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Notes to the financial statements

For the year ended 30 June 2012

• claims incurred but not reported to, or accepted by, ACC as at the valuation date

• closed claims that are expected, on the basis of actuarial projections, to be reopened after the valuation date • the costs of managing reported but unsettled, reopened, and IBNR (incurred but not yet reported) claims. The estimated liability is on a ‘best estimate’ basis. This means there is no deliberate over- or under- statement of any component of the liability. Due to the uncertainty in the outstanding claims liability estimate and the number of assumptions required in its determination it is highly likely that actual experience will differ from the stated estimate. A risk margin is added to the central estimate to increase the probability to a 75% confidence level that the estimate will not be less than actual payouts. The future claim payments are brought to present value as at the valuation date using a risk-free discount rate. Standard actuarial techniques are used to formulate the central estimate taking into account trends in historical claims data, reviewing current conditions that may impact future trends, and scanning the horizon of possible changes that may affect trends in the future.

Where possible both the numbers of claims receiving payments and the average amounts of these payments are analysed separately. When claim numbers are too unstable for this method to be reliable an analysis of aggregate payments is undertaken.

The following actuarial valuation techniques are used to project the various benefit types: • payment per active claim method

• payment decay method

• individual claim projection method.

Some elements of the claims liability are subject to more uncertainty than others. For past injury years a higher proportion of the ultimate number of claims for that year will have been reported. These reported claims will have a longer history of payments and a smaller outstanding amount, all other things being equal, than claims reported in more recent injury years. IBNR claims have no payment history and must be estimated in their entirety. Hence the outstanding claims liability estimate for more recent injury years will be subject to more uncertainty.

The general sources of uncertainty include:

• actual future claim closure rates differ from those expected due to unanticipated changes to Scheme utilisation rates associated with prior injuries

• actual future claim costs differ from those expected due to unanticipated inflationary trends and claims duration • the actual timing of claim payments differs from those expected

• unanticipated changes in operational processes that affect claim development patterns

• future advances in medicine and treatment may impact recovery periods, cost structures, and Scheme utilisation • ACC legislation is periodically reviewed and court cases can result in entitlements which are not anticipated being paid. Currently the largest areas of uncertainty affecting the outstanding claims liability include:

• the future costs associated with personal and social rehabilitation support services provided to individuals experiencing significant disability as a result of an injury. In particular, the cost of personal care services, whether it be home- or residential-based care. This may involve anything from helping with daily duties to providing nursing care services. The number of hours per day, type of services required, provider type, and average costs per hour are key assumptions that need to be projected decades into the future. The estimate carries around it a wider range of uncertainty due to the length of the projection period and the variation of disability and/or demonstrated independent participation by the client • in the years through to early 2009, there have been significant increases in Scheme utilisation from growth in new claims

Notes to the financial statements

For the year ended 30 June 2012

The improvement in claims duration is a result of changes made in claims management and operational initiatives implemented which have improved rehabilitation rates. The assumptions for claims volume and duration are subject to a higher level of uncertainty given the recent change in trend

• the costs of elective surgery continue to grow at a rate well above Labour Cost Index (LCI) and Consumer Price Index (CPI); it is uncertain whether this trend will continue. A portion of this benefit (for example, implant purchases) is subject to currency exchange risk which as of late has been quite volatile.

Discounting methodology

Estimated future claim payments are adjusted in line with expectations of future inflation. These inflated cash flows are then discounted using a risk-free rate that is based on the yield curves of New Zealand government bond rates. The longest term of a current New Zealand government bond is 11 years. Discount rates are smoothed at a maximum increment of 0.15% per annum or a five-year period (whichever is the longer) to eventually attain a long-term risk-free discount rate of 6.00%. This long-term rate is based on an examination of average New Zealand government returns over an extended period of time.

Risk margin

The probability of sufficiency used for determining the outstanding claims liability is the same as that used for the liability adequacy test, which is 75%.

Refer to Note 24 and 25. Gradual process claims

In accordance with section 6 of the AC Act and financial reporting standards, ACC recognises in its financial statements a liability for future payments in respect of claims incurred. The present value of the expected future payments for these claims is included in the outstanding claims liability (OCL).

This includes claims made for gradual process injuries. These claims are a result of injuries that have occurred due to prolonged exposure in the workplace to conditions that result in some form of harm. The most common examples of such claims are asbestosis (due to prolonged exposure to asbestos dust in the atmosphere) and hearing loss (due to prolonged exposure to excess noise).

Due to the nature of these injuries, many years can pass between exposure to the conditions that result in harm and the individual receiving treatment or suffering incapacity.

ACC’s accounting policy is to recognise a financial liability for gradual process injury when a claim is made. A gradual process claim can be made when a person is regarded as suffering personal injury caused by work-related gradual process, disease, or infection which, in accordance with section 37 of the AC Act, is at the earlier of either the date that the person first receives treatment or the date that the injury first results in incapacity.

As part of determining that the above treatment is appropriate, ACC has taken external advice regarding the recognition of the liability for gradual process claims based on current legislation and financial reporting standards.

The effect of this accounting treatment is that until the injury presents itself such that the person receives treatment or suffers incapacity and hence is entitled to make a claim, ACC does not record a liability in the OCL.

However, in order to highlight the contingent liability related to persons who may have suffered exposure to conditions of harm but have not yet suffered incapacity or made a claim on ACC, an assessment of the potential payments under such future claims has been made and is disclosed by way of a note to the accounts in Note 26.

The Ministry of Business, Innovation and Employment is considering amendments to the AC Act which may result in a change to the timing of recognising a liability for future gradual process claims. Any such amendments may require ACC to change its accounting policy with respect to the recognition of a liability for gradual process claims and as a consequence include within the OCL an actuarial estimate of both current and future gradual process claims.

Notes to the financial statements

For the year ended 30 June 2012