Report on the costs of the Australian Government’s
Run-Off Cover Scheme for medical indemnity insurers
A.1.1 ROC support payments are paid to Medicare Australia (formerly the Health Insurance Commission) in the form of an annual lump sum imposed as a tax on each MII from 1 July 2004. The lump sum is intended to cover the cost of claims and the MII’s administration costs.
A.1.2 The amount of support payments is calculated as a percentage of premium income received from contributing doctors. The calculation rules are set out in the ROCSPA and regulations. The tax imposed on each MII is the applicable percentage of the insurer's premium income (section 6) for the applicable contribution year ending on 30 June or an alternative date specified in the regulations (section 5).
A.1.3 All MIIs except for AMIL were required to remit their first ROC support payments on 30 June 2005. Since AMIL’s policy year is a calendar year, it was not required to remit ROC support payments until 31áDecember 2005.
A.1.4 Under section 7, a MII's premium income for the purpose is the sum of all of the premiums paid to the insurer for medical indemnity cover provided for medical practitioners, reduced according to the formula:
Premium income equals
Net premium minus Net premium Î Applicable percentage ¸ (1 + Applicable percentage)
A.1.5 Net premium is calculated according to section 7 as follows:
- sum of all premiums paid to the insurer during the operation of the ROC Scheme for medical indemnity cover provided for medical practitioners (including subsidy payments made to the insurer on behalf of medical practitioners to assist with the cost of purchasing medical indemnity cover under s 43(1) Medical Indemnity Act) (sub-sá(1));
- minus the amount of GST payable (sub-s (2)(a)) and the amount of stamp duty payable (sub-s (2)(b)) in relation to the premiums;
- plus/minus other payments specified in the regulations.
A.1.6 The applicable percentage is specified in the regulations as 8.5áperácent for all insurers except AMIL who has a higher percentage of 9.5625áperácent in place for the next four years.
A.1.7 The effect of all of this is that the ROC support payment is currently calculated as:
Net premium Î 8.5áperácent ¸ 1.085 for all MIIs except AMIL, and
Net premium x 9.5625áperácent ¸ 1.095625 for AMIL.
A.2.1 Eligible doctors are medical practitioners who satisfy one or more of the following eligibility criteria at the time the claim (or medical incident) is first notified to the MII or MDO (section 34ZB(2) of the Medical Indemnity Act):
- 65 years or older and permanently retired from private medical practice;
- has not engaged in private medical practice during the preceding three years and states that he/she will not return to medical practice;
- dead (provided that a claim can be made against the deceased’s estate through a legal representative);
- ceased practice due to permanent disability (subsection (4B));
- ceased practice because of maternity (subsection (4A));
- is specified in the Medical Indemnity Regulations 2003 (regulation
12) to be eligible:
- overseas trained doctors who held a 422 or 457 visa and who have ceased medical practice and do not reside in Australia;
- doctors who only provide gratuitous services and who are 65 or older, or have not been in paid practice for the previous three years, or are on maternity leave or are permanently disabled; and
- public sector doctors who are are 65 or older and have retired permanently from medical practice, or have not engaged in medical practice for the previous three years.
Provision and notification of compulsory run-off cover
A.2.2 The last medical indemnity insurer is required to provide run-off cover to an eligible doctor under section 26A of the PSPS Act.
A.2.3 The compulsory run-off cover must encompass the same nature and range of incidents as the last medical indemnity cover held by the eligible doctor (subsection 26A(4)(b)).
A.2.4 Section 26D compels MIIs to notify eligible practitioners of:
- the nature and range of incidents encompassed by the compulsory run-off cover; and
- the terms and conditions on which it is provided.
The compulsory run-off cover is taken to be a contract of insurance between the MII and the eligible practitioner for the purposes of the PSPSáAct (section 26E).
A.3.1 The legislation defines claims broadly. Claims need not involve legal proceedings. Claims may include civil claims for negligence, administrative proceedings, disciplinary proceedings (including those performed by a professional body) and inquiries or investigations into conduct (subsection 4(1) of the Medical Indemnity Act).
A.3.2 The ROC Scheme applies to claims notified to the MII on or after 1áJulyá2004 by eligible doctors. It indemnifies MIIs and MDOs in relation to eligible claims made against eligible medical practitioners. The Commonwealth is liable to pay run-off cover indemnities in relation to eligible claims (sectioná34ZC) regardless of whether the MII or MDO has sought private reinsurance (section 34ZF).
A.3.3 A run-off claim is eligible under subsection 34ZB(1) if
- it is made by an eligible practitioner under subsection 34ZB(2) (see Appendix 2);
- it relates to incident(s) occurring in connection with a person's practice as a medical practitioner (see paragraph 34ZB(1)(b));
- at the time of the incident a contract of insurance or an arrangement with an MDO provided medical indemnity cover in accordance with the Medical Indemnity (Prudential Supervision and Product Standards) Act 2003 (PSPS Act) for the person (see paragraph 34ZB(1)(c)); and
- the person is indemnified for the claim in accordance with section 26A of the PSPS Act or incident-occurring based cover provided by an MDO (paragraph 34ZB(1)(e)).
A.3.4 The practical implementation of these eligibility rules will be refined and further codified as they are applied over time.
A.3.5 Applications for ROC indemnity payments must be notified to Medicare Australia (section 36 of the Medical Indemnity Act). They are paid by the CEO of Medicare Australia before the end of the month that immediately follows the month in which the MII applies for the indemnity (section 37).
A.3.6 The ROC Scheme operates after the High Cost Claims Scheme (HCCS). Thus, part of the cost of eligible large claims is first met by the HCCS with the rest being picked up by the ROC Scheme (subsection 34ZH(2)). The HCCS meets 50áperácent of total costs incurred in relation to an eligible ROC claim exceeding $300,000.
Components of the ROC Scheme costs
A.4.1 It is helpful to consider two relevant pools of practitioners:
- doctors eligible for the ROC Scheme as at 30 June 2005; and
- doctors practising as at 30 June 2005.
A.4.2 ROC Scheme liabilities for the first group relate solely to medical incidents occurring prior to 30 June 2005. We have relied directly on information provided by actuaries of the MIIs to estimate these liabilities.
A.4.3 ROC Scheme liabilities for the second group relate to both:
- medical incidents occurring prior to 30 June 2005. We have relied directly on information provided by actuaries of the MIIs to estimate these liabilities; and
- medical incidents occurring after 30 June 2005. These new liabilities were projected using a model developed for the purpose within this office.
Information provided by the MIIs
A.4.4 We have relied directly on information provided by actuaries of the MIIs to estimate the ROC Scheme liabilities related to all medical incidents occurring prior to 30 June 2005.
A.4.5 Information was provided by the MIIs and MDOs in relation to projected future payments for:
- ROC claims notified as at 30 June 2005; and
- ROC incurred-but-not-reported (IBNR) claims as at 30 June 2005.
A.4.6 Table 8 below summarises the estimated accrued ROC Scheme liabilities as at 30 June 2005. The liabilities are divided into those attributable to claims notified as at 30 June 2005 and those attributable to IBNR claims as at 30áJuneá2005.
Table 8: ROC Scheme liabilities related to medical incidents prior to 30 June 2005
|Estimated liabilities for future ROC indemnity payments made by
MIIs in relation to claims notified as at 30 June 2005.
|Estimated future ROC indemnity payments in relation to IBNR
claims as at 30 June 2005.
|Total ROC Scheme liabilities.||$30.3 million*|
* Numbers do not add due to rounding.
A.4.7 The Government will fund the ROC claims cost of those practitioners who were eligible for cover at the commencement of the scheme. It is not possible to estimate this component of the liability with any precision. However, for the purpose of this report, the 30 June 2005 liability has been assumed to be split in the following way to give broad consistency with the results of our own model.
- $9 million in respect of doctors eligible for the ROC Scheme as at 1áJuly 2004.
- $9 million in respect of doctors who became eligible for the ROC Scheme during the 2004-05 financial year.
- $12 million in respect of practising doctors who were not eligible for the ROC Scheme as at 30 June 2005.
A.4.8 The actual value of the Government obligation will not be known for a number of years but estimates will become more reliable with time.
A.4.9 Projected payments in relation to medical incidents occurring before 30áJune 2005 were aggregated directly from estimates provided by actuaries of the MIIs.
Description of the model used to project the accrual of new ROC Scheme liabilities during 2005-06
A.4.10 The accrual of new ROC Scheme liabilities during the 2005-06 financial year relates to doctors practising as at 30 June 2005 and medical incidents occurring after 30 June 2005. The projected accrual of ROC Scheme liabilities was based on a model developed for the purpose.
A.4.11 The approach involved projecting the expected future ROC indemnity payments for each doctor who was practising as at 30áJuneá2005. Projection of indemnity payments entailed the projection of:
- incidents which will result in a claim;
- the delay involved in notification of claims;
- the cost of claims after allowing for the HCCS;
- the likelihood of eligibility for the ROC Scheme at the time a claim is notified; and
- the delay involved in the payment of notified claims.
Components of claim cost
A.4.12 For the purposes of the model, a ROC claim includes any claim notified and finalised at direct cost to the MII. Claim costs include all costs which are directly attributable to the claim. Internal claims administration costs are dealt with separately.
A.4.13 Directly attributable claim costs include damages, plaintiff legal costs to the extent that they are awarded, and defence costs to the extent that they are directly attributable to the claim.
A.4.14 Internal claims administration costs have been estimated at 5áperácent of the direct cost of each claim for the purpose of this report. Where a ROC claim is partly covered by the HCCS, the allowance for claims administration paid under the ROC Scheme is assumed to be 5áperácent of the total claim cost, including the portion covered by the HCCS.
Claim frequency assumptions
A.4.15 Claim frequency and claim size assumptions were made in light of information provided by the actuaries of the MIIs.
A.4.16 The overall claim frequency was assumed to be 5áperácent. That is, on average each ‘at-risk’ doctor was assumed to have a 5áperácent chance of being involved in a medical incident in the next year which will result in a future medical indemnity claim. Individual claim frequencies were adjusted based on premium as discussed below.
A.4.17 Doctors with standard medical indemnity premiums of less than $1,500 were excluded from the analysis in order to ensure that only genuine ‘at-risk’ doctors were the focus of the investigation. The excluded group contained students, interns, trainees and hospital indemnified doctors in some of the data provided by the MIIs. In all 53,079 practising doctors have some standard premium, and after excluding 20,425 with premiums of less than $1,500 we were left with 32,654 ‘at-risk’ doctors and we have set our claim frequency assumption at 5áperácent with the intention of being consistent with this.
Adjustment to individual claim frequencies based on premium
A.4.18 The likelihood of future notifications of ROC claims was projected according to the assumed ‘riskiness’ of each individual doctor. The risk of medical indemnity claims posed by each practitioner was determined based on risk categorisation. Doctors were categorised according to specialisation, age, gender and MII.
A.4.19 The average premium for each risk group was used as a proxy for the risk of medical indemnity claims. The claim frequency for each group was multiplied by the ratio of the premium for the group and the premium of the entire cohort of ‘at-risk’ doctors.
A.4.20 Although insurance premiums are broadly determined in line with claim risk, the premium of a group is at best an imprecise proxy for risk. For example, market and financial considerations affect premiums charged. However, given the data available, relative premiums have been assumed to be a reasonable means of categorising doctors according to their risk of medical indemnity claims for the purposes of this model.
A.4.21 Insurance premiums tend to diminish for doctors towards retirement age. This supports the suggestion that doctors tend to wind down their practice hours and possibly perform fewer risky medical procedures (for example, surgery) as they approach retirement. The possible reduction in risk towards retirement is apparent from the pattern of relative premiums for ‘at-risk’ male doctors shown in Figure 6 below. The pattern is less obvious for females, given the low proportion of females in the oldest cohorts.
Figure 6: Relative standard premiums by age for male doctors
* The graph includes all male practitioners with premiums of at least $1,500 from all MIIs except AMIL. Gender information was not available for AMIL practitioners.
A.4.22 The model does not impose an assumed pattern of ‘winding down of risky practice’ with age. Reduction in claim risk is accounted for in the model to the extent that it is reflected in diminishing premiums.
Claim size assumptions
A.4.23 Claim sizes were assumed to increase with the delay to notification, on the basis that claims which take longer to report tend to be bigger on average for example, cerebral palsy cases.
A.4.24 The assumed claim reporting pattern is shown in Table 9 below. Claim sizes presented in the table do not include allowance for inflation or superimposed inflation. Adjustment for inflation and superimposed inflation is discussed below.
A.4.25 The claim reporting pattern is based on the reporting patterns provided by two of the MIIs.
Table 9: Claim reporting and size pattern
|Development year||Proportion of number of claims notified (per cent)||Gross average claim size|
* Gross average claim sizes presented in the table are intended to be in 2005 dollars and do not include allowance for inflation and superimposed inflation.
A.4.26 Claims cost net of high cost claim indemnities is calculated assuming that the HCCS threshold will change such that a constant proportion of the gross average claim size will be met by the HCCS. Thus, for simplicity, the HCCS threshold is assumed to increase in line with claims inflation over time. The model effectively assumes that 24áperácent of the total discounted claims cost will be met by the HCCS and 26áperácent of the ROC discounted claims cost will be met by the HCCS.
A.4.27 The projected ROC claims cost is very sensitive to the proportion of claims which are assumed to be reported late. The longer the delay between the incident and the claim, the greater the likelihood that a doctor will be eligible for the ROC Scheme at the time the claim is notified. Thus, a small change in the assumed proportion of late reported claims can have a significant impact on the estimated ROC claims cost.
Probability of a claim falling under the ROC Scheme
A.4.28 The model involved projection of the proportion of the total accrual of liabilities which falls under the ROC Scheme.
A.4.29 A practitioner can become eligible for the ROC Scheme by reason of
- retirement at 65 years and older;
- resignation; or
- satisfaction of other eligibility criteria specified in the regulations.
A.4.30 The probability of becoming eligible for the ROC Scheme was estimated for each practitioner based on their age as at 30 June 2005 and their sex. Note that practitioners do not become eligible by means of resignation until three years have passed since cessation of practice.
A.4.31 The estimated likelihood of doctors becoming eligible for the ROC Scheme was overlayed on the projected claim notifications to give the projected ROC claim notifications for each doctor. The expected notified claims cost was multiplied by the likelihood of eligibility in each future year, and summed across all practitioners to arrive at the expected cost of ROC claims notified in that year.
A.4.32 In other words, the total ROC claim notifications were calculated as the scalar product of the vector of claim notifications and the vector of probabilities of ROC Scheme eligibility for each practising doctor in each future year.
A.4.33 It was assumed that on average doctors who become eligible for the ROC scheme do so half-way through each financial year.
A.4.34 The probabilities of death and disablement were assumed to be an increasing multiple of the probabilities of death in Australian Life Tables 2000-02 (ALT 2000-02). The probabilities of death were assumed to be 50áperácent of ALTá2000-02 until age 65 whereafter they were assumed to be 90áperácent of ALTá2000-02. The probabilities of permanent disability were assumed to be an increasing multiple of ALT 2000-02 from 20 to 40áperácent from age 25 to 64, andá0 from 64 onwards.
A.4.35 The assumed probabilities of maternity leave were derived assuming that female doctors each have an average of 1.5 children between ages 28 and 43 and that they take one year of maternity leave for each child. The probabilities of alternative means of ROC Scheme eligibility (particularly resignation and retirement) were inferred from the age distribution of practising doctors.
A.4.36 The probabilities of resignation were assumed to be 0.5áperácent between ages 39 and 51, increasing linearly to 1áperácent at age 56, increasing to 6áperácent at age 60, and increasing linearly to 10áperácent at age 64. The probabilities of retirement were assumed to be 13áperácent between ages 65 andá70, increasing linearly to 41áperácent at age 84. The probabilities of retirement were assumed to be 100áperácent for ages 85 and above, given the negligible effect on the results.
A.4.37 It is instructive to present the probabilities that a practising male doctor will be eligible for the ROC Scheme in future years. The decrement assumptions are summarised in Table 10 in the form of assumed probabilities of being eligible for the ROC Scheme at the end of each of the next 10 financial years for males.
Table 10: Assumed probabilities of eligibility for the ROC Scheme over the next 10 financial years for male doctors
|Age at 30 June 2005|
A.4.38 The model is very sensitive to the assumed resignation and retirement decrements and the calibration of these decrements is very important. The model is somewhat less sensitive to death and permanent disability decrements since resignation and retirement are assumed to be more likely means of eligibility. The model is not particularly sensitive to maternity decrements as doctors on maternity leave are only eligible for the ROC Scheme for the period of leave which is assumed to be one year.
A.4.39 Figure 7 below depicts the number of doctors projected to become eligible for the ROC Scheme by various means during the 2005-06 financial year. Although doctors will become eligible for the ROC scheme during 2005-06 by way of permanent cessation of practice (having ceased practice during 2002-03), the number below refers to doctors who will actually become eligible during 2008-09.
Figure 7: Projected entries to the ROC Scheme based on decrement assumptions
A.4.40 The number of doctors projected to enter the ROC Scheme by reason of retirement and maternity leave was substantially higher than the number provided by the insurers for the 2004-05 financial year (see Figure 2).
A.4.41 It is possible that the information provided by the MIIs under-represented the number of doctors who became eligible for the ROCs scheme during 2004-05 by way of age retirement. Alternatively, the assumed retirement rates may be too high. The definition and concept of retirement might be less clear-cut for a private medical practitioner than for, say, a general workforce employee. This point will require close scrutiny in future years, and also in the administration of the ROC Scheme.
A.4.42 In the case of maternity leave, it may be that the information provided by the insurers under-represented the number of doctors taking maternity leave, that doctors have less children than the general population, or that doctors who become pregnant are less likely to take maternity leave for a complete premium year. However, the assumed probabilities of maternity leave have not been adjusted given that they do not have a major effect on the estimate of the accrual of ROC Scheme liabilities during 2005-06.
A.4.43 Where the date of birth was not available for a doctor, an age was assigned randomly according to the age distribution of all ‘at-risk’ doctors. Information on the gender of AMIL practising doctors was not available. A gender was randomly assigned according to the gender distribution of all ‘at-risk’ doctors of the same age.
Payment patterns, inflation and discounting
A.4.44 ROC indemnity payments in relation to medical incidents occurring after 30 June 2005 were projected assuming the payment pattern in Tableá11 below.
A.4.45 This simple pattern has an average delay of about four years which is consistent with our understanding of typical experience.
Table 11: Payment pattern assumed
|Delay from notification to payment
|Proportion of claim costs paid|
A.4.46 Medical indemnity claim costs tend to increase at a faster rate than general inflation. Claim payments were projected to increase in line with wage inflation plus superimposed claim cost inflation.
- Wage inflation was assumed to be 4áperácent per annum. This is not inconsistent with general expectations of wage growth.
- Superimposed inflation was assumed to be 2.5áperácent peráannum. Superimposed inflation refers to the tendency for medical indemnity claim amounts to increase at rates faster than general inflation. Bursts of superimposed inflation have been observed in the past. Despite this, superimposed inflation is typically allowed for with a constant assumption. For this exercise, an allowance of between 2áperácent and 5áperácent peráannum might be reasonable. We have adopted an assumption towards the lower end of this range, having regard to the potential impact of the various tort reforms that have taken place over the last few years.
A.4.47 Claim payments were discounted at a rate of 5.2áperácent peráannum. This is broadly consistent with the yield on Commonwealth bonds at 30 June 2005.
Data summarising the cohort of ‘at-risk’ doctors
A.4.48 Table 12 summarises the age distribution of the cohort of ‘at-risk’ doctors, with the total premium representing a proxy for risk of medical indemnity claims for each age group.
Table 12: Cohort of ‘at-risk’ doctors
|Age at 30 June 2005||Number 'at-risk'||Total premium ($’000)||Proportion males|
Estimate of the projected accrual of new ROC liabilities during the 2005-06 financial year provided by the actuaries of the MIIs
A.4.49 An estimate of the projected accrual of ROC liabilities during the 2005-06 financial year was provided by each of the actuaries of the MIIs for their particular MII. The estimates provided summed to $9.8 million, which is less than the estimate of $14.6 million based on our model. Our estimate is roughly 10áperácent of the estimated accruing claims cost for 2005-06. Estimates provided by industry actuaries varied from less than 3áperácent to around 10áperácent of estimated claims cost for individual insurers.
A.4.50 The estimates of the projected ROC scheme accrual are particularly sensitive to the assumed proportion of late reported claims. Industry estimates appear to be quite different from one another, varying from about 3áperácent to 10áperácent of claims cost. However, it is worth noting that these apparently very different estimates represent an assumed difference between non-ROC scheme claim costs of about only 7áperácent. Thus, the high estimate of 10áperácent is consistent with an assumption that 90áperácent of the claims cost will fall outside of the ROC scheme while the low estimate of 3áperácent is consistent with an assumption that 97áperácent of the claims cost will fall outside of the ROC scheme.
Projection of future ROC Scheme costs
A.4.51 Table 13 below summarises the first 10 years ROC indemnity payments which were aggregated to derive the projected ROC Scheme costs in future years.
Table 13: Calculation of projected ROC indemnity payments
|Medical incidents pre 1 July 2005|
|Year ending 30 June||Notified as at 30/6/2005 ($m)||IBNR as at 30/6/2005 ($m)||Total ($m)||Medical incidents post 30 June 2005 Total
* Note that the costs of notified and IBNR claims do not always sum to the total cost of medical incidents pre 1 July 2005 due to rounding.
Uncertainty in relation to liability projections
A.4.52 The projected ROC indemnity payments summarised in Table 13 are subject to uncertainty which relates to:
- data in relation to the claiming behaviour of eligible doctors;
- substantial random variation associated with medical incidents and the notification of claims from year to year;
- calibration of the model claim size and claim frequency assumptions to the underlying claim process (medical indemnity liabilities are characterised by very few claims associated with large random variation such that a wide range of results can be obtained with equal statistical significance);
- the possibility that doctors approaching retirement might cut down on their practice hours and possibly engage in less ‘risky’ practice (for example, less surgery) to a greater extent than allowed for in the model;
- sensitivity of the model to the proportion of late-reported claims;
- sensitivity of the model to the decrement assumptions;
- the possibility that not all ROC Scheme eligible claims have been identified and that recoveries will be more diligently pursued later in the claim process; and
- recent tort reforms in a number of jurisdictions with the possible effect of ‘bringing forward’ claims and distorting recent claim experience.
A.4.53 The information provided by the actuaries of the MIIs and MDOs relied on broadly similar valuation models. The range of assumptions adopted by industry actuaries reflects the substantial uncertainty involved in estimating liabilities of the ROC Scheme.
A.4.54 It must be emphasised that different results can be obtained from different yet equally plausible models and assumptions. Again, this is a common issue with liabilities of this nature.
ę Commonwealth of Australia 2006
ISBN 0 642 74332 0