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Note 14. Risk Management

Insurance risk

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 14A: Sensitivity to insurance risk

TABLE A: Analysis of sensitivity of 30 June 2013 net provision to various changes in assumptions
Item Amount Amount Change from final estimate Change from final estimate Note
2013 2012 2013 2013 2013 2012 2012  
  $’000 $’000 $’000 % $’000 %  
Net liability, including prudential margin 11,656 12,107 - 0.0 - 0.0 (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 +1% 11,838 12,208 182 1.6 101 0.8 (d)
Superimposed inflation -1% 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)

*Figures extracted from PricewaterhouseCoopers report, Defence Service Homes Insurance Scheme Outstanding Claims Liability as at 30 June 2013

Notes: (a) Net provision, including prudential margin.

Net provision, 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 expense) 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 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 the Scheme’s underwriting standards.

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

Concentration risk

The Scheme manages exposure to concentration risk by issuing polices across all Australian locations. Reinsurance is purchased to reduce potential exposure to catastrophe losses.

Claims management and claims provisioning risk

The Scheme’s approach to determining the outstanding claims provision and the related sensitivities are set out in note 1.

The Scheme 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.
  • The aggregate outstanding claims provision for the Scheme 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.

Reinsurance counterparty risk

The Scheme reinsures a portion of risks underwritten to control exposure to insurance losses, reduce volatility and protect capital.

The Scheme’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 the Scheme’s reinsurance management strategy.
  • Reinsurance arrangements are regularly reassessed to determine their effectiveness based on current exposures, historical losses and potential future losses.
  • 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-. The Scheme currently has no receivables with reinsurance counterparty’s below A-.

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