Estimating Liabilities for Child Sexual Abuse

Geoff has been consulting in general insurance for over 30 years, and has been an adviser to many insurers, accident compensation schemes, and governments. Geoff’s comments represent his own personal views and do not represent the views of any other person or organisation.

The Royal Commission into Institutional Responses to Child Sexual Abuse has reached the stage where there is much debate about compensation, civil litigation and redress. The Royal Commission is not due to present its final recommendations until the end of 2017, following which all levels of government will need to consider their response.

In the meantime, insurance companies and other institutions, such as government agencies, that might face an increase in the cost of claims arising from past events need to continually prepare accounts with provisions for outstanding claims liabilities. Appointed Actuaries need to come to grips with the appropriate treatment, given their responsibilities to report on insurance liabilities and financial condition.

MY PROPOSITION

I start with the view that there is no value for any users of the accounts, or stakeholders in the actuary trying to anticipate possible outcomes when reporting liabilities. While this may seem counter-intuitive it is where I have landed after thinking about the question for nearly two years.

The outcome of the Royal Commission is speculative at this stage, and nobody knows what will be recommended, let alone what will eventually transpire. No defendant or insurer can currently provide useful information to a user of its accounts about the impact on profitability or solvency by booking a liability figure that is no better than speculation.

Does it make sense to report that an entity has made a loss (by increasing claim provisions) because the Royal Commission is underway? Does it make sense to say that an institution is insolvent or heading that way at the present time?

INSURANCE LIABILITY VALUATION REPORTS

If my proposition were to be accepted, then the logical consequence for an actuarial liability valuation would be:

• don’t change a central estimate or risk margin on account of possible changes in liabilities as a result of the Royal Commission;
• don’t reduce currently held reserves on the basis that a redress scheme would reduce insurer liabilities;
• if there is a ‘business as usual’ reserving basis for child sexual abuse claims, continue to review and update that basis in a consistent manner (i.e. consistent claims reporting patterns and unchanged average claim costs); and
• describe in reporting the nature of the uncertainty, the reason the approach was adopted and comment on the relative materiality of the liabilities to the company.

A further logical consequence would be that, if material, the annual financial report of an insurer or other institution would include a note as to the uncertainty surrounding the estimate of the liability.

FINANCIAL CONDITION REPORTS

Each year the Appointed Actuary must prepare a Financial Condition Report (FCR) for the Board of an insurer, which is provided in turn to APRA. My suggested approach to the FCR relies on the confidentiality of the report, and the consequent ability of the actuary to make a ‘full and frank’ report. This is in contrast to the insurer’s annual financial report and APRA returns.

The approach that I would think about for the FCR would be roughly as follows.

1. Discussion of the nature and extent of potential exposures (including if there is believed to be none).
2. Discussion of the extent to which the insurer has good knowledge of its potential exposures (e.g. insureds and policy details) or whether potential exposures exist that cannot be specifically identified.
3. Include in the stress tests one with a plausible adverse outcome in respect of child sexual abuse claims, with perhaps
   a reverse stress test if the potential exposure is large enough for the company to be technically insolvent.
4. In reviewing the Risk Management Framework, include commentary on how the risk management process has been dealing with the potential for changed insurance outcomes following the Royal Commission.

HOW DO THESE THOUGHTS FIT WITH STANDARDS?

The two boxes opposite give a brief outline of how my suggested approach might sit with relevant standards. For an insurer these are accounting (AASB1023), APRA (GPS320) and Actuarial (PS300). For non-insurers the relevant standard is AASB137.

These comments are superficial and are not based on any authoritative source. Each insurer or institution will need to consider accounting and actuarial advice specific to their own circumstances.

WHERE TO FROM HERE?

While the approach described above makes sense to me now, it will not always be thus. Circumstances will clearly change in future, but in a way and in a timeframe that is not known. For this reason the approach must always be reconsidered each time liabilities are reviewed.

Each actuary (and each insurer or affected institution) will need to form his or her own views on the appropriate steps to take.

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