Thursday, March 12, 2009

A manufactured "crisis"

For the past week, the government has been mounting a consistent campaign to talk down ACC and claim it is in some sort of financial "crisis" in order to justify privatisation. The Minister for ACC, Nick Smith, has even gone so far as to claim that "if ACC was an insurance company, it would be insolvent". But the problem for the government is that this crisis does not exist. According to the experts, the "crisis" is a reflection of the global economic crisis and an artefact of ACC's transition.

The Standard quotes an article from this morning's Dominion-Post (offline) from actuary John Eriksen:

“All this talk of liabilities being blown out is complete nonsense. It’s ill-founded scaremongering, which, given the current economic picture, is the last thing people need to be told.

“All this nonsense is easily explained. Assets have basically dropped in value, helped in no small part by the collapse of the markets. But the ACC has also taken a hit on the liabilities side. So, on paper the losses have ballooned, when in reality there’s nothing wrong with it.”

Meanwhile, in the Herald, Brian Fallow goes into more detail. The short version is that its all about the discount rate used to compute lifetime injury costs:
A key variable is interest rates. The lower rates are the larger the notional lump sum needed to fund the required cash outgoings will be. And lately they have dropped with a thud.

In the actuaries' latest estimate the steep drop in interest rates, all along the yield curve but especially at the short end, has alone added $1.6 billion to the liability - more than half the overall increase.

Together with other changes in economic assumptions, including the outlook for economic growth and wage inflation, it accounts for 71 per cent of the latest "blowout" in liabilities the politicians are wringing their hands over.

Given the prodigious sum governments around the world are borrowing it is a racing certainty interest rates will climb - and the seesaw effect on the net present value of ACC liabilities will be downward.

(Emphasis added).

Fallow thinks there are problems with ACC - increased claims, declining rehabilitation outcomes, increased medical costs - but not the sort of crisis National is manufacturing. And Fallow is at a loss to explain why they are doing this, "unless [they] plan to undermine the scheme itself".