Australian Government, Australian Government Actuary

Appendix 5: Projected Liabilities

A.5.1 The Medical Indemnity Act requires that the report include a projection of the Commonwealth’s liabilities in relation to amounts of Run-Off Commonwealth contributions in future financial years. This Appendix summarises the results of that projection, describes the methodology and assumptions and discusses the uncertainty in relation to the liability projections.

Summary of Projected Liability

A.5.2 In line with previous reports, we have projected the liabilities forward from the valuation date by taking the liability at the valuation date, adding the interest assumed in the valuation, adding an amount for new accrued claims and deducting payments expected in that year along with their associated claims handling expenses.

A.5.3 Table 14 below sets out estimates of the liabilities of the Notional Account at the end of each of the next five financial years. The purpose is to illustrate the short-term development of the Scheme. There is substantial uncertainty in these estimates. The numbers shown have been discounted to the end of the relevant financial year but have not been discounted to give values in today’s terms. The projected liabilities are not too dissimilar from the corresponding amounts presented in last year’s report.

Table 14: Projected balance sheet liabilities of the Notional Account

The liability as at 30 June 2017 was estimated to be $65.3 million, and this number is expected to grow steadily to $108.9 million by 2022. We estimated new accrual to be $8.0 million in 2018 and allowed this number to increase with inflation.

Description of the model used to project the accrual of new Run-Off Cover Scheme liabilities after 30 June 2017

A.5.4 The approach involved projecting the expected future ROC indemnity payments for each medical practitioner who was practising as at 30 June 2017.

A.5.5 A practitioner can become eligible for the Scheme by reason of:

  • retirement at 65 years and older;
  • permanent disability;
  • death;
  • maternity;
  • resignation; or
  • satisfaction of other eligibility criteria specified in the regulations.

A.5.6 The probability of becoming eligible for the Scheme was estimated for each practitioner based on their age as at 30 June 2017 and their gender. Note that practitioners do not become eligible by means of resignation until three years have passed since cessation of practice.

A.5.7 The estimated likelihood of practitioners becoming eligible for the Scheme was overlaid on the projected claim notifications to give the projected ROC claim notifications for each practitioner. 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.5.8 It was assumed that on average practitioners who become eligible for the Scheme do so half-way through the financial year.

A.5.9 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 Scheme at the time a claim is notified; and
  • the delay involved in the payment of notified claims.

A.5.10 The total expected future ROC claim notifications were calculated as the scalar product of the vector of claim notifications and the vector of probabilities of Scheme eligibility for each practising medical practitioner in each future year.

Run-Off Cover claims

Components of claim cost

A.5.11 For the purposes of the model, a ROC claim includes any eligible claim notified and finalised at direct cost to the MII. Claim costs include all costs which are directly attributable to the claim. Indirect claims handling expenses (CHE) are dealt with separately.

A.5.12 Directly attributable claim costs include damages, plaintiff legal costs to the extent that they are awarded, and legal defence costs to the extent that they are directly attributable to the claim.

Assumptions

Overview of changes in assumptions

A.5.13 According to the data provided by the industry, 1,376 practitioners (excluding overseas trained medical practitioners who had permanently ceased practice) became eligible for cover under the Scheme during 2016-17. This is higher than our estimate in our previous review that 975 practitioners (excluding ‘Other’) would become eligible for cover during 2016-17. Whilst we had a relatively low estimate in our previous review, we also had low confidence in the accuracy of the eligibility data. This was due to major inconsistency issues that could not be resolved at the time, and the significant increase in the numbers of eligible practitioners reported by the industry since 2013-14. As a result, we revised down our eligibility assumptions for future new entrants in last year’s review.

A.5.14 This year, we have performed a detailed analysis of the eligibility data where data was checked against other data sources for information about the doctors’ premiums before they became eligible for cover and, if applicable, the doctors’ most recent premiums. We have also obtained confirmation from the Department of Health that a doctor can be both eligible for ROCS and contributing to ROCS. An example of this is when a doctor purchases a cover for only Good Samaritan acts after having retired and becoming eligible for ROCS. This analysis gave us more confidence in the credibility of the eligibility data provided by the industry. We have therefore used the data with minimal adjustments. As a result, we have revised up our eligibility assumptions for future new entrants to align with historical experience.

A.5.15 Claim experience in 2016-17 has been close to expected. However, a short period of emerging experience should not necessarily be relied on as a guarantee that underlying assumptions are appropriate for such a long-tail and uncertain line of insurance as medical indemnity. This is especially true in relation to this Scheme, due, for example, to the following factors:

  • ROC claims are very long-tail and model projections are particularly sensitive to assumptions; and
  • the Scheme is still relatively immature.

A.5.16 This year, for the first time we have had access to the NCPD data. This allowed us to review a range of assumptions, and we have made certain changes in light of the data as described below.

A.5.17 We have updated our assumptions for claim reporting and size.

A.5.18 We have updated our assumptions in respect of the average claim size. The NCPD data indicated that while the average claim against obstetricians is higher than those against non-obstetricians, the difference is not as significant as we previously thought. In addition, there are specialties that have a larger average claim size than obstetricians. Therefore, it does seem reasonable to continue modelling obstetricians separately. In this report, we have set the same assumptions for all specialties in this review. Furthermore, we have revised down our average size assumption from around $150,000 to around $140,000 (net of HCCS) in light of the NCPD experience.

A.5.19 We have also updated our assumption for the payment pattern, that is, the delay from claim notification to settlement. The NCPD data showed that a higher proportion of claims were notified within the first five years for all insurers than our previous assumption. We have previously allowed a ten year payment pattern. The NCPD data showed that the industry experience was not too different from our assumption. However, there is evidence that a higher proportion of payments are made in the first two years and around 5 per cent of payments are made after 10 years. Our updated assumptions are more in line with industry experience.

A.5.20 We have not changed our claim frequency assumption as it does not appear to be inconsistent with the NCPD data.

A.5.21 We have not altered any of the financial assumptions in this review. Economic assumptions are set out in Appendix 4 and have been used consistently in both the calculation of the liability at the valuation date and in the projection.

Practitioner population

A.5.22 As noted above, the projection aims to project the expected future ROC indemnity payments for each medical practitioner who was practising as at 30 June 2017. This starts with the population of medical practitioners who were practicing in 2016-17. This data is provided by the MIIs and maintained by DHS.

A.5.23 Practitioners with total medical indemnity payments (including both medical indemnity premiums net of discounts and loadings plus membership fees) of less than $1,700 were excluded from the analysis in order to ensure that only genuine ‘at-risk’ medical practitioners were the focus of the investigation. The excluded group contained interns and trainees that exist in some of the data provided by the MIIs. A total of 86,300 practising medical practitioners have paid some medical indemnity premium. After excluding those medical practitioners, we were left with 48,650 ‘at-risk’ medical practitioners. This approach is unchanged from our previous reports.

A.6.24 Table 15 summarises the age distribution of the cohort of ‘at-risk’ practitioners, with the total premium representing a proxy for risk of medical indemnity claims for each age group. Note that age and gender were not available for a small number of medical practitioners.

Table 15: Cohort of ‘at-risk’ medical practitioners

There were 48,650 ‘at-risk’ doctors in 2017. The proportion of males was 66%. ‘At-risk’ doctors paid $363.8 million in premiums and membership fees.

Note: Numbers may not add due to rounding. Total premium includes membership fees. If membership fees are excluded, total premium across both categories is approximately $330 million.

Demographic assumptions

A.5.25 Demographic assumptions are required to project the number of eligible medical practitioners in future years from the current population of ‘at risk’ medical practitioners.

A.5.26 In order to assess the future rate at which liabilities will accrue, we project the expected number of 2017-18 new entrants in the categories that are expected to generate a future liability. Those events that are expected to potentially generating a material liability under the scheme are considered to be retirement at 65 or older, resignation from private practice for three years, death, permanent disability and maternity leave. We have not projected new entrants in the ‘other’ category. Historically, practitioners in this category have paid very low premiums. Accordingly, we have assumed that medical negligence claims against them are likely to make an immaterial contribution to the Scheme costs.

A.5.27 This year, we have reviewed the demographic assumptions following analysis of the eligibility data provided by the industry. This has led to the assumptions described below.

A.5.28 The probabilities of death and disablement are assumed to be an increasing multiple of the probabilities of death in Australian Life Tables 2010-12 (ALT 2010-12). The probabilities of death are assumed to be 28 per cent of ALT 2010-12 until age 64, 40 per cent from age 65 to 69, and 48 per cent of ALT 2010-12 thereafter. The probabilities of permanent disability are assumed to be 12 per cent of ALT 2010-12 up to age 24, an increasing multiple of ALT 2010-12 from 12.3 to 24 per cent from age 25 to 64, and 0 from 65 onwards. These are unchanged from last year.

A.5.29 The probabilities of maternity leave were previously assumed for ages between 28 and 43. The analysis of the eligibility data supports a slightly wider age range and higher probabilities for all ages (and especially mid-30s). We have used the eligibility experience since 2004 and the publicly available information from the Australian Bureau of Statistics to derive a set of probability assumptions that produces a reasonable number of doctors taking maternity leave next year and an age distribution that aligns with historical experience. We have retained the assumption that each doctor takes one year of maternity leave for each child.

A.5.30 The probabilities of resignation were previously assumed for ages between 39 and 64. It was assumed that the probability increases linearly from age 54. The experience since 2004 has shown that resignations also peak in mid-30s. The updated assumptions produce an overall higher number of resignations and an age distribution that aligns with historical experience.

A.5.31 The probabilities of retirement were previously assumed to be the same for males and females. The experience since 2004 has shown that females tend to retire earlier than males and the difference is significant enough to justify gender specific assumptions. The updated assumptions produce an overall higher number of retirements for both genders and an age distribution that aligns with historical experience.

A.5.32 It is instructive to combine the above assumption and present the probabilities that a practising male medical practitioner will be eligible for the Scheme in future years. The decrement assumptions are summarised in Table 16 in the form of assumed probabilities of being eligible for the Scheme at the end of each of the next 10 financial years for males.

Table 16: Assumed probabilities of eligibility for the Run-Off Cover Scheme over the next 10 financial years for male medical practitioners

The probability of eligibility increases with age. For a male doctor aged 80 at 30 June 2017, the probability that he will be eligible for ROCS in 2018 is 27.5%, compared with 0.02% for a male doctor aged 20.

A.5.33 The resulting number of practitioners who are expected to become eligible in 2017-18 is set out in section Table 19.

Population average claim frequency

A.6.34 The overall claim frequency for the entire at risk population was assumed to be 4 per cent. That is, on average each ‘at-risk’ medical practitioner was assumed to have a 4 per cent chance of being involved in a medical incident in the next year which will result in a future medical indemnity claim. This is unchanged from last year.

A.5.35 Individual claim frequencies were then adjusted based on premium as discussed below. This approach has not been changed from our previous reports.

Individual claim frequencies based on premium

A.5.36 The likelihood of future notifications of ROC claims was projected according to the assumed ‘riskiness’ of each individual practitioner. The risk of medical indemnity claims posed by each practitioner was determined based on risk categorisation. Practitioners were categorised according to specialisation, age, gender and MII.

A.5.37 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 to the premium of the entire cohort of ‘at-risk’ medical practitioners.

A.5.38 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 practitioners according to their risk of medical indemnity claims for the purposes of this model.

A.5.39 Insurance premiums tend to diminish for practitioners towards retirement age. This supports the suggestion that medical practitioners 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’ medical practitioners shown in Figure 5. Note that age and gender were not available for a small number of medical practitioners.

Figure 5: Relative premiums by age for ‘at-risk’ medical practitioners

This chart shows that the proportion of premiums paid is greater than the proportion of ‘at-risk’ practitioners aged between 40 and 60.  The proportions are similar for doctors aged between 60 and 70.  For all other ages, the proportion of premiums paid is slightly lower than the proportion of practitioners.

Note: The graph includes all practitioners with total payments (including membership fees) of at least $1,700 from all MIIs.

Individual claim frequencies based on assumed wind down of risky practice

A.5.40 The relative premiums of older medical practitioners appear to indicate a reduction in risky practice as medical practitioners approach retirement. Consistent with this, industry actuaries have also suggested that medical practitioners tend to wind down their risky practice approaching retirement. However, relative premiums may not capture the full extent of the reduction, since premiums are calculated on a claims-made rather than claims-occurring basis.

A.5.41 We have continued the practice of assuming that medical practitioners wind down their risk exposure from age 60, at a rate that is reflected in the premiums shown above. Premium relativities are augmented with a wind down from age 60 according to the formula 0.8 (age-59). This is unchanged from last year.

A.5.42 This assumption is very subjective and is not amenable to objective validation. Nonetheless, it does not appear unreasonable in light of observed claim experience.

Claim size

A.5.43 Claim sizes are assumed to increase, the longer the delay from the incident occurring until it is notified to the insurer. This is on the basis that claims which take longer to report tend to be bigger on average. One example is cerebral palsy cases.

A.5.44 The average claim size was assumed to be around $140,000. This was reduced from the previous assumption of $150,000. We have altered the assumption in light of NCPD data.

A.5.45 The assumed claim reporting pattern is shown in Table 17 below. Assumed claim sizes presented in the table do not include allowance for inflation or superimposed inflation.

Table 17: Claim reporting and size pattern

We assumed that 58% of the claims will be reported within the first two years, though the delay may be as long as 20 years, and that average claim sizes increase with the delay in reporting.

(a) Gross average claim sizes presented in the table are intended to be in 2017 dollars and do not include allowance for inflation and superimposed inflation.

A.5.46 The projected ROC claims cost is 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 practitioner will be eligible for the Scheme at the time the claim is notified. Thus, the majority of Scheme cost relates to the small proportion of claims which are notified very late.

Impact of the High Cost Claim Indemnity on claim size

A.5.47 Claims cost net of the HCCS 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.

A.5.48 The model effectively assumes that 17 per cent of the ROC discounted claims cost will be met by the HCCS. This is explained in more detail in Appendix 6.

Payment patterns – notification to settlement

A.5.49 ROC indemnity payments in relation to medical incidents occurring after 30 June 2017 were projected assuming the payment patterns from the point of notification to the point of settlement, as set out in Table 18 below.

A.5.50 This payment pattern has been slightly changed from that adopted in last year’s report in light of information provided by insurers and NCPD data.

Table 18: Payment pattern assumed

We assumed that almost 46% of claim costs will be paid within first three years of notification, though the delay may be as long as 20 years.

Projection Results

Projection of ‘at-risk’ medical practitioners

A.5.51 We have applied the demographic assumptions to the at risk population to project the new ‘at-risk’ medical practitioners expected to join the scheme in future years.

A.5.52 Figure 6 depicts the number of ‘at-risk’ practitioners projected to become eligible for the Scheme by various means during the 2017-18 financial year. Although medical practitioners will become eligible for the Scheme during 2017-18 by way of cessation of practice (having ceased practice during 2014-15), the number below refers to medical practitioners who will actually become eligible during 2020-21.

Figure 6: Projected entries of ‘at-risk’ practitioners to the Run-Off Cover Scheme based on decrement assumptions

This chart shows the projected numbers of new entrants during 2017-18 to the ROC Scheme based on decrement assumptions. We project 819 new entrants as a result of retirement from private medical practice, 129 new entrants as a result of either death or permanent disability, 330 new entrants due to maternity leave, and 185 new entrants due to cessation of practice for other reasons.

A.5.53 The numbers of practitioners projected to enter the Scheme are more in line with the long term historical numbers (excluding “Other”) provided by the insurers following changes in our assumptions as shown in Table 19.

Table 19: Run-Off Cover Scheme historical and projected new entrants by reason of eligibility

There were 1,376 reported new entrants (excluding “Other”) in 2017. The number of reported new entrants since 2012-13 has been significantly higher than previous years. We projected 1,463 new entrants (excluding “Other”) in 2017-18.

(a) Overseas trained medical practitioners who had permanently ceased practice in Australia under an appropriate visa.

A.5.54 Where the date of birth or gender was not available for a practitioner, these were assigned randomly according to the age and gender distribution of ‘at-risk’ medical practitioners.

Projection of future Run-Off Cover Scheme costs

A.5.55 Table 20 summarises the next 10 years’ ROC indemnity payments which were aggregated to derive the projected Scheme costs in future years. The payment projected for 2017-18 is a blend of actual payments made by DHS to the end of December 2017 and projected payments for 2017-18 by industry actuaries.

Table 20: Calculation of projected Run-Off Cover indemnity payments

The projected indemnity payments for future years relate to incidents occurred before and after 1 July 2017. The proportion of payments related to incidents post 1 July 2017 increases gradually to almost 50% of the total projected payments by 2027. For incidents occurred before 1 July 2017, payments related to IBNR claims steadily increase, while payments related to notified but not yet report claims diminishes over time.

Note: numbers may not add up due to rounding.

Uncertainty in relation to liability projections

A.5.56 The projected ROC indemnity payments summarised in Table 20 are subject to uncertainty which relates to:

  • data in relation to the claiming behaviour of eligible practitioners;
  • 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 few claims associated with large random variation such that a wide range of results can be obtained with equal statistical validity);
  • the extent to which medical practitioners approaching retirement might cut down on their practice hours and possibly engage in less ‘risky’ practice (for example, less surgery);
  • sensitivity of the model to the proportion of late-reported claims;
  • sensitivity of the model to the decrement assumptions;
  • the possibility that not all Scheme eligible claims have been identified and that recoveries will be more diligently pursued later in the claim process; and
  • tort reforms in a number of jurisdictions with the possible effect of ‘bringing forward’ claims and distorting claim experience.

A.5.57 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 Scheme.

A.5.58 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.