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Note 14: Financial Instruments

Note 14A. Categories of Financial Instruments

Financial assets    2013 2012
Fair value through profit and loss:   $'000 $'000
Investments 6D 46,930 48,746
Total fair value through profit and loss   46,930 48,746
Loans and receivables:      
Cash and cash equivalents 6A 4,778 2,851
Trade receivables 6B 518 525
Premiums and recoveries receivables 6C 10,965 8,640
Other receivables 6B 1,420 1,873
Total loans and receivables   17,681 13,889
Carrying amount of financial assets   64,611 62,635
Financial Liabilities At amortised cost:      
Payables - suppliers 8A 13,089 14,764
Gross outstanding claims 8E 13,676 14,882
Other payables - reinsurance premiums 8F 592 1,291
Total financial liabilities   27,357 30,937
Carrying amount of financial liabilities   27,357 30,937
Note 14B. Net Income and Expense from Financial Assets    2013 2012
Fair value through profit and loss   $'000 $'000
Investment revenue 3F 1,601 2,137
Total investment revenue   1,601 2,137
Change in fair value   (117) (208)
Net gain at fair value through profit and loss   1,484 1,929

Net income/expense from financial assets not at fair value through profit and loss is nil (2012: nil).

Note 14C. Net Income and Expense from Financial Liabilities

There was no income or expense from financial liabilities.

Note 14D. Fair Value of Financial Instruments

The carrying amount of financial instruments approximates the fair value.

Note 14E. Credit Risk

DVA’s exposure to credit risk at reporting date in relation to each class of financial assets is the carrying amount of those assets as indicated on the Balance Sheet. DVA has assessed the risk of the default on payment and there were no identified impairments as at 30 June 2013 (2012: nil).

DVA manages its credit risk by undertaking background and credit checks prior to establishing a debtor relationship and only dealing with banks with a ‘AA’ rating.

DVA holds no collateral to mitigate against credit risk.

The following table illustrates DVA’s gross exposure to credit risk, excluding any collateral or credit enhancements.

  2013 2012
  $'000 $'000
Financial assets Cash and cash equivalents 4,778 2,851
Trade receivables 518 525
Investments 46,930 48,746
Premiums and recoveries receivables 10,965 8,640
Other receivables 1,420 1,873
Total 64,611 62,635
Financial liabilities Payables - suppliers 31,089 14,764
Gross outstanding claims 13,676 14,882
Other payables - reinsurance premiums 592 1,291
Total 27,357 30,937

Credit quality of financial instruments not past due or individually determined as impaired

  Not past due nor impaired 2013 Not past due not impaired 2012 Past due or impaired 2013 Past due or impaired 2012
  $'000 $'000 $'000 $'000
Receivables Cash and cash equivalents 4,778 2,851 - -
Trade receivables 422 504 96 21
Investments 46,930 48,746 - -
Premiums and recoveries receivables 10,193 7,934 772 706
Other receivables 1,420 1,873 - -
Total 63,743 61,908 868 727

Ageing of financial assets that were past due but not impaired for 2013

  0 to 30 days 31 to 60 days 16 to 90 days 90+ days Total
  $'000 $'000 $'000 $'000 $'000
Receivables Trade receivables 42 9 41 4 96
Premiums and recoveries receivables 511 180 81 - 772
Total 553 189 122 4 868

Ageing of financial assets that were past due but not impaired for 2012

  0 to 30 days 31 to 60 days 61 to 90 days 90+ days Total
$'000 $'000 $'000 $'000 $'000 $'000
Receivables Trade receivables 18 - - 3 21
Premiums and recoveries receivables 474 154 76 2 706
Total 492 154 76 5 727

Note 14F. Liquidity Risk

DVA’s financial liabilities are payables, outstanding claims and other interest bearing liabilities arising from its insurance activities. The exposure to liquidity risk is based on the notion that DVA will encounter difficulty in meeting its obligations associated with financial liabilities. This is highly unlikely as DVA is appropriated funding from the Australian Government and DVA manages its budgeted funds to ensure it has adequate funds to meet payments as they fall due. In addition, DVA has policies in place to ensure timely payments were made when due and has no past experience of default.

Maturities for non-derivative financial liabilities 2013

  On demand Within 1 year 1 to 5 years > 5 years Total
  $'000 $'000 $'000 $'000 $'000
Liabilities Payables - suppliers 3,790 9,299 - - 13,089
Gross outstanding claims 13,676 - - - 13,676
Other payables - reinsurance premium 592 - - - 592
Total 18,058 9,299 - - 27,357

Maturities for non-derivative financial liabilities 2012

  On demand Within 1 year 1 to 5 years > 5 years Total
  $'000 $'000 $'000 $'000 $'000
Liabilities Payables - suppliers 3,287 11,477 - - 14,764
Gross outstanding claims 14,882 - - - 14,882
Other payables - reinsurance premium 1,291 - - - 1,291
Total 19,460 11,477 - - 30,937

DVA has no derivative financial liabilities in either 2013 or 2012.

Note 14G. Market Risk

DVA holds basic financial instruments that do not expose DVA to certain market risks. DVA is not exposed to ‘Currency risk’ or ‘Other price risk’ and the only interest-bearing items on the Balance Sheet is the managed fund that is operated by UBS on behalf of DSHIS. The table below is a sensitivity analysis of the risk that the Scheme is exposed to:

Sensitivity analysis of the risk that DVA is exposed to for 2013

        Effect on
  Interest rate Balance Change in risk Profit and loss Equity
Interest rate risk (UBS Investment) 3.32% 46,930 +0.5% -0.5% 235 (235) 235 (235)

Sensitivity analysis of the risk that DVA is exposed to for 2012

        Effect
  Interest rate Balance Change in risk Profit and loss Equity
    $'000   $'000 $'000
Interest rate risk (UBS Investment) 4.53% 48,746 +0.5% -0.5% 244 (244) 244

Note 14H: Risk Management

Insurance Risks

The risks inherent in any single insurance contract are the possibility of the insured event occurring and the uncertainty of the amount of the resulting claim. By the very nature of an insurance contract, these risks are random and unpredictable. In relation to the pricing of individual insurance contracts and the determination of the level of the outstanding claims provision in relation to a portfolio of insurance contracts, the principal risk is that the ultimate claims payments will exceed the carrying amount of the provision established.

Note 14I. Sensitivity to Insurance Risk

Item Amount Change from final estimate Note
2013 $'000 2012 $'000 2013 $'000 2013 % 2012 $'000 2012 %  
Net liability, including prudential margin 11,656 12,107 - - - - (a)
Inflation +1% 11,840 12,312 184 1.6 205 1.7 (b)
Inflation -1% 11,483 11,915 (173) -1.5 (192) -1.6 (b)
Discount +1% 11,619 12,069 (37) -0.3 (38) -0.3 (c)
Discount -1% 11,693 12,146 37 0.3 39 0.3 (c)
Superimposed inflation in PPCI models +1% per qtr 11,838 12,208 182 1.6 101 0.8 (d)
Superimposed inflation in PPCI models - 1% per qtr 11,486 12,010 (170) -1.5 (97) -0.8 (d)
10% more IBNR claims in PPCI models 11,721 12,167 65 0.6 60 0.5 (e)
10% less IBNR claims in PPCI models 11,591 12,048 (65) -0.6 (59) -0.5 (e)

Notes: (a) Net provisions, including prudential margin:

  2013 2012
  $'000 $'000
Estimated gross outstanding claims 14,932 16,258
Less: Estimated outstanding recoveries 3,276 4,151
Net outstanding claims (incl GST and claims administration) 11,656 12,107
Less: GST 1,256 1,376
Net outstanding claims (incl claims administration expense) 10,400 10,731

Equivalent net provision derived by:

(b) adding/ subtracting 1% p.a. to each future assumed inflation rate.

(c) adding/ subtracting 1% p.a. to each future assumed discount rate.

(d) adding/ subtracting 1% to superimposed inflation assumption.

(e) increasing/ reducing Incurred But Not Reported (IBNR) claims in each of the PPCI models by 10%.

This table has been revised to improve the transparency of the reconciliation of net outstanding claims.

Underwriting risks

Selection and pricing of risks

Risks insured are limited to dwelling houses owned by persons eligible under the Defence Service Homes Act 1918. Insurance policies are written in accordance with local management practices and regulations within each jurisdiction taking into account DVA’s underwriting standards.

Pricing of risks is controlled by use of in-house pricing models relevant to the market in which DVA operates. Experienced underwriters and actuaries maintain historical pricing and claims analysis and these are combined with a knowledge of current developments in the market.

Concentration risk

DVA manages exposure to concentration risk by issuing policies across all Australian locations. Reinsurance is purchased to reduce potential exposure to catastrophe losses.

Claims management and claims provisioning risk

DVA’s approach to determining the outstanding claims provision and the related sensitivities are set out in Note 1.20.

DVA seeks to ensure the adequacy of its outstanding claims provision by reference to the following controls:

  • Experienced claims managers work with underwriters on coverage issues and operate within the levels of delegation issued to them in respect of the settlement of claims;

  • Processes exist to ensure that all claims advices are captured and updated on a timely basis and with a realistic assessment of the ultimate claims cost; and

  • The aggregate outstanding claims provision for DVA is reviewed by an external actuary annually.

Despite the rigour involved in the establishment and review of the outstanding claims provision, the provision is subject to significant uncertainty for the reasons set out in Note 1.20.

Reinsurance counterparty risk

DVA reinsures a portion of risks underwritten to control exposure to insurance losses, reduce volatility and protect capital. DVA’s strategy in respect of the selection, approval and monitoring of reinsurance arrangements is addressed by the following protocols:

  • Treaty or facultative reinsurance is placed in accordance with the requirements of DVA’s reinsurance management strategy,

  • Reinsurance arrangements are regularly reassessed to determine their effectiveness based on current exposures, historical losses and potential future losses, and

  • Exposure to reinsurance counterparties and the credit quality of those counterparties is actively monitored.

Strict controls are maintained over reinsurance counterparty exposures. Reinsurance is placed with counterparties that have a Standard & Poor’s credit rating of A- or above. Credit risk exposures are calculated regularly and compared with authorised credit limits, and the arrangements discontinued from the day the counterparties’ credit rating falls below A-. DVA currently has no receivables with reinsurance counterparties below A-.

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