ACS2011PaperAndrewHoultram

Lengthened
Workers’ Compensation Tails
Implications for Self-Insurers
Prepared by
Andrew Houltram & Scott Duncan
Presented to the Institute of Actuaries of Australia
Accident Compensation Seminar
20 - 22 November 2011
Brisbane
This paper has been prepared for the Institute of Actuaries of Australia’s (Institute) 2011 Accident Compensation
Seminar.
The Institute Council wishes it to be understood that opinions put forward herein are not necessarily those of
the Institute and the Council is not responsible for those opinions.
 Taylor Fry Pty Ltd
The Institute will ensure that all reproductions of the paper
acknowledge the Author/s as the author/s, and include the above
copyright statement:
The Institute of Actuaries of Australia
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Email: actuaries@actuaries.asn.au Website: www.actuaries.asn.au

Lengthened Workers’ Compensation Tails – Implications for Self-Insurers
Abstract
In several jurisdictions self-insurers find that, compared with what would have been
anticipated some years earlier, the length of their workers’ compensation liability tail has
increased.
Any entity that has contemplated self-insurance under Comcare will have discovered that
compared with most jurisdictions, the liability tail is long. A longer tail than previously also
characterises liabilities in other jurisdictions where settlement of serious injury claims by
lump sum has become rarer. New South Wales and South Australia are particular cases in
point.
This paper analyses the effect of an increased tail-length on:
 The value of the deferral of cash outflows under self-insurance;
 The expected effects on financial statements; including a reduced likelihood under
current Accounting Standards that a benefit will be observable in the workers’
compensation expense line of the profit & loss statement, even in circumstances
where a benefit exists;
 Profit & loss statement volatility and the potential impact of prior year cost revisions;
 On-costs such as those associated with financial guarantees and general
administration expenses.
Keywords: workers’ compensation, self-insurance, feasibility assessments;

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1. Introduction
1.1 Background and Paper Structure
Background
Benefit entitlements and utilisation patterns in several jurisdictions have changed over time.
In many cases, claims associated with long-term injuries that might previously have settled
after two or three years with a lump sum, will now be more likely to generate payment
streams that extend over many more years; possibly decades.
This paper explores some of the impacts of longer workers’ compensation tails on self-
insurers and highlights the need to capture these when analysing how self-insurance costs
compare with the cost of insurance. The paper’s particular areas of focus are:
 the value to a self-insurer of the extension of the deferral of cash outflows;
 two expense categories, namely:
o financial guarantee costs; and
o general administration expenses;
 impacts on a self-insurer’s financial statements; and
 profit and loss statement volatility.
The investigation uses changes that have occurred in New South Wales since 2001 as its main
illustration. Due to statutory benefit changes that took effect from that time, lengthening of
the payment tail in that jurisdiction has been particularly stark. However, the general
conclusions are applicable wherever liability profiles lengthen. For example:
 companies that move to self-insurance under Comcare from other jurisdictions will
experience the effects of a lengthened tail. This is because, with the exception of New
South Wales, workers’ compensation liabilities incurred under Comcare have a
considerably longer tail than those of the state-based jurisdictions.
 workers’ compensation liability tail length has increased in South Australia;1
and
 there will undoubtedly be future changes in these and other schemes, some of which
will involve tail lengthening.
Structure
The paper covers the following topics:
The components of self-insurance cost
Section 2 describes the self-insurance cashflows that it is appropriate to compare with the
premium payable for a policy year, along with the expected payment patterns assumed in the
analysis.
Special attention is paid to the cost of the financial guarantee that is required as a self-
insurance license condition, since for various reasons the financial significance of the cost of
the financial guarantee has grown substantially in recent years, and it is higher where liability
profiles are longer.
1
Most recently, a lengthening has occurred due to statutory changes imposing restrictions on the use of
redemptions, but larger increases appear to have occurred prior to that. The discounted mean term of outstanding
claims liabilities recognised in the WorkCoverSA financial statements at June 2001 was 2.6 years (using a
discount rate of the risk free rate plus 2.5%). At June 2010 (using a risk free rate), the discounted mean term was
7.5 years. The discount rate bases are inconsistent, but it seems clear that the increase in mean term is very much
higher than could be attributed to the discount rate change alone.

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The dynamics of cash outflow deferral under self-insurance and its impact on the finances of
a company
In section 3, a framework is set out for considering the impact that self-insurance is expected
to have on a company’s finances as a result of the deferral of cash outflows. The framework
takes into account returns that the company can achieve on funds retained in the business as a
consequence of self-insuring, and in a simplified form, explores tax considerations.
The analysis considers the sensitivity of the results to the length of the liability tail, the rate of
return that can be achieved by the company on retained funds, tax, and the presence or
absence of a risk margin in the accounting provisions.
The impact on financial statements
Section 4 explores the impact of self-insurance on the way workers’ compensation expenses
are disclosed in a company’s financial statements. The analysis highlights that self-insurance
can be of benefit to a company, even in circumstances where the workers’ compensation costs
it requires to be recognised in the financial statements are expected to be higher than under
insurance.
Profit & Loss Statement Volatility
In assessing the suitability of self-insurance as the mechanism to provide for its workers’
compensation obligations, a company needs to consider both expected cost and variability.
The cost variability that is usually of most concern to a self-insurer is not the variation that
ultimately emerges between accident years. Rather, it is the much higher variability that a
self-insurer experiences in the contribution of workers’ compensation expenses to the profit
and loss result across accounting years.
Section 5 describes why, when liability profiles are longer, the variability in results between
accounting years is likely to be considerably higher. Because longer tails are associated with
greater result volatility, it becomes increasingly important to manage self-insurers
expectations on this front in longer-tailed environments.
The emergence of Paid Loss Retro Policies in Schemes with lengthening tail.
With a longer liability tail, both the potential financial risks and rewards associated with self-
insurance is magnified. A paid loss retro policy offers a mid-ground solution for those
entities that do not want to assume the full risks and responsibilities that accompany self-
insurance.
Currently, paid loss retro policies are available in New South Wales, while in South Australia
a similar option is planned for introduction in 2012. In the final section of the paper, the
general features of paid loss retro policies as they currently apply in New South Wales are
discussed, and the key differences between insurance, self-insurance and paid loss retro
policies are flagged.

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2 Components of Self-Insurance Cost
To explore the effects of extended liability tails on self-insurers, a series of projections has
been performed that simulate aspects of their experience under two scenarios; one where the
liability profile is relatively long-tailed, and one where it is relatively short. The simulated
items include cashflows, balance sheet provisions, profit & loss statement changes and the
cost of financial guarantees.
The projections require assumptions about:
 premium that would be paid if insurance was in place;
 the cost of claims that would be covered by a policy of insurance, and the time at which
claim payments would be made; and
 the amount and timing of payments under self-insurance for :
o reinsurance premium;2
o financial guarantees;
o contribution/levies to the workers’ compensation authorities; and
o claims handling and general administration expenses.
Collectively, the items under the third bullet point are referred to in this paper as the
accompanying expenses.
Though the assumptions are intended to be realistic, qualitatively, the general conclusions set
out in the paper would not be materially different under alternative reasonable assumptions.
2.1 Matching
In any meaningful comparison of costs under self insurance and insurance, costs need to be
matched. That is, when assessing the cost of self-insurance, all the expenses that would not
be incurred if an insurance policy were put in place need to appropriately captured.
Self-insurance of one policy year generates obligations to make payments in some expense
categories well after the exposure period has expired. Those categories are:
 claim payments;
 claim handling expenses; and.
 costs in respect of a financial guarantee.
Payments in these categories will be required throughout the entire period over which claims
from the accident year run off.
Self-insurance costs that should be deemed comparable with a single year’s premium are:
Direct claims cost for all claims with an injury date falling within the ‘policy year,’
regardless of when they are paid:
o compensation to injured workers;
o treatment and rehabilitation expenses;
o the cost of legal advice relating to claims; and
o the cost of investigation.
2
The ‘cost’ of reinsurance is really the excess of reinsurance premium over any reinsurance recoveries. However,
retentions that apply to reinsurance of self-insured workers’ compensation risks are typically set sufficiently high
that it is reasonable to treat the expected reinsurance recoveries as zero, and to treat premiums as representing the
reinsurance ‘cost’.

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For this reason the terms policy year and accident year are used interchangeably
throughout the paper.
Accompanying expenses associated with those claims. These are comprised of:
o claims handling expenses incurred throughout the period over which claim run-
off (this category includes a share of general administration expenses and
actuarial fees);
o the reinsurance premium paid at the start of the policy period;
o any contribution/levy payable to workers’ compensation authorities at the start of
the policy period; and
o the cost of financial guarantees that workers’ compensation authorities require as
a condition of license. At the start of each year during the period over which
claims from the accident year run off, a portion of the required financial
guarantee will relate to that accident year.
2.2 Detailed Projection Assumptions
The comparisons apply the following assumptions:
Insurance:
 Premium: The self-insurance scenarios are compared with the case where, if
conventional workers’ compensation insurance arrangements are entered into, the
premium payable for the policy year would be $7.25m.
In practice, for each policy year, premium calculations are performed twice; once at its
commencement, and once again at the policy year’s expiry. The calculation at the end
differs from the initial one by using true wages in place of an estimate, and by bringing
in more claims experience. The difference between the two generates an adjustment
premium which can be positive or negative.
The modeling makes the simplifying assumption that premium payments are made as a
single installment, paid on the policy period start date. Equivalently, the amount of any
adjustment premium at the end of the policy year is taken to be zero. Further, the cost
associated with the employer excess on individual claim amounts has been ignored.
The simplifications aid the ease with which the calculations progress, but should not
affect the conclusions drawn from the analysis.
The comparisons assume that the premium is a tax-deductible expense.
Self-insurance:
 Direct Claims Cost: Two scenarios are considered; which are termed the shorter-tail
and longer-tail scenarios. The scenarios are based on scheme assessments of liability
profiles in New South Wales at distinct time-points.
Diagram 2.1 illustrates the two profiles. Each is taken from projections made by the
actuaries who have advised the NSW Scheme at different times. The shorter-tail
scenario comes from the assessment for the 2001 accident year that was made on a pre-
reform basis at the 31 December 2001 valuation. The longer-tail scenario comes from
the assessment for the 2010 accident year that was made at the 31 December 2010
valuation. The undiscounted mean term for the shorter-tail scenario is 4.3 years. For
the longer-tail scenario it is 12.1 years.

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The projections have been scaled so that, when risk-free discount rates are applied, the
present values of the payment streams are identical.
Diagram 2.1 Projected Payment Pattern Comparisons
0
200
400
600
800
1,000
1,200
0 5 10 15 20 25 30 35 40 45 50 55
Development Year
Amount
Shorter Tail Scenario
Longer Tail Scenario
Summaries of the benefit changes that are the primary reason for the profile change are
described in the NSW Scheme’s actuarial report.3
Although there is a link between the
scenarios and the NSW WorkCover assessments now and before the scheme reforms,
that connection is of no particular consequence to the topics explored in the paper.
Discounted at risk free rates to the start of the policy year, the present value of the
direct claims cost for each scenario is $5m. The claim payment projections associated
with each scenario are set out in attachment A.1. Claim payments are assumed to be
made, on average, half-way through each year.
Except where otherwise specified, where a liability estimate is made, the assumption is
made that there is perfect foresight on the part of the actuary. That is, payments in a
given year are assumed to equal those projected by the valuation basis.
 Claims handling expenses are assumed to amount to 10% of claim payments under
both scenarios. They are assumed to be paid, on average, half-way through each year.
Although the projections assume an equal claims handling expense rate under both
scenarios, some remarks are included later in this section about how rates may compare
under the longer-tail and shorter-tail scenarios. A claims handling expense allowance
equal to 10% of projected claim payments is included as part of the outstanding claims
provision.
 Workers’ compensation authority contributions are incurred at the start of the
accident year. The assumed amount has been determined with reference to the
obligations that currently apply in New South Wales (4% of deemed tariff premium).
The projections assume a cost of $290,000 applies, which is paid at the start of the
accident year.
3
http://www.workcover.nsw.gov.au/formspublications/publications/Documents/workcover_nsw_scheme_valulation
_at_december2010_3458.pdf

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 Reinsurance premium - The projections allow for a premium of $240,000, payable at
the commencement of the accident year.
 Financial guarantee costs are assumed to be 1% of the required guarantee amount. An
accident year will contribute to the financial guarantee requirement throughout the full
period over which its claims run off. The cost of the financial guarantee is assumed to
be paid at the commencement of each financial year.
 The risk margin held in the balance sheet outstanding claims provision is 15% of the
discounted outstanding claims liability inclusive of the claims handling expense
provision. In the commentary, some remarks are made about the sensitivity of the
results to this assumption.
 Risk free discount rates assumed are those that applied at 30 June 2011. They are set
out in attachment A.2. Commentary regarding the effects of variations in discount rates
between balance dates is included in Section 5.
 The following expenses are tax deductible:
o direct claim payments made in the year;
o claims handling expenses paid in the year;
o reinsurance premium;
o workers compensation authority contributions/levies;
o the financial guarantee charge; and
o the provision for outstanding claims at the end of each year, inclusive of the risk
margin, but exclusive of any amounts relating to claims handling expenses.
 Company Rates of Return – The projections assume the company can achieve a pre-
tax rate of return 3% higher than risk free rates on any additional funds retained as a
result of deferring cash outflows. This is the subject of further discussion in Section 3
of the paper.
 Corporate Tax Rate – a rate of 30% has been applied. Any tax is paid on the last day
of the financial year. The possibility of any complications in the company’s
arrangements that might mean that the tax effect of any contribution to before-tax profit
or loss does not generate a tax effect of 30% of that contribution, due at the end of that
tax year, are ignored.
Diagrams 2.2 and 2.3 set out the gross of tax cashflow profiles associated with a single
accident year that are applied in the projections, inclusive of the accompanying expenses.

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Diagram 2.2 – Longer Tail Scenario
0
200
400
600
800
1,000
1,200
1,400
1,600
0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54
Development Year
$'000
Accompanying Expenses
Claim Payments
Diagram 2.3 – Shorter Tail Scenario
0
200
400
600
800
1,000
1,200
1,400
1,600
0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54
Development Year
$'000
Accompanying Expenses
Claim Payments
2.3 Some comments regarding the assumptions and general assessments of self-insurance
savings
A brief examination of the assumptions set out in section 2.2 reveals that the sum of the
present value of the direct claims cost and the various expenses is significantly less than the
assumed premium of $7.25m, even at risk-free discount rates (later in the paper, the use of
higher discount rates is discussed). Hence, under the assumptions it is a fait accompli that
self-insurance will be assessed as a ‘cheaper’ option than insurance.
There is some justification for anticipating that it should be the exception rather than the rule,
that at risk-free rates, the present value of expected claim payments and expenses should be
lower than premium. This can be seen by considering entities insured in a jurisdiction which
has a monopoly, publicly underwritten scheme, which does not seek to make a profit over the
longer-term. General reasoning suggests that (if one sets aside the possible effect of
incentives self-insurance carries to improve outcomes and to lower costs, then) on average,
self–insurance should be expected to be a more expensive means of satisfying workers
compensation obligations than insurance.

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The reason for this is that, summed across all policyholders, expected claim payments are
those for the entire scheme. Similarly, summed across all policyholders, the premium
amounts should reflect:
 expected claim payments,
 expected expenses; and
 expected investment returns between the receipt of premium and payment of claims and
expenses.
As a proportion of expected claim payments, self-insurer expenses are likely to be greater
than those associated with the scheme, since self-insurers bear some expenses that the scheme
does not. Those expenses are:
 reinsurance premium, and
 financial guarantee costs.
Additionally, due to economies of scale one would expect the expenses associated with the
wider scheme to be lower than would apply if the scheme were partitioned into a large
number of self-insured units.
Self-insurance viability assessments that conclude the present value of claims costs and
associated expenses are lower than the insurance premium warrant careful inspection before
the results are accepted. While there will be exceptions, for a policy selected at random, the
reasoning set out above suggests the opposite result is more likely.
There are several reasons why, without foreshadowing experience changes under self-
insurance, or better returns that the company might be able to achieve during the period
between when premium would have been paid and when claim payments are required, the
conclusion that self-insurance will be the cheaper option in the long-run could be reached
erroneously. They include:
 due to the unavailability of a more extensive claims history, viability assessments are
typically based on data that is limited to a few accident periods, and which includes
only the first few years of claim development:
o by chance, this could be a set of claim cohorts with costs lower than the
(unknown) longer-run average;
o being based on a small data set, without a full run-off history of any accident
year, the risk of setting an inappropriate valuation basis is high. For example, the
risk of underestimating the impact of low frequency, high cost claims (which
might not be present in the data, but which should be allowed for in a long-run
cost comparison unless reinsurance retentions are low enough to remove them as
an issue) is heightened. Similarly, with low data volumes, the risk of inadequate
allowance for persistence of claims in the tail; or failure to recognise the presence
of superimposed inflation effects is higher.
 failure to recognise the full extent of claims handling expenses, or the financial
guarantee cost associated with an accident cohort; and
 premium may have been captured over a period that was more expensive than is likely
to reflect its longer run cost.

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If one accepts that sustained bias against a prospective self-insurer is unlikely to exist in the
premium system, it follows that a decision to self-insure should not be based primarily on
how past premium levels have compared to the cost that would have been involved in
retaining liability for the claims which have emerged, and the other accompanying costs of
self-insurance. Rather, a decision to self-insure should be based on an assessment that:
 self-insurance will motivate a greater emphasis on injury prevention and claims
management that will reduce costs (both through the direct cost of claims and the
indirect benefit of improved productivity associated with reduced injury rates); and
 retained funds can be applied to generated better returns for the company than can be
achieved by the investments of the workers’ compensation authorities, and
 these benefits outweigh the risks associated with retaining the liability, including the
difficulties associated with the increased volatility that will apply to workers’
compensation expenses across financial years.
Many of the projection assumptions applied in this paper, including how the cost of premium
compared to the expected cost of claims and accompanying expenses that would apply under
self-insurance have been drawn from a commercial analysis performed for a prospective self-
insurer. Those assumptions embed a cost advantage to self-insurance. For the reasons listed
above, there is a risk that the bias in favour of self-insurance embedded in the assumptions
might not reflect the underlying reality. If this turns out to be the case, the general themes of
this paper, which focus on characteristics of self-insurance where liability tail lengths change,
will still hold. The paper’s conclusions are not contingent on the cost advantage under self-
insurance being realised.
2.4 Claims Handling Expenses
The assumptions applied in the paper’s modeling make no allowance for differences in claims
handling expense rates between the shorter and longer-tail scenarios. However because claims
management effort is more likely to be required for a sustained period of many more years
under the longer-tail scenario, it seems likely that as a proportion of claim payments, claims
handling expenses are likely to be higher.
It is noteworthy that for the NSW workers’ compensation managed scheme, the claims
handling expense rate included in the outstanding claims provision was 3.6% of the expected
claims cost in December 2001, when a shorter-tail scenario applied. In December 2010,
under a longer-tail scenario, the rate was 8.6%.
2.5 Financial Guarantee Costs
All jurisdictions require the annual lodgment of a deposit or financial guarantee as a condition
of self-insurance. In practice, lodgment of a deposit is rare. Almost all self-insurers satisfy
the requirement with a financial guarantee.
The detail of the financial guarantee calculation varies by jurisdiction, but in recent years
there has been some convergence. The calculation approach is now similar for New South
Wales, Queensland and Victoria.
The projections follow the requirement that applies in New South Wales, but most of the
general conclusions that are drawn about the impact of an increased tail length on the
effective cost of the financial guarantee apply across all jurisdictions.4
4
Most of the conclusions rely upon the impact that a longer-tail liability profile has on self-insurers’ outstanding
claims liability estimates and their run-off patterns, and all jurisdictions have financial guarantee requirements that
are a function of the self-insurers outstanding claims liability.

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In New South Wales, the required financial guarantee is 150% of the greater of:
 the central estimate of the outstanding claims liability estimate as at the balance date,
plus
 an estimate of the expected liability which will emerge in the next 12 months, less
 an estimate of the total amount expected to be paid on all claims during the next
12 months
And
 the central estimate of the outstanding claims liability as at the balance date.
For calculation purposes, the estimate of the claims liability includes an allowance for claims
handling expenses.
The cost of the financial guarantee associated with an accident year has been estimated in two
steps:
Firstly, the position of an entity which has been a longstanding self-insurer has been
considered and the required financial guarantee for the upcoming year has been estimated.
For this purpose, longstanding means long enough so that the oldest accident year has
completely run-off. The calculation allows the cost to be divided into that attributable to each
accident year.
Then, the attribution is converted to track the contribution of the upcoming accident year to
future financial guarantees throughout the period over which its claims run off.
Attachment B shows the calculation of the financial guarantee for an entity which has self-
insured for many years, for which:
 the upcoming accident year has expected claim payments by development year that
correspond to those set out in Attachment A.1; and
 by development year, projected payments for all earlier accident years is identical to
those for the upcoming year, except that for earlier accident years they are reduced by
8% pa. The reduction allows for inflation and an assumed rate of business growth.
For the longer-tail scenario the total amount of the required financial guarantee is $40.019m.
Attachment B.2 shows full details of the portion of this that is related to each accident year.
If the upcoming accident year was 2011/12, then the contribution of each accident year to the
financial guarantee is set out in Table 2.1.
Table 2.1 Contribution of each accident year to the required financial guarantee at
the commencement of 2011/12
Accident Year
Ending
30 June
$’000*
Accident
Year Ending
30 June
$’000*
Accident
Year Ending
30 June
$’000*
2012 6,843 2004 1,391 1996 524
2011 5,195 2003 1,206 1995 468
2010 4,193 2002 1,058 1994 418
2009 3,372 2001 935 1993 374
2008 2,733 2000 830 1992 333
2007 2,264 1999 738 1991 297
2006 1,907 1998 657 1990 265
2005 1,624 1997 587 earlier 1,809
Total 40,019
* see attachment B, Table 2, column (L).

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The contribution of the 2011/12 accident year to the financial guarantee requirements in
future years can be determined from table 2.1 by backing out the 8% pa reduction.5
Values
for the first 27 years are shown in table 2.2. The full projection extends to 2070 and is set out
in attachment B.2.
Table 2.2 Contribution of the 2011/12 accident year to the required financial
guarantee at the commencement of future financial years
Financial
Year Ending
30 June
$’000*
Financial
Year Ending
30 June
$’000*
Financial
Year
Ending
30 June
$’000*
2012 6,843 2021 2,411 2030 1,671
2013 5,610 2022 2,283 2031 1,613
2014 4,891 2023 2,181 2032 1,554
2015 4,248 2024 2,089 2033 1,496
2016 3,718 2025 2,006 2034 1,438
2017 3,326 2026 1,930 2035 1,380
2018: 3,026 2027 1,861 2036 1,322
2019 2,783 2028 1,795 2037 1,263
2020 2,574 2029 1,732 2038 1,203
* see attachment B, Table 2, column (N).
Diagram 2.4 shows the projected contribution of the accident year to the required financial
guarantee in future financial years under the shorter and longer-tail scenarios.
Diagram 2.4 also shows the contribution that would have been required for the shorter-tail
scenario had financial guarantee requirements remained as they were some years ago in New
South Wales; when the requirements did not include a prospective element, and when they
incorporated a margin of 20% rather than 50%. This has been included to examine changes in
financial guarantee cost that have arisen due to explicit changes in the statutory requirements,
as a separate matter from those that have arisen due to changes in the liability profile.
Diagram 2.4 Contribution of 2011/12 Accident Year to the required financial guarantee
in future years
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2012 2017 2022 2027 2032 2037 2042 2047 2052 2057 2062 2067
Financial Year Ending 30 June
$'000
Shorter-Tail Scenario -
Previous Requirements
5
For example, 5,610= 5,195 x (1.08) ; 4,891 = 4,193 x (1.08) ^2

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The slower run-off of the liability under the longer-tail scenario generates a more persistent
contribution to future financial guarantee requirements. Consequently, the significance of the
cost of the financial guarantee has become more pronounced where liability tails have
lengthened.
Assuming the cost of the financial guarantee is 1% of the guarantee amount, then applying
risk free discount rates, the present value of the cost of the financial guarantee associated with
the accident year is:
 $474k in the case of the longer-tail scenario (approximately 9.5% of the present value
of claims cost);
 $274k in the case of the shorter-tailed scenario (approximately 5.5% of the present
value of claims cost); and
 $221k in the case of the shorter-tailed scenario under the previous arrangements, where
there was no prospective element and a 20% margin applied (approximately 4.4% of
the present value of claims cost);
Taken in isolation, explicit changes to financial guarantee requirements over time would have
increased their effective cost by 25% (from 4.4% to 5.5% of the present value of claims cost).
The change due to increasing the tail length has added a further 73% (from 5.5% to 9.5%)
2.5 The increasing significance of financial guarantee expenses
Tail lengthening has coincided with other changes that have added to the significance of the
financial guarantee cost. In particular:
 Banks and other financial institutions have significantly re-assessed their risk appetite.
The rates charged for financial guarantees have increased markedly compared with
those that would have applied in 2007 and earlier. It is not unusual to encounter
instances where rates have tripled or quadrupled over that time. Some self-insurers
have seen considerably larger increases. Furthermore, general terms and conditions
attaching to the financial guarantee product have often become more onerous. For
example, in some cases the company may be required to maintain a deposit with the
institution from which the guarantee is sourced.
 In some jurisdictions, changes to the financial guarantee requirements have:
o increased the margin applied to the central estimate; and
o introduced a prospective element.
The aggregate effect of:
 increases in the tail length of workers’ compensation liabilities;
 introduction of a prospective element to financial guarantee requirements;
 increases to the margin applied to the central estimate when determining the financial
guarantee requirement; and
 increases to the rates charged by financial institutions for financial guarantees,
has been very significant.

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For example, the present value of the cost of the financial guarantee, where:
 the rate charged by financial institutions was 0.3% of the guarantee amount (which for
an entity now being charged a rate of 1%, was more typical prior to the global financial
crisis of 2008); rather than the 1.0% which now applies; and
 a prospective element did not apply to financial guarantee requirements; and
 the margin was 20% rather than 50%.
would have been approximately $66k (1.3% of the present value of claims cost) under the
shorter-tail scenario.
Hence, with new rates charged by financial institutions, the regulatory change in financial
guarantee requirements; and the change in liability profile, in this illustration the effective
cost of the financial guarantee has increased from 1.3% of the present value of claims cost, to
9.5%.
What was once a trivial component of the cost of self-insuring is now much more significant.
This highlights the need to accurately capture to cost of financial guarantees in any
comparison of self-insurance costs with the costs of conventional insurance.

- 14 -
3. The value of deferral of cash outflows
A significant attraction of self-insurance is that, during the deferral period, funds that would
have been lost to the company if an up-front premium was paid to an insurer, are available for
general investment in the business.
The return that can be achieved on the additional funds retained in the business as a result of
self-insuring will depend on the circumstances of the company and will change with time.
Though the expected rate of return will vary, in the long-run most entities would expect to
generate returns in excess of risk-free rates. One useful way to consider the value of having
additional funds available is that they could be applied to reduce corporate borrowings.
Corporate borrowings would certainly attract interest rate charges in excess of risk-free rates.
A thorough examination of the effect of self-insurance on an entity needs to recognise the
value associated with retention of funds during the period over which cash outflows are
deferred.
The examination will also be more relevant to the company if it takes into account tax effects.
In practice, accurate representation of any particular company’s tax position can be
complicated. The illustrative projections provided here reflect how tax operates in a simple
case, in line with the assumptions set out in Section 2. Although taking tax effects into
account may seem important, at least under the assumptions applied for the modeling
described in this paper, the projections suggest that the ratio of self-insurance to insurance
cost is quite insensitive to the assumed taxation rate (including an assumption of zero).
An approach to the comparison of the expected cost of insurance and self-insurance that takes
into account tax effects and the returns expected to be achieved on retained funds is set out in
Attachment C.
For self-insurance, the comparison envisages deposit into a notional fund, which is called the
Additional Funds Account in this paper, by the workers’ compensation business unit, of the
amount that would have been paid as premium if the liability were insured. Throughout the
period over which the accident year’s claims run-off, the fund accrues interest at the rate the
company is assumed to earn on any retained funds. In the case where retained funds are
applied to reduce corporate borrowing, this is equivalent to crediting the notional fund with
the interest cost saved by the company.
Draw-downs are made from the notional account to satisfy:
 claim payments;
 claims handling expenses;
 the contribution that the accident year’s outstanding claims liability estimates make to
the financial guarantee requirement throughout the run-off period;
 the Workers Compensation Authority contribution at the commencement of the
accident year; and
 the reinsurance premium for the accident year, payable at its commencement.
At the end of each year, the before-tax investment return on the notional fund is determined,
along with the associated tax liability. The net of tax earnings are then credited to the fund.
At the end of the run-off period, the accumulated value of the notional fund is returned to the
workers’ compensation business unit.

- 15 -
For each year throughout the run-off period, a projection is also made of the incurred cost for
tax purposes associated with claims and expenses attributable to the accident year. The
associated tax credit or debit is ‘charged’ to the workers’ compensation business unit at the
end of each year.
Constructed this way, the cashflows that contribute to the workers’ compensation costs under
self-insurance are:
 the initial payment from the workers’ compensation business unit to the Additional
Funds Account;
 credits at the end of each year corresponding to the tax effect of the progress of incurred
claims cost and other self-insurance expenses; and.
 the credit at the conclusion of the run-off period of the accumulated value of the
Additional Funds Account.
To summarise the projected profit cost of self-insuring as a single value to compare with the
premium, modeled costs attributable to the workers’ compensation business unit need to be
discounted to the commencement of the accident year. The appropriate rate to apply is the
rate, net of tax, that the company is assumed to be able earn on the retained funds. Where the
company can apply funds to earn a return in excess of risk-free rates, discounting using risk-
free rates is likely to understate the full value to the entity, of the additional funds at its
disposal under self-insurance. This is the case regardless of the accounting standard’s
requirement to apply risk-free discount rates when constructing balance sheet provisions.
This analysis framework is useful for examining the impacts of self-insurance on the financial
dynamics of a company. However, because of the way the longer and shorter liability profiles
have been derived, little can be read into specific differences in the outcomes that have been
modeled under the two scenarios. The two scenarios were constructed by equating the claims
cost present values applying a risk-free discount rate and deeming them to be ‘equivalent’ on
this basis. The analysis framework applies a different discount rate, which complicates any
comparison of outcomes under the two scenarios.
The objective of this section of the paper does not extend to quantification of the financial
effect of the additional deferral of cash outflows that has accompanied the extension of self-
insurer liability tails. Self-evidently however, an extended deferral period will increase the
amount of funds retained, and will increase the period for which those funds can be put to use
in the wider company. This will amplify the benefits associated with cash outflow deferral.
Consequently, as liability tails have lengthened, it has become more important that the
assessment framework captures the benefits associated with the deferral. The framework
presented here, and which is set out in greater detail in Attachment C, aims to do that.
While the example set out in this paper assumes that the company can use any excess funds
internally to reduce corporate borrowings, for which it is charged a 3% interest premium over
risk-free rates, in practice, a company is likely to be interested in illustrations of the effect of
applying a range of scenarios assuming a variety of earning rates on additional funds.
Applying discount rates that exceed risk-free rates by 3%, the present value of cashflows to
and from the workers’ compensation business unit, at the commencement of the accident year
is $3.989m.
A similar modelling exercise can be undertaken for the shorter-tail scenario, and also for the
case of insurance (where the modelling is simple since there is only the premium at the
commencement of the policy year, and the associated tax credit at the end). The results are
summarised in table 3.1.

- 16 -
Table 3.1 Present value cost comparison taking into account earnings on retained
funds and tax effects
Present value of the net of tax
workers’ compensation cost
$’000
Insurance 5,1876
Self-insurance – Longer-tail scenario 3,989
Self-insurance – Shorter-tail scenario 4,110
The sensitivity of the results for the longer-tail scenario to changes in some of the
assumptions is set out in tables 3.2 to 3.4.
Table 3.2 Sensitivity Test – Return above risk free
Return achieved on
retained funds
risk free rates plus
Present value of the net of
tax workers’
compensation cost
self-insurance longer-tail
scenario
$’000
Insurance7
$’000
Ratio of self-
insurance expected
cost to insurance
cost
0% 4,643 5,145 90
1% 4,398 5,159 85
2% 4,181 5,173 81
3% 3,989 5,187 77
4% 3,818 5,201 73
5% 3,663 5,241 70
The assessed benefit of self-insurance is highly sensitive to the assumed rate of return that the
company could achieve on retained funds. In this paper’s example, if risk free rates are
assumed the difference between expected costs under insurance and self-insurance are much
closer. It seems that taking into account the return that a company can earn on retained funds
in the analysis is important.
Table 3.3 Sensitivity Test – Tax Rate
Tax Rate
tax workers’ compensation
cost
scenario
$’000
Insurance
$’000
Ratio of self-
insurance expected
cost to insurance
cost
0% 5,712 7,250 79
10% 5,142 6,572 78
20% 4,568 5,885 78
30% 3,989 5,187 77
40% 3,409 4,479 76
50% 2,826 3,760 75
6
$7.250m – 30% x $5.187m x 1.0476) ^ -1
7
The small increase that is attributed to the Insurance cost as the assumed return available on retained funds is
increased relates to the cost of paying a gross of tax premium at the commencement of the year, but then waiting
until the end of the year for the associated tax effect.

- 17 -
The assessed result is quite insensitive to the assumed rate of tax. The example suggests that
performing the analysis gross of tax rather than net of tax understates the financial benefit of
self-insuring, but only trivially.
Table 3.4 Sensitivity Test – Risk Margin
Tax Rate
tax workers’ compensation
cost
scenario
$’000
Insurance
$’000
Ratio of self-
insurance expected
cost to insurance
cost
0% 4,067 5,187 78
15% 3,989 5,187 77
30% 3,911 5,187 75
The effect is small, but carrying a risk margin lowers the expected cost of self-insurance. It
does this by introducing an additional tax deduction for the additional component of the
outstanding claims provision.
Table 3.5 sets out sensitivity results equivalent to those set out in table 3.2 for the shorter-tail
scenario. Illustrating the increased importance under longer-tailed scenarios of taking into
account the returns that the company expects to generate on retained funds, the present value
of self-insured costs under the shorter-tail scenario is less sensitive to the assumed rate of
return that can be achieved on those funds, than is the case for the longer-tail scenario.
Table 3.5 Sensitivity Test – Return above risk free – Shorter-Tail Scenario
Return achieved on
retained funds
risk free rates plus
tax workers’
compensation cost
self-insurance shorter-tail
scenario
$’000
Insurance8
$’000
Ratio of self-
insurance expected
cost to insurance
cost
0% 4,488 5,145 87
1% 4,356 5,159 84
2% 4,230 5,173 82
3% 4,110 5,187 79
4% 3,996 5,201 77
5% 3,888 5,241 75
In light of what will be discussed in Section 4, an important point to note from the results of
the examples set out in this section is that when the full effects of self-insurance on the
finances of the company are considered, the conclusion has been reached that self-insurance
is expected to carry a significant financial benefit.
In section 4, this conclusion is contrasted with another measure that some might use to gauge
the outcomes of self-insurance.
8
The small increase that is attributed to the Insurance cost as the assumed return available on retained funds is
increased relates to the cost of paying a gross of tax premium at the commencement of the year, but then waiting
until the end of the year for the associated tax effect.

- 18 -
4. Accounting Effects
This section considers the effect that moving from insurance to self-insurance is expected to
have on an entity’s financial statements.
4.1 Incurred Claims Cost definition and the impact of the unwind of discount
Where a company self-insures, the incurred claims cost taken up in the financial statements in
a given year equals:
claim payments made during the accounting year
plus the closing outstanding claims provision
less the opening outstanding claims provision
The full cost of workers’ compensation under self-insurance also includes accompanying
expenses being:
the reinsurance premium paid in the year
plus the workers compensation authority contribution/levy paid in the year
plus the financial guarantee paid in the year
plus claims handling expenses paid during the year
Implicit in this definition is that the effect of unwinding a year’s discounting is taken up in the
financial statements as part of workers’ compensation expenses.
For fair comparison with effect of insurance on the financial statements, an offset to the
discount unwind should be taken into account. The offset is the return earned on funds the
company retains under self-insurance by virtue of the deferral of cash outflows. While the
financial statements will carry the benefit of those returns, it will not be explicitly treated as
an offset to workers’ compensation expenses. Rather, it will be spread throughout the
financial statements as items such as reduced interest charges on borrowings, or returns
generated on additional investment in plant and equipment. Typically the return on retained
funds isn’t explicitly identifiable.
The treatment of discount unwinding means that when the workers’ compensation expense
line is considered in isolation, the expected charge under self-insurance may very well be
significantly higher than it appears under insurance. This can be the case even where self-
insurance carries an expected financial benefit. The excess of the expected charge under self-
insurance tends to be greater the longer the liability profile.
The financial significance of the discount unwind (and the return on retained funds) is higher
in a longer-tail than a shorter tail scenario. It will gradually increase as the self-insured
outstanding claims provision builds over the years after self-insurance commences, or after
transition from a short-tail to longer tail scenario begins. All other things being equal, in the
first few years after either of these events occurs, the workers’ compensation expenses
recognised in the financial statements should be expected to increase gradually, even where
claims experience is stable, and it is likely to settle at a higher level than the workers’
compensation premium that would have applied had the liability been insured.
It is important for a self-insurer to be aware of this effect if it is to avoid forming the view that
self-insurance has been detrimental to the company’s finances in circumstances where a more
holistic view would lead to the opposite conclusion. If performance monitoring exercises are
undertaken to compare self-insurance and insurance costs, the benefit of deferring cash
outflows also needs to be appropriately taken into account.

- 19 -
To illustrate the increase in expected workers’ compensation expense charged to the financial
statements, the financial statements of a self-insurer have been modelled that has expected
claims and accompanying expenses that follow the shorter-tail and longer-tail profiles
described in Section 2, and for which those claim and expense payments are borne out in
practice as the liability runs off. The assumptions for the simulation are consistent with those
underlying the projections described in Sections 2 and 3. Those projections showed that
under these assumptions self-insurance was expected to carry a financial benefit.9
The modelling of the workers’ compensation expenses recognised in the financial statements
is conducted in two steps:
Firstly, the workers’ compensation expense disclosed in the financial statements is
tracked across the run-off period for a single accident year. The comparative cost under
insurance is the premium paid at the commencement of the policy year. Under
insurance, there are no further expenses throughout the run-off.10
Secondly, under assumptions regarding past rates of company growth and inflation, the
collective effect of successive accident years on the workers’ compensation expenses
disclosed in the financial statements is determined for a single accounting year. The
collective effect is calculated assuming that, as a proportion of salaries, claims costs and
the costs of accompanying expenses are the same as those for the single accident year
case.
4.2 The impact of a single accident year on the workers’ compensation expense line for a
self-insurer throughout claims run-off period
Applying the assumptions set out in Section 2 and 3; and assuming that outcomes are exactly
as projected, the contributors to workers’ compensation costs under self-insurance have been
calculated, as they would be disclosed in the financial statements. In line with their
presentation in company accounts, the calculations have been performed on a gross of tax
basis. Attachment D sets out the full details of the projection.
To indicate how the calculations progress, those relating to the first two years of the longer-
tail scenario are set out below:
First Year (Development Year Zero)
The workers’ compensation charge to the profit & loss statement is the sum of:
Claim payments11
$0.853m
Claims handling expenses12
$0.085m
Contribution to the financial guarantee requirement13
$0.068m
Workers Compensation Authority contribution $0.290m
Reinsurance premium $0.240m
Outstanding claims provision at year end $5.548m
Total cost in development year zero $7.085m
The cost of insurance charged to the accounts in development year zero is the premium;
which is $7.250m.
Hence, workers’ compensation expenses recognised in the financial statements in the first
year are lower than those for insurance by $0.165m.
9
See table 3.1.
10
Section 2 acknowledges that this is a simplification; but expected later payments (primarily the employer excess
on claims) should not be significant.
11
Attachment A.1
12
10% of the claim payments
13
1% of the contribution to the financial guarantee set out in table 2.2.

- 20 -
Second Year (Development Year One)
In the next year of run-off (development year 1) the contribution of the accident year to
the workers compensation expense recognised in the financial statements is the sum of:
Claim payments14
$0.986m
Claims handling expense15
$0.099m
Contribution to the bank guarantee requirement16
$0.056m
Outstanding claims provision at year end $4.560m
less Outstanding claims provision at start of year ($5.548m)
Total cost in development year one $0.152m
The cost of insurance in development year one is zero17
(it is also zero throughout the
remainder of the run-off).
Therefore, workers’ compensation expense recognised in the financial statements in
development year one is higher than that under insurance by $0.152m.
The projected emergence of workers’ compensation expenses through the accounts for a
single accident year for the longer and shorter-tail scenarios is set out in Diagram 4.1. The
expected costs are expressed as the amount by which they exceed the cost of insurance.
Diagram 4.1 – Excess of the expected cost of self-insurance over insurance by
development year; full run-off of a single accident year
-200
-150
-100
-50
0
50
100
150
200
250
0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48
Development Year
$'000
14
Attachment A.1
15
10% of the claim payments
16
1% of the contribution to the financial guarantee set out in table 2.2.
17
This is a simplification, but not a financially important one. In practice an excess is usually payable on claims,
so late-reported ones will generated some cash outflow for an insured entity. There may also be some expenses
incurred in dealing with the insurer.

- 21 -
Several features are apparent:
 Only in the development year zero is the profit and loss charge under self-insurance
significantly lower than it is for insurance.
 For the longer-tail scenario, for decades after development year zero, the accident year
produces a profit and loss charge, where-as under insurance there is none. The charge
under self-insurance arises because:
o the accident year contributes to the financial guarantees required throughout the
run-off period; and
o the unwind of discount is treated as a workers’ compensation expense under the
Accounting Standards, but any offsetting returns from retained funds are
recognised elsewhere in the financial statements. The release of risk margin
produces a partial offset, but the release is slow when the run-off tail is long, so
the net profit and loss charge in later development years remains significant.
 Compared to the shorter-tail scenario, the longer-tail scenario produces a profit and loss
charge which persists over a much longer period (decades), and which is of much
greater financial significance. That is, where the tail is longer, the slower rate of claim
payment increases the financial significance of both the unwind of discount, and the
contribution to the financial guarantee.
As the illustrations assume that payments and claim handling expenses emerge exactly as
projected, no profit or charge emerges due to a difference between actual and projected
payments.
Whether or not a risk margin is included in the outstanding claims provision makes a
significant difference to the pattern profit and loss charge emergence. Diagram 4.2 compares
the expected emergence patterns assuming a 15% risk margin is included in the provision, and
assuming no risk margin is held.
Diagram 4.2 – Excess of the expected cost of self-insurance over insurance by
development year; full run-off of a single accident year
Risk margin impact
-1,000
-800
-600
-400
-200
0
200
400
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50
Development Year
$'000
Longer Tail Scenario - no risk margin
Longer Tail Scenario - 15% risk margin
Eliminating the risk margin, increases the up-front profit recognition substantially. The offset
is that there is no release of risk margin in later development years to mitigate the charges
arising from discount unwind and the maintenance of the financial guarantee.

- 22 -
In summary, considering costs associated with a policy year cohort of claims:
 In the policy year itself, insurance generates an up-front charge which is higher than the
expected charge recognised in the financial statements under self-insurance.
 Self-insurance will continue to generate a profit and loss charge throughout the run-off
period, where-as insurance generates none.
 These effects are magnified if a risk margin is not incorporated in the outstanding
claims provision. That is, the profit and loss charge under self-insurance will be lower
in the policy year itself by a much greater amount, but the expected ongoing charge in
later years will also be higher.
 Under self-insurance, both the required financial guarantee, and the impact of discount
unwind are approximately proportional to the outstanding claims liability at the start of
each financial year. Consequently, the longer the liability tail, the higher and more
persistent the ongoing impact of the accident year’s claims are likely to be on charges
generated for future financial statements.
4.3 Longer-term financial statement impacts of self-insurance
This section explores the aggregate financial statement impact across groups of accident years
for an entity that has been self-insuring for an extended period. To examine the impact, the
modelling assumes that the same claim payment profile applies to the entity in each accident
year. However, as one goes back through prior accident years, the claim cost amounts
involved are reduced by 8%pa (the reduction aims to take into account inflation and the
growth in the business over time to its current size).
Additional prior years are brought into consideration by adding profit and loss components
from successive development years, reduced by 8% pa.
For example, for an entity in its second year of self-insurance under the longer-tail scenario,
the total profit & loss charge is estimated as the sum of:
 the development year zero charge for the latest accident year ($7.085m as described in
Section 4.1); and.
 the development year one charge for the preceding accident year ($0.152m as described
in Section 4.1, but reduced by 8% to allow for inflation and business growth).
The result is summarised in the table 4.1. Table 4.1 also shows the profit & loss charge
assuming the current year is the third year of self-insurance.

- 23 -
Table 4.1 Workers’ compensation expenses – longer-tail scenario
Expected profit & loss charge in first, second and third year of self-insurance
(development years 0, 1 & 2) $m
Development
Year 0
Development
Year 1
Aggregate at
development
Year 1
Development
Year 2
Aggregate at
development
Year 2
Claim payments 0.853 0.913 1.766 0.519 2.315
Claims handling expense 0.085 0.091 0.177 0.052 0.231
Contribution to the financial
guarantee requirement
0.068 0.052 0.120 0.042 0.162
Workers’ Compensation
Authority Contribution
0.290 0.000 0.290 0.000 0.290
Reinsurance Premium 0.240 0.000 0.240 0.000 0.240
Outstanding claims Provision
at year end
5.548 4.222 9.770 3.403 13.173
Outstanding claims Provision
at year start
0.000 (5.137) (5.137) (3.909) (9.047)
Aggregate 7.085 0.141 7.226 0.139 7.365
Under this scenario, the total workers’ compensation charge that the entity should expect to
recognise if it is in its second year of self-insurance is $7.226m, if it is in its third then the
expected charge is $7.365m.
The process can be extended to estimate the profit & loss charge if the company is in its,
fourth and later years of self-insurance by adding the impact from earlier accident years under
the same inflation and growth assumptions. The process can also be repeated for the shorter-
tailed scenario.
Eventually the position is reached whereby assuming earlier starting points for self-insurance
makes no difference to the expected costs recognised in the current year’s profit & loss
statement (because the earliest accident year of self-insurance will have fully run off). In this
paper, that position is referred to as the ‘mature position’.
Full details leading to the estimate of expected cost recognised in the workers’ compensation
expense line of the financial statements in a mature position is set out in attachment D.2 and
D.4. Diagram 4.3 summarises the progression leading to the mature position result, which is
set out in table 4.2.

- 24 -
Diagram 4.3 Workers’ compensation cost comparison
Workers’ compensation expense line only
6,600
6,800
7,000
7,200
7,400
7,600
7,800
8,000
8,200
8,400
1st Year 6th Year 11th
Year
16th
Year
21st
Year
26th
Year
31st
Year
36th
Year
41st
Year
46th
Year
Years since implementation
$'000
Insurance
Self-insurance Longer-Tail Scenario
Self-insurance Shorter-Tail Scenario
Table 4.2 Financial Statement Workers’ compensation expenses
Expected charge at mature position $m
Longer-Tail
Scenario
Shorter-Tail
Scenario
Claim payments 4.514 4.683
Closing outstanding claims provision 32.471 20.832
Opening outstanding claims provision (30.066) (19.289)
Claims handling expenses 0.451 0.468
Workers Compensation Authority Contribution 0.290 0.290
Reinsurance Premium 0.240 0.240
Cost of financial guarantee 0.400 0.257
Total Cost 8.301 7.481
Closing outstanding claims provision as a proportion
of claim and expense payments in the year
551% 351%
Table 4.2 also shows the ratio of the closing outstanding claims provision to the sum of claim
payments and accompanying expenses during the year. This statistic is discussed in the
section 5 commentary on profit and loss volatility.
The following features are apparent from table 4.2 and diagram 4.3:
 Under the assumptions, in the mature position, insurance generates the lowest workers’
compensation expense charge in the accounts. This is the opposite result to that
determined from the analysis in Section 3 (where returns on retained funds and tax
effects were explicitly modeled).
 As tail-length increases, the expected workers’ compensation charge seen in the
accounts increases, driven by the impact of discount unwind and the cost of the
financial guarantee.
 As tail length increases, it takes more time to reach a mature position. During this time
the relative size of the workers’ compensation charge seen in the accounts increases
from one year to the next.

- 25 -
 Initially, a move to self-insurance will be expected to be favorable for the workers’
compensation expense line of the financial statements, but this position is temporary.
 The workers’ compensation expense line does not capture an important benefit of self-
insurance. That is, that cash outflow is deferred, and funds are retained that can be
applied to earn a return for the company. The effects of this deferral are captured
elsewhere in the financial statements. This needs to be appreciated when assessing the
benefits of the decision to self-insure.
 The outstanding claims provision will ultimately be significantly higher under the
longer-tail scenario than under the shorter-tail scenario.
In summary, in cases where these is a financial benefit associated with self-insurance, it may
not seem so if one focuses on workers’ compensation costs as they are disclosed in the
financial statements. This effect is magnified when liability tails are longer. Full assessment
of self-insurance effects needs to incorporate the impact of the capacity to use the retained
funds for the general financing of the business. This becomes more important when liability
tails are longer.
It is not uncommon for self-insurers to hold no risk margin in their outstanding claims
provision. For the longer-tail scenario, diagram 4.4 illustrates the impact of removing the risk
margin on the reported expense.
Diagram 4.4 Workers’ compensation cost comparison
Workers’ comp expense line only – Risk margin effect
6,600
6,800
7,000
7,200
7,400
7,600
7,800
8,000
8,200
8,400
1st Year 6th Year 11th
Year
16th
Year
21st
Year
26th
Year
31st
Year
36th
Year
41st
Year
46th
Year
Years since implementation
$'000
Insurance
Self-Insurance Longer-Tail Scenario - 15% margin applied
Self Insurance Longer-Tail Scenario - no risk margin applied
Notwithstanding the observation from table 3.4 that adding a risk margin should be expected
to reduce the ‘real’ cost of self-insurance to the company by a small amount (by generating an
additional tax deduction), it has the opposite effect on the appearance of the workers’
compensation expense line in the financial statements. The workers’ compensation expenses
appear higher when a margin is included.18
18
If the exercise is repeated for the shorter-tail scenario, removing the risk margin also reduces the amount of
workers’ compensation expenses disclosed in the financial statements, but the size of the effect is much smaller.
Under the assumptions set out in this paper, the expected expense still exceeds the expected cost of insurance, but
only by a trivial amount.

- 26 -
5. Profit & Loss Volatility and Risk
Unavoidably, workers’ compensation costs are volatile expense items. Volatility is a feature
of the expense regardless of whether the arrangements to provide for the obligation take the
form of conventional insurance, paid loss retro policies or self-insurance.
Conventional insurance carries the lowest volatility expectation, but it is nonetheless volatile.
It carries cost certainty in the sense that once the policy year ends, the workers’ compensation
expense is finalised. However, claims outcomes for a policy year do affect the workers’
compensation expense for future accounting periods, but only indirectly, through its impact in
future years on the premium formulae that apply in most jurisdictions.19
Premium rate volatility
The discussion in this section focuses on cost variability under self-insurance, and how this is
affected by a longer-tail liability profile, but it is worthwhile re-iterating that volatility is also
a feature of premium rates when the liability is insured, and that the premium rate volatility
can be significant.
Several factors contribute to premium rate volatility under insurance:
 Workers’ compensation authorities (and insurers in the case of privately underwritten
schemes) continuously monitor the experience of the pool of risks they manage to
estimate an aggregate breakeven premium rate. This is the average premium rate that
must be collected from insured entities to provide for total expected claims from the
upcoming policy year. For all schemes, there have been periods when this rate has
varied substantially between years. Changes in this assessment contribute to
fluctuations in rates charged to individual policyholders.
 From time to time, workers’ compensation authorities have deliberately aimed to
collect amounts different to the breakeven premium rate (for example, to assist with the
funding of deficits or distribution of surplus)
 The experience of individual industry classifications is monitored and individual tariff
rates can be adjusted by degrees that vary from changes in the overall breakeven
premium rate
 In most jurisdictions, claims experience over recent policy periods is factored into the
premium rate charged.
Volatility under self-insurance
In assessing the suitability of self-insurance as the mechanism to provide for its workers’
compensation obligations, in addition to operational matters, a company needs to consider
both expected cost and variability.
There are two broad categories of cost variability that could be considered:
 variability in the cost of claims between accident years; and
 variability in the contribution that workers’ compensation expenses make to profit
outcomes between accounting years.
Variability in the cost of claims between accident years can be significant, but longstanding
self-insurers find that variability in the contribution that workers’ compensation expenses can
make to profit outcomes between financial years is much higher. This second category of
variability is far and away the more problematic for them.
19
Where workers’ compensation risks are privately underwritten, no formula applies to premium setting, but one
would still expect an individual policyholder’s claims history to be factored into the premium rate.

- 27 -
The main reason that accounting year variability is much greater relates to the accounting
treatment of the outstanding claims provision. In particular, the most significant contributor
is the treatment of revisions to estimates of the liability associated with prior-year claims.
Over time, the outstanding claims provision becomes a large balance sheet item. Under the
accounting standards, any change in the assessment of the liability associated with prior year
claims is taken up in the profit and loss statement in the year the revision is made.
Consequently, even a change that is small as a proportion of the outstanding claims provision
can generate a profit and loss expense that can be very high in comparison to the expected
workers’ compensation profit and loss charge. Even though the revision relates primarily to
past years, it is the current year’s profit and loss statement that carries the impact.
This point is well appreciated by actuaries, but the impact can come as a surprise to new self-
insurers. It is well worth emphasising the accounting treatment of revisions to prior-year
liability provisions, the fact that they are likely to occur each year, and their likely financial
significance, to prospective self-insurers at the time that self-insurance viability is being
assessed. This variability will generally prove to be much more important to a self-insurer
than variations in cost between accident years.
Increases in the liability tail length magnify the potential for volatility to be generated from
revision to prior-year liability estimates. The self-insurer will ultimately build up a much
larger outstanding claims provision, with a financially significant contribution from many
more accident years than when the tail length was shorter. This generates higher levels of
sensitivity to (and hence risk from):
 Changes to discount rates and inflation projections. These will generate liability
estimate changes of increasing financial significance.
 Valuation basis changes. The self-insurer is subject to greater ‘analysis risk’ in the
sense that if components of the outstanding claims valuation basis emerge as
inappropriate, then the rectification can affect a greater number of accident periods than
would have been the case when the liability tail was shorter. This is especially true of
any changes required to the far tail. This increases the potential financial effect of
valuation basis changes.
 Environmental Effects. There is greater exposure to financial impacts from legislative
changes which may have some retrospective effect (an example from recent years is the
increase to the pension age).
As longer liability tails generate greater volatility across accounting the importance of
communicating its potential effects to current and prospective self-insurers is increased.
In what follows, a selection of the effects is examined in greater detail:
Discount Rate Changes
The relevant accounting standards require that the outstanding claims provision to be set as
the present value of the projected future payments associated with pre-balance date claims.
The standards further require that discount rates should reflect current market assessments of
the time value of money. The requirements are generally interpreted as mandating discount
rates that reflect the yields available on a basket of Commonwealth Government securities
with cashflows that match the projected claim payments associated with the liability.
Yields on Commonwealth Government securities fluctuate over time according to market
conditions, changing the required discount rates from one balance date to the next. Even if
there are no changes to projections of future claim payments, the impact of relatively minor
changes in discount rates can have a significant effect.

- 28 -
The projections indicate that if:
 the self-insurer is in the long-run ‘mature’ position described in section 4.3, and
 experience over the year has been exactly as projected, and
 no changes are made to the valuation projections,
then if discount rates were to be lower by 1% across the yield curve at the closing valuation,
the closing outstanding claims provision would be:
 $0.59m higher for the shorter-tail scenario; but
 $2.70m higher for the shorter-tail scenario.
For the shorter tail scenario, the total pre-tax workers’ compensation expense shown in the
profit and loss statement would increase from $7.48m to $8.08m (an increase of
approximately 8%).
However, for the longer-tail scenario, the total pre-tax workers’ compensation expense shown
in the profit and loss statement would increase much more significantly, from $8.30m to
$11.03m (an increase of approximately 33%).
The effect is much greater in the longer-tail case for two reasons:
 because of its longer duration, the liability estimate is more sensitive to discount rate
changes, and
 as a multiple of the expected expense for the year, the outstanding claims provision is
larger.
At least in part, insurers can immunise their insurance results against the impact of discount
rate changes by investing the funds that support the outstanding claims provision in
Government fixed interest securities of equivalent term. When interest rates change, the
movement in the provision that needs to be brought to account is matched by a change in the
value of assets (full matching can’t be achieved in the case of very long-tailed liabilities
because, in practice, there are no securities of sufficiently long duration to permit it, but the
effect can at least be mitigated)
It is open to self-insurers to take a similar approach to mitigate the impact of discount rate
changes, but in practice few do, preferring instead to invest funds in the general business.
Consequently, for self-insurers, when discount rates fall, claims costs in the financial
statements typically increase without the offsetting effect of increases in the value of a
matching asset portfolio.
Self-insurers typically struggle to understand a higher profit and loss charge for workers’
compensation expenses arising from discount rate changes that can occur even in
circumstances where claims costs are actually well-controlled. It is clear that as the
outstanding claims provision builds after transition to a longer-tailed scenario, and the
sensitivity of the profit and loss charge to discount rate changes grows, this source of
volatility magnifies and becomes even more problematic for them.
For longstanding New South Wales self-insurers, it is worth highlighting that the process of
transition from the short to long tail scenario is still in progress. Sensitivity of the profit and
loss charge to discount rate changes has grown over the past ten years or so, but it will
continue to grow for many years yet.

- 29 -
Valuation Basis Changes
Initially, when a scheme changes from providing shorter-tail to longer-tail benefits, the
prospect of setting an outstanding claims valuation basis that reflects experience is slim. The
valuation basis will be based primarily on judgement, accessing whatever relevant collateral
information can be drawn upon to estimate claims run-off patterns. Inevitably in such
circumstances, the risk of misstatement is high, and the degree of misstatement could be
significant.
As claims experience under a longer-term scenario emerges, experience can begin to inform
valuation basis changes. However, it will be many years from the commencement of a
longer-term scenario until the far tail begins to emerge. In the interim, projection
assumptions will continue to be based to a large extent on the judgement of the actuary. As
the experience emerges, and the properties of the tail become better appreciated, the valuation
basis can be changed to be more experience and less judgement-based. When those changes
are made, many accident years are affected simultaneously, with the potential to generate a
significant effect on the profit and loss charge.
A particularly problematic scenario is one in which the actuary is initially unaware of the
need to apply judgement to provide for a longer-tail, and instead continues to develop
projection assumptions by drawing on experience from accident years that were part of a
shorter-term scenario. By the time it becomes apparent through experience that a longer-tail
scenario has commenced, it is likely that the outstanding claims liability will be understated
across several accident years. The impact on the profit and loss statement of rectifying the
valuation basis can be large.
Valuation basis changes will also be required as a matter of course to reflect any emerging
trends. In a shorter-tail scenario the likely impact of such changes is limited, since the
outstanding claims liability estimate will only be financially significant across a few accident
years. By contrast, in a longer-tail scenario, the potential financial impact can be much
higher, since by the time they are recognised, the impact will often affect the liability estimate
for many more accident years simultaneously.
Self-insurance outstanding claims analysis is typically based on small datasets. The
experience on which valuation bases are set, are therefore affected to a greater degree by
chance variation. Consequently, in percentage terms there is greater scope for more
significant hindsight adjustments.
In the context of a self-insurer, where the data available for analysis is typically sparse,
valuation basis changes generating a 10% increase in the outstanding claims liability estimate
would not normally be regarded as remarkable; greater increases would not be unusual. In
the absence of any other changes, in the calculation examples set out in this paper a 10%
increase in the closing outstanding claims liability estimate would increase the workers’
compensation profit and loss charge:
 from $7.481m to $9.564m for the shorter-tail scenario (an increase of 28%); and
 from $8.301m to $11.548m in the longer-tail scenario (an increase of 39%).
Once again, the volatility in workers’ compensation expenses is significantly amplified when
liability tails are longer.

- 30 -
Because self-insurers are exposed to greater volatility when liability tails are longer, it
becomes more important that their expectations with respect to result stability are set
realistically. This is particularly the case when an entity has self-insured for an extended
period in a jurisdiction such as New South Wales, or has transferred from other state
jurisdictions to Comcare. This is because although the self-insurer may think they appreciate
the degree of result volatility they should anticipate, in reality it is likely to be greater than in
the past, and is likely to continue increasing for some time yet.
Random variation that is not so random
An unfortunate reality for self-insurers is that circumstances that are likely to lead to
hindsight increases to outstanding claims liability estimates are not entirely random. They
tend to be correlated with circumstances which are adverse for most companies’ wider
financial results. For example:
 reduced interest rates (requiring discount rate reductions) tend to accompany a weak
economy (the environment around the global financial crisis provides a stark example);
 a weak economy often reduces return to work prospects, leading to deteriorating claims
continuance rates.
 adverse circumstances specific to the self-insurer resulting in retrenchments can
increase claims from the retrenched; and
 in an environment where increased retrenchments are occurring, return to work
prospects are likely to be poorer, leading to deteriorating claims continuance rates.
This is another point that is relevant to an entity considering the merits of self-insurance,
which is worthwhile emphasising as part of any viability assessment.
A note on new Self-insurers and their initial ‘honeymoon’ period
A special case of gradually increasing propensity for financial reporting outcomes to be
volatile as the outstanding claims provision gradually builds towards a mature level is the
case of a new self-insurer.
In the early years following a decision to self-insure it is common for a new self-insurer to be
highly satisfied with its decision, particularly where the liability tail is long. The decision will
have been made after a viability assessment which (if the company did decide to self-insure)
would have indicated worthwhile cost savings were likely. For the first few annual
valuations, the majority of the cost will be embedded in the outstanding claims liability
estimate, which will most likely be made by the same actuary who was responsible for the
viability assessment. With little additional claims experience to inform the valuation basis,
the valuation will commonly apply projection assumptions that are not very different to those
on which the viability assessment was based. Consequently, self-insurance cost outcomes
will appear to be quite close to those anticipated by the viability assessment.
A new self-insurer will experience expense outcome variations between years that primarily
reflect cost variations between accident years. It takes some years to build up an outstanding
claims provision big enough so that revisions to liability estimates for prior years, arising
from discount rate changes and valuation basis changes, emerge as the much greater long-
term source of volatility.
It is important that new self-insurers are aware that the relatively low volatility in cost
outcomes in the early self-insurance years does not reflect what is likely in the longer-term,
once ‘prior-year effects’ become more significant. Similarly, in the early years after
transition from a shorter-tail to a longer-tail scenario, it is highly likely that profit and loss
volatility will be at significantly lower levels than is likely to become the norm in the long-
term.

- 31 -
6. The Emergence of Paid Loss Retro Arrangements
Paid Loss Retro (PLR) arrangements have been available in New South Wales since 2009,
they are proposed to be available in South Australia from July 2012. It may be no
coincidence that these jurisdictions are two for which we have drawn attention to as having a
liability tail length that has increased over time.
PLR policies represent a mid-ground arrangement that sits partway between full acceptance
of all of the risks that accompany self-insurance, and the much lower risk that accompanies
conventional insurance.
This section of the paper provides a brief overview of the operation of PLR arrangements as
they apply in New South Wales. More detail can be found in Attachment E. However, for a
definitive description of how the policies operate, the Insurance Premiums Order covering
Paid Loss Retro policies should be consulted along with other material on the New South
Wales WorkCover website.
Principal Features
Under a PLR arrangement, premium for a policy year is paid by instalments over a five-year
period. Except for the first, the amount of the instalments is not known at the policy’s
commencement. Subject to a minimum and maximum, they vary depending on the progress
of claims costs that arise from injuries suffered during the policy period, up until the point
where the instalment is calculated.
In addition to the payment of premium, a PLR policyholder is required to lodge a financial
guarantee with WorkCover. For each policy year for which the final instalment premium has
not yet been determined, the amount of the guarantee is equal to the maximum total premium
that might ultimately be paid under the policy, less the sum of instalments paid to date.
The initial instalment premium is a multiple of the tariff premium that would have applied
under conventional insurance. At other instalment points, reported incurred cost from the
policy year is determined (subject to certain exclusions and caps) and scaled by factors that
vary according to the time since the policy period commenced. Previous instalment
premiums that have already been paid are deducted from the newly calculated premium to
determine the new instalment amount (which may be a refund)
Once the final instalment premium is paid, the employer carries no further liability in respect
of the policy period.
The premium formula is calibrated so that the up-front premium is much lower than the
premium payable under a conventional insurance policy, and further premium amounts are
likely to be payable at each of the calculation points over the following five years.
PLR policies present a mechanism for employers to bear costs that are more reflective of their
workers’ compensation claims experience than is the case for conventional policies, while
limiting some of the more extreme effects associated with the lengthening payment tail.
Compared to self-insurance, these policies should result in lower (but still significant)
expense line volatility and a smaller financial guarantee requirement. However, funds are still
built up within the firm, albeit to a lesser degree than under self-insurance.
Claims are managed by agents to the New South Wales WorkCover Scheme, as is the case for
claims under conventional insurance policies.

- 32 -
Key differences between PLR policies, self-insurance and conventional insurance
The following list draws out key differences between the characteristics of PLR policies,
conventional policies, and self-insurance:
 Initial deposit premium under a PLR policy is much lower than under a conventional
insurance policy, but further premium instalments (some of which could potentially be
partial refunds) will continue for five years. Under self-insurance, payments will
extend over a much longer period; possibly decades.
 In a mature position, the total premium payments required of a PLR participant might
not be noticeably different than under conventional insurance, since, in addition to an
instalment premium being required for the upcoming year, premium adjustments will
be required for five preceding policy periods.
 Ultimately, for each policy year, the premium paid under a PLR arrangement is more
heavily dependent upon the claims experience from that policy year than is the case for
a conventional insurance policy. In this sense, the premium is more responsive to
favourable or unfavourable experience. However, the premium is payable over an
extended period of five years, so the full benefit (in the case of favourable experience)
or strain (in the case of unfavourable experience) crystallises more slowly. Self
insurance ultimately delivers the full financial effects of claims experience from the
accident year, but over a very extended period.
 It can be well-argued that, compared with conventional insurance, PLR policies provide
greater motivation for good occupational health and safety practices and better claims
management efforts, as there is a closer link between claims costs and premiums. This
link is less pronounced than under self-insurance where there is a direct relationship.
 Outbound payments are slower under a PLR policy than they are under conventional
insurance, but are much quicker than under self-insurance. Hence, compared to a
conventional insurance policy, a PLR arrangement retains additional funds in the
business for a period, but the effect is considerably less extensive than under self-
insurance.
 PLR policies are likely to generate profit and loss charge outcomes that are significantly
more volatile across accounting years than conventional insurance policies (although
this is partly dependant on how future premium obligations in respect of past policy
periods is treated under the accounting standards). However the volatility will be much
less pronounced than under self-insurance.
 Under a PLR arrangement, in addition to premium, a cost is incurred by they
policyholder by virtue of the requirement to maintain a financial guarantee. No such
additional cost accompanies a conventional policy.
 Requirements that an employer must satisfy before the company can be admitted to a
PLR arrangement are less stringent than the full requirements to be a self-insurer. At
the time of writing, in New South Wales, PLR applicants must :
o Have a minimum basic tariff premium of $500k
o Provide an annual written commitment from the CEO and/or Board. The
commitment is to set internal targets against key performance indicators
o Demonstrate to WorkCover –
- there is no undue volatility in the claims history
- the existence of a satisfactory OH& S and workers’ compensation
compliance history
- its return to work program is satisfactory.

- 33 -
7. Conclusion
This paper has shown that longer tailed liabilities amplify both the expected benefits and the
risks associated with self-insurance. The advantages of deferring cash outflows from the
company are heightened, since the deferral is for a longer period. However, this comes at the
price of increased volatility in the workers’ compensation expenses, and increased risk of
liability mis-statement. Some on-costs increase non-trivially, and there are effects on the
company’s financial statements that may not be obvious, but which ought to be appreciated.
Because a longer liability tail increases the risk associated with self-insurance, for some
entities, it is possible that it could tip the balance in their assessment to the conclusion that
self-insurance is not the most suitable way of financing workers’ compensation obligations.
In two jurisdictions that have experienced lengthened liability tails, paid loss retro
arrangements have been introduced that may be attractive to such entities.

- 34 -
Bibliography
Cohen A & Grace E, (2002) “WorkCover Authority of NSW Actuarial Review of the
Outstanding Liabilities of the WorkCover Scheme Statutory Funds at 31 December 2001”.
Marjoribanks, C & Woofe N (1998) “Current Issues for Self Insurers”, presented to the
Institute of Actuaries of Australia 7th
Accident Compensation Seminar.
Hart, D (1998) “Assessing the viability of Workers’ Compensation Self-Insurance”, presented
to the Institute of Actuaries of Australia 7th
Accident Compensation Seminar.
Playford M & Wright D, (2011) “WorkCover NSW Actuarial Valuation of Outstanding
Claims for the NSW Nominal Insurer at 31 December 2010”.

Attachment A
A.1 Direct Claim Payments Profile
Development
Year
Shorter
Profile
Longer
Profile
Development
Year
Shorter
Profile
Longer
Profile
0 522 853 38 <0.1 49
1 824 986 39 <0.1 45
2 983 640 40 <0.1 42
3 1,180 563 41 0 39
4 959 472 42 0 36
5 506 370 43 0 33
6 284 300 44 0 30
7 191 254 45 0 28
8 136 225 46 0 25
9 99 190 47 23
10 78 162 48 21
11 66 142 49 19
12 56 132 50 18
13 52 124 51 17
14 61 116 52 16
15 37 109 53 14
16 22 105 54 13
17 16 101 55 12
18 12 97 56 11
19 8 94 57 10
20 5 91 58 8
21 3 89 59 4
22 2 87 60 0
23 1 85
24 0.8 83
25 0.6 82
26 0.4 80
27 0.3 79
28 0.3 77
29 0.2 75
30 0.2 73
31 0.2 70
32 0.19 68
33 0.17 65
34 0.14 62
35 0.12 59
36 0.10 55
37 <0.1 52
A.2 Risk Free Discount Rates
Development
Year
Rate
% pa
0 4.76
1 4.80
2 4.90
3 5.06
4 5.27
5 5.52
6 5.79
7 and later 5.83
To determine discounted provisions, risk free rates are taken to be static.
That is, the yield curve is the same by duration at each balance date

A.3 Longer-Tail Scenario - Outstanding Claims Provision and its composition at
the end of each development year, for a single accident year
Development
Year
Central
estimate
Claims
Handling
Expense
Risk Margin
Total
Provision
Total
Provision
excluding
CHE
0 4,386 439 724 5,548 5,110
1 3,605 360 595 4,560 4,199
2 3,138 314 518 3,969 3,655
3 2,726 273 450 3,448 3,176
4 2,386 239 394 3,019 2,780
5 2,134 213 352 2,700 2,486
6 1,941 194 320 2,456 2,262
7 1,785 178 295 2,258 2,079
8 1,651 165 272 2,089 1,923
9 1,546 155 255 1,955 1,801
10 1,464 146 242 1,852 1,706
11 1,398 140 231 1,769 1,629
12 1,339 134 221 1,694 1,560
13 1,286 129 212 1,626 1,498
14 1,237 124 204 1,565 1,441
15 1,193 119 197 1,509 1,389
16 1,150 115 190 1,455 1,340
17 1,110 111 183 1,404 1,293
18 1,071 107 177 1,355 1,248
19 1,033 103 171 1,307 1,204
20 996 100 164 1,260 1,160
21 959 96 158 1,213 1,117
22 922 92 152 1,166 1,074
23 884 88 146 1,119 1,030
24 847 85 140 1,071 987
25 809 81 134 1,024 943
26 771 77 127 975 898
27 732 73 121 926 853
28 693 69 114 876 807
29 653 65 108 826 761
30 614 61 101 777 715
31 575 58 95 728 670
32 537 54 89 679 625
33 499 50 82 631 581
34 462 46 76 585 539
35 427 43 70 540 497
36 393 39 65 497 458
37 360 36 59 456 420
38 330 33 54 417 384
39 301 30 50 380 350
40 274 27 45 346 319
41 248 25 41 314 289
42 225 22 37 284 262
43 203 20 33 256 236
44 182 18 30 230 212
45 163 16 27 206 190
46 146 15 24 184 170
47 130 13 21 164 151
48 116 12 19 146 135
49 102 10 17 129 118
50 88 9 15 112 103
51 75 8 12 95 88

A.3 (cont.)
Development
Year
Central
estimate
Claims
Handling
Expense
Risk Margin
Total
Provision
Total
Provision
excluding
CHE
52 63 6 10 80 73
53 51 5 8 65 60
54 41 4 7 51 47
55 30 3 5 38 35
56 21 2 3 26 24
57 12 1 2 15 14
58 4 0 1 5 5
59 0 0 0 0 0
60 0 0 0 0 0
* Discounting is at risk-free rates
A.4 Shorter-Tail Scenario - Outstanding Claims Provision and its composition at
the end of each development year, for a single accident year
Development
Year
Central
estimate
Claims
Handling
Expense
Risk Margin
Total
Provision
Total
Provision
excluding
CHE
0 4,719 472 779 5,970 5,498
1 4,112 411 678 5,202 4,791
2 3,310 331 546 4,187 3,856
3 2,266 227 374 2,866 2,639
4 1,396 140 230 1,766 1,627
5 948 95 156 1,200 1,105
6 705 71 116 892 822
7 545 55 90 670 635
8 434 43 72 549 506
9 355 35 59 449 413
10 293 29 48 371 342
11 240 24 40 304 280
12 195 19 32 247 227
13 152 15 25 192 177
14 96 10 16 122 112
15 64 6 10 80 74
16 44 4 7 56 51
17 30 3 5 37 34
18 19 2 3 24 22
19 12 1 2 15 14
20 8 1 1 10 9
21 6 1 1 7 7
22 4 0 1 5 5
23 3 0 1 4 4
24 3 0 0 3 3
25 2 0 0 3 2
26 2 0 0 2 2
27 2 0 0 2 2
28 1 0 0 2 2
29 1 0 0 1 1
30 1 0 0 1 1

A.4 (cont.)
Development
Year
Central
estimate
Claims
Handling
Expense
Risk Margin
Total
Provision
Total
Provision
excluding
CHE
31 1 0 0 1 1
32 1 0 0 1 1
33 1 0 0 1 1

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