor Accident Commission have been conducted properly and in accordance with law.

 

Audit Communications to Management

 

Matters arising during the course of the audit were detailed in a management letter to the Chief Executive Officer.  The response to the management letter was considered to be satisfactory.  Major matters raised with the Commission and the related responses are considered herein.

 

Claims Management - Compulsory Third Party Fund

 

The results of the audit indicated the claims manager Allianz had a satisfactory level of internal controls in place.  However, there were several areas where controls in relation to the computerised claims management system used by Allianz could be improved.  The main areas related to controls over access to the system and delegations of authority.

 

In response the Commission indicated that Allianz have undertaken to implement action to address the issues raised by Audit.

 

 

INTERPRETATION AND ANALYSIS OF FINANCIAL REPORT

 

The implementation of Australian equivalents to International Financial Reporting Standards (AIFRS) occurred in 2005-06.  Data for both 2005-06 and 2004-05 has been prepared using AIFRS.  Earlier data has not.  Note 3 to the financial statements sets out adjustments arising from the adoption of AIFRS.

 

Highlights of Financial Report

 

 

2006

2005

Percentage

 

$’million

$’million

Change

UNDERWRITING RESULT

 

 

 

Net premium revenue

386

378

2

Net claims

(369)

(359)

3

Other underwriting expenses

(81)

(74)

9

Underwriting Loss

(64)

(55)

16

INVESTMENT RESULT

 

 

 

Net investment revenue

137

91

51

Investment market value movements

33

67

(51)

Revenue from Investment Activities

170

158

8

Net Profit

106

103

3

 

 

 

 

Net Cash Flows from Operations

(25)

10

-

 

 

 

 

ASSETS

 

 

 

Current assets

239

242

(1)

Non-current assets

1 717

1 548

11

Total Assets

1 956

1 790

9

LIABILITIES

 

 

 

Current liabilities

495

480

3

Non-current liabilities

1 135

1 090

4

Total Liabilities

1 630

1 570

4

EQUITY

326

220

48

 

The Commission’s financial performance is significantly influenced by two inter-related aspects of its business as outlined below:

 

·                     Underwriting result — Underwriting operations are influenced by premium income, the number of claims and the estimated costs of settling those claims.  The underwriting result is determined as premium revenue less claims expense (after the cost and recoveries associated with reinsuring a portion of the insurance portfolio’s risk with third parties) and other underwriting costs.

·                     Investment result — Investment operations is an integral part of any insurance business as the estimated return on invested funds is a significant component of the pricing strategy employed by the business. 

 

Australian Accounting Standards Board AASB 1023 General Insurance Contracts requires that ‘market value accounting’ be adopted in the accounting for and valuation of investments.  This means that the investment result includes not only interest and related income received, but also changes in the market values of investments held at balance date.  Changes in the market values of investments can be subject to wide fluctuations and it is important to emphasise that investment market value movements recognised in the Commission’s financial statements are unrealised.  That is, until such time as the investments are sold, no gain or loss is actually received or incurred by the Commission.

 

Income Statement

 

Underwriting Result

 

The underwriting loss increased by $9 million in 2006 to a loss of $64 million partly as a result of other underwriting expenses increasing by $4.9 million due to an increase in collection charges.

 

Another contributing factor to the increased underwriting loss was a new provision embodied in AASB 1023 which requires that a liability adequacy test be undertaken annually.  The test is to determine whether the net unearned premium reserve is sufficient to cover future claims expense, including an appropriate prudential margin and associated claims management expenses.  If the liability adequacy test is not met then additional provisioning must be included.  An actuarial determination of the sufficiency of the net unearned premium reserve indicated that an additional $6.7 million was required, an increase of $1.8 million over the previous year.

 

Net premium revenue increased in 2006 by $7.6 million or 2 percent.  This small increase reflects the decision by the Third Party Premium Committee to decrease premiums by 2.7 percent for the 2005-06 financial year.  Net premium revenue has increased steadily since 2002.  Details of premium increases over the five years to 2006 is provided under the heading ‘Solvency Level’ herein.

 

Net claims and underwriting expenses have increased steadily over the same period except for 2004 when a decrease of $9.1 million was experienced.   Net claims expense is a combination of actual claim payments and the movement in outstanding claims provision.  The claims expense for 2006 was $369 million, an increase of $8.3 million and comprised gross claim payments of $286 million ($264 million) coupled with the increase in the outstanding claims provision of $83 million ($97 million).

 

An analysis of the underwriting result for the Commission for the five years to 2006 is presented in the following chart.

 

Investment Result

 

The investment result has improved markedly in the last three years compared with the previous two years.  Net investment revenue increased by $46 million in 2006 compared with a $19 million increase the previous year.   The value of investment market value movements was $33 million in 2005, a decrease of $34 million over the previous year.  The overall investment result has improved by $12 million in 2006 which is reflective of the continued strong performance in investment markets over the last three years.

 

An analysis of the investment result for the Commission for the five years to 2006 is shown in the following chart.

 

 

In 2006 MAC achieved a return on its investment portfolio of 10.2 percent (10.8 percent) which compares with its internal benchmark of 9.4 percent (10.3 percent).

 

Operating Result

 

The Commission has recorded an operating profit of $106 million in 2006.  This is an increase of $3 million over the previous year and continues the significant improvement over the losses incurred in 2002 and 2003.  The turnaround in operating result over the last three years is due mainly to the effects of the positive movement in the market value of investments and improved investment revenue, together with an increase in premium revenue offset by an increase in claims expense.

 

Balance Sheet

 

Investments

 

The total value of investment assets has increased by $682 million over the five years to 2006 with investments totalling $1.9 billion as at 30 June 2006.  The portfolio mix over the last two years has been relatively constant with a slight shift away from fixed interest and into equity in 2006.  As at 30 June 2006 fixed interest investments accounted for 60 percent, equity 31 percent and property 9 percent of the investment portfolio.

 

For the five years to 2006 a structural analysis of investment assets is shown in the following chart.

 

 

Outstanding Claims

 

The primary liability of the Commission is for outstanding claims.  The liability covers claims reported but not yet paid, incurred but not reported, the anticipated direct and indirect costs of settling those claims and estimated reinsurance and other insurance costs.

 

Calculation of the liability is an estimation process and a range of factors, including economic assumptions, affect the calculation.  There is therefore a need for professional actuaries to undertake the calculation and for reporting purposes detailed disclosure of a range of the assumptions made in the calculation to be included in the notes to the financial statements.

 

The liability calculation is reviewed by independent actuaries for the Commission.  Detail of the calculation is provided in Notes 2(e) and 16 to the financial statements.

 

The provision for outstanding claims has increased by $340 million over the last five years.  In 2006 the provision increased by $82 million to $1.45 billion.  The movement in the provision is a combination of the estimated cost of settling claims incurred in 2005-06, any changes in the estimated cost of settling claims incurred in previous years, together with any payments made to settle claims.  Factors considered by the Actuary which impact the estimate of amounts required to settle claims include the:

 

·                     number of claims incurred;

·                     length of time taken to settle the claim;

·                     average amount of claim payments;

·                     inflation and discount rates used.

 

Over the past three years there have been other specific factors which have impacted on the calculation of the provision resulting in a lesser increase in the provision than would otherwise have been experienced.  These include:

 

·                     the introduction of lower speed limits in various areas of South Australia;

·                     the implementation of a lower scale of payments for pain and suffering for minor injuries;

·                     a change in the administrative procedures regarding management of claims.

 

Also impacting on the calculation of the outstanding claims liability is the solvency requirements promulgated by the Treasurer pursuant to the Motor Accident Commission Act 1992 which require a greater risk margin to be included in the provision than in previous years.  The risk margin is required to achieve an 80 percent probability that the provision is adequate.  This requirement exceeds the Australian Prudential Regulation Authority nominated target of 75 percent probability of sufficiency, as set out in Prudential Standard GPS 210.  Refer to further commentary provided under the section ‘Solvency Level’ herein.

 

The following chart sets out details of the liability for the five years to 2006.

 

 

The ratio of investments to outstanding claims liability is shown in the following chart.  The ratio shows that the value of the Commission’s assets are sufficient to cover the value of its outstanding claims.  The ratio has continued to increase in 2006 as growth in the value of investment assets held as at 30 June 2006 has exceeded growth in the value of outstanding claims.

 

 

Solvency Level

 

Subsection 14(3) of the Motor Accident Commission Act 1992 (the Act) requires the Commission to seek to achieve and maintain a sufficient level of solvency for the CTP fund in accordance with a formula determined by the Treasurer. 

 

The primary aim of establishing a benchmark level of solvency is to ensure that the fund can reasonably expected to meet all of its liabilities as they fall due and essentially reflects the target level of reserves deemed by the Treasurer to be appropriate for the CTP fund to provide comfort that the scheme will endure future market turbulence with minimal risk of falling into a negative net assets position.

 

In May 2006 the Treasurer changed the formula used for determining the required level of solvency pursuant to the Act.  The new formula specifies that the CTP fund will have a sufficient level of solvency if its assets exceed the sum of:

 

·                     the fund’s liabilities;

·                     10 percent of the outstanding claims liabilities provision;

·                     10 percent of the premium liabilities provision; and

·                     10 percent of the investments in equities and property.

 

The Treasurer also requires that the provisions for outstanding claims liabilities and premium liabilities include a prudential margin which will be calculated by reference to an 80 percent probability that the provisions will be adequate as reported in actuarial reports to the Commission and also that the calculation of these provisions comply with the requirements of:

 

·                     Accounting Standard AASB 1023 General Insurance Contracts;

·                     Professional Standard Number 300, Actuarial Reports and Advice on Outstanding Claims in General Insurance issued by the Institute of Actuaries of Australia;

·                     Australian Prudential Regulation Authority GPS 210 in respect of the outstanding claims liabilities and premium liabilities (with the exception that the risk margins adopted are to be at the 80 percent probability of sufficiency compared with the 75 percent probability APRA requires).

 

As at 30 June 2006 the target level of reserves, as determined by application of the formula, was $1862.4 million.  The assets of the CTP fund as at that date were $1954.2 million or 104.9 percent of the target level of solvency, a surplus of $91.8 million. 

 

The following chart shows the level of solvency achieved over the period since the solvency targets were initially set.  All amounts were calculated using the revised formula promulgated by the Treasurer.  The chart highlights a gradual improvement in performance over the four year period.  The achievement of the required level of solvency in the last two years coincides with the improvement in investment market returns and also the increases in premiums being at the level recommended by the independent Third Party Premium Committee (TPPC) (refer to the table below for more details on recent premium increases).

 

 

The recent history regarding the implementation of premium increases recommended by the TPPC is outlined below:

 

 

2006

2005

2004

2003

2002

 

Percent

Percent

Percent

Percent

Percent

TPPC:

 

 

 

 

 

Recommended rise (effective for the

 

 

 

 

 

  financial year)

(2.7)

5.5

16.4

21.7

13.6

Actual rise

(2.7)

5.5

16.4*

15.5

4.7

Difference

-

-

-

6.2

8.9

 

*  The increase for some premium classes was capped at 9 percent.

 

As can be seen from the foregoing table, since 2004 the premiums recommended by the TPPC were approved by the Treasurer whereas in the previous two years a lesser rise was approved.  Subsection 25(3a) of the Act requires that subject to any direction of the Treasurer to the contrary, the Commission must not, while there is less than sufficient level of solvency in the CTP Fund, fix its third party insurance premiums at amounts less than those determined by the TPPC.  Application of this subsection since its promulgation in 2002 has contributed to the improved solvency level to the point where since 2005 the desired level of solvency has been achieved and in 2005-06 allowed for a decrease in premiums charged.

 

Under the provisions of the Motor Accident Commission Act 1992, two of the principal objectives of the Commission in providing compulsory third party insurance are to achieve and maintain a sufficient level of solvency in the CTP Fund; and to minimise premium charges having regard to the Commission