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How the Financial Undertaking is determined

For a self-insurer with three years or more experience as a self-insurer

The methodology for a self-insurer with three years or more experience as a self-insurer shall be based on a minimum of 150% of the central estimate of outstanding claim liabilities, as determined by a certified actuary, in accordance with the Institute of Actuaries’ professional standards.

A minimum quantum guarantee of $1 million will apply for all guarantees for a self-insurer with three years or more experience as a self-insurer.

For a self-insurer with less than three years of experience as a self-insurer

The methodology is different for a self-insurer in its initial permit period compared to a self-insurer renewing its permit.

This recognises that, because a new self-insurer has no history of liability, its claims provision can be expected to increase substantially over the first three years.

A Financial Undertaking from an approved financial institution will incorporate an allowance for at least one very significant claim. This allowance will be at least $500,000, or any greater amount that equates to the self-insurer’s excess on its excess of loss policy. This minimum risk level is considered necessary due to the small size of many Tasmanian self-insurers.

Step 1: Calculate a notional premium

The Board will calculate a ‘notional premium’ using the same methodology used to calculate notional premiums (PDF, 124.5 KB) to the Board:

  • Year 1: notional premium x 100%
  • Year 2: notional premium x 140%
  • Year 3: notional premium x 180%

Step 2: Add in a margin

The margin is equal to the greater of:

  • 30% of the adjusted notional premium (as calculated in step 1)
  • $500,000 minimum excess.
  • the amount of the excess to be paid (per event retention)

Self-insurer permit conditions currently provide for an excess of up to $1 million.

The three-year scaling effect accounts for the projected proportional liability for claims over that period.

Example

Financial Undertaking in year 1

Total
Assume notional premium = $300,000
Assume per-event retention = $400,000

Notional premium x 100% = $300,000

plus the greater of:

  • 30% of $300,000 = $90,000
  • $500,000 (minimum excess)
  • $400,000 (per event retention)

$300,000






$500,000

  $800,000

Financial Undertaking in year 2

Total
Assume notional premium = $300,000
Assume per-event retention = $400,000

Notional premium x 140% = $420,000

plus the greater of:

  • 30% of $420,000 = $126,000
  • $500,000 (minimum excess)
  • $400,000 (per event retention)
$420,000






$500,000
  $920,000

Financial Undertaking in year 3

Total
Assume notional premium = $300,000
Assume per-event retention = $750,000

Notional premium x 180% = $540,000

plus the greater of:

  • 30% of $540,000 = $162,000
  • $500,000 (minimum excess)
  • $750,000 (per event retention)

$540,000






$750,000

  $1,920,000
Updated: 10th December 2019