• Table of Contents
• Disability Investment Group
• Executive Summary
• National Disability Insurance Scheme (NDIS) – A Possible Model
• Principal Recommendation
• Summary of Other Recommendations
• Section I
• Part 1: Experience of Disability in Australia
• Part 2: Need for Change
• Section II
• Part 3: Establishing a New National Disability Insurance Scheme
• Part 4: Ensuring Income Support is Adequate
• Part 5: Improving savings and taxation incentives for privately - funded services
• Section III
• Part 6: Providing More Housing for People with Disability
• Part 7: Offering Better Employment Opportunities
• Part 8: Building Research and Best Practice
• Appendices
• Appendix A
• Appendix B
• Appendix C
• Appendix D
• Appendix E
• Appendix F
• Appendix G
• Appendix H
• Appendix I
• Appendix J

The Way Forward – A New Disability Policy Framework For Australia

• Previous: Appendix C
• Next: Appendix E

Appendix D: Insurance Scheme Funding Arrangements

In an Australian insurance³ context, it is a requirement for operations to be structured on a fully-funded basis, plus a margin to increase the probability of sufficiency. This means that each year the premiums that are collected are set aside and invested to meet the full cost of claims incurred or received in the year underwritten by the policy,⁴ and also to provide a ‘risk margin’ to cover the uncertainty inherent in the claims process.

It is usual practice for State and Territory accident compensation schemes, which are not required to report to APRA, to fund their operations in a similar manner. The NSW Lifetime Care Authority, which is the only Australian scheme specifically established to provide for the lifetime care and support needs of a group of people (in this case those injured in NSW in a motor vehicle injury), is also funded in this way.

In these operations, therefore, the premiums are based on a number of critical assumptions including the expected number of claims and the forecast cost of those claims. Then the scheme managers have to balance the assets of the scheme against the liabilities to ensure that funding is available to meet future costs.

Fully-funded schemes are attractive from an intergenerational perspective, because future tax payers do not have to meet costs that were incurred in earlier years. Such intergenerational neutrality is particularly important when there are likely to be significant demographic shifts, such as the current expectation that as the Australian population ages, people with disability are likely to increasingly outlive their parents.

In the short-term pay-as-you-go funding arrangements are cheaper than fully-funded models, but in the long-term fully funded models are less expensive as the accumulated assets, and the investment return on them, become an ever increasing source of funds.

In Australia today, there are a large number of people with disability, whose needs are being met by their families and for whom no funds have been set aside to provide for their future care. In addition, many people with disability today have unmet needs for care and support, equipment, therapy and other services. As noted in this Report these costs are growing at around 4.8 per cent in real terms, and they represent a very significant notional unfunded liability.

The DIG in framing its recommendations therefore had to balance a preference for a fully-funded scheme, that would be a best practice insurance structure, a desire to meet current and future demands for services, the short-to medium-term fiscal outlook, the Government’s commitment to fiscal restraint and the demographic and social forces that are causing an inexorable growth in the unfunded real costs of disability at rates that are well in excess of real GDP growth.

As a pragmatic way forward the DIG, after consulting with PwC, is recommending that the funding arrangements for a NDIS should include the funding to meet immediate demands for services on a pay-as-you-go basis for people with disability at the time the scheme is introduced and funding to meet both the immediate and some of the future costs of care and support for people who acquire or are born with disability after the scheme is introduced.

In the analysis undertaken for DIG by PwC, 30 per cent of the future costs of care of new incidence of disability is set aside each year. This will result in a growing asset pool as the funds are invested and should be sufficient to ensure that the scheme is managed based on insurance principles.

Over time more and more people will have 30 per cent of their future costs of care set aside. This will provide an offset to the demographic forces that would otherwise result in disability costs rising relative to GDP. Based on the calculations by PwC it seems reasonable to expect that while the introduction of a NDIS would lead to an increase in gross disability expenditure in the first few years of the scheme, thereafter gross disability expenditures would quickly stabilise relative to GDP, implying intergenerational neutrality.

In addition there will be potentially large savings in other government expenditures, including reduced dependence on the Disability Support Pension and Carer Payment and additional offsets in the health, criminal justice, aged care and other parts of the social service system as a result of the introduction of a NDIS.

Full details of the funding assumptions are available in the PwC Report.

3. Insurance operations regulated by the Australian Prudential Regulatory Authority (APRA).
4. Policies may specify “claims incurred” or “claims made” coverage, which defines which events are eligible for coverage in a particular policy period.

• Previous: Appendix C
• Next: Appendix E

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