In 2021, SIRA clawed back $91 million in excess insurer profit earned on the sale of compulsory motor accidents insurance and returned it to NSW drivers. This move was made possible after the 2017 reforms introduced a transitional excess profits and losses (TEPL) mechanism that was designed to eliminate insurer ‘super profits’ of the past. To our knowledge, the activation of this mechanism to claw back excess insurer profit and return it to the people was a world first.
In 2017, NSW reformed its motor accidents compulsory third party (CTP) insurance scheme. CTP insurance is mandatory for motor vehicles registered in NSW and covers drivers against liability for the injury or death of another person. In the reforms, NSW introduced a transitional excess profits and losses (TEPL) mechanism that provides the State Insurance Regulatory Authority (SIRA) with powers to control the level of profit insurers earn on the sale of CTP Green Slips.
The purpose of the mechanism is to ensure that insurer profits are neither excessive nor inadequate. Prior to the 2017 reforms, there was no mechanism to cap insurer’s pricing of the sale of compulsory Green Slip insurance. This led to perverse incentives for insurers to drive up the price of Green Slips to earn what became known as ‘super profits’. The historically high level of profitability was making the scheme unaffordable for NSW drivers, with the average price of Green Slips hitting a record high of $635 in 2016. As a result, NSW had the highest Green Slip prices in the country.
Using the innovative TEPL mechanism, SIRA assesses the profitability in the scheme in annual assessment cycles (or more often if required) to determine if insurers are earning ‘excessive profit’ or suffering ‘excessive losses’. Currently, these thresholds are set at:
- 10% for excess profit, which means that SIRA can claw back insurer profit above 10% and return it to NSW drivers
- 3% for excess losses, which means that when insurers earn below 3% profit, SIRA can increase a levy that forms part of Green Slips to reimburse insurers a component of their losses. As the scheme is privately underwritten, the excess losses mechanism exists to ensure that there remains an incentive for private insurers to continue to offer CTP insurance.
The assessments target only pure profit taken by insurers ie the money left over after injured road users receive treatment and care, and other benefits under the scheme. SIRA cannot subsidise losses for poor insurer behaviour, such as uncontrolled spending or undercutting the market. The annual profit assessment cycles must determine that there is sufficient certainty of insurers’ future claims costs for profit to be recouped or losses subsidised.
The TEPL mechanism includes a provision for innovation support that allows insurers to apply to retain up to an additional 3% of profit on Green Slips. SIRA can grant innovation support when insurers invest in measures that improve outcomes for injured road users or road safety for motorists. Before innovation support can be granted and profit retained, the innovation must be proven to deliver measurable benefits.
In 2021, SIRA activated the TEPL mechanism for the first time to claw back almost $91 million in insurer profits. This amount reflected the excess profit insurers earned on the sale of Green Slips after paying for accidents that occurred on the roads in 2017. The $91 million was redistributed among NSW drivers through an average $19 saving on their next Green Sli
What Makes Your Project Innovative?
NSW is the first state in Australia to implement a CTP profit clawback mechanism and the design used in NSW is unlike any other in the world. The innovative scheme design has proven its value to NSW drivers after $91 million was clawed back from insurers in 2021. Without this policy, this $91 million would have remained in the pockets of insurers. To our knowledge, this was the first time in the world that a profit clawback mechanism has been activated. Within the policy design is a provision called ‘innovation support’ that allows insurers to apply to retain up to an additional 3% of profit on Green Slips. This policy encourages insurers to innovate to invest in measures that improve outcomes for injured road users or road safety for motorists. Insurers must have evidence that the innovation has delivered measurable benefits to receive final approval and retain a share of profit.
What is the current status of your innovation?
After clawing back $91 million from insurers in 2021, SIRA is now undertaking its next annual assessment to determine if insurer profit should again be clawed back and returned to NSW drivers. The current assessment is reviewing whether insurers earned excess profit on the 2018, 2019 and 2020 accident years.
A preliminary review has concluded that excess profit was taken at an industry level. Now, actuaries are reviewing the profit earned by each individual insurer before a final determination is made. To date, SIRA has granted preliminary approval for five applications for innovation support. To receive final approval and to retain a share of profit, insurers must have evidence that the innovation has delivered measurable benefits.
Collaborations & Partnerships
Establishing reasonable insurer profit levels had attracted extensive debate over many years, from actuaries, economists, and others. The reform was led by the public sector and involved public consultation with a broad range of stakeholders. Generally, non-insurance stakeholders recognised insurers needed a reasonable but not excessive profit margin. Insurers themselves had some differing views and some believed a higher level was appropriate, but despite this, insurers were cooperative.
Users, Stakeholders & Beneficiaries
- SIRA sets the profit thresholds and undertakes the assessment cycles to determine if the mechanism needs to be activated and innovation support should be granted.
- Six CTP insurers are licenced to sell CTP insurance in NSW. A key feature of the 2017 CTP reforms was introducing the power to regulate profit, so insurers were aware of this when they applied for a licence.
- NSW drivers benefit from reduced insurer profit through lower premium costs.
Results, Outcomes & Impacts
In 2021, SIRA activated the mechanism for the first time to claw back almost $91 million in insurer profits. SIRA is currently completing its 2022 assessment cycle and the preliminary results show that excess profit was earned at an industry level. A decision will be made before the end of 2022 if the mechanism should be activated again.
Insurer profit is assessed by an appointed scheme actuary in annual assessment cycles. The actuary reports undergo a peer review process before being provided to the insurers for comment and finalised. If an insurer disagrees with the decision to claw back insurer profit, there is an avenue for them to seek a review of the decision. No insurer sought to review the decision to claw back profit in 2021.
With any new scheme, as claims experience develops, there will be greater certainty of costs and insurers should begin to price premiums accordingly.
Challenges and Failures
A key challenge of the scheme is the need for the annual assessment cycles to predict the future costs of insurance claims and the profit earned after all future benefits have been paid. SIRA must be satisfied that there is sufficient certainty of an insurer’s future claims costs on accidents that occurred in a relevant accident year before the mechanism can be activated. Given that it is a relatively new scheme and because of its long-tail nature, predicting future claims costs is highly uncertain.
The last few years have highlighted the need to incentivise and improve understanding on what it takes to access innovation support. To date, no insurer has been granted final approval for innovation support. SIRA is developing new guidance and will be holding insurer forums to encourage innovations that improve outcomes for injured people or road safety.
Conditions for Success
For this policy to succeed, there needs to be a strong and detailed policy in place that establishes the assessment process and the circumstances when the mechanism can be activated.
The agency needs to make a large human and financial commitment to undertake the annual assessments. Outside of the agency’s own resources, the agency must engage a scheme actuary and peer review actuary to undertake the assessments, which takes time and is costly.
Additionally, intervening in privately underwritten markets, especially when there will always be a level of uncertainty of future claims costs, requires strong leadership and regulatory courage.
The profit clawback mechanism has not been replicated in Australia and, as far as we can tell, a profit clawback mechanism has never been activated in the world. After it was put into practice in 2021, SIRA attracted the interest of other Australian jurisdictions who reached out to learn more about how the mechanism works. While it has not been replicated yet, there is the potential – and clear advantages – for this to be adopted by other jurisdictions to ensure that citizens are charged fair and equitable premiums on compulsory insurance products.
Putting the TEPL policy into practice has been a learning curve. Firstly, because it has never been done before so it was unchartered territory. Secondly, because the “devil is in the detail” in the implementation itself.
Another key learning was to build policy based on future scenarios rather than the present. After the 2017 reforms, a new insurer was granted a licence to offer CTP insurance in NSW – the first time this had happened in more than 20 years. Now, it’s become clear that the policy relating to innovation support excludes new insurers as they have not earned excess profit on past accident years so therefore cannot apply to retain a share of profit. SIRA is currently reviewing the innovation support framework, part of which includes considering how new insurers can access innovation support. SIRA aims to encourage the uptake of innovation support to improve outcomes for injured people and road users.
https://www.sira.nsw.gov.au/__data/assets/pdf_file/0003/567642/Motor-accident-guidelines-transitional-excess-profits-and-transitional-excess-losses.pdf https://www.sira.nsw.gov.au/news/ctp-prices-set-to-drop-when-insurer-profit-is-returned-to-motorists https://www.sira.nsw.gov.au/news/cheaper-green-slips-are-now-guaranteed https://www.sira.nsw.gov.au/news/assessment-of-ctp-insurer-profit-underway
- Implementation - making the innovation happen
20 January 2023