NEW ZEALAND GAZETTE, No. 42 — 20 APRIL 2017

(LCI) for the Motor Vehicle Account).

The funding policy is consistent with the principles in section 166A of the Act.

Variations in claims and economic experience are expected for a scheme such as ACC. The ten-year horizon allows for a gradual return of an Account’s funding ratio towards the target and is expected to result in relatively small on-going changes in levy rates. A shorter horizon would result in a more rapid return to the target funding ratio, but also larger changes in levy rates.

Levy rates are recommended and set every two years. The effect of this is to reset the funding horizon every two years. All other things being equal, this will mean that an Account’s funding ratio will approach the target, but never fully arrive at it. As the funding ratio approaches the target, funding adjustments will decrease and levy rates will more closely reflect new-year claim costs.

Another way to consider the funding policy is that it determines both how quickly the funding ratio approaches the funding target and the levy rate approaches new year claim costs. Any deviation from the funding policy changes the expected trajectory towards these targets.

In practice, experience will not exactly match what was assumed when recommending levy rates, and therefore levies are expected to vary around the best estimate forecasts shown in this report.

The Motor Vehicle Account levy rate recommended to the Minister by the Board for 2017/19, as well as those indicated for subsequent out-years, were consistent with the funding policy.

Assumptions underlying the projections for the Motor Vehicle Account

Projections in this report are based on the assumptions underlying the 2017/19 levy rate recommendations made by ACC, but with prescribed rather than recommended levy rates where these differ.

The 2017/19 levy rates consulted on and recommended by the Board to the Minister for ACC were determined based on the following:

Claims experience trends up to 31 March 2016. Increases in costs, compared to the previous consultation, have been driven by a higher than expected number of weekly compensation and medical claims, and claims remaining active longer than previously projected. These trends have been reflected by allowing for:

• An increase in projected claim volumes, particularly for claims receiving weekly compensation which, in addition to population growth, are assumed to continue increasing at around 2% per annum over the next 3 years before flattening off. This assumed increase is lower than recent claims volume growth of around 6%.
• A small increase in the projected duration of weekly compensation claims. The reflected increase is less than recent experience implies.
• Superimposed inflation estimated at 2–5% for various types of medical treatment and social rehabilitation.
• Estimates of future investment returns given current and expected future market conditions as at 31 March 2016.
• Risk-free interest rates as implied by the New Zealand Government bond yield curve derived as at 30 April 2016. This is inconsistent with the timing of other economic assumptions, however this has no material impact on levy paths.

See Appendix B for an explanation of these terms.

Prescribed Motor Vehicle Account Levy Rates for the 2017/19 Levy Period (1 July 2017 to 30 June 2019)

Following public consultation, the Board recommended that the Government reduce the Motor Vehicle Account average levy by 13%, from $130.26 to $113.94 (excluding the MSL) for the 2017/19 levy period. Expected claims costs have increased, driven primarily by more claims receiving weekly compensation. This has been more than offset by changes in economic factors.

The recommended rates, as well as the indicative out-year levy rates in the Board’s consultation, were consistent with the funding policy. Cabinet agreed to the rates recommended by the Board, and the rates have now been prescribed in the Accident Compensation (Motor Vehicle Account Levies) Regulations 2017.

Levy rates have been set at a level below new-year claim costs to reduce the expected funding ratio from 112.7% to 112.5% by 31 March 2019. Indicative future levy rates, shown below, gradually move the Motor Vehicle Account’s funding ratio towards the funding target.

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