Comcare statement for the year ended 30 June 2017

OVERVIEW

Objectives of Comcare

Comcare is a Commonwealth corporate not-for-profit entity and is the statutory body responsible for administering the Commonwealth's workplace health and safety framework, statutory framework for rehabilitation and workers' compensation, and common law liabilities for asbestos compensation.

Comcare is structured to meet the following outcomes:

Outcome 1: Support participation and productivity through healthy and safe workplaces that minimise the impact of harm in workplaces covered by Comcare.

Program component 1.1 Work Health, Safety and Rehabilitation Regulation
Program component 1.2 Comcare Workers' Compensation Scheme Management
Program component 1.3 SRCC and Seacare Authority Support
Program component 1.4 Premium Claims
Program component 1.5 Pre-premium Claims
Program component 1.6 Asbestos Claims

The Basis of Preparation

The financial statements are general purpose financial statements and are required by section 42 of the Public Governance, Performance and Accountability Act 2013.

The financial statements have been prepared in accordance with:

Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 (FRR) for reporting periods ending on or after 1 July 2015.

Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) that apply for the reporting period.

The financial statements have been prepared on an accrual basis and in accordance with the historical cost convention, except for certain assets and liabilities at fair value. Except where stated, no allowance is made for the effect of changing prices on the results or the financial position. The financial statements are presented in Australian dollars.

New Australian Accounting Standards

Adoption of New Australian Accounting Standard Requirements

No accounting standard has been adopted earlier than the application date as stated in the standard.

The following new standards were issued prior to the signing of the statement by the accountable authority and Chief Financial Officer, were applicable to the current reporting period and had an effect on the entity's financial statements.

Standard/ Interpretation

Application date

Nature of impending change/s in accounting policy and likely impact on initial application

AASB 124 Related
Party Disclosures

1 July 2016

Entities are required to report their related party transactions in their disclosure notes to the financial statements. The standard also imposes disclosure obligations on Ministers including Assistant Ministers and Parliamentary Secretaries as they are key management personnel of the Government.

Future Australian Accounting Standard Requirements

The following new standards, revised standards, interpretations and amending standards issued by the Australian Accounting Standards Board prior to the sign-off date are not expected to have a financial impact on Comcare for future reporting periods but will affect disclosures.

Standard/ Interpretation

Application date

Nature of impending change/s in accounting policy and likely impact on initial application

AASB 15 Revenue from Contracts with Customers

1 July 2017

This standard establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers, with revenue recognised as 'performance obligations' are satisfied.
Comcare will assess the likely impact of this standard on Comcare's financial statements for future periods.

AASB 9 Financial Instruments

1 January 2018

This standard simplifies the classifications of financial instruments into those to be carried at amortised cost and those to be carried at fair value. The new standard also:

  
  • simplifies requirements for embedded derivatives
  • removes the tainting rules associated with held-to-maturity assets
  • provides an opportunity to fair value investments in equity instruments to other comprehensive income, with no separate impairment test, whilst taking dividends to income
  • requires entities to reclassify their financial assets when there is a change in the entity's
    business model.
  

Comcare will assess the likely impact of this standard on Comcare's financial statements for future periods.

AASB 16 Leases

1 January 2019

AASB 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligations to make lease payments.
AASB 16 substantially carries forward the lessor accounting requirements in AASB 117 Leases. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two type of leases differently.
AASB 16 requires enhanced disclosures for both lessees and lessors to improve information disclosed about an entity's exposure to leases.

Significant accounting judgements and estimates

Comcare's compensation schemes exhibit many of the characteristics of an insurance business. Comcare's statutory relationship with its customers and the Commonwealth is not of the nature of an insurance contract as defined under AASB 1023 General Insurance Contracts. Comcare regards the application of AASB 137 Provisions, Contingent Liabilities and Contingent Assets in the valuation of its claims provisions as more appropriate.

The valuation of workers’ compensation claims liabilities was undertaken as at 30 June 2017 by independent consulting actuaries, Taylor Fry Pty Ltd (Taylor Fry). The valuation of common law asbestos-related disease claims liabilities was undertaken as at 30 June 2017 by independent consulting actuaries, Finity Consulting Pty Ltd (Finity).

The provisions represent an estimate of the present value of future payments in respect of claims for events occurring before 30 June 2017 with a 75% probability of sufficiency. The estimated cost of claims includes direct expenses to be incurred in settling claims. Expected value of recoveries from third parties is included in Trade and Other Receivables.

Comcare takes all reasonable steps to ensure that it has appropriate information regarding its claims exposures. However, given the uncertainty in establishing the claims provisions, it is likely that the final outcome will prove to be different from the original liability established.

Many sources of uncertainty exist when estimating a “long tail” provision. There are some general sources of uncertainty and these arise from:

  • the actuarial models and methods which may not exactly match the underlying claims process
  • past claim fluctuations which may create uncertainty in selecting model parameters
  • unavailable data or undetected errors in data which may result in inappropriate parameters being selected
  • future economic and environmental conditions which may be different to those assumed
  • future claim fluctuations, resulting in uncertainty of the projected liability, even if the model and its parameters were perfect.

Taxation

Comcare is exempt from all forms of taxation except Fringe Benefits Tax and the Goods and Services Tax.

Principles of accounting for workers' compensation claims

Comcare manages workers' compensation claims for Commonwealth employees and employees of the ACT Government under the Safety, Rehabilitation and Compensation Act 1988 (SRC Act). Workers' compensation claims for work related injuries and illness sustained on or after 1 July 1989 are referred to as 'premium claims' or 'premium business'. Workers' compensation claims for work related injuries sustained by Commonwealth employees prior to that date are referred to as 'pre-premium claims' or 'pre-premium business'.

For premium claims, premiums are received from employers covered under the SRC Act. They are calculated using a system and methodology developed by an independent actuary and are intended to fully cover all liabilities incurred over the life of these claims. All premiums are charged up front for the full financial year. There are no unearned premiums or deferred acquisition costs at the end of the financial year. Changes to premiums arising from wage and salary adjustments are recognised in the year they become payable or receivable.

Pre-premium claims are funded by parliamentary special appropriations on an emerging cost basis.

In accordance with section 128A of the SRC Act, a provision is not required to be made for liabilities incurred prior to 1 July 1989 in respect of public trading or government business enterprises.

Claims provisions

The valuation of workers’ compensation claims liabilities was undertaken as at 30 June 2017 by independent consulting actuaries, Taylor Fry Pty Ltd.

The valuation of common law asbestos-related disease claims liabilities was undertaken as at 30 June 2017 by independent consulting actuaries, Finity Consulting Pty Ltd.

The liability for workers’ compensation claims (both premium and pre-premium) and common law asbestos-related diseaseclaims are determined in accordance with the requirements of AASB 137 Provisions, Contingent Liabilities and Contingent Assets. Provisions for claims are recognised when:

  • Comcare has a present legal or constructive obligation as a result of past events
  • it is probable that an outflow of resources will be required to settle the obligation
  • the amount has been reliably estimated.

Where there are a number of similar obligations for each claim type, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same claim type may be small.

The expected future payments are discounted to present value using a risk free rate. The expected future payments include claims reported but not yet paid, claims incurred but not reported (IBNR) and anticipated claims handling costs. Claims handling costs can either be associated directly with individual claims, such as legal and other professional fees, or associated indirectly with individual claims, such as claims administration costs.

Workers' compensation claims provisions

There are specific sources of uncertainty arising from the nature of the schemes and the data. Allowance is made, however, for changes or uncertainties which may create distortions in the underlying statistics or which might cause the future cost of claims to increase or decrease when compared with past cost of claims including:

  • trends in long-term weekly income replacement benefit and medical cost continuance rates
  • the longer lag times between injury and claim relative to other workers’ compensation schemes
  • movements in industry benchmarks
  • changes in service delivery which might accelerate or slow down the development and/or recording of paid or incurred claims,
    compared with the statistics from previous periods
  • changes in the legal environment
  • medical and technological developments.

The injury profile within the schemes creates dynamic expenditure patterns. Typically injuries can be of an immediate and short-term duration as well as those which are more permanent resulting in long-term entitlements. Historically, the expenditure trend does concentrate earlier (the discounted mean term of the liabilities is approximately 8 years). However, the provisions have a long tail element where payments are expected to be made for the next 50 or more years.

For the purpose of estimating the workers’ compensation provisions Taylor Fry considers the varying types of benefits. These include the following:

  • incapacity payments, split between short-term and long-term payments
  • medical and rehabilitation expenses
  • legal expenses
  • other, including permanent impairment, non-economic loss payments, death, common law and other payments.

In calculating the estimated cost of future workers’ compensation claims, Taylor Fry uses a variety of estimation techniques, generally based upon statistical analysis of historical experience, which assumes that the development pattern of the current and future claims will be consistent with past experience.

The sensitivity analysis shown below attempts to quantify some of the significant uncertainty around the valuation estimates. It is not intended to be comprehensive and uncertainty remains in other areas. It shows that, notwithstanding the substantial downward adjustment in the liability as a result of changes in the assumptions for valuations, the risk of over or underestimating the liability remains. At the same time, these results show there is still room for further decline in expenditure under assumptions that would not be unreasonable given recent experience.

Details of the specific assumptions used in deriving the claims liabilities at year end are detailed in Notes 2.4D-G.

Premium Business

The value of the provision for premium claims liability has reduced by $338m in 2016-17 ($67m reduction in 2015-16).

Changes to premium claims liability

$m

Opening balance of gross liability as at 1 July 2016

2,767

Roll forward adjustment to 30 June 2017

56

Projected gross liability as at 30 June 2017

2,823

Changes in economic assumptions

(47)

Number of claimants currently receiving incapacity and/or medical payments lower than forecast

(172)

Number of new claimants receiving incapacity and/or medical payments lower than forecast

26

Changes to shorter-term continuance rates

(87)

Continuance rates at longer durations since injury, including the impact of retirement

(142)

Claims administration expenses

(41)

Reductions in the assumed average quarterly payments

(18)

Incapacity compensation extended to State Pension Age

82

Other

5

Closing balance of gross liability as at 30 June 2017

2,429

Commonwealth latent mental disease claims

Comcare carried out analysis of data in relation to latent mental disease claims and has recognised a separate provision for liability arising from constructive obligations existing before the date of injury, but after the date of exposure to the cause of injury. This accounting practice recognises the liability before Comcare's legal obligation to provide compensation under the SRC Act. The additional liability cannot be funded from premiums until the year in which the resulting injuries occur.

Premium business sensitivity analysis

As the workers’ compensation provisions are subject to a variety of assumptions, it is considered prudent to disclose what the sensitivities of the significant assumptions could be. In its report, Taylor Fry has provided the following information regarding areas of uncertainty and key risks.

Longer-term continuance rates

The valuation estimate is extremely sensitive to the assumed longer-term continuance rates (for claims of 12.5 or more years since injury). Past longer-term continuance rates have shown considerable variability from year to year and estimates of future longer-term continuance rates are highly uncertain. If continuance rates for incapacity and medical payments were to reach levels 0.3% and 0.4% higher respectively than those assumed for this valuation – a plausible increase given historical variability in these rates – the central estimate of the liability would increase by around $129m. However, if experience were to move in the opposite direction, then the liability would decrease by around $104m.

Shorter-term continuance rates

The liability estimate is highly sensitive to forecast short term continuance rates (for payments of less than 12.5 years since injury). In the past there has been considerable quarterly variation in short term continuance rates, increasing the uncertainty of estimates. If short term continuance rates on both incapacity and medical payments were to reach levels 0.5% per quarter higher than forecast, then the central estimate of liability would increase by around $145m. However, if experience was 0.5% per quarter lower than forecast, the central estimate of liability would decrease by $126m. Both these scenarios can be considered moderate variations in continuance rate assumptions given the historical variability in continuance rates.

Mental disease claims

There is considerable uncertainty about the ultimate number of mental disease claims that will receive at least one incapacity payment for the 2016 and later injury years. The projected numbers of accepted mental disease claims for the 2016 and 2017 injury year are 55% and 52% lower respectively than 2013. If the number of accepted mental disease claims for 2016 and later injury years are understated by 15% then the central estimate would increase by about $26m.

Unit administration expenses remain at 2015-16 level

Administration expenses per service unit increased during 2015/16 due to fewer open claims, fewer claims reports and external claims management trials. It is assumed that the cost per weighted service unit will decrease progressively after 2016/17 to return to the average cost per weighted service unit over 2010/11 to 2014/15. If the cost per weighted service unit remains at the 2015/16 level in the future for both Commonwealth Current and ACT customers, then the liability estimate would increase by $31M.

The illustrative alternative valuation assumptions considered in the analysis are intended to provide some indication as to the relative sensitivity of the estimate to changes in some of the assumptions used. The range of the values considered in this analysis should not be considered as necessarily presenting a "reasonable" range of possible outcomes.

It should also be noted that the analysis considers the impact of changes in each factor in isolation. In reality, several factors might vary at the same time. Hence the combined effect of several variations from the assumptions could be significantly greater than the variation indicated for each factor in isolation. No reliance should be placed on this analysis in regards to the level of uncertainty in the estimates. This has been modelled and quantified separately by Taylor Fry in arriving at a provision for premium claims liabilities where a 13% risk margin has been applied to the central estimate, which gives an intended 75% probability of sufficiency.

Economic assumptions

This provision is sensitive to interest rate assumption changes as Taylor Fry calculates the future cash flows and then discounts these future values to the present value using the discount rate. The level of the discount rate, while not affecting the projected future cash flows themselves, will alter the present value assigned to those cash flows, and hence the estimate of the liability.

Using a discount rate 1% higher would decrease the central estimate of the liability by $154m while a discount rate 1% lower would increase the liability by $182m.

Common law asbestos-related disease claims

The estimated cost of asbestos-related disease claims is by its nature highly uncertain. In projecting future events which may not occur for 40 to 50 years the actuary is extrapolating disease incidence numbers many years beyond the data from which the projection models have been calibrated. Further, in projecting the future cost of compensation in a common law system the actuary needs to consider the potential for the claims and litigation environment to change. The outlook for future compensation costs for asbestos litigation in general and for Comcare’s liabilities in particular contains a great number of uncertainties in relation to factors such as:

  • the number of diagnosed incidences of asbestos-related diseases
  • the proportion of cases being compensated
  • medical diagnostic and treatment improvements
  • the litigation environment, including legal precedents and court procedures
  • the cost per claim and the contribution from co-defendants.

Sensitivity analysis performed by Finity Consulting indicates that the net central estimate liability, including expenses, may vary by approximately -$125m to +$180m (i.e. -20% to +28%) as a result of some plausible changes in the valuation basis. This illustrates the uncertainty inherent in the projections. It is possible that a number of these changes could occur simultaneously, resulting in even larger changes. Each of the scenarios in the sensitivity analysis lies within the selected risk margin (which is 40% of the central estimate).

Disclosure of funding for Comcare

Premium Business

Premium business refers to workers’ compensation claims resulting from injuries that have occurred since 1 July 1989.

In accordance with section 97C of the SRC Act, Comcare calculates premiums to be charged for each financial year based on the expected costs for claims when the date of injury, as defined in the SRC Act, is in that year. The calculation of the Comcare premium pool takes into account actual and notional interest expected to be earned on the premium funds collected.

Prior to being repealed (effective 1 July 2002), subsection 97A(1) of the SRC Act required that premiums collected by Comcare be paid to the Australian Government. These funds will be returned to Comcare through parliamentary appropriations as required for payment of claims relating to incidents occurring after 1 July 1989. As at 30 June 2017 the notional balance of these funds was $1,541.6m (2016: $1,519.0m). This appropriation is only payable to Comcare after it has exhausted all of its retained funds. Premiums received from 1 July 2002 are retained by Comcare.

The funds held with the Australian Government earned notional interest of $22.6m in 2016-17 (2016: $27.9m) calculated as part of the requirements of Section 90C of the SRC Act. This interest was added to the balance of the notional reserve as at 30 June 2017. The interest rate used is the rate of return on six month overnight indexed swaps as reported by the Reserve Bank of Australia.

Independent actuarial assessment has established that the actuarial liability for the premium business claims as at 30 June 2017 is $2,429.1m (2016: $2,767.5m).

The following table summarises the sources of funds available to Comcare to settle the outstanding claims for the premium business.

 


Note

2017
$'000

2016
$'000

Net premiums held in the Commonwealth Consolidated Revenue Fund

 

1,541,614

1,518,996

Cash and cash equivalents

 

934,371

788,105

Actuary assessed third party recoveries

 

8,400

9,600

Actuary assessed gross outstanding liability for payment of premium related claims*

2.4D

(2,429,100)

(2,767,500)

Funding of claims liabilities

 

55,285

(450,799)

* Excludes $17.0m for additional latent mental disease claims where the date of injury as defined in the SRC Act is after balance date. Refer to Note 2.4E for Commonwealth latent mental disease claims provision.

Pre-premium business

Workers’ compensation claims resulting from injuries that occurred prior to 1 July 1989 are referred to as ‘pre-premium’ claims. Expenses associated with these claims are funded from Australian Government special appropriations. Independent actuarial assessment has established that the outstanding liability for these claims as at 30 June 2017 is $347.9m (2016: $373.6m).

The following table summarises the sources of funds available to Comcare to settle the outstanding claims for the pre-premium business.

 


Note

2017
$'000

2016
$'000

Special appropriation receivable

 

364,235

386,258

Cash and cash equivalents

 

(16,335)

(12,658)

Actuary assessed gross outstanding liability for payment of pre-premium related claims

2.4F

(347,900)

(373,600)

Surplus funds in excess of claims liabilities

 

-

-

Asbestos-related disease business

Comcare is also responsible for the management of asbestos-related personal injury common law disease claims against the Commonwealth. Expenses associated with these claims are funded from Australian Government special appropriations. Independent actuarial assessment has established that the outstanding liability for these claims as at 30 June 2017 is $969.9m (2016: $1,070.6m).

The following table summarises the sources of funds available to Comcare to settle the outstanding claims for the asbestos-related disease business.

 


Note

2017
$'000

2016
$'000

Special appropriation receivable

 

798,602

897,431

Cash and cash equivalents

 

44,478

31,469

Actuary assessed third party recoveries

 

126,840

141,680

Actuary assessed gross outstanding liability for payment of asbestos-related claims

2.4G

(969,920)

(1,070,580)

Surplus funds in excess of claims liabilities

 

-

-

Events after the reporting period

There was no subsequent event that had the potential to significantly affect the ongoing structure and financial activities of Comcare.