so - Independent Consumer and Competition Commission

Transcription

INDEPENDENT CONSUMER AND COMPETITION COMMISSION
REVIEW OF THE COMPULSORY THIRD PARTY MOTOR
VEHICLES INSURANCE REGULATORY CONTRACT
- PROPOSED FINAL REPORT -
(Yet to be determined 2013)
1
FOREWORD
The Independent Consumer and Competition Commission (hereafter the “Commission or ICCC”) was
established in 2002 through an Act of Parliament called the Independent Consumer and Competition
Commission Act 2002 (hereafter the “ICCC Act”) to promote competition and fair trade, regulate the
prices of certain goods and services and protect consumer interests, and other related purposes in
Papua New Guinea.
Under its role of regulating prices, the Commission has the responsibility to regulate the prices of
services provided by Regulated Entities, amongst other things. These Regulated Entities include public
utility service providers such as PNG Power Ltd, and PNG Ports Corporation Ltd. Other Regulated
Entities also include Post PNG Ltd and Motor Vehicles Insurance Ltd (hereafter ‘MVIL1’) which is the
subject of this report.
The regulatory arrangements that apply to these Regulated Entities are set out in detail in the
Regulatory Contracts that have been prepared for, and apply to, each of the Regulated Entities. These
Regulatory Contracts specify the minimum service standard requirements of the Regulated Entities, the
price path that will apply over an agreed period of time and the pricing principles that are to be
applied in reviewing that price path at some future date. Each Regulatory Contract further specifies
the penalties that the Regulated Entities will incur if they fail to meet the service standards built into
the price path and forming the basis of the Regulatory Contract.
A Regulatory Contract currently exists for MVIL known as the Compulsory Third Party (CTP) Motor
Vehicles Insurance Regulatory Contract (hereafter ‘Regulatory Contract’).
This Final Report highlights the key findings and final determinations based on submissions received
during the consultation period and the Commission’s own independent assessment and review of MVIL’s
business. As part of the public consultation process, a Draft Report was released on 29 August 2012,
seeking comments from relevant stakeholders and the general public of which information gathered
from this review process has being considered and incorporated into formulating this Final Report. The
Commission received 3 submissions in relation to the Draft Report (from MVIL, the Office of the
Insurance Commissioner and the Independent Public Business Corporation).
………………………………………………..
Dr. Billy Manoka, (PhD)
Commissioner & Chief Executive Officer
1
MVIL is one of the state owned entities through a shareholding held by Independent Public Business Corporation (IPBC). As
per the ICCC Act, MVIL is a regulated entity and the provision of third party motor vehicle insurance service is a regulated
service. MVIL was established by the Motor Vehicles (Third Party Insurance) Act as the sole Compulsory Third Party (CTP)
Insurer of all motor vehicles in PNG.
2
LIST OF ACRONYMS
Capex
Commission
Contract
CPI
CSO
CTP
Finity
GoPNG
ICCC
ICCC Act
ICT
IPBC
MVIL
NSO
Opex
SOE
Capital expenditure
Independent Consumer and Competition Commission
CTP Motor Vehicles Insurance Regulatory Contract
Consumer Price Index
Community Service Obligation
Compulsory Third Party
Finity Consulting Pty Ltd
Government of PNG
Independent Consumer and Competition Commission
Independent Consumer and Competition Commission Act 2002
Information, Communication and Telecommunication (ICT)
Independent Public Business Corporation
Motor Vehicles Insurance Limited
National Statistical Office
Operating expenditure
State Owned Entity
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TABLE OF CONTENTS
FOREWORD ................................................................................................................................................................2
TABLE OF CONTENTS.............................................................................................................................................4
EXECUTIVE SUMMARY ............................................................................................................................................7
KEY FINDINGS ........................................................................................................................................................................7
FINAL DETERMINATIONS ......................................................................................................................................................7
1.
INTRODUCTION ............................................................................................................................................. 10
1.1
REGULATION OF MOTOR VEHICLE INSURANCE LIMITED ..................................................................................10
1.2
BRIEF OVERVIEW OF MVIL’s OPERATION ...........................................................................................................10
1.3
CTP MOTOR VEHICLES INSURANCE REGULATORY CONTRACT ........................................................................11
1.4
BACKGROUND TO THE REVIEW ............................................................................................................................12
1.5
PURPOSE AND OBJECTIVE OF REVIEW ...............................................................................................................12
1.6
LEGISLATIVE REQUIREMENTS...............................................................................................................................12
1.7
FORMAT AND TIMETABLE OF REVIEW PROCESS ................................................................................................13
1.8
THE FINAL REPORT AND THE FINAL REGULATORY CONTRACT ......................................................................14
1.9
GENERAL INFORMATION REQUEST ......................................................................................................................14
1.10
CONFIDENTIALITY .................................................................................................................................................14
1.11
CONTRACTUAL OBLIGATION ................................................................................................................................15
1.12
OFFENCES ...............................................................................................................................................................15
2.
RATIONALE FOR REGULATION ................................................................................................................ 16
2.1
FOCUS OF REGULATION .......................................................................................................................................16
2.2
PREVIOUS FORM OF REGULATION .......................................................................................................................16
2.3
FORM OF REGULATION .........................................................................................................................................17
2.4
BENEFITS OF THE FORM OF REGULATION .........................................................................................................17
2.5
LENGTH OF REGULATORY PERIOD ......................................................................................................................18
3.
3.1
PRICING ISSUES ............................................................................................................................................. 19
PREVIOUS PRICING ISSUES ....................................................................................................................................19
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3.2
UNCERTAINTY IN THE MECHANISMS OF PRICE DETERMINATION ....................................................................19
3.3
MVIL’S PROFIT AND SOLVENCY POSITION ..........................................................................................................20
4.
DETERMINATION OF PREMIUMS REQUIRED FOR 2013 ................................................................... 21
4.1
BASIC PRINCIPLES OF INSURANCE PROJECTIONS ..............................................................................................21
4.2
METHOD FOR DERIVING THE PREMIUM DETERMINATION MODEL ...................................................................22
4.3
AVERAGE PREMIUM REQUIRED .............................................................................................................................22
4.4
VEHICLE CLASSES RELATIVITIES ..........................................................................................................................27
5.
MVIL FINANCIAL FORECAST MODEL ...................................................................................................... 35
5.1
2002 FORECAST VERSUS EXPERIENCE ................................................................................................................35
5.2
APPROACH TO FINANCIAL FORECAST ................................................................................................................39
5.3
2013 – 2017 FORECAST ........................................................................................................................................39
5.4
SUMMARY OF FINANCIAL PROJECTIONS .............................................................................................................44
5.5
CONCLUSIONS FROM THE FINANCIAL FORECAST ..............................................................................................46
6.
PRICE CONTROL FORMULA ...................................................................................................................... 47
6.1
FORMULA STRUCTURE AND COMPONENTS ........................................................................................................47
6.2
FORMULA COMPONENT DEFINITIONS .................................................................................................................47
6.3
ALLOCATION TO VEHICLE CLASS.........................................................................................................................49
6.4
2013 STARTING VALUES .......................................................................................................................................50
6.5
ESCALATIONS TO COST COMPONENTS ...............................................................................................................50
6.6
CHANGES IN VEHICLE MIX ....................................................................................................................................50
6.7
OTHER RISK SHARING PROVISIONS ......................................................................................................................51
6.8
CHANGES FROM PRIOR REGULATORY CONTRACT ............................................................................................51
6.9
TOTAL REVENUE REQUIREMENTS........................................................................................................................51
7.
7.1
8.
SERVICE STANDARDS .................................................................................................................................. 52
SERVICE STANDARDS UNDER PREVIOUS REGULATORY CONTRACT ................................................................52
COMMUNITY SERVICE OBLIGATIONS ..................................................................................................... 55
8.1
MVIL COMMUNITY SERVICE OBLIGATIONS ..........................................................................................................55
8.2
CSO AND PREVIOUS REGULATORY CONTRACT ..................................................................................................55
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8.3
9.
CSO UNDER THE NEW REGULATORY PERIOD .....................................................................................................56
KEY ISSUES RELATING TO MVIL .............................................................................................................. 56
9.1
INCREASING NUMBER OF MOTOR VEHICLES ......................................................................................................56
9.2
DETERIORATION OF ROAD INFRASTRUCTURE ...................................................................................................57
9.3
FRAUDULENT CLAIMS ...........................................................................................................................................57
9.4
SETTLEMENT COSTS AND DECISIONS BY THE JUDICIARY ................................................................................57
9.5
INVESTMENTS .........................................................................................................................................................58
9.6
DELAYS IN CLAIM PAYMENTS ...............................................................................................................................58
9.7
ISSUANCE OF SAFETY STICKERS TO MOTOR VEHICLES ....................................................................................58
9.8
PROCUREMENT OF DRIVING LICENSES ................................................................................................................58
10.
CHANGES UNDER THE NEW REGULATORY CONTRACT ............................................................. 59
10.1
LENGTH OF THE REGULATORY PERIOD ..............................................................................................................59
10.2
COST OF FUNDING NEXT REGULATORY CONTRACT .........................................................................................59
10.3
REPORTING FRAMEWORK .....................................................................................................................................59
10.4
MINIMUM SERVICE STANDARDS ............................................................................................................................60
10.5
MINIMUM SERVICE STANDARDS VERSES SENIOR MANAGEMENT REMUNERATION .........................................62
10.6
COMPETITIVE PROCUREMENT PROCESS .............................................................................................................62
10.7
RING FENCING ........................................................................................................................................................62
APPENDIX ................................................................................................................................................................ 64
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EXECUTIVE SUMMARY
The Independent Consumer and Competition Commission (“the Commission or ICCC”) has a regulatory
contract known as the CTP Motor Vehicles Insurance Regulatory Contract (“Regulatory Contract”),
which is binding on Motor Vehicles Insurance Limited (“MVIL”) and the Commission for a term that has
being determined to be five (5) years commencing 1 January 2013.
This report sets out an overview of the Commission’s key findings and Final Determinations of the
Regulatory Contract for MVIL that will apply for the next regulatory periods commencing 1 January
2013 to 31 December 2017. The report incorporates submissions and comments received from relevant
stakeholders based on the Draft Report which was issued for public comment on 29 August 2012 and the
Commission’s own independent assessment and analysis of the matters relating to the operations of
MVIL.
KEY FINDINGS
Having considered the issues surrounding the provision of compulsory third party (“CTP”) insurance
cover to owners of registered motor vehicles in PNG, the Commission is of the view that the previous
price control mechanism was appropriate, however requires some simplifications in the pricing
formula. This is to ensure that MVIL is able to recover the expenses associated with the provision of
third party insurance to its customers.
The Commission has independently reviewed the data and submissions provided by MVIL and have
incorporated these into the modeling of the forward looking price path for the provision of compulsory
third party insurance cover service. As required under the regulatory principles in the previous
Regulatory Contract, the model used to determine the Maximum Average Net Premium (MANP), must
be based on an actuarial assessment of the key components such as the frequency of claims, the
average size of claims, the pattern of claims, average reinsurance payments, profit loading and others.
The previous Regulatory Contract contained service standard obligations which have not been met by
MVIL. The new Regulatory Contract contains some explicit service standard requirements such as the
re-establishment of an office in Popondetta and the upgrading of several agencies to branch levels, and
to ensure it has a greater claims administration presence throughout the country, amongst other
things.
FINAL DETERMINATIONS
The regulatory period for the previous Regulatory Contract was 10 years (2002-2011). Given the
significant changes that can occur over that period of time, the Commission is of the view that a 10
year period is too long. This is consistent with the Commission’s determinations on the appropriate
regulatory control periods for PNG Ports, PNG Power and the two water businesses (Eda Ranu and
Water PNG).
The Commission has determined that the Regulatory Contract is to be for a period of 5 years but for
the Commission to have the option to extend the Regulatory Contract for a further 5 years subject to
the MVIL meeting minimum performance standards.
The pricing of CTP insurance is not straightforward and requires estimation of the cost of claims which
have been incurred (including claims on accidents that have happened but are yet to be paid). The
requirement for estimation introduces an element of uncertainty into the determination of appropriate
premiums. In addition, the claims experience for particular types of vehicles varies considerably from
year to year, thus adding additional uncertainty.
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The recommended premiums have been based on an independent actuarial assessment of the costs of
providing CTP insurance in PNG, the details of which are set out in Sections 3 and 4 of this Report.
The Maximum Average Net Premium (MANP) is set by the Commission via the Regulatory Contract. The
MANP is based on the average premium across all vehicle types. As such, the MANP is influenced by
both the premiums charged to each class of vehicle and the number of vehicles within each vehicle
class. Thus, the MANP could change purely due to a change in the mix of vehicles registered.
The existence of the MANP is to ensure that consumers are not required to pay more than is necessary.
The MANP (expressed in Kina) for Regulatory Year t (MANPt) is calculated as follows:
MANPt   ARPt  AEt  ARIPt  1  PLt 
where:
ARPt
AEt
ARIPt
PLt
is the Average Risk Premium (expressed in Kina) for Regulatory Year t;
is the Average Expenses (expressed in Kina) for Regulatory Year t;
is the Average Reinsurance Premium (expressed in Kina) for Regulatory Year t; and
is the Profit Loading for Regulatory Year t.
The components of the formula are largely the same as those in the previous Regulatory Contract
although there have been some simplifications. The main changes relate to the basis for determining
the Average Expenses, the Average Reinsurance Premium and future premium inflation. In addition,
MVIL has recommended the incorporation of an actuarial review to support the determination of the
Average Accident Size (AAS) and the Accident Frequency (AF) with the review proposed to be
completed every two (2) years. Given the potential for expenses including reinsurance costs to change
also, the Commission has determined that all elements of the break-even premium be considered as
part of the mid-term review. The Commission has determined that an annual assessment of the
premiums is not necessary as long as there is sufficient monitoring of the claims experience and an
annual actuarial assessment of outstanding claims liabilities is undertaken.
The key benefits of the changes are greater simplicity and a reduced likelihood of inadequate pricing
due to cost development. These benefits are partially offset by potential differences in the actual and
expected rates of inflation.
The new Regulatory Contract contains explicit service standard requirements including the reestablishment of an office in Popondetta and the upgrading of several agencies to branch levels.
MVIL appears to have an effective system to collect premiums. It is therefore only appropriate that an
effective system should be also implemented to assess and process claims. Under the previous
Regulatory Contract MVIL has been serving its customers through provincial visitations with no
monitoring on the outcome by the Commission.
A key new requirement under the new Regulatory Contract ensures that MVIL has a greater claims
administration presence throughout the country through the establishment of regional offices. In the
draft report the Commission recommend that claims administration be available in each province, in
doing so the Commission has accepted MVIL argument that amongst other reasons it was not financially
viable, , to handle claims administratively in each provincial centre. In addition to the establishment of
regional claims administration function provincial visitations will continue to be encouraged by the
Commission but with closer scrutiny by the Commission under the new regulatory period.
In conjunction with the establishment of regional offices to process claims and the instalment of the
new MVIL claims management system, the Commission has determined that under the forthcoming
regulatory contract MVIL will be required to pay claims within a mandatory time period of 6 months
8
from the time a claim is first submitted to MVIL. Under the previous Regulatory Contract, no time limit
was imposed on MVIL on the resolution of claims and as a matter of course claims took many months
and years to reach resolution. Any extension to the mandatory time frame for claim payment after will
only be allowed on a case by case bias in consultation with the Commission. Penalties will be imposed
if MVIL does not comply with this requirement.
Additional recommended measures to improve claims administration and payment outcomes include
the installation of toll-free service telephone line for customers to follow-up on their claims. It will
firstly be installed at the headquarters in Port Moresby and subsequently regional centres. Further,
MVIL will be required to provide claims information on a quarterly basis for monitoring purposes.
As part of its Community Service Obligations (CSO), MVIL would be expected to invest as much
resources into development of strategies to minimise accidents. In this capacity MVIL could partner
with relevant organisations such as the Land Transport Board, Provincial Traffic Registry, Traffic Police,
and the National Road Safety Council (NRSC), including providing funding assistance. There is also a
need for MVIL to educate the public about the existence of CTP insurance cover and the processes for
lodging a claim.
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1.
INTRODUCTION
1.1
REGULATION OF MOTOR VEHICLE INSURANCE LIMITED
The compulsory third party (CTP) motor vehicles insurance industry in PNG is declared under section 26
of the Motor Vehicles (Third Party Insurance) Act (Chapter No. 295) (hereafter the “Motor Vehicles
Act”) to be a regulated industry for the purposes of the Independent Consumer and Competition
Commission Act 2002 (hereafter the “ICCC Act”).
In 2002, the Minister for Treasury declared under section 32 of the ICCC Act that:


Motor Vehicles Insurance Limited (“MVIL”) be a regulated entity; and
The provision of CTP motor vehicles insurance coverage to be a regulated service.
Furthermore, MVIL is licensed under the Insurance Act 1995 to provide CTP motor vehicles insurance
coverage in PNG. Owners of motor vehicles are required under the Motor Vehicles Act to take out CTP
motor vehicles insurance coverage with MVIL.
As a result of these declarations made under the Motor Vehicles Act and the ICCC Act, the Commission
is responsible for regulating the premiums and service standards of MVIL in its provision of CTP motor
vehicles insurance coverage service.
This is done through a Regulatory Contract (see section 1.3) that is binding on MVIL and the
Commission pursuant to the provisions of the Motor Vehicles Act and the ICCC Act.
1.2
BRIEF OVERVIEW OF MVIL’s OPERATION
MVIL’s business has a range of components and a significant number of associated stakeholders. Figure
1.1 provides a schematic overview of MVIL’s operations.
Figure 1.1 – Overview of MVIL’s Operations
ICCC
MVIL
Vehicles
Registrations
Road
Worthy
Accidents
Drivers
Police/Road
Police
Infrastructure
Claims
Doctors
Lawyers
Licensing
10
Courts
Figure 1.1 above shows that:
 The Commission oversees the operations of the MVIL via the Regulatory Contract;
 There are three key elements of MVIL’s operations:
o Collecting the insurance premiums from registered vehicles;
o Encouraging accident prevention and advising people of their rights if they are involved in
an accident;
o Handling and paying the claims made by people injured in accident;
 There are a range of stakeholders with cross-over interests in each of the three elements:
o Vehicles – vehicles must be registered and driven by a licensed driver, thus the MVIL has
some reliance on the registration authority, road worthiness testing of vehicles, the drivers
of vehicles and the adequacy of the licensing of those drivers;
o Accidents – the number and severity of accidents are influenced by a range of factors which
includes driver behaviour and skill, the policing of road laws and the standard of the road
infrastructure itself;
o Claims – Apart from the severity of the injury, the cost of a claim is impacted by the level of
awards set by the judiciary as well as the quality and timeliness of medical treatment.
MVIL relies upon the services provided by these stakeholders:
 Insurance policies rely on vehicle registration and the road worthiness of vehicles. There is no
assessment of the adequacy of drivers and hence reliance is placed on the licensing regime;
 MVIL can provide education to reduce accidents but relies heavily on the enforcement of road
laws by police and the development and maintenance of the road infrastructure;
 MVIL will not be aware of an accident until it is reported via a claim. MVIL must then manage
the claims process which includes dealing with medical practitioners, lawyers and the courts;
 MVIL must ensure that sufficient income is obtained via the insurance premiums at registration
to cover the cost of claims resulting from accidents that occur.
1.3
CTP MOTOR VEHICLES INSURANCE REGULATORY CONTRACT
A regulatory contract has similar characteristics to a tariff setting agreement between a regulated
entity and the regulator. The Commission currently has a regulatory contract in place with MVIL known
as the CTP Motor Vehicles Insurance Regulatory Contract (“Regulatory Contract”) and is administered
by the Commission as the Regulator. This Regulatory Contract is binding on MVIL and the Commission
pursuant to the provisions of the ICCC Act and the Motor Vehicles Act.
The Regulatory Contract regulates the premiums that MVIL may charge for the provision of CTP motor
vehicles insurance coverage and the charges that MVIL may make for endorsements in respect of
policies for that insurance.
The existence of the Regulatory Contract is imperative in two ways:


firstly, it substantially reduces the discretion of the Commission in setting premiums by
adhering strictly to the formulas set out in the Regulatory Contract; and
secondly, given MVIL’s monopoly power, it provides a necessary control on the premiums
charged by the MVIL which might otherwise be excessive or pay limited regard to service
standards.
11
Under the previous form of pricing arrangement, there was no set formula to use in determining
premiums. As such, the existence of the Regulatory Contract ensures that there is a level/fair playing
ground which is beneficial to all parties. The Regulatory Contract ensures that cost reflective premiums
are charged to motor vehicle owners and, at the same time, premiums are sufficient to enable MVIL to
maintain its operations on an ongoing basis as well as to provide funds to enable services to be suitably
expanded in the future.
Apart from premium setting, the Regulatory Contract covers the following items:





The definition of regulated services;
The initial prices for these regulated services;
An adjustment mechanism for prices over the term of the Regulatory Contract;
The term of the Regulatory Contract;
The definition of force majeure and other regulatory pass through events which would result in
a change within the Regulatory Contract;
 The service standards; and
 The review process associated with the subsequent regulatory period.
1.4
BACKGROUND TO THE REVIEW
The Regulatory Contract outlines the pricing arrangements which bind the Commission and the
regulated entity with pricing formulas such that prices are sufficient to sustain the operations of the
entity as well as providing sufficient scope for further investment.
The first Regulatory Contract for MVIL was set in 2002 for a regulatory period of 10 years and expiring
on 31 December 2011. To enable sufficient time for this regulatory review, an interim Regulatory
Contract has been applied for 2012 that being the Draft Regulatory Contract submitted by MVIL which
is consistent with section 36(6) of the ICCC Act. This was the second review and the term of the
Regulatory Contract has been determined to be for a period of five (5) years commencing on 1 January
2013 to 31 December 2017.
1.5
PURPOSE AND OBJECTIVE OF REVIEW
This review was undertaken to determine MVIL’s price path and the minimum service standards for the
next regulatory period for the provision of its regulated CTP motor vehicles insurance coverage service.
The key task is to ensure that the pricing control mechanism determined for the provision of third
party insurance provided by MVIL should allow MVIL to recover the costs associated with the efficient
management of the CTP business as well as producing an appropriate rate of return for the capital
invested.
The new Regulatory Contract that is now issued with the completion of this review will supersede the
previous Regulatory Contract and will bind both MVIL and the Commission, for the next regulatory
period.
1.6
LEGISLATIVE REQUIREMENTS
This review was undertaken in accordance with clause 6.2 and 7.1 of the previous Regulatory Contract
and also considered the requirements of the ICCC Act and the Motor Vehicles Act.
12
The objectives of the ICCC Act are to enhance the welfare of the people of PNG, to promote economic
efficiency, and to protect the long term interests of the people of PNG (Section 5(1) of the ICCC Act).
It should not exercise any power in a manner that is inconsistent with the requirements of a Regulatory
Contract that is in effect (Section 7(4) of the ICCC Act). At the same time, the Commission is to act
independently in its consideration of the issues and is not subject to direction by Government (section
23 of the ICCC Act).
1.6.1 Regulatory Principles
The Commission undertook this review in accordance with clause 6.2 of the previous Regulatory
Contract, which provides for the setting of the next Regulatory Contract. The requirements outline the
things that the Commission must take into account in the next Regulatory Contract review.
These include:
(i)
the legitimate business interests of MVIL;
(ii)
the legitimate business interests of Customers of MVIL;
(iii) the nature of the services which would be regulated under the Compulsory Third Party Motor
Vehicles Insurance Regulatory Contract;
(iv)
the costs of providing the services which would be regulated under the Compulsory Third
Party Motor Vehicles Insurance Regulatory Contract;
(v)
the costs of complying with relevant health, safety, environmental, social and other
legislation and regulatory requirements applying to the compulsory third party motor vehicles
insurance industry in Papua New Guinea;
(vi)
the return on assets required to sustain past and future investment in the compulsory third
party motor vehicles insurance industry in Papua New Guinea;
(vii) relevant international benchmarks for prices, costs and return on assets in comparable
industries, taking into account the particular circumstances of Papua New Guinea;
(viii) the financial implications of the Compulsory Third Party Motor Vehicles Insurance Regulatory
Contract (if it were to come into force) for MVIL and the compulsory third party motor
vehicles insurance industry in Papua New Guinea;
(ix)
the degree of actual and potential competition in the supply of the services the prices of
which may be regulated under the Compulsory Third Party Motor Vehicles Insurance
Regulatory Contract;
1.7
(x)
any other factors specified in or under relevant legislation; and
(xi)
any other factors the Commission considers relevant.
FORMAT AND TIMETABLE OF REVIEW PROCESS
In arriving at this Final Report, the Commission issued a Draft Report with a review period in
accordance with the timetable outlined below.
13
Table 1.1 Review Timetable
EVENTS
DATE
MVIL submits Draft Regulatory Contract & written submissions
2 September 2011
The Commission published the Draft Report & Draft Regulatory Contract and
invites relevant stakeholders for written submissions
29 August 2012
Close of submissions or comments from relevant stakeholders
28 September 2012
The Commission issues Final Report and Final Regulatory Contract.
Yet To be
determined
In undertaking this review, the Commission was mindful of the need to allow a transparent public
consultation process whereby all interested parties were able to contribute to the review by way of
written submissions to the Commission. The Commission remains a strong advocate of the public
consultation process.
The submissions received in response to the Draft Report have been taken into consideration as part of
developing this Final Report and the new Regulatory Contract. MVIL was also given the opportunity to
make further submission based on the Draft Report.
1.8
THE FINAL REPORT AND THE FINAL REGULATORY CONTRACT
Since this review is important to the Commission and MVIL, all issues and concerns raised by MVIL, the
Commission and relevant stakeholders during the consultation and review period has been taken into
consideration and therefore this Final Report forms the basis of the new Regulatory Contract. Note that
the Final Regulatory Contract must be read together with this Final Report because if the Final
Regulatory Contract is silent on certain areas, the Final Report determinations and conclusions take
effect.
The Commission is proposing to adopt this approach mainly because of its experiences in the past with
other regulatory contract reviews that have shown that once a final regulatory contract is released, the
final report is ignored. That should not have been the case as the final report discusses the entire third
party insurance industry issues and concerns. What is reflected in the regulatory contract is an extract
of the final report, or the key determinations or decisions therein.
1.9
GENERAL INFORMATION REQUEST
The Commission may also require from MVIL to furnish any information or answer to any matters
relating to the previous contract, this contract or the subsequent regulatory contract. This information
request must be given under an oath or under a signed statutory declaration to be true in every respect
to the best of his/her knowledge. This information must also be provided in the form required by the
Commission with in 14 days of any written request by the Commission to MVIL.
1.10
CONFIDENTIALITY
The Commission will only disclose information to the general public from the course of this regulatory
period and subsequent regulatory period, except information that is designated as ‘confidential ‘ by
MVIL. It must also be noted that the Commission, may if it considers that if the information designated
14
as “confidential’ by MVIL is in the best interest of the general public, it will and can disclose such
information.
1.11
CONTRACTUAL OBLIGATION
Where the Commission or the MVIL form the opinion on the balance of probabilities, that one or the
other is contravening or is likely to contravene the provisions of this contract and the contravention is
of a material nature, then the provisions of the ICCC Act will be followed and complied with in dealing
with the subject of the contravention or the likely contravention by either party to this contract.
1.12
OFFENCES
Any offences, criminal act that has been committed, or where MVIL or the Commission suspects to be
committed, in the previous regulatory contract, this contract or the subsequent regulatory contract by
either a personal from the Commission, the entity concerned or any personnel on any matters relating
to the contract must be made known to both the Commission and MVIL.
This offence must be made aware to IPBC, the Minister for Public Enterprise and the relevant law
enforcement agencies ( by MVIL and the Commission) where a criminal act concerning the previous
regulatory contract, this regulatory contract and the subsequent regulatory contract is being
investigated and prosecuted by the relevant law enforcement agency.
15
2.
RATIONALE FOR REGULATION
As a matter of government policy MVIL was established in 2002 with its own enabling legislation as the
sole provider of the CTP motor vehicle insurance cover in PNG.
Given MVIL’s monopoly position there is the need for independent regulatory oversight of the industry
and MVIL. Accordingly, the Commission was granted regulatory oversight, pursuant to section 32 of the
ICCC Act 2002, by the Minister for Treasury matters.
As the independent regulator of MVIL, the Commission is responsible for ensuring that MVIL complies
with minimum service standards and ensuring that MVIL does not unfairly, or inappropriately, utilise its
monopoly position. Regulation should also ensure that there is appropriate focus and oversight over the
various aspects of MVIL’s business which includes financial performance, service delivery obligations
and corporate responsibility.
2.1
FOCUS OF REGULATION
The key elements for independent regulatory oversight by the Commission are:

Efficient Premiums – as a monopoly provider of a compulsory product the reasonableness of the
premiums charged needs to be monitored. Premiums need to be sufficient to cover claims costs
and expenses but must also be affordable to consumers;

Quality of service – the absence of competition means that there is no natural incentive to
provide quality service. As a compulsory product the consumer should be able to expect a
minimum level of service. As the regulator, the Commission has responsibility to ensure that
specified minimum services standards are met.

Financial Management – As a body responsible for delivering benefits to the community and
managing public funds, the efficient and responsible financial management of MVIL’s assets is
paramount;

Efficient Operations – the Commission should ensure that the guidelines and requirements
placed on MVIL allow sufficient flexibility for MVIL to operate efficiently;

Scheme Equity – the Commission must ensure that there is a suitable balance between the
interests of consumers and the financial stability of the scheme.
2.2
PREVIOUS FORM OF REGULATION
In considering the form of regulation to apply, the Commission took into consideration the regulatory
contract principles under Part III, Division 2 of the ICCC Act. It states that a regulatory contract shall:





have a contract not exceeding 10 years nor should it be less than 5 years;
regulate prices for the supply of regulated goods and services by the regulated entity over the
term of the regulatory contract;
specify service standards the relevant regulated entity shall meet;
specify a process for the issue of a new regulatory contract to replace that regulatory contract
on the expiry of its term; and
deal with such other matters as the ICCC Act 2002 or any Act that declares an industry to be a
regulated industry, or a regulation made under such an Act, required to be dealt in a regulatory
contract.
16
MVIL premiums are currently regulated using a maximum average net premium (MANP) approach. This
method is similar to a price cap form of regulation which the Commission has adopted in some past
regulatory decisions for regulated utilities.
Under this form of regulation, the average premium requires an estimate of:






the number of registered vehicles;
the number of claims or accidents that result in a claim;
the average cost of those claims or accidents;
the underwriting and management expenses incurred by the MVIL;
the cost of reinsurance; and
an appropriate profit loading.
The Commission’s current regulatory contracts with other regulated entities (PNG Ports Corporation
Ltd, PNG Power Ltd and Post PNG Ltd) incorporate a forecast cost-of-service approach in establishing
the regulated entities operational costs and set a revenue path according to a CPI + X formula. This is
typically referred to as the cost ‘Building Block’ approach.
Unlike other utilities, MVIL is required to set prices in advance for claims that may or may not occur
and where the timing of payments in also uncertain. As a result, a different form of pricing
methodology is appropriate and the Commission has decided to regulate MVIL using Price Cap
(Maximum Average Price Cap) form of regulation.
2.3
FORM OF REGULATION
The Commission has adopted the previous form of regulation for the next regulatory period albeit with
some slight changes to the term of the regulatory period, service standards and the pricing formula.
2.4
BENEFITS OF THE FORM OF REGULATION
The key benefits of the adopted form of regulation are that all the issues of importance to the
Commission as the regulator, and MVIL as the regulated entity, is contained in the new Regulatory
Contract.
In addition to the premium setting process, the Regulatory Contract covers other areas of importance
such as:





The definition of regulated service;
The initial prices for these regulated service;
An adjustment mechanism for prices over the term of the Regulatory Contract;
The term of the new Regulatory Contract;
The definition of force majeure and other regulatory pass through events which would result in
a change within the Regulatory Contract;
 The service standards; and
 The review process associated with the subsequent regulatory period.
The Regulatory Contract sets out specific formulas the regulator must use to determine premiums for
the issuance of the CTP motor vehicles insurance cover in each regulatory year. This arrangement
provides an environment of certainty to both the service provider (MVIL) and the customers.
In addition, the arrangement ensures that the discretion of the Commission in setting premiums is
reduced as a result of strict adherence to the formulas set out in the Regulatory Contract.
17
Furthermore, it allows for an equitable and affordable coverage for the wider general public with
uniform premiums by class of vehicles throughout PNG. Some degree of cross-subsidisation between
policyholders is necessary to maintain the affordable aspect of premiums.
2.5
LENGTH OF REGULATORY PERIOD
The regulatory period for the previous Regulatory Contract was 10 years (2002-2011). The Commission
is of the view that a 10 year period is too long given that circumstances can significantly change over
that period of time. The adoption of a regulatory period of less than 10 years is consistent with the
Commission’s determinations on the appropriate regulatory control periods for other regulated
entities. Past experience has shown significant variance between the actual and forecast costs for
several regulated businesses as evidenced in 2009 when PNG Ports requested an early review of its 10
year regulatory contract due to significant forecast costs variances and the rehabilitation needs of its
network of 16 declared ports.
The Commission has set the Regulatory Contract to be for a period of 5 years with the option for the
Commission to have the option to extend the Contract for a further 5 years subject to MVIL meeting
minimum performance standards. The advantage of this approach is that there is no need to undertake
a full and costly review if it is not necessary. Examples of minimum requirements are:
 Claim rates (i.e. claims per vehicle) and average costs (i.e. costs per accident) are relatively
stable moving in line with projections. A significant growth in claim rates or average costs
would warrant a more detailed assessment;
 Expense rates (i.e. expenses per vehicle) are relatively stable or moving in line with
projections;
 There have not been significant changes in the vehicle fleet or the nature in which vehicles are
used. A significant change in the vehicle fleet would warrant a review of the premium liabilities
or MVIL may not be able to charge sufficient premiums;
 MVIL has met its minimum service requirements or has at least provided satisfactory
explanations/reasons for minimum service standards not being met;
 MVIL has sufficient solvency to maintain ongoing operations. Thus, the level and stability of the
assets supporting MVIL’s must be adequate.
2.6
MID TERM REVIEW OF COMPETITION
In stances where the Commission believes that an existing non-regulated service or a new non regulated service has the potential to have a significant substantive degree of market power, it may
require MVIL to submit a written statement which makes an assessment of the need for and extent of
regulation of the provision of MVIL CTP services in PNG. The manner in which the statement must be
provided or the processes in conducting a Mid Term Competition Review are outlined explicitly under
clause 7.2 in the Final MVIL CTP Regulatory Contract.
18
3.
PRICING ISSUES
3.1
PREVIOUS PRICING ISSUES
The Commission under the previous Regulatory Contract set out a premium rate across all vehicle
classes. The weighted average of these premiums, which are determined for each vehicle class, must
not exceed the Maximum Net Average Premium (MANP). The premiums for each vehicle class needed to
consider the uncertainty relating to the ‘true’ price, the need to manage premium movements from
year to year as well as ensuring premiums remains affordable. These issues are more significant than
the mechanics of pricing alone.
Under the current Regulatory Contract, MVIL is required to appoint an appropriately qualified
independent international actuarial consultant to conduct an actuarial assessment report of the
industry. Finity consultant was appointed by MVIL to do the End of Term Actuarial Report for the
existing regulatory period.
Some of the pricing issues highlighted in the Finity Report that have been considered are:
3.2

Vehicles Cross-subsidisation: Some vehicle classes are currently subsidising other vehicle
classes. For instance, PMVs pay less than their theoretical premiums with sedans paying more.
In other words, sedan drivers effectively subsidise PMV drivers. An element of crosssubsidisation is necessary as the increase to the underlying premiums would raise affordability
issues. It is therefore necessary to ensure reasonable movements are applied on any annual
basis.

Vehicle Groupings: MVIL via the Finity Report highlights that some vehicle categories are too
small to enable statistically sound relativities to be determined. The report groups the vehicle
categories into 11 classes for the purpose of determining vehicle relativities. The Commission
concurs with the grouping of classes to better enable relativities to be determined and is
satisfied with the 11 classes used. While the Commission has accepted the proposed 11 vehicle
classes it request MVIL maintaining vehicle numbers at a more detailed level than the 11 classes
to enable the detailed monitoring of the changes in mix of vehicles driven over the coming
years.

Allocation of Expenses: The Finity Report highlighted that to allow for the correlation between
administration expenses and claims costs (increasing number and size of claims increases the
expenses associated with managing claims for a particular vehicle class), the expense
assumption to be applied should be a combination of a fixed cost for each vehicle and variable
cost differentiated by class of vehicle. The variable costs are applied as a function of the risk
premium. This represents a change from previous practice, whereby a flat cost per policy was
charged but should be a more equitable allocation with higher costs allocated to classes with
higher claims costs.
UNCERTAINTY IN THE MECHANISMS OF PRICE DETERMINATION
The historical claims experience highlights that different vehicles types have considerably different
claim frequency and cost of claims.
19
Claims costs take several years to emerge and the cost in any year of insurance requires an element of
estimation to determine to full cost. There is inherent uncertainty in any estimates of future claim
liabilities. This uncertainty is due to the fact that the ultimate liability for any claim is subject to the
outcome of events yet to occur, for instance, the likelihood of claimants bringing suit, the size of
judicial awards, changes in medical and other technologies affecting treatment of claimants and
attitudes of claimants towards settlements of their claims.
Thus, there is considerable uncertainty surrounding the true cost of claims in any one insurance year
and even greater uncertainty when split by vehicle category.
MVIL, through the Finity Report, has assumed that future motor vehicle bodily injuries or deaths caused
will proceed as observed in recent years. No allowance has been made for changes to the legal, social
or economic environment (or to the interpretation of current policies) that might affect the cost,
frequency or future reporting of claims. It is possible that one or more changes to the environment
could change which would materially impact the estimates put forward.
3.3
MVIL’S PROFIT AND SOLVENCY POSITION
As a minimum, MVIL’s premiums must be sufficient to cover the future cost of claims resulting from
claims incurred in the year of the policy. This means that the premiums, plus future investment
income on those premiums, must be greater than or equal to the cost of claims. MVIL’s accounts show
underwriting losses in 4 of the last 8 years (2004 to 2011) and an aggregate profit over that time.
However, the underwriting result can be misleading and needs to be interpreted carefully. The largest
contributor to the underwriting profit is the profit in 2011. Much of this reported profit relates to a
reassessment of the cost of claims across a range of policy years and does not necessarily indicate that
the premiums for the 2011 policy year were adequate.
A review of the operating profit or loss highlights that the impact of the insurance business (via the
underwriting profit) is immaterial compared to the impact that movements in investments have. This
is because MVIL’s investment assets swamp their insurance liabilities.
MVIL’s strong historical solvency position is dependent on some significant illiquid investments.
Valuations of these investments have varied considerably and substantial write downs in asset values
have been observed in 2010 and 2011 (in particular). There is some risk that further write-downs in
asset values could occur which would reduce MVIL’s level of solvency.
With current assets in cash and bank accounts exceeding the estimated insurance liabilities, the
financial position of MVIL appears to be sound at this point in time.
The Commission considers, however, that MVIL should not aim to utilise its current strong solvency
position to cross-subsidise premiums.
3.4 ADDITIONAL FUNDING FROM THIRD PARTY
Any additional funding from third party such as, donations, in the form of gifts, interest-free
concessional loans or Community Service Obligations (CSO) from the Government, etc, intended to
make insurance cover cheaper or improve the access to CTP Motor Vehicle Insurance services for
customers in a particular area should be identified separately by MVIL.
The Commission is of the view, therefore, that regulated entities (including MVIL) are not entitled to
recover the costs of acquiring such contributed assets or concessional value of interest on borrowings
from their price paths; hence, any such gifted assets or ‘soft’ loans should be excluded from the
20
regulated asset base and appropriate adjustment to the aggregate cost of capital or debt should be
made to avoid ‘double-dipping’.
It must also be noted that if the Commission considers it necessary or desirable, will require MVIL to
publicise the details of the assets and capital projects it proposes to acquire using third party funding
or financial assistance of any kind, including, but not limited to, concessional interest loans, at a time
and in a manner the Commission considers appropriate.
4.
DETERMINATION OF PREMIUMS REQUIRED FOR 2013
The average premium required for 2013 requires an estimate of:






the number of vehicle registrations;
the number of claims or accidents;
the expenses that will be incurred by the MVIL;
a suitable profit loading.
This section works through the various elements of the required premium projection.
4.1
BASIC PRINCIPLES OF INSURANCE PROJECTIONS
Unlike most products and services, the cost of providing an insurance product is typically quite
uncertain. That uncertainty varies depending on the nature of the insurance being provided and is
typically higher for products such as CTP compared to motor vehicle property insurance.
In determining the average price for many (non-insurance) products, the uncertainty relates to the
number of units that will be sold and across which the fixed expenses can be spread – the cost of
producing the product is typically well understood. For insurance, there is not only uncertainty in the
number of policies that will be sold but also uncertainty in relation to the underlying cost of the
insurance product. Thus, it is necessary to estimate the likely cost of claims for the new underwriting
period as well as the number of policies that will be sold.
Figure 4.1 provides a schematic of the claims cost projection that is required.
Figure 4.1 – Example of Claim Payment Development
Year of
Accident
2005
2006
2007
2008
2009
2010
2011
2012
2013
1
644
501
345
368
363
548
547
2
1,661
1,058
1,174
1,225
1,151
1,659
3
1,772
1,480
1,695
1,498
1,994
Delay to Payment
4
5
6
7
2,245 1,954 1,435 1,240
2,190 2,047 1,765
1,505 1,767
2,469
21
8
9
10+
Figure 4.1 provides an example of what is often called a claims triangle. To explain:









In this case the figures contained in the triangle represent payments made;
Each row of payments relates to a particular year of accident;
Payments made in delay year 1 are made in the year of the accident, payments made in delay
year 2 are made the year after the accident and so on;
For the 2009 accident year, there were 363 payments made in the accident year (i.e. in 2009),
1,151 made in delay year 2 (i.e. the year following accident = 2010) and 1,994 payments made
in delay year 3 (i.e. 2011);
Each column of payments represents payments made at the same time after accident;
Each diagonal of payments represents payments made in a calendar year (e.g. the 2011
payments = 547+1,659+1,994+2,469+1,767+1,765+1,240);
The green section of the triangle represents the known claims experience;
The red section represents the claim payments that must be estimated in order to determine
the total cost for a particular accident year. Claim payments extend well beyond 10 years after
the accident with some amounts observed after 20 years post accident;
The blue section of the diagram represents the costs that need to be projected in order to
determine the premium required for 2013. Policies underwritten in calendar year 2013 will
have exposure spanning 2013 and 2014 (since a policy written on 31 December 2013 will be
covered up to 31 December 2014).
It is clear from Figure 4.1 that there is a substantial estimation process that is required in order to
forecast the required premium for 2013. Those forecasts need to adequately consider the potential for
changes in claim rates and costs including the impact of inflation and the investment income that will
be earned on the premiums received (until claim payments are made).
4.2
METHOD FOR DERIVING THE PREMIUM DETERMINATION MODEL
The basis for determining the premium to apply to each vehicle is made up of two components:


The average premium required across all vehicles; and
The premium relativity for each vehicle class.
The average premium is determined via an analysis of aggregate claims and exposure information. The
average premium required for 2013 requires an estimate of:






the number of vehicle registrations;
the number of claims or accidents;
the expenses that will be incurred by the MVIL;
a suitable profit loading.
Premium relativities measure the average cost of each class of vehicle against the average cost of the
whole fleet combined. For example, it can be shown that a premium relativity of 1.2 (sometimes
shown as 120) for a class of vehicle, means that the average premium is 1.2 times that the overall
average premium.
4.3
4.3.1
AVERAGE PREMIUM REQUIRED
Number of Vehicles
22
Figure 4.2 shows historical vehicle numbers (2001 to 2009) and projected vehicle numbers (2010 to
2013) as forecasted by Finity. Vehicle numbers have grown strongly over the last decade with growth
averaging around 4,500 per annum. Similar levels of growth are anticipated going forward.
Figure 4.2 – Actual and Projected Number of Vehicles
Subsequent to Finity’s review, the 2010 and 2011 vehicle numbers have become available. The actual
number of vehicles (and for those projected for 2012 and 2013) are around 3,000 lower than the Finity
forecast. We have applied the forecast based on the data up to 2011 for the purpose of determining
the premium pool.
Table 4.1 sets out the results of the projections.
Table 4.1 – Vehicle Number Projections
Item
Aggregate Projection
Projection by Class
Finity Projection
Projection using 2011 data1
2010
2011
2012
2013
81,021
81,269
80,000
75,318
85,567
86,064
84,885
81,668
90,113
90,858
89,769
86,367
94,659
95,652
94,654
91,067
Note: 1. Based on actual 2011 registrations projected at Finity assumed growth rate.
Table 4.1 shows that the three projections produce very similar estimates of the number of vehicles
expected in 2012 with the difference between the highest and lowest estimate being 1.2%. The
forecast at 2013 is about 4% lower when the actual registrations for 2010 and 2011 are incorporated.
Given the manner in which the average premium is calculated a change in estimated vehicle numbers
does not impact the estimated average premium required.
4.3.2
Accident Frequency
The accident frequency represents the number of accidents per 1,000 vehicles. Accident frequency is
used rather than the number of accidents to remove distortions caused by changes in the vehicle fleet –
as the number of vehicles on the road increases, the number of accidents would also be expected to
increase.
23
A frequency is often calculated using the number of claims rather than the number of accidents. Since
the PNG CTP scheme is fault-based, all claims relating to a particular accident should be allocated to
the at-fault vehicle. It is therefore simpler to use number of accidents.
Figure 4.3 shows the observed accident frequency from 2003 to 2009 (as per Table 5.1 from the Finity
Report). Note that the frequency for the more recent years includes an element of projection given
that some accidents take several years to be reported. For the 2009 year, around 60% of the frequency
is based on known accidents and 40% on accidents estimated to be reported after 2009. For the 2008
year the ratios are approximately 92% and 8% respectively.
Figure 4.3 - Observed Accident Frequency
1.60%
Accident Frequency
1.40%
1.20%
1.00%
0.80%
0.60%
0.40%
0.20%
0.00%
2003
2004
2005
2006
2007
2008
2009
Accident Year
Figure 4.3 shows an improving trend in the accident frequency from 2003 to 2008 and a slight kick up in
2009. For the purposes of determining the accident frequency to adopt for 2013, an assumed rate of
between 1.1% and 1.2% would seem reasonable. Thus Finity’s assumption of 1.15% appears to be
reasonable.
4.3.3
Average Accident Size
For the same reasons as with the frequency measure, the average size is measured as an average cost
per accident.
The average cost by accident year contains a significantly greater element of estimation then the
accident frequency. Most accidents (over 90%) are notified within 2 years of the accident occurring.
The payment of claims, however, takes considerably longer. For example, the actual payments
represent only 4% of the projected ultimate cost for the 2009 accident year and only 20% of the 2008
accident year ultimate cost. It typically takes around 8 years for 90% of the costs for claims in an
accident year to be paid.
The Finity liability report provides an estimate of the ultimate average accident cost by accident year
which is summarised in Figure 4.4 below.
24
Figure 4.4 Average Accident Size – in Dec-09 Kina Values
40,000
Average Size - K
35,000
30,000
25,000
20,000
15,000
10,000
5,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
-
Accident Year
Figure 4.4 shows that the average size reduced considerably over the early years of the scheme but
that there is an apparent upward trend since around 2003. Based on the recent experience, an average
size (in Dec-09 Kina values) of between K25,500 and K27,000 would appear to be reasonable.
The average size assumption required for the 2013 premiums needs to be adjusted to allow for:




Inflation from 2009 to 2013;
The potential for costs to continue to grow by more than inflation (typically referred to as
superimposed inflation);
Claims inflation from 2013 until the payments are made;
Discounting the future cash flows to allow for investment income.



Inflation is assumed to be 6% per annum;
No allowance for superimposed inflation is made; and,
The expected interest earnings on the premiums received is 6% per annum;
If:
then the reasonable range for the average size assumption is around K32,000 to K34,000.
If the growth above inflation observed from 2003 is expected to continue and the assumed rate of
growth is 2% per annum then the range of average size assumptions becomes approximately K37,500 to
K40,000. If the 2% growth is only expected to occur from 2013 (i.e. not between 2009 and 2013) then
the range becomes K35,000 to K38,000.
It is clear from the paragraphs above that the average size could span a broad range, from a low of
about K32, 000 to a high of approximately K40,000. The key issue is the level of superimposed inflation
that is anticipated. Finity has assumed an average size of K35,526 for the 2012 year although adjusting
for 2% superimposed inflation rather than 4% (as used in the Finity Report) and inflating to 2013
actually results in the same average size assumption. This appears to be reasonable though an
understanding of the experience between 2009 and 2011 would provide good insight into the level of
growth in average size that should be assumed.
25
4.3.4
Claim Cost per Vehicle
The claims cost per vehicle is simply the accident frequency multiplied by the average accident size.
Based on the observations in Sections 4.3.2 and 4.3.3 a reasonable range for the estimated cost per
vehicle is set out in Table 4.2.
Table 4.2 Claim Cost per Vehicle
Item
Low
Frequency
High
Finity Assumption
1.10%
1.20%
1.15%
Average Size
30,500
42,500
35,526
Risk Premium
335.50
510.00
408.55
Table 4.2 shows a wide range in potential risk premium (or cost per vehicle). The low end of the range
is likely to be somewhat optimistic and the high end is likely to prove to be too pessimistic. The
amount assumed in the Finity Report is reasonable.
4.3.5
Average Expenses per Policy
Table 4.3 Summary of Administration Expenses
Item
Expenses - Km
Expenses per policy - K
2011
2009-11 Average
Finity
Assumption
18.009
201
20.238
225
18.200
203
Administration expenses increased substantially between 2008 and 2009 from around K12.5 million to
K21.2 million. Expenses for 2010 were K21.5 million and the 2011 figure has been reported as K18
million.
Various aspects of the recent administration expenses with MVIL have been discussed and it has been
concluded that expenses are likely to be higher than those forecasted by Finity. The main reason for
the expectation of higher expenses is the need to fund additional branches in order to meet MVIL’s
service targets. As a result, we consider an expense allowance of K225 per policy to be reasonable.
4.3.6
Average Reinsurance Premium per Policy
Table 4.4 Summary of Reinsurance Expense
Item
RI Expense – Km
RI Expense per policy - K
2011
2009-2011 Average
Finity
Assumption
0.700
0.762
0.885
7.80
8.49
9.86
26
The recent reinsurance expense information provided by MVIL appears to be estimated rather than
actual with the 2010 and 2011 figures being the same and both less than the 2009 amount. Globally
the cost of reinsurance is expected to increase in 2012 (and most likely 2013) and it seems appropriate
to adopt a reinsurance expense which allows for this increase.
The amount adopted by Finity is consistent with the observed reinsurance cost in 2009. This appears to
be an appropriate starting point in the absence of updated information relating to the MVIL’s
reinsurance negotiations.
4.3.7
Profit Loading
Given the uncertainty in future claims costs that are exhibited in CTP insurance it is typical for insurers
to require higher profit loadings than would be required for motor vehicle property insurance, for
example. Profit margins of 8% to 15% are not uncommon. As a result of their substantial net asset
position, MVIL has the ability to withstand variations in claims experience without putting its solvency
position at risk. Given MVIL’s high level of solvency, Finity recommended a profit margin of 2.5% of
premium. The Commission considers that the adoption of a profit margin at this level is a fair
compromise between underwriting the insurance business at its true cost versus taking advantage of
MVIL’s significant net assets. The Commission notes that should a significant proportion of MVIL’s
assets be redistributed for some reason then it may be necessary to increase the profit loading in the
premiums.
4.4
VEHICLE CLASSES RELATIVITIES
Vehicle class relativities are used to determine the premium to charge to particular vehicle classes.
There are currently 38 vehicle classes although 4 have no registered vehicles and 7 have fewer than 50
registered vehicles. A further 7 classes have fewer than 500 registrations.
Due to the low level of registrations in many classes their own claims experience is not sufficient in
terms of providing a reliable basis for determining its premium relativity. A class with 500 registrations
would be expected to have around 5 claims per annum. The occurrence or otherwise of a significant
claim could materially impact the observed premium relativity.
Thus, for determining premium relativities it is necessary to combine similar vehicle classes in order to
have a sufficient level of claims experience to provide a reliable basis for analysis. Given the need to
combine vehicle classes for analysis it raises the question as to whether the number of vehicle classes
should be reduced.
4.4.1 Vehicle Class Groups
As described in Section 3.1, Finity has grouped the 38 vehicle classes into 11 major classes. Overall,
the groupings appear to be reasonable being based on grouping vehicles with similar characteristics.
There are some potential anomalies which are highlighted below.
Buses with more than 9 seats (which are around 5% of the vehicle fleet) are categorised as extra-large
cars – low risk. This places them in the same category as business use utilities and long wheel based
station wagons but in a lower risk category than vans exceeding 9 seats.
Taxis are categorised as larger car – private which seems odd given that taxis are clearly not for private
use. It may be, however, that their claims experience is more akin to a private van than a business use
sedan.
There are several cases where vehicles are placed in private use categories yet are clearly business use
vehicles. It may well be that their use is more similar to private use than business use.
27
It is not possible to determine whether the vehicle classes highlighted above are incorrectly grouped
without being able to examine the claims experience for that class alone. Reliance has therefore been
placed on the adequacy of Finity’s analysis for determining the appropriate groupings.
4.4.2 Observed and Adopted Vehicle Relativities
The observed vehicle relativities can have significant variation from year to year. The lack of case
estimate information means that relativities have had to be based on claim payment information.
Further, the lack of reliability of transaction data extracted from MVIL’s systems means that a split of
the premium relativities between claim frequency and average claim size has not been undertaken.
Such a split is desirable since the impact of small numbers of large claims can be more readily observed
and allowed for.
The figures below provide a summary of the observed and selected relativities for each of the vehicle
class groupings. Note that the vehicle class relativities are based on the risk premium. The relativity
of the total premium (i.e. once expenses and profit margin are added) is different since elements of
the additional costs are the same Kina amount for each vehicle.
Figure 4.5 – X-Large Cars – Low Risk – Observed and Selected Relativities
1.00
0.90
0.80
Relativity
0.70
0.60
0.50
0.40
0.30
0.20
0.10
X-Large Cars - Low Risk
Selected
0.00
2000 Avg2001 Avg2002 Avg2003 Avg2004 Avg2005 Avg2006 Avg2007 Avg
CPP
CPP
CPP
CPP
CPP
CPP
CPP
CPP
The extra-large cars (low risk) group is the dominant vehicle class with just over 19,000 vehicles in
2009 or 25% of the vehicle fleet. It is clear from Figure 4.5 that the claims experience has been
significantly lower than the relativity recommended. The recommended relativity is lower than that
recently charged and has been limited to fit within the prescribed premium rating principals.
28
Figure 4.6 – X-Large Cars – High Risk – Observed and Selected Relativities
2.00
1.80
1.60
Relativity
1.40
1.20
1.00
0.80
0.60
0.40
0.20
X-Large Cars - High Risk
Selected
0.00
2000
2001
2002
2003
2004
2005
2006
2007
Avg CPP Avg CPP Avg CPP Avg CPP Avg CPP Avg CPP Avg CPP Avg CPP
Extra-large cars (high risk) are the second largest category of vehicles with just over 13,000 registered
vehicles in 2009 (or 17% of the vehicle fleet). The historical experience is in line with the
recommended relativity.
Figure 4.7 – Smaller Cars – Private – Observed and Selected Relativities
0.45
0.40
0.35
Relativity
0.30
0.25
0.20
0.15
Smaller Car - Private
0.10
Selected
0.05
0.00
2000
2001
2002
2003
2004
2005
2006
2007
The smaller car – private class is of a similar size to the extra-large (high risk) class with around 11,500
registered vehicles in 2009 (15% of the fleet). The observed experience is similar to the recommended
relativity.
29
Figure 4.8 – Utility - Private – Observed and Selected Relativities
2.00
1.80
1.60
Relativity
1.40
1.20
1.00
0.80
Utility - Private
0.60
Selected
0.40
0.20
0.00
2000
2001
2002
2003
2004
2005
2006
2007
The utility – private class had around 7,000 registered vehicles in 2009 (or 9% of the fleet). Recent
experience shows a deteriorating trend and the recommended relativity may understate the future
claims experience.
Figure 4.9 – Larger Car– Private– Observed and Selected Relativities
0.90
0.80
0.70
Relativity
0.60
0.50
0.40
0.30
Larger Car (excl Utility) - Private
0.20
Selected
0.10
0.00
2000
2001
2002
2003
2004
2005
2006
2007
The larger car (excl. utility) – private class had around 6,000 vehicles registered in 2009 (8% of the
fleet). The experience has deteriorated over time and the recommended relativity is similar to the
most recent claims experience. If, however, the claims experience continues to deteriorate then the
relativity could be understated.
30
Figure 4.10 – Smaller Car – Business– Observed and Selected Relativities
0.90
Smaller Car - Business
0.80
Selected
0.70
Relativity
0.60
0.50
0.40
0.30
0.20
0.10
0.00
2000
2001
2002
2003
2004
2005
2006
2007
The smaller car – business class had approximately 5,500 registrations in 2009 (7% of the fleet) and
shows quite variable claims experience. The recommended relativity appears to provide a reasonable
estimate of the average experience.
Figure 4.11 – PMV (Buses) – Observed and Selected Relativities
12.00
10.00
PMV (Buses)
Selected
Relativity
8.00
6.00
4.00
2.00
0.00
2000 Avg 2001 Avg 2002 Avg 2003 Avg 2004 Avg 2005 Avg 2006 Avg 2007 Avg
CPP
CPP
CPP
CPP
CPP
CPP
CPP
CPP
The PMV (buses) claims experience has been considerably worse than the relativity applied. Whilst the
experience appears to have improved over time, the relativity still needs to almost double to reflect
the claims experience. The poor experience for buses is not uncommon – the relativity for buses in
Australia in typically considerably higher than average.
31
Figure 4.12 – Utility > 1.25 tonnes – Observed and Selected Relativities
4.50
4.00
3.50
Relativity
3.00
Utility exceeding 1.25 tonne
Selected
2.50
2.00
1.50
1.00
0.50
0.00
2000
2001
2002
2003
2004
2005
2006
2007
The utility exceeding 1.25 tonne class had around 4,000 registered vehicles in 2009 (5% of the fleet).
The historical experience has been variable and, with the exception of the 2000 year the experience
has been less than the recommended relativity.
Figure 4.13 – Trade Plate – Observed and Selected Relativities
0.35
Trade Plate
0.30
Selected
Relativity
0.25
0.20
0.15
0.10
0.05
0.00
2000 Avg2001 Avg2002 Avg2003 Avg2004 Avg2005 Avg2006 Avg2007 Avg
CPP
CPP
CPP
CPP
CPP
CPP
CPP
CPP
There were around 3,500 tractor/trade plate registrations in 2009 (5% of the fleet). The experience
has been quite variable though there is potential for the recommended relativity to be a little higher
than the future experience.
32
Figure 4.14 – Motor Cycle– Observed and Selected Relativities
0.60
Motor Cycle
0.50
Selected
Relativity
0.40
0.30
0.20
0.10
0.00
2000
2001
2002
2003
2004
2005
2006
2007
There were around 1,000 motorcycles registered in 2009 (1% of the fleet). The experience, whilst
variable, has tended to exceed the recommended relativity. We note that the relativity of 0 in 2007
implied there were no (or very few) motor cycle claims – this may be a data issue or a timing issue
rather than a true relativity.
Figure 4.15 – Trailer – Observed and Selected Relativities
1.00
0.90
0.80
Relativity
0.70
Trailer
0.60
Selected
0.50
0.40
0.30
0.20
0.10
0.00
2000
2001
2002
2003
2004
2005
2006
2007
There were approximately 900 trailers registered in 2009 (1% of the fleet). The 2001 and 2002 years
must have some sizeable claims relating to them and should be given only partial weight when setting
the future relativity. Of concern is the recent claims experience which is higher than the
recommended relativity. There is some chance that the emerging experience will be worse than the
recommended rate.
33
4.4.3 Cross-subsidies Across Classes
Due to restrictions placed on premium movements from year to year as well as movements in the
observed claims experience compared to expectations, there are some classes whose recommended
relativities differ from those based purely on the observed experience. The key vehicle classes where
the recommended premium relativities differ from the experience are summarised in Table 4.5.
Table 4.5 – Observed and Experience Relativities for Selected Classes
Recommended
Experience
PMV (Buses)
X-Large Cars – Low Risk
2.73
0.90
1.80
5.50
0.40
1.60
Approximate Difference
in Premium
K965
-K215
-K130
Utility – Private Use
Motor Cycle
Trailers
1.09
0.20
0.07
1.20
0.23
0.14
K35
K15
K30
Item
Cross-subsidies across vehicle classes are common in CTP schemes around the world. The
comprehensive nature of the insurance means that it is necessary to maintain affordable premiums.
4.4.4 Determining the Required Premium by Vehicle Class
The required premium for each vehicle class is calculated as follows:

Plus

Plus

Plus

Risk premium – equals the average risk premium (K409) multiplied by the recommended
premium relativity for that class;
Administration expenses – equals 50% of the recommended average administration expenses
(50% x K225) plus 50% of the recommended average administration expenses multiplied by the
premium relativity for that class;
Reinsurance expense – equals 50% of the recommended average reinsurance expense (50% x
K9.86) plus 50% of the recommended average reinsurance expense multiplied by the premium
relativity for that class;
Profit loading – equals 2.5% times the sum of the risk premium, the administration expenses and
the reinsurance expense.
34
5.
MVIL FINANCIAL FORECAST MODEL
A forecast financial model was prepared prior to commencement of the initial contract period. As part
of this review, the initial model has been updated to project the financial position of MVIL from 2012
to 2021. Model assumptions updated to reflect the experience observed as at 31 December 2011 and
expectations of future experience.
As part of the process, the projection position as at 31 December 2011 from the original model has
been compared to the observed experience. For the 2012 to 2021 projection particular focus has been
placed on areas where the initial projection was materially different to the actual experience.
5.1
2002 FORECAST VERSUS EXPERIENCE
Figure 5.1 compares the actual and expected premium income. The overall trend in premium income
is consistent with expectations although the actual experience has been around 20% to 25% lower than
expected.
Figure 5.1 – Premium Income
Premium Income
80,000
70,000
2002 Projection
Kina '000's
60,000
Actual
50,000
40,000
30,000
20,000
10,000
-
2004
2005
2006
2007
2008
2009
2010
2011
Figures 5.2 and 5.3 show that both reinsurance expense and administration costs have both
substantially exceeded forecasts. With reinsurance costs being 2.5 times higher than forecasted while,
claims administration expenses have been about twice as high as was projected
35
Figure 5.2 – Reinsurance Expense
Reinsurance Expense
2002 Projection
-
Actual
Kina '000's
(200)
(400)
(600)
(800)
(1,000)
(1,200)
2004
2005
2006
2007
2008
2009
2010
2011
Figure 5.3 – Claims Administration Expenses
Claims Admin Expenses
2002 Projection
Kina '000's
(5,000)
Actual
(10,000)
(15,000)
(20,000)
(25,000)
2004
2005
2006
2007
2008
2009
2010
2011
Figure 5.4 summarises the incurred claims costs. These represent amounts paid plus movement in
insurance liabilities (outstanding claims and unearned premiums). Claims costs have remained
relatively stable over the 2004 to 2011 period and have been substantially lower than the continuously
increasing costs that were projected. Given the average term of the liabilities an increasing trend in
claims costs would be expected for the first 10 or so years of the scheme. The relatively stable
experience observed is likely to have been caused by releases from conservative liability estimates in
the early years of the scheme.
36
Figure 5.4 – Incurred Claims Costs
Claims Costs
-
(10,000)
Kina '000's
(20,000)
2002 Projection
(30,000)
Actual
(40,000)
(50,000)
(60,000)
(70,000)
2004
2005
2006
2007
2008
2009
2010
2011
The combination of items in Figures 5.1 to 5.4 produces the underwriting profit summarised in Figure
5.5. Profits have been considerably higher than expected due in particular to the considerably lower
than expected claims costs.
Figure 5.5 – Underwriting Profit
Underwriting Profit
25,000
20,000
2002 Projection
Kina '000's
15,000
Actual
10,000
5,000
(5,000)
2004
2005
2006
2007
2008
2009
2010
2011
(10,000)
(15,000)
(20,000)
Figure 5.6 summarises the investment income. There have been some considerable asset increases
which have driven the significant income observed. The losses in recent year similarly reflect large
reductions in those asset values.
37
Figure 5.6 – Investment Income
Investment Income
250,000
2002 Projection
200,000
Actual
Kina '000's
150,000
100,000
50,000
(50,000)
2004
2005
2006
2007
2008
2009
2010
2011
(100,000)
(150,000)
(200,000)
The overall profit has been dominated by the investment income, the movements of which are of the
order of 10 times the movements in the underwriting profit. Thus, even though there have been strong
underwriting profits in recent years, the poor investment performance in recent years has led to
substantial losses. The most significant impact on this result would have been the Global Financial
Crisis which can be clearly depicted during the last three (3) years, 2009 -2011.
Figure 5.7 – Profit before Tax
Profit before Tax
250,000
200,000
2002 Projection
Kina '000's
150,000
Actual
100,000
50,000
(50,000)
2004
2005
2006
2007
2008
2009
2010
2011
(100,000)
(150,000)
The losses observed in recent years have eroded the net assets as shown in Figure 5.8. Although there
have been significant losses in the last 3 years, the net assets are still well in excess of those projected
(assuming no dividends).
38
Figure 5.8 – Net Assets
Net Assets
700,000
2002 Projection
600,000
Actual
Kina '000's
500,000
400,000
300,000
200,000
100,000
-
2004
5.2
2005
2006
2007
2008
2009
2010
2011
APPROACH TO FINANCIAL FORECAST
The 5 year forecast from 2013 to 2017 has been based on recently observed experience and assumed
little or no change in investment mix and strategy. The forecast incorporates expected premiums in
2013 and allows for growth in costs and income and is designed to provide a reasonable but high level
summary of the future of the scheme.
5.2.1
Key Assumptions
The key forecast assumptions are:













5.3
Inflation is assumed to be 6% per annum;
Superimposed inflation is applied to claims costs and premium growth at a rate of 2% per
annum;
Investments are assumed to earn 6% per annum;
Receivables, prepayments and other assets are assumed to grow at 2% per annum;
Investments in associates and subsidiaries as assumed to maintain their current value;
Sundry creditors and accruals are assumed to grow at 2% per annum;
New year claims costs are assumed be incurred at a loss ratio of 62%;
Registration and commission income is assumed to be 12% of gross written premium;
The reinsurance expense is assumed to be 2% of gross written premium;
Underwriting expenses are assumed to be 14% of gross written premium;
VAT refund is assumed to be 9.1% of claim payments;
Claim payments are assumed to grow at inflation plus superimposed inflation (i.e. 8% per
annum); and
Administration expenses are assumed to grow at 6% per annum.
2013 – 2017 FORECAST
The forecast outcomes are summarised in the following graphs. They include the observed experience
from 2004 to 2011 and the projected experience from 2013 to 2017.
39
Figure 5.9 – Actual and Projected Premium Income
Kina '000
Premium Income
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
-
Actual
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Calendar Year
Figure 5.10 – Actual and Expected Reinsurance Expense
Kina '000
Reinsurance Expense
1,800
1,600
1,400
1,200
1,000
800
600
400
200
-
Actual
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Calendar Year
40
Figure 5.11 – Actual and Projected Claims Administration Expenses
Claims Admin Expenses
30,000
Kina '000
25,000
20,000
15,000
10,000
Actual
5,000
-
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Calendar Year
Figure 5.12 – Actual and Expected Claims Costs
Claims Costs
35,000
30,000
Actual
Forecast
Kina '000
25,000
20,000
15,000
10,000
5,000
-
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Calendar Year
41
Figure 5.13 – Actual and Expected Underwriting Profit
Underwriting Profit
25,000
Actual
20,000
15,000
Kina '000
10,000
5,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-5,000
-10,000
-15,000
-20,000
Calendar Year
Figure 5.14 – Actual and Expected Investment Income
Investment Income
250,000
Actual
200,000
150,000
Kina '000
100,000
50,000
-50,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-100,000
-150,000
-200,000
Calendar Year
42
Figure 5.15 – Actual and Expected Profit Before Tax
Profit Before Tax
250,000
Actual
200,000
Kina '000
150,000
100,000
50,000
-50,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-100,000
-150,000
Calendar Year
Figure 5.16 – Actual and Expected Net Assets
Net Assets
700,000
600,000
Kina '000
500,000
400,000
300,000
Actual
200,000
100,000
-
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Calendar Year
43
5.4
SUMMARY OF FINANCIAL PROJECTIONS
The tables below summarise the forecast profit and loss and balance sheet statements.
Table 5.1 – Projected Balance Sheet
Balance Sheet - K'000
2010
2011
2012
2013
2014
2015
2016
2017
CURRENT ASSETS
Cash and Bank Accounts
Receivables
Prepayments & Other Assets
76,212 133,680
15,907 14,296
964
866
170,397 206,622 247,125 292,325 342,680 398,691
15,319 15,625 15,938 16,256 16,581 16,913
915
934
952
971
991
1,011
Total Current Assets
93,084 148,842
186,631 223,181 264,014 309,552 360,253 416,615
NON CURRENT ASSETS
Investments in UnQuoted shares
Investments in Quoted shares
Investments in Subsidiaries
Investments in Associates
Other Investments
Property Plant
Intangible Assets
Future Income Tax Benefit
11,643
1,643
453,129 126,638
17,718 17,718
20,906 20,906
97,023 100,563
47,261 49,988
14
125
125
135,000 143,100 151,686 160,787 170,434 180,660
17,718 17,718 17,718 17,718 17,718 17,718
20,906 20,906 20,906 20,906 20,906 20,906
105,000 111,300 117,978 125,057 132,560 140,514
52,500 55,650 58,989 62,528 66,280 70,257
125
125
125
125
125
125
Total Non Current Assets
647,804 317,594
331,248 348,798 367,401 387,120 408,023 430,179
Total Assets
740,888 466,436
517,879 571,979 631,416 696,673 768,275 846,794
Sundry Creditors & Accruals
Outstanding Claims
IBNR
Unearned Premiums
Provision for Income Tax
Loans
-2,192 -4,257
-78,895 -77,455
-20,752 -15,130
-19,915 -23,925
391
391
-100,000
-
-3,343 -3,410 -3,478 -3,547 -3,618 -3,691
-93,511 -108,151 -123,962 -141,038 -159,480 -179,397
-21,179 -22,873 -24,703 -26,680 -28,814 -31,119
-29,054 -31,157 -33,413 -35,831 -38,425 -41,207
391
391
391
391
391
391
-
Total Liabilities
-221,364 -120,376
-146,696 -165,200 -185,165 -206,705 -229,946 -255,023
Net Assets
519,525 346,060
371,184 406,779 446,251 489,967 538,329 591,771
Capital Reserve
Share Capital
Asset Revaluation Reserve
Accumulated Profits
-33,528 -33,528
-33,519 -33,519
-2,689 -2,689
589,260 415,795
-33,528 -33,528 -33,528 -33,528 -33,528 -33,528
-33,519 -33,519 -33,519 -33,519 -33,519 -33,519
-2,689 -2,689 -2,689 -2,689 -2,689 -2,689
440,919 476,515 515,987 559,703 608,064 661,507
Total Equity
519,525 346,060
371,184 406,779 446,251 489,967 538,329 591,771
LIABILITIES
44
Table 5.2 – Projected Profit and Loss Statement
Profit & Loss - K'000
Gross Premium Income
Less:Unearned Premium Movement
Add: Net Registration and Commission Income
2010
45,177
3,099
5,511
2011
54,946
4,010
6,352
2012 2013 2014 2015 2016 2017
58,108 57,980 62,178 66,679 71,506 76,682
5,129 2,103 2,255 2,419 2,594 2,782
6,973 6,958 7,461 8,001 8,581 9,202
Gross Premium & Net Registration Income
47,589
57,288
59,952 62,835 67,384 72,261 77,492 83,102
700
6,482
700
7,689
1,162 1,160 1,244 1,334 1,430 1,534
8,135 8,117 8,705 9,335 10,011 10,735
Net Premium & Registration Income
40,407
48,898
50,655 53,558 57,435 61,593 66,051 70,833
Claims Paid
Outstanding Claims Movement
IBNR Movement
Less: Reinsurance Recovery
Less: VAT 1/11 Refund
19,303
-215
562
1,787
17,767
-1,440
-5,623
1,670
18,213
4,236
6,049
1,656
Net Incurred Claims Expense
17,864
9,035
Staff Costs
Admin Costs
Premises & Equiptment Costs
Computing Costs
Other Costs
8,189
5,114
3,290
667
4,220
6,371
6,343
1,927
624
2,744
Administration Expenses
21,479
18,010
20,364 21,585 22,881 24,253 25,709 27,251
Total Claims & Administration Expenses
39,344
27,044
47,206 45,736 48,964 52,423 56,132 60,108
1,064
21,854
3,449 7,822 8,472 9,170 9,920 10,725
Investment Income
Share Price Movements - Gain/(Loss)
3,665 31,013
-61,413 -180,654
24,751 27,774 31,000 34,547 38,442 42,717
-3,076
-0
0
Total Investment Income/(Loss)
-57,748 -149,641
21,675 27,774 31,000 34,547 38,442 42,717
Operating Profit / (Loss) Before Tax
-56,684 -127,787
25,124 35,596 39,472 43,716 48,361 53,442
Less Reinsurance Expense
Less Underwriting Expenses
Underwriting Profit/(Loss)
45
19,670
4,575
1,694
1,788
21,244
4,941
1,830
1,931
22,943
5,336
1,976
2,086
24,779
5,763
2,134
2,253
26,761
6,224
2,305
2,433
26,842 24,151 26,083 28,170 30,423 32,857
7,666
6,731
2,236
645
3,085
8,126
7,135
2,370
684
3,270
8,614
7,563
2,512
725
3,467
9,131
8,017
2,663
769
3,674
9,678
8,498
2,823
815
3,895
10,259
9,008
2,992
864
4,129
5.5
CONCLUSIONS FROM THE FINANCIAL FORECAST
The financial forecast shows a strong growth in operating profit in future years. However, much of the
forecast profit emanates from investment income with around 75% of profit estimated to arise from
investment income. Whilst such returns are feasible, they do not allow for drops in asset values which
could have a material impact on the forecast profit. As such, the forecast should be considered as the
outcome if the assumed future conditions occur.
The forecast also shows a considerable growth in the underwriting profit. This is simply an outcome of
assuming that policies are written at profitable levels and that the claims experience is as expected.
There is considerable uncertainty around what that might be and this is evidenced via a simple scenario
test. If the investment income was assumed to be 3% per annum rather than 6% per annum then the
2017 investment income would reduce from K42 million to K9 million. The change in net assets as a
result of the lower investment income is summarised in Figure 5.17.
Figure 5.17 – Impact of Low Investment Performance on Projected Net Assets
Net Assets
700,000
600,000
Kina '000
500,000
400,000
300,000
Actual
200,000
Forecast
100,000
Low
-
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Calendar Year
Overall, the projection of MVIL’s financial position using neither pessimistic nor optimistic assumptions
shows that the business is expected to be sustainable for the foreseeable future.
46
6.
PRICE CONTROL FORMULA
6.1
FORMULA STRUCTURE AND COMPONENTS
The Maximum Average Net Premium (MANP) is set by the Commission via the Regulatory Contract. The
MANP is based on the average premium across all vehicle types. As such, the MANP is influenced by
both the premiums charged to each class of vehicle as the number of vehicles within each vehicle
class. Thus, the MANP could change purely due to a change in the mix of vehicle registered.
The MANP determined by the Commission in each regulatory year needs to ensure that MVIL is able to
recover the expenses associated with the provision of third party insurance to consumers. The
existence of the MANP is to ensure that consumers are not required to pay more than is necessary.
The MANP (expressed in Kina) for Regulatory Year t (MANPt) is calculated as follows:
MANPt   ARPt  AEt  ARIPt  1  PLt 
where:
ARPt
AEt
ARIPt
PLt
is the Average Risk Premium (expressed in Kina) for Regulatory Year t;
is the Average Expenses (expressed in Kina) for Regulatory Year t;
is the Average Reinsurance Premium (expressed in Kina) for Regulatory Year t; and
The components of the formula are defined in Section 6.2. The basis of allocating the components to
each vehicle class is described in Section 6.3.
6.2
FORMULA COMPONENT DEFINITIONS
6.2.1 Average Risk Premium
The Average Risk Premium (expressed in Kina) for Regulatory Year t (ARPt) is calculated as follows:
 AF 
ARPt   t   AAS t
 100 
where:
AFt
is the Accident Frequency per 100 vehicles for Regulatory Year t, which is equal to
1.15, or such other number as determined by reference to that part of the Mid Term
Actuarial Report or that number determined by the Commission;
AASt
is the Average Accident Size for Regulatory Year t, which:
(b)
for the First Regulatory Year is equal to K35,526;
(c)
for the 2015 Regulatory Year, it is determined by reference to that part of the Mid Term
Actuarial Report or that number determined by the Commission; and
(d)
for each other Regulatory Year t is calculated as follows:
AAS t  AAS t 1  1  CPI t  SI t 
where:
47
AASt-1
CPIt
is the Average Accident Size for the Regulatory Year immediately
preceding the relevant Regulatory Year t;
is calculated as:
PNGCPIt-1 = (PNGCPIt-1–PNGCPIt-2) / PNGCPIt-2x`
where:
PNGCPIt-1 is the Adjusted PNG CPI for the 12 month period ending on 30
September in Regulatory Year t-1 or calendar year t-1 and is calculated in
accordance with of Schedule YYY of the Regulatory Contract ; and
accordance with Schedule 6 of the Regulatory Contract ;
or such other value as determined by reference to that part of the Mid Term
SIt
is the forecasted Superimposed Inflation for Regulatory Year t, which is
equal to 2.0%, or such other value as determined by reference to that
part of the Mid Term Actuarial Report or that number determined by the
Commission.
6.2.2 Average Expenses
The Average Expenses (expressed in Kina) for Regulatory Year t (AEt) are calculated as follows:
AEt  AEt 1  1  CPI t 
where:
AEt-1
is the Average Expenses (expressed in Kina) for Regulatory Year t-1.
purposes, AE2012 is K202.74; and
CPIt
is calculated as:
For these
where:
accordance with of Schedule YYY of the Regulatory Contract ; and
or such other value as determined by reference to that part of the Mid
Term Actuarial Report or that number determined by the Commission; and
48
6.2.3 Average Reinsurance Premium
The Average Reinsurance Premium (expressed in Kina) for Regulatory Year t (ARIPt) is calculated as
follows:
ARIPt  ARIPt 1  1  CPI t 
where:
ARIPt-1 is the Average Reinsurance Expenses (expressed in Kina) for Regulatory Year t-1. For
these purposes, ARIP2012 is K9.86; and
CPIt
is calculated as:
where:
accordance with of Schedule 6 of the Regulatory Contract ; and
or such other value as determined by reference to that part of the Mid Term
6.2.4 Profit Margin
The profit margin to be applied to the sum of the average risk premium, average expense and average
reinsurance premium is 2.5%. The appropriateness of this assumption is to be reconfirmed in the Mid
Term Actuarial Report.
6.3
ALLOCATION TO VEHICLE CLASS
Premiums are calculated for each vehicle class by combining the average premium components with
the vehicle class relativities (described in Section 4). The MANP for class i in year t (MANPi,t) is
calculated as:
MANPi,t = (ARPi,t + AEi,t + ARIPi,t) x (1+ PLt)
where:
ARPi,t is the average risk premium for class i for Regulatory Year t and equals ARPt x PRi,t;
PRi,t is the premium relativity for class i for Regulatory Year t;
AEi,t is the average expenses for class i for Regulatory Year t and equals 0.5 x (AEt + AEt x
ARPi,t / ARPt);
ARIPi,t is the Average Reinsurance Premium for class i for Regulatory Year t and equals 0.5 x
(ARIPt + ARIPt x ARPi,t / ARPt); and
PLt
49
We note that risk premium is apportioned based on the premium relativity for each class and the
expenses and reinsurance premium are 50% fixed cost and 50% based on risk premium.
6.4
2013 STARTING VALUES
Using the formula [MANPt = (ARPt + AEt + ARIPt) x (1 + PLt)] and the explanations provided thereof in the
preceding passages, and based on the historical information provided by MVIL, the Commission has
determined the premiums for the first regulatory year 2013 as shown in the table below. The same
formula will be used to determine the premiums for the duration of the regulatory period from 2014 to
2017.
Table 6.1 Premiums for year 2013
Risk
Premium
Relativity
2013 MNP
Insurance
Levy
Trailer
0.07
145.9
Tractor/Trade Plate
0.20
Motor Cycle
NRSC
Sub-total
VAT
Gross
Premium
1.46
7.30
154.65
15.47
170.12
214.50
2.15
10.73
227.37
22.74
250.11
0.20
214.50
2.15
10.73
227.37
22.74
250.11
0.30
267.28
2.67
13.36
283.31
28.33
311.64
Smaller Car- Business
0.35
293.66
2.94
14.68
311.28
31.13
342.41
Utility -Private
Larger Car (excl Utility) Private
1.12
700.01
7.00
35.00
742.01
74.2
816.21
0.64
446.70
4.47
22.34
473.50
47.35
520.85
X Large Car -Low Risk
0.90
583.91
5.84
29.20
618.94
61.89
680.84
X Large Car - High Risk
1.58
942.76
9.43
47.14
999.32
99.93
1099.26
1.80
1058.86
10.59
52.94
1122.39
112.24
1234.63
PMV Buses
2.73
1551.79
15.52
77.59
1644.89
164.49
1809.38
Risk Premium
409
Vehicle Class
Expenses
203
RI Expenses
9.68
Profit Margin
2.5%
6.5
ESCALATIONS TO COST COMPONENTS
Average Accident Size is assumed to increase in line with CPI inflation plus an additional 2% Super
Imposed inflation. Both Average Expenses and Average Reinsurance Premium are assumed to increase
in line with CPI inflation (only) each year.
6.6
CHANGES IN VEHICLE MIX
Since changes in vehicle mix can impact the calculated MANP, the Regulatory Contract has been set
such that the mix of vehicles in 2011 is used for the determination of the MANP in years 2 and 3 of the
contract period and the mix of vehicles in 2014 is used for the determination in years 4 and 5. This
50
avoids the occurrence of a situation whereby an increase in the proportion of high risk vehicles leads to
a reduction in premium rates for those vehicles in order to maintain the required MANP.
6.7
OTHER RISK SHARING PROVISIONS
Specific allowance for a Force Majeure Event is made for in the regulatory contract. If one occurs,
MVIL may apply to the Commission to charge customers an additional FM Pass Through Amount to
compensate MVIL for additional costs. Subject to a number of conditions, including consideration of
the extent to which it would have been reasonable for MVIL to have procured insurance against the
consequences of the Force Majeure Event, the Commission musk seek to ensure that the FM Pass
Through Amount fully compensates for the increase in costs the MVIL submits it has incurred.
6.8
CHANGES FROM PRIOR REGULATORY CONTRACT
The most significant change proposed by MVIL, through the Finity Report, is the simplification of the
calculation of the MANP formula. In particular the basis of determining the Average Expenses, the
Average Reinsurance Premium and future premium inflation. In addition, MVIL has incorporated a
requirement for an actuarial review to support the determination of the Average Accident Size (AAS)
and the Accident Frequency (AF) with the review proposed to be completed every two (2) years.
Under the Regulatory Contract, the mid-term review will be required to be completed after two (2)
years. MVIL’s proposal specifies a review of the claim frequency and average claim size. Given the
potential for expenses are reinsurance costs to change also, the Commission recommends that all
elements of the break-even premium be considered as part of the mid-term review.
The key benefits of the changes proposed are identified as being greater simplicity and a reduced
likelihood of inadequate pricing due to cost development. These are partially offset by potential
differences in the actual and expected rates of inflation.
The changes allow MVIL to have the ability to respond to claims experience trends which are not able
to be included within a simplified premium formula. The Commission supports the amended formula
although it is noted that this it will require greater emphasis be placed on proper and accurate data
collection by MVIL.
6.9
TOTAL REVENUE REQUIREMENTS
The total revenue for the commencement year net of charges is estimated to be K58 million. This
estimate is based on the MANP for 2013 multiplied by the expected number of registrations for 2013 of
91,067. The actual revenue will vary depending on the actual number of registrations and the mix of
registrations by class. The required revenue will depend on the number and cost of claims, the exact
answer to which will not be known for many years.
51
7.
SERVICE STANDARDS
7.1
SERVICE STANDARDS UNDER PREVIOUS REGULATORY CONTRACT
According to Schedule 4 of the previous Regulatory Contract, MVIL was required to meet two main
minimum service standards and they relate to:
a) the provision of facilities either by itself or through an agent for motor vehicle owners to obtain
Third Party Insurance Cover; and
b) the provision of facilities either by itself or through an agent for claims assessment and claim
payment for customers wishing to make a claim for damages (death or bodily injury) arising out
from the use of motor vehicles by not later than 31 December 2004.
Furthermore, these facilities were to provide an avenue for claimants/customers to raise queries
relating to claims and, where necessary, facilitate in forwarding claims to the central claims
assessment facilities located in Port Moresby.
Note that for both requirements, the facilities were to be set in each provincial capital in PNG and to
be open and accessible to members of the public during ordinary business hours on all business days.
7.2
MVIL’S PERFORMANCE DURING PREVIOUS REGULATORY PERIOD
a)
Facilities for Third Party Insurance Cover Issuance
A requirement of the service standards under the previous Regulatory Contract required MVIL, by itself
or through an agency, to establish facilities in each provincial centre for customers to obtain third
party insurance cover. As such, MVIL established eleven branches and eight agencies throughout the
country for this purpose as shown in Table 7.1.
52
Table 7.1: MVIL Branches & Agencies for Third Party Insurance Cover Issuance
Branch
Single
Sticker
Capital
NCD/CP
Pom
√
√
WHP
Mt Hagen
√
√
NCD/CP
EHP
ENBP
Simbu
MP
WSP
ESP
SHP
WNBP
MBP
Pom
Goroka
Kokopo
Kundiawa
Lae
Vanimo
Wewak
Mendi
Kimbe
Alotau
√
√
√
√
√
√
√
√
√
√
√
√
√
√
ARB
Enga
MP
MP
Buka
Wabag
Madang
Lorengau
√
√
√
√
√
√
5. Kiunga - Ningerum Transport P/L
WP
Daru
√
√
6. Kavieng - Traffic Isle Ltd
NIP
Kavieng
7. Lihir - Lihir Tyre Center
8. Tabubil - Tawap Kamen
Investments P/L
NIP
Kavieng
√
√
WP
Daru
√
√
1.
Central Traffic Registry
2.
Mt Hagen Traffic Registry
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
MVIL Registry NCD
MVIL Goroka
MVIL Kokopo
MVIL Kundiawa
MVIL Lae
MVIL Vanimo
MVIL Wewak
MVIL Mendi
MVIL Kimbe
MVIL Alotau
Online Manual
Twin
Sticker
Province
√
√
√
√
√
√
AGENTS
1.
2.
3.
4.
Buka Traffic Registry
Enga Provincial Govt
Madang Provincial Govt
Manus Provincial Govt
√
√
There were three provincial centers without any branches or agencies being Popondetta, Kerema and
Daru.
Discussion of Issues
A Popondetta office was in operation until it was affected by Cyclone Guba in 2007 and was
subsequently closed. Motor vehicle owners in the Northern Province since 2007 have been sending
their necessary documents to Port Moresby for vehicle registration and CTP insurance cover. The
Commission considers this situation to be regrettable and considers that it appropriate that immediate
measures to rectify the situation are undertaken.
Given its geographic location and limited number of registered vehicles, it is not viable to establish an
agency in Daru town. MVIL has agencies in Kiunga (Ningerum Transport P/L) and Tabubil (Tawap
Kamen Investments P/L) which are both necessary given the vehicle numbers in those district
townships.
The Commission understands that a branch/agency was not established in Kerema town due to the road
link with Port Moresby. All vehicles owner in Gulf Province travel to Port Moresby to register their
motor vehicles and for the payment of third party insurance cover.
Whilst it is MVIL’s obligation to establish branches/agencies in each provincial capital, the Commission
encourages the establishment of a branch/agency in areas it is economically viable.
53
It should also be noted that the issuance of the twin stickers2, particularly the registration of motor
vehicles is a matter beyond the Commission’s jurisdiction. As such, the Commission cannot impose
requirements on MVIL to issue twin stickers as part of its minimum service standard requirements.
However, the Commission strongly encourages MVIL to make all necessary efforts to issue twin stickers
in consultation with the relevant stakeholders such as the provincial governments.
b)
Claims Assessment & Payment Facilities
The second requirement under the previous Regulatory Contract provided for MVIL to ensure it had a
greater claims administration presence throughout the country. MVIL decided against decentralisation
of claims processing on the basis that it was not financially viable to handle claims administratively in
each provincial centre. Furthermore, MVIL claimed that factors such as lack of infrastructure,
communications facilities and rising security issues for staff warranted the concentration of claims
administration at the head office in Port Moresby.
As an alternative, MVIL has been serving its customers through provincial visitations. MVIL claimed to
visit provincial centres (not all provinces though) two times annually to attend to claims resulting from
motor vehicle accidents. For instance, to attend to claims from Southern Highlands, Enga and Western
Highlands Provinces, MVIL officers fly into Mt Hagen and spend a week there to attend to the
claimants. For Eastern Highlands and Simbu Provinces, MVIL officers spend a week in Goroka to attend
to the same. The trips to other provinces depend on number of accidents occurring.
MVIL claimed that prior to visitations, public announcements in the print media and the radio stations
informing the general public of the visitation were made. MVIL further claimed that medical staff
visitations were slated on a needs basis. MVIL considered that such visitations have greatly improved
the speed of claims settlements, a claim which is considered questionable by the Commission.
The Commission considers that the reasons provided by MVIL for not providing facilities to assess and
pay claims are shallow and therefore has proposed to include further minimum services standards for
MVIL to lift their performance in this regulatory period. These additional service standards are
discussed in more details under section 10 of this Final Report.
2
Twin sticker refers to an adhesive label that contains both the motor vehicle registration and the CTP motor vehicle third party
insurance information. It can be noted from Table 7.1 that provinces that have branches issue twin stickers (except Lae), whilst
the MVIL agents issue each sticker separately.
54
8. COMMUNITY SERVICE OBLIGATIONS
The Government currently does not have a Community Service Obligation Policy. In the absence of a
funding mechanism for CSOs, the Commission has adopted a uniform pricing approach when setting the
price paths for regulated entities in previous reviews.
Since the establishment of the Commission in 2002, the Commission has consistently adopted a uniform
pricing approach in the regulation of utilities. This includes Postal services, PNG Ports’ essential ports
services and water charges. The ‘uniform pricing’ (also known as ‘postage stamp pricing’) for all
centres provides a funding mechanism for the regulated entities to continue to deliver vital services to
centres around PNG that are considered in a commercial sense as ‘loss making’. The loss making
centres/sectors of a regulated business are incapable of recovering the stand alone costs of delivering
service.
8.1
MVIL COMMUNITY SERVICE OBLIGATIONS
As part of its regulatory obligations, MVIL has to maintain a presence in all provincial centres
throughout PNG. The premiums are uniform across all centres to ensure that the compulsory service
can be provided at an affordable level.
Furthermore, a degree of cross subsidies between policyholders with high claims experience and other
policy holders exists to ensure that cover can be provided at an affordable level to all vehicle owners in
PNG. In the absence of a CSO Policy, the uniform premiums and cross-subsidies between different
policy holders helps to ensure that MVIL continues to provide sustainable CTP motor vehicle insurance
coverage scheme throughout PNG.
As a state owned entity, MVIL has an obligation to accommodate CSOs in its operations.
8.2
CSO AND PREVIOUS REGULATORY CONTRACT
Under the previous Regulatory Contract, there was no provision for any CSO and it is noted that there is
no Government CSO policy in place. However, as part of its CSO as a state owned entity, MVIL
undertook the initiative to promote the national road safety awareness campaigns, spending a
considerable amount of money to tackle the issues of ‘speeding, drink driving, pedestrian safety and
overloading of Public Motor Vehicles’ with a view to reduce the increasing number of road accidents.
Given PNG’s passion for rugby league, MVIL has fronted its campaign with some of the best known
players in the Australian National Rugby League (NRL) Competition.
The Commission notes that approximately K1 million was used for this public awareness campaign since
its commencement in November 2009. Whilst the Commission supports the objectives of the campaign,
it has concerns about the potential for recovering the expenses via reductions in claims costs. To put
the cost of the public awareness campaign into perspective, K1 million is about 3% of the annual claims
cost. Thus, to be effective, the campaign would need to reduce the number of accidents by around 30
per annum. Other strategies should be considered with the focus being on those which are expected to
have the maximum possible impact of reducing the number of accidents.
In its submission, the Insurance Commission, whilst noting that the advertising campaign outlined above
was a good initiative, queried whether MVIL had figures to show the effectiveness of the campaign.
The Insurance Commission also queried whether MVIL might consider partnering with other relevant
stakeholders such as taking the campaign to schools to educate the drivers of the future.
The Commission considers that MVIL should ensure that there is evidence that the advertising campaign
is benefiting the community before committing to further campaigns.
55
8.3
CSO UNDER THE NEW REGULATORY PERIOD
The Commission’s view is that MVIL should consider other options as well as the previous strategy as
part of its CSO.

Partnership with other agencies – There are a range of other government
agencies/organisations whose actions could assist in the reduction of accidents and hence CTP
claims. Organisation such as the Land Transport Board, Provincial Traffic Registry, Traffic
Police, providers of road worthiness certificates, legislators (e.g. via the tightening of drinkdriving laws) and the National Road Safety Council (NRSC) all have the potential to influence the
number of accidents. Given these organisations tend to have limited funding, it may be
beneficial to PNG citizens for MVIL to sponsor particular strategies or campaigns. Potential
examples include:
o
o
9.
Roadblocks to impound unregistered or uninsured vehicles;
Police blitzes targeting unlicensed drivers and those under the influence of alcohol.

Claim management - Another area for MVIL to assist as part of its CSO is to do with claims.
Premium collection involves a relatively straightforward transaction. Assessing and settling
claims are, however, considerably more complicated. MVIL should continue to examine
measures to reduce claim processing times as well as the providing the appropriate level of
compensation to injured road users;

Public Awareness and Education – the Commission notes that there is a need for MVIL to
educate the public about the existence of CTP coverage, their rights and the processes for
lodging a claim. Much of the education revolves around public awareness of the various aspects
of MVIL’s business (including the extent of cover and the practical basis for lodging claims and
time limits) but should also include road safety education.
KEY ISSUES RELATING TO MVIL
There are many key business issues currently confronting MVIL and the third party insurance industry.
Some of the various kinds of risks and uncertainties MVIL faces in the process of conducting its business
are covered in this section.
9.1
INCREASING NUMBER OF MOTOR VEHICLES
With the positive growth of the country’s economy over the last decade, an increasing number of
people continue purchasing motor vehicles for personal use whilst the boom in the mining and mineral
sectors has also increased the demand for heavy duty vehicles. Moreover, the importation of used
vehicles over the internet has dramatically increased the number of vehicles around the country. MVIL
statistics indicate that the number of vehicles registered has increased by over 4,500 per annum over
the last decade.
The increase in the number of vehicles in PNG warrants a review of the previous vehicle classes and to
consider the need to introduce new vehicle classes. An increase in the number of motor vehicles is
also expected to lead to an increased number of accidents each year. Feedback from the Insurance
Commissioner commented on the quality of vehicles being imported as another area of concern.
Recent registration statistics show an increasing trend in vehicle numbers which is supported by vehicle
import statistics. The change in nature of type and use of vehicles warrants further investigation as to
whether the previous vehicle classes were suitable. The Commission notes that this may need to be a
56
subjective assessment since there is unlikely to be sufficient claims experience to reliably differentiate
the historical data.
9.2
DETERIORATION OF ROAD INFRASTRUCTURE
The failure to properly maintain a road can contribute to an accident, through such factors as the
accumulation of debris on the road, the presence of potholes or other wear, deterioration or fading of
road signs, overgrown trees and foliage that obstructs a driver's line of sight or obscures signage. In
the built up areas, inadequate signage and traffic controls are also an issue. Moreover, given the rough
conditions of the rugged PNG terrains and the deteriorating road networks in the country, it is
considered that a lot of unnecessary and avoidable accidents are occurring.
The rate of deterioration of the roads is further fuelled by the increasing number of motor vehicles
which overcrowd and congest the limited road network thus putting excess strain on the roads. This is
exacerbated by a lack of maintenance. Poor road conditions are expected to result in higher numbers
of claims.
Apart from contributing to accidents, there are more wide reaching impacts. Inefficient road
infrastructure can be an important factor which impedes (potential) investments in an economy, as
revealed by a study undertaken by the Institute of National Affairs.
Whilst feedback highlighted that the deteriorating road infrastructure should not directly concern MVIL,
the Commission notes that MVIL is impacted by the deterioration via both increased numbers of
accidents and their severity. As a result, the Commission considers that MVIL should play a strong
advocacy role in pushing for improvements in the road infrastructure across the country – particularly
because this will become a worsening issue as both the population and the vehicle fleet increase.
9.3
FRAUDULENT CLAIMS
Almost as long as there has been insurance, there have been people who have tried to defraud
insurance companies and MVIL is no exception. Whilst the Commission does not have specific evidence,
MVIL has claimed that fraudulent claims are real and do occur. It has been claimed that a variety of
people including policemen, lawyers, doctors and accident victims have colluded to lodge claims to
defraud MVIL. It is a matter of priority that strategies should be implemented to ensure that claims
that are not genuine are not paid. In 2006, the former Chief Executive Officer of MVIL Dr. John Mua
was reported in the Post Courier as saying that 10% to 15% of the accident claims at MVIL were
fraudulent.
The Insurance Commission, in its submission, highlighted that evidence of fraudulent claims should be
met with severe penalties. The Commission considers that MVIL should seek to ensure that systems are
in place to identify and reject fraudulent claims in order to control the inflationary costs on premiums.
9.4
SETTLEMENT COSTS AND DECISIONS BY THE JUDICIARY
As per section 49(2)(a) of the Motor Vehicles (Third Party insurance) Act, the maximum limit is
K150,000.00 for death or bodily injury to any one person in an accident or K750,000.00 for any one
accident or series of accidents arising out of the one event.
There may be instances where a considerable number of injuries and/or deaths caused by a major
accident warrant a review of the maximum limit set. One such incident was the January 2010 accident
in the Markham Valley where more than 40 people died and several were seriously injured. The
maximum mandatory amount of K750,000 per accident is clearly insufficient when shared amongst the
more than 40 people who were injured or died.
57
The Commission considers that a review of the Act to set a fair and reasonable level of compensation in
such cases is preferable and to avoid the victims needing to dispute the matter through the courts.
9.5
INVESTMENTS
MVIL has a range of investments which are not considered standard for a manager of a CTP scheme.
Direct investments such the controversial K100 million investment in Australia is an example of such
investments.
The Insurance Commission raised a similar concern in its submission and suggested that safeguards in
the MVIL might be initiated. The IPBC highlighted that the nature of MVIL’s investments fell under
their monitoring functions. Given the IPBC’s feedback the Commission is satisfied that specific
requirements on MVIL’s investments are not required at this point in time. The Commission reserves
the right to alter this view if MVIL’s liquidity (readily sellable assets) is not sufficiently higher than its
liabilities.
The Commission notes that a standard investment basis for a scheme such as MVIL would be to have
excess funds managed by a professional investment manager who would seek to offset the risk profile
of this sort of insurance. There is also some potential that investment in some areas could create a
conflict of interest between the management of the scheme and the management of the investment.
9.6
DELAYS IN CLAIM PAYMENTS
It is noted that a lot of claims are paid many years after the date of lodgment of a claim. Claims
processing time is one of the main issued addressed in the new Regulatory Contract. Some level of
delay is inevitable given the nature of injuries and claims settlement process though. CTP claims are
referred to as long tail claims due to the time it can takes for both claims to be reported and claims to
be settled. Late reported claims are often referred to as IBNR (Incurred But Not Reported) claims.
9.7
ISSUANCE OF SAFETY STICKERS TO MOTOR VEHICLES
It is widely acknowledged that unroadworthy vehicles are operating on a daily basis. The Commission
considers that the impounding of these vehicles would help reduce the use of these vehicles. This may
also require tougher penalties on drivers of unroadworthy vehicles as well as incentives to Police to
charge offenders.
Feedback from the Insurance Commission supports the Commission’s view that tougher penalties should
apply. In fact, the Insurance Commission suggests that fewer garages should be eligible to provide
roadworthy certificates. The Commission concurs with the views of the Insurance Commission, noting
that a reduction in unroadworthy vehicles would ultimately be expected to result in reduced
premiums.
9.8
PROCUREMENT OF DRIVING LICENSES
The Commission is aware of claims that some people are fraudulently obtaining driving licenses. This
brings into question the integrity of the agencies and its employees that issue driving licenses and is a
major concern for the safety of road users. The Commission considers that a concerted effort is
required from all relevant agencies to address this issue.
The Insurance Commission recommended in its submission that more severe penalties be introduced
(and enforced) to combat this issue. The Commission concurs with the views of the Insurance
58
Commission, noting that a reduction in fraudulently obtained licenses would ultimately be expected to
result in reduced premiums.
10.
CHANGES UNDER THE NEW REGULATORY CONTRACT
The new Regulatory Contract is largely the same as the previous one.
proposed in the new Regulatory Contract are summarised below.
10.1
The major amendments
LENGTH OF THE REGULATORY PERIOD
The new Regulatory Contract contains a regulatory period of 5 years with the option of a further 5
years subject to certain criteria being met as detailed in Section 2.5. The new Regulatory Contract will
Commence from 1 January 2013 to 31 December 2017 (both dates inclusive).
10.2
COST OF FUNDING NEXT REGULATORY CONTRACT
To ensure that money is readily available to fund the cost of any future reviews, the Commission has
included a clause in the new Regulatory Contract (refer to clause 8.3) to make it mandatory for the
GoPNG to fund the review. If the Commission notes that the GoPNG will not provide funding for the
next regulatory contract review by or towards the end of the year 2016, the Commission will seek
funding from the MVIL management. If MVIL will provide the funding for the cost of the review, this
review cost will be allowed to be recovered under the new price set for the next regulatory period.
The Commission is concerned that the cost of the review funded by the regulated entity is allowed to
be factored in the determination of the price path for period and therefore contributes towards
exponential or subsequent increases in charges/rates for the services provided each year after year.
10.3
REPORTING FRAMEWORK
A reporting framework has been included in the new Regulatory Contract as Schedule 5 with regards to
financial information of MVIL, accidents and claims information. Also refer to Appendix A in this report
for a copy. The Commission has, in the development of the Reporting Framework, sought to find a
balance between the need for detailed information for the effective monitoring and reporting of MVIL
performance and the regulatory burden the provision of the data creates.
The Commission considers that the report requirements contained in the new Regulatory Contract
strikes the correct balance and notes that the requested information mirrors that that the management
of an effective and efficient business would require to make informed decisions in its day to day
operations.
Further, the Commission will ensure that operational costs are at efficient levels so that additional
costs are not passed onto consumers. It will assist the Commission to apply a price path for regulated
services such that it reflects the efficient cost of providing compulsory third party insurance service
provided by MVIL within PNG.
a) Financial Information
It is imperative to monitor the revenues and expenses of MVIL to ensure that MVIL spends within budget
and as planned. Specifically, the Commission needs to know exactly how much is generated each from
both the regulated and non-regulated services, what portion of the cost of operation is consumed by
both the regulated and non-regulated services, monies are spent only on essential areas of their
operation, amongst other things. In doing this annually, the Commission will ensure that operational
costs are at efficient levels so that additional costs are not passed onto consumers. It will assist the
59
Commission to apply a price path for regulated services such that it reflects the efficient cost of
providing CTP insurance cover by MVIL within PNG
It should be noted that the inclusions in the new Regulatory Contract are consistent with the other
regulatory contracts issued by the Commission to regulated entities such as PNG Ports Corporation Ltd,
PNG Power, Post PNG and Water utilities.
b) Information on Accidents
It is also important that the Commission keeps track of the number of accidents occurring by vehicle
type and the amounts paid for claims by accident period and province etc. This information is required
to enable the monitoring of vehicle relativities. Vehicle relativities are required to ensure that
appropriate premiums are charged to the various vehicle types. A reporting template to this effect has
been developed and referred to in the Regulatory Contract.
c) Information on Claims
The Commission will require from MVIL the claims information to ensure that claims are paid within the
mandatory time period of 6 months that is set in the new regulatory period. As such, on a quarterly
basis, claims information by province should be furnished to the Commission inlcuding the number of
claims submissions received by MVIL, total amount of claims paid, average amount paid, total number
of claims paid (or not paid) within a quarter.
10.4
MINIMUM SERVICE STANDARDS
The Commission considers that the minimum service standards in the previous Regulatory Contract are
insufficient. Hence, the Commission has included additional service standards as outlined hereunder.
The three key areas for MVIL to improve their performance are; Third Party Insurance issuance, claim
payments and preventive measures to reduce accidents. Full details of the requirements are provided
in Schedule 3 of the new Regulatory Contract.
a) Facilities for Third Party Insurance Cover Issuance
The Commission is pleased to note that MVIL has a presence in all provincial capitals either through
itself or agencies as shown in Table 7.1. MVIL is encouraged to continue to maintain its presence,
however, the Commission urges MVIL to upgrade agencies to branch level as the way forward where
economical. As such, MVIL will be required to upgrade its operational status from an agency to branch
level for the provinces of Madang and Enga by 31 December 2013 in order to meet the demands
imposed by the increased number of motor vehicles and economic developments in the said provinces.
Other provinces operating as agencies can continue to operate as such until such time that
circumstances warrant an upgrade to branch level.
On the same note, it is of great concern to the Commission that MVIL has yet to re-open its office at
Popondetta to date. Hence, MVIL will be required to re-open its office at Popondetta by 31 December
2013.
b) Claims Assessment & Payment Facilities
The reasoning provided by MVIL for not decentralising the claims assessment and payment facilities to
other provincial centres as discussed under section 7.2(b) of this report are considered by the
Commission as insufficient. As such, the Commission will require offices to be set up in the forthcoming
regulatory period in selected provinces as a short term measure but with a view to increasing them to
other provinces where economically warranted in the long term.
60
The sites selected for the establishment of claim handling facilities in the short term are Mt. Hagen,
Goroka, Lae and Kokopo. This will result in claim handling services being available in all regions of PNG
It is anticipated that by 31 July 2015, the branches in these centres will be operational and able to
accommodate the assessment, processing and payment of claims.
The Commission has taken this measure to purposely reduce the time taken by MVIL to pay out claims
as it has caused countless and varied miseries to claimants. Currently to follow up on claims, customers
have been expending their limited resources flying in from other regions to Port Moresby only to be
faced with a lot of unexpected difficulties and delays. The regional facilities, customers can follow up
on their claims at the nearest centres additional the establishment of claim centres in all regions will
facilitate claims being processed within the required timeframe for claims settlement and discourage
claimants from travelling to the headquarter (Port Moresby) to follow-up on their claims.
It is expected that customers will pursue their claims through the nearest regional MVIL offices from
August 2015 onwards. Only claims matters that require further deliberation will be sent to the
headquarters in Port Moresby for the senior executives’ decisions.
Nonetheless, the provincial visitations will continue to be encouraged by the Commission as and when
MVIL feels necessary to attend to claims issues. A report of these visitations will also be provided to the
Commission for comments. MVIL will also be required to make direct contact with the customers using
the contact details provided in the claims application forms before these visitations. MVIL will also
have to inform customers not contacted directly through other available modes of communication such
as the print media, social media et al for three weeks prior to the dates of visitations.
Further, the Commission is pleased to note that the establishment of a new claims management system
at the headquarters in Port Moresby will reduce the time taken to assess process and pay out claims. As
such, part of the minimum service standards, MVIL will be required to pay out claims within six (6)
months from the time a claim is first lodged. Should a claim exceed 6 months without satisfactory
explanations provided to the Commission, a penalty fee of 10% will be incurred on the value of the
final claim payment for every month it exceeds beyond the period stipulated and paid to the customer.
Where MVIL considers there will be extension required, it must provide justification for the extension
to the Commission during the first week of the fifth month to avoid penalties and allow time for the
Commission and MVIL to deliberate further on the next course of action to undertake. Again, based on
the merits or otherwise of the explanations, the Commission will make a decision accordingly.
Moreover, as one of the measures to improve on turnaround time to pay claims, a toll-free telephone
number will be set up by MVIL at the headquarters in Port Moresby specifically for claimants to followup on their claims. MVIL will be required to have this service readily available by 30 June 2013. The
customers will call the toll-free telephone number free of charge with the charges by telephone
carriers charged to MVIL. The toll-free telephone number service will also be set up at the regional
centres once established.
(c) Other Service Standards
It is important for MVIL to commit to a community service obligation that is aimed at educating and
conducting awareness about safe driving practises as a measure to minimise accidents. This will be
considered as part of the minimum service standards in the next regulatory period.
The twin sticker issue is seen to be causing unnecessary inconveniences to the customers. Whilst twin
sticker issues are beyond the Commission’s jurisdiction, the Commission still believes that MVIL must
make all efforts in consultation with the relevant stakeholders, particularly the provincial government
authorities, to ensure that MVIL issues only twin stickers via all its branches and agencies throughout
the country by 31 December 2015. It would be beneficial to all parties were MVIL branches and
agencies to become a one-stop shop where both the third party insurance cover and the vehicle
registration stickers are issued as one. As part of the service standards in the forthcoming regulatory
61
period, MVIL will be required to take all necessary measures to ensure that only twin stickers are issued
before the date set herein. MVIL will also be required to provide evidence by way of furnishing
documents to the Commission that it is indeed trying its best to make it a reality.
10.5 MINIMUM SERVICE STANDARDS VERSES SENIOR MANAGEMENT REMUNERATION
The Commission would like to see that senior management who have the responsibility to ensure that
minimum service standards be held accountable should MVIL perform below expectations. Senior
management have a duty to ensure that the customer has access to quality and reliable services from
MVIL. Failure to meet the minimum service standards would see senior management of MVIL having
their remuneration reduced if sufficient explanations are not provided to the Commission. The
Commission would like to see these actions taken on an annual basis, based on objective criteria, as a
measure to maintain and improve on the service standards requirements.
These are appropriate incentives provided to MVIL to ensure that service standard requirements are
met.
10.6 COMPETITIVE PROCUREMENT PROCESS
This clause is another new performance clause included in the Regulatory Contract which allows the
Commission to ensure that, for any planned capex programmes or investment (procurement of office
building, etc.) best business practises are followed. That means that any capital investment projects
undertaken by MVIL must be competitively tendered.
10.6.1 GENERAL DUTIES AND OBLIGATIONS
In terms of any procurements, MVIL is required to provide to the Commission its Approved Annual Plans
indicating its annual capital and operational plans which it intends to undertake at a value of which
will be at or over K500,000.00. The Commission will also require documentation as evidences of any
capital and operational expenditure procurements valued to be K500,000.00 or above during previous
regulatory period, this contract period or the subsequent regulatory period as outlined in clause 6.4 of
the Final Regulatory Contract.
10.7 RING FENCING
The Commission as part of this new regulatory contract has now increased the quality and frequency of
MVIL’s reporting system to the Commission. If and when the Commission considers it appropriate to
promote competition in the market, it may require MVIL to adopt a ring fencing approach for all of its
operations and report to the Commission on an annual basis.
MVIL may be required to submit to the Commission the following;


Its Contestable and Third Party Insurance Services operated by MVIL or any relevant
shareholder of MVIL, and
Its annual reconciliation between revenues and costs delivered by both the Regulated and Nonregulated services such as issuance of drivers’ licences, registration of safety stickers, transfer
of registration titles, plates, etc provided by MVIL or relevant shareholder of MVIL.
The reporting template for the regulated and non-regulated services must be completed and submitted
to the Commission by no later than 30 June of each regulatory period. This information must be tied
back to either, audited financial statements where available or monthly management reports to the
board, where audited financial statements are not available. Importantly, the audited financial
62
statements do not necessarily need to be signed by the Auditor General, rather must have cleared all
other audit standards that is signed by a qualified accountant as required by the regulatory contract.
63
APPENDIX
A.
Reporting Framework
1.
Financial Information
Reporting Template
Branch Name
Current Year
Total
Previous Year Total
Comments
Revenue*
A
Direct Operating costs*
B
Indirect Operating costs*
C
Total operating costs*
D=B+C
Surplus/Deficit for the
E=A-D
branch
 * denotes that the information must tie back to either, audited financial statements – where
available, or monthly management reports to the Board of Directors – where audited financial
statements are not available.

a)
Revenue – refers to revenues from both regulated & non-regulated services.
MVIL regulated business
Vehicle Class
Revenue*
1) Trailer
2)
Tractor/Trade Plate
3)
Motor Cycle
4)
5)
6)
Utility -Private
7)
Larger Car (excl Utility) -Private
8)
9)
Current
Year Total
A
10) Utility exceeding 1.25 tonne
11) PMV Buses
Direct operating costs*
Indirect operating cost*
Total Operating Costs
B
C
D=B+C
64
Previous Year
Total
Comments
Surplus/Deficit For The Class
E=A-D

* denotes that the information must tie back to either, audited financial statements – where

Revenue – refers to total of gross premiums from the different vehicle types listed. It also
includes VAT and levies for the Insurance Commission and NRSC etc.
b)
Information on both regulated and non-regulated services
Current
Revenue
Total Business Revenue
Regulated Services
Vehicle Registration
Licenses
Replacement of Registration Sticker
Replacement of Registration Sticker PMV
Transfer of Registration Plate Number
Trader Plate
Plate for use on a motor vehicle
Plate for use on a motor cycle
Replacement - certificates for trade
plates
Trailers
Substitute of Registration Certificate
Release of Information - Provision
others
Non Regulated Services
Year
Total
Previous
Year Total
Revenue
Comments
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O=B+C+D+E+F+G+
H+I+ J+K+L+M+N
Other revenues
TOTAL REVENUE*

Regulated Services – refers to revenues received from the issuance of CTP motor vehicles
insurance which includes VAT and levies for the Insurance Commission and NRSC.

Other revenues – refers to revenues collected from sources other than those mentioned and
needs to be explained; e.g. aid grant etc.
Total Business Costs
Current Year Total
Regulated services (direct)
Regulated services (indirect)
Total regulated
Unregulated services (direct)
Unregulated services (indirect)
Total Unregulated services
A
B
C=A+B
D
E
F=D+E
65
Previous
Year Total
Comments
Other costs
Total costs

G
H=C+F+G
Other costs - all other costs to be explained; e.g. interest on loans etc.
Total business payments
Funded by regulated services
Funded by unregulated services
Total Dividend*
Current Year Dividends Previous
or capital return# Total Year Total
A
B
C=A+B
Comments

* denotes that the information must tie back to either, audited financial statements – where

#
separately report dividends from capital returns.
Note: For the avoidance of doubt Audited Statements can include statements which have prepared and
reviewed by an auditor but not signed off by the Auditor General of PNG.
2.
Information on Accidents
a) Accidents Information per Vehicle Class
Vehicle Class
No. of Accidents
Trailer
Tractor/Trade Plate
Motor Cycle
Utility -Private
Larger Car (excl Utility) -Private
exceeding 1.25 tonne
PMV Buses
66
Amount Paid
Province
b) Information on Claims
Provinces
by Region
Total # of
claims
received
Total # of
claims
paid
Total
amount
paid (K)
Average
amount
paid per
claim (K)
Total # of
claims paid
within 3
months
Total # of
claims not
paid within 3
months
1. Highlands
a) Hela
b) SHP
c) Enga
d) WHP
e) Jiwaka
f) Simbu
g) EHP
2. Momase
a) WSP
b) ESP
c) Madang
d) Morobe
3. Islands
a) Manus
b) NIP
c) ENBP
d) WNBP
e) AROB
4. Southern
a) MBP
b) Northern
c) Central
d) NCD
e) Gulf
f) Western
Note: To avoid any confusion Hela = Hela Province, SHP = Southern Highlands Province, Enga = Enga
Province, WHP = Western Highlands Province, Jiwaka = Jiwaka Province, Simbu = Simbu
Province, EHP = Eastern Highlands Province, WSP = West Sepik Province, ESP = East Sepik
67
Province, Madang = Madang Province, Morobe = Morobe Province, Manus = Manus Province, NIP =
New Ireland Province, ENBP = East New Britain Province, WNBP = West New Britain Province,
AROB = Autonomous Region of Bougainville, MBP = Milne Bay Province , Northern = Northern
Province, Central = Central Province,NCD = National Capital District, Gulf = Gulf Province and
Western = Western Province.
68

so - Independent Consumer and Competition Commission

Transcription

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