Remember the State Banks of Victoria and South Australia? The current governments in both States certainly should as their collapse brought down the last Labor administrations in the early 1990s.

As a result Victoria and SA aren’t in the banking business any more. But they still have something in common as the only states or territories still running monopolies in both workers compensation and compulsory motor insurance.

Victorians like to boast about their low workers compensation costs. Most of the credit is due to draconian Kennett-era cuts to benefits for injured workers which were largely retained by the Bracks/Brumby team, after some cosmetic concessions to unions.

In SA, after years of procrastination, the Rann Government this year finally took the axe to an unsustainably generous benefit structure which produced a billion dollar unfunded liability and Australia’s highest premiums. The unions predictably went ballistic and the Liberals had the gall to back them after doing nothing when in office apart from a politically motivated and unaffordable cut in premiums.

We hear less about the motor insurers, Victoria’s Transport Accident Commission (TAC) and SA’s Motor Accident Commission (MAC). That should change because their 2007-08 annual reports, when they finally emerge, will almost certainly show that both are technically insolvent, ie liabilities exceed assets. They continue to operate only because, like the State Banks before them, they are government guaranteed.

Based on previous efforts any casual observer will be hard pressed to find their financial position from these glossy documents or, indeed, that they are in insurance at all despite more than $1 billion in combined premium income.

As with their websites, they will wax lyrical about their road safety promotions and related activities. The TAC likes pictures of people in wheelchairs and would have you believe they are solely responsible for halving of the Victorian road toll over the past decade or so.

Never mind that the same thing’s happened more or less to the same extent in every other state and territory and indeed most of the developed world.

Never mind that all the serious science on the subject attributes this mainly to better vehicle design, better roads and better enforcement – none of which has anything to do with the TAC.

The limited research on the subject is at best inconclusive about the value of educational and advertising campaigns that the TAC and MAC deliver.

However this positioning may be because, as insurers, TAC and MAC are very good road safety advocates.

The most objective measure of relative performance is the compulsory premiums paid by motorists when they register their cars. Six years ago Victoria and SA were in the middle of the pack. Today they are the second and third most expensive behind the Northern Territory, another government monopoly.

In September 2002 the TAC and MAC metropolitan rates were $315 and $335 respectively. Now they are $415.80 and $410. In the competitive, privately-underwritten NSW and Queensland schemes, the equivalent benchmark rates have gone from around $339 to $360 and $320 to $286 respectively.

It’s important to note that NSW increased benefits last year with the introduction of no fault life time care for very seriously injured people, while Queensland cut benefits for minor injuries in 2003.

Both TAC and MAC are essentially long tail insurers — long tail meaning that claims payments will be spread over many years. It is a highly specialised business that requires strong management focus and discipline because of the temptations created by all that money sitting around in claims reserves. Any loss of focus can be a slippery slope, at the bottom of which lies the ruins of HIH Insurance and many others. There’s a three volume Royal Commission report on the subject if you’re interested.

You only need to delve a little deeper for evidence that should worry residents of Victoria and SA who are effectively the guarantors of these enterprises.

For example, this table on p45 of the 2006-07 MAC annual report shows that total claim payments have gone up 23% over the past five years while the number of claims finalised went down 47%. After allowing for normal inflation, average claim payments increased 41%.

Since most of these claims costs involve health care and lost income, some inflation is to be expected. But on any measure this does seem excessive and raises questions about the level of scrutiny and accountability of MAC’s contracted claims manager Allianz. The German giant won a competitive tender for this role in 2003 and has just had its contract renewed without another tender.

The TAC’s cost profile is different because it is essentially a no fault scheme. Benefits for less serious injuries are limited – most initial treatment costs are met by Medicare – but badly injured people are looked after for life.

TAC manages claims in-house but they too seem to have an inflation problem. Their 2006-07 report shows a 10% increase in the actuarial assumption for average claim size in just 12 months. Administration costs are also up 10% despite falling new claim numbers.

This table from the 2005-06 report provides more insight.

It shows the main driver in increased TAC costs was common law legal actions – costs up 56% over five years. This is supposed to be a no fault system with Australia’s tightest damages regime, but it is difficult to avoid the conclusion that Victoria’s entrepreneurial plaintiff law industry has found a way back onto the motor accident compensation teat. Is current minister Tim Holding, scion of the Holding Redlich law firm’s founders, paying attention?

Curiously, the table couldn’t be found in the 2006-07 report.

Recently there were revelations of rorting of TAC funds by surgeons at Alfred Hospital. The fact that it was uncovered by a hospital inquiry into one of its staff and not the TAC is another pointer to weakness in cost controls.

Until now, the deterioration in the underlying costs of both organisations has been masked by strong investment performances on claims reserves. Since HIH collapsed, prudential standards force private sector insurers to invest all their claims reserves in risk free securities with terms matched to payment patterns. The state insurers are not so constrained and both TAC and MAC have large exposures to equity and property markets.

They did well in the boom times and this year they will share the pain. TAC reserves are managed by Victorian Funds Management Corporation which has flagged losses this year totalling around $4.2 billion. The TAC share will be around $800 million, a $1.8 billion turnaround after booking $980 million in investment returns last year. One question worth asking when this figure is confirmed is whether Premier John Brumby will give back a $600 million “capital return” used to raid the TAC for 2006 election promises.

MAC manages its own funds but it is unlikely the picture will be very different as it has a similar portfolio mix.

While all appears calm on the surface, some recent changes in key personnel suggest otherwise. MAC’s long serving chief executive, Geoff Vogt, finished up with his contract at the end of June. While he’s telling people it was his decision, another term was never on the table. His TAC equivalent, Paul O’Connor, is finishing up next month seven months early – ostensibly because he didn’t want to be part of the organisation’s relocation to Geelong from January. VFMC chairman Mike Fitzpatrick also quit this week, following four key funds managers out the door.

One striking feature of both organisations is an almost total lack of insurance expertise on their boards. TAC chairman Paul Barker has credentials in audit, banking and funds management and is also on the Workcover board. MAC’s Roger Cook is prominent in Adelaide’s small pool of professional directors but his main expertise is in commercial property, perhaps explaining MAC’s unusually large direct exposure to that sector.

It’s obvious that the new CEOs face considerable challenges in curbing costs and turning around performance. It will be even more challenging because both appointees also have no real experience or background in insurance.

O’Connor’s replacement is Janet Dore, who was headhunted last year as Chief Claims Officer in an overt piece of succession planning. She’s a good choice to bed down the Geelong move after running councils in Newcastle and Ballarat. The claims role was meant to be a crash course in insurance.

The Geelong move, a purely political exercise in pork-barrelling, makes her task all that much harder because it has come at a considerable cost in experienced personnel. Replacements certainly won’t be found among the ranks of the redundant Ford workforce.

Many of MAC’s problems can be traced back to the change in claims managers in 2003 when Allianz wrongly assumed former long-serving employees of the privatised State Government Insurance Commission would just move across. Many instead took their redundancies and had a life-change. Allianz struggled to fill the void and in the first year claim processing slowed dramatically and costs soared.

The situation has improved somewhat but the high levels of ongoing claims inflation should be the top priority of incoming CEO Andrew Daniels, who started this week.

Daniels has accountancy qualifications but his last job was running Adelaide’s flagship car race, the Clipsal 500. Its board also happens to be chaired by Cook. The press release announcing his appointment highlighted his skill in responding to a fatal crash. It said nothing about insurance, but with MAC’s current trajectory that could come in handy.

Peter Fray

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