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Note 7. Managing Uncertainties

This section analyses how DVA manages financial risks within its operating environment.

Note 7.1. Contingent Assets and Liabilities

Note 7.1A: Departmental—Contingent Assets and Liabilities
  Indemnities Total
  2017 2016 2017 2016
  $'000 $'000 $'000 $'000
Contingent liabilities        
Balance from previous period 35,024 27,995 35,024 27,995
Re-measurement (780) 7,029 (780) 7,029
Total contingent liabilities 34,244 35,024 34,244 35,024
Net contingent liabilities 34,244 35,024 34,244 35,024

Quantifiable Contingencies

The indemnity of $34,244,000 (2016: $35,024,000) represents the net assets of Defence Service Homes Insurance Scheme being an indemnity offered to policy holders by the Australian Government under the Defence Service Homes Act 1918.

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Note 7.1B Administered—Contingent Assets and Liabilities

Quantifiable Administered Contingencies

DVA has no contingent liabilities in respect of claims for damages/costs (2016: nil). A small number of claims for damages were outstanding at 30 June 2017. The possible losses relating to these claims have been insured by Comcare or are provided for in the Military Compensation provision (Note 4.4).

Unquantifiable Administered Contingencies

As at 30 June 2017 DVA had a number of legal claims against it that DVA is defending which could give rise to gains or losses. It is not possible to estimate the amounts of any eventual payments that may be required in relation to these claims.

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Note 7.2. Financial Instruments

Note 7.2A: Categories of Financial Instruments
    2017 2016
  Notes $'000 $'000
Financial Assets      
Held-to-maturity investments      
Investments 3.1D 62,169 58,655
Total held-to-maturity investments   62,169 58,655
Loans and receivables      
Cash and cash equivalents 3.1A 6,413 7,711
Trade receivables 3.1B 840 1,335
Premiums and recoveries receivables 3.1C 15,490 13,233
Other receivables 3.1B 633 449
Total loans and receivables   23,376 22,728
Total financial assets   85,545 81,383
Financial Liabilities      
Financial liabilities measured at amortised cost      
Payables—suppliers 3.3A 20,297 14,132
Gross outstanding claims 3.4A 18,897 13,290
Other payables—reinsurance premiums 3.3C 366 476
Total financial liabilities measured at amortised cost   39,560 27,898
Total financial liabilities   39,560 27,898

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Note 7.2B: Net Gains or Losses from Financial Assets
    2017 2016
  Notes $'000 $'000
Held-to-maturity investments      
Interest revenue 1.1C 1,493 1,218
Net gains on held-to-maturity investments   1,493 1,218
Financial assets at fair value through profit or loss      
Investment revenue 1.1C - 140
Net gains on financial assets at fair value through profit or loss   - 140
Net gains on financial assets   1,493 1,358

Net income/expense from financial assets not at fair value through the profit or loss is nil (2016: nil).

Note 7.2C: Net Gains or Losses from Financial Liabilities
There was no income or expense from financial liabilities (2016: nil).

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Note 7.2D: 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 7.2E: Sensitivity to Insurance Risk

TABLE A: Analysis of sensitivity of 30 June 2017 net provision to various changes in assumptions
Item Amount Change from
final estimate
Change from
final estimate
2017 2016 2017 2017 2016 2016
$'000 $'000 $'000 % $'000 %
Net liability, including prudential margin 17,759 13,326 - - - - (a)
Inflation +1% 17,791 13,366 32 0.2 40 0.3 (b)
Inflation –1% 17,729 13,286 (30) -0.2 (40) -0.3 (b)
Discount +1% 17,674 13,258 (85) -0.5 (68) -0.5 (c )
Discount –1% 17,846 13,395 87 0.5 69 0.5 (c )
Superimposed inflation in PPCI models +1% per qtr 17,791 13,382 32 0.2 56 0.4 (d)
Superimposed inflation in PPCI models—1% per qtr 17,727 13,270 (32) -0.2 (56) -0.4 (d)
10% more IBNR claims in PPCI models 17,857 13,394 98 0.6 68 0.5 (e)
10% less IBNR claims in PPCI models 17,661 13,258 (98) -0.6 (68) -0.5 (e)


  1. (a) Net provisions, including prudential margin:
  2017 2016
  $'000 $'000
Estimated gross outstanding claims 20,645 14,372
Less: Estimated outstanding recoveries 2,886 1,046
Net outstanding claims (incl GST and claims administration) 17,759 13,326
Less: GST 1,749 1,081
Net outstanding claims (incl claims administration expense) 16,010 12,245

Equivalent net provision derived by:

  1. (b) adding/ subtracting 1% p.a. to each future assumed inflation rate.
  2. (c) adding/ subtracting 1% p.a. to each future assumed discount rate.
  3. (d) adding/ subtracting 1% to superimposed inflation assumption.
  4. (e) increasing/ reducing Incurred But Not Reported (IBNR) claims in each of the Payment Per Claims Incurred (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 1.1C Insurance Activities and Note 7.2E Sensitivity to Insurance Risk.

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 1.1C.

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-.

Note 7.3. Administered—Financial Instruments

Note 7.3A: Categories of Financial Instruments
    2017 2016
  Notes $'m $'m
Financial Assets      
Loans and receivables      
Cash and cash equivalents 4.1A 77 47
Total loans and receivables   77 47
Available-for-sale financial assets      
Investments in Commonwealth entities 4.1C 1,430 1,319
Total available-for-sale financial assets   1,430 1,319
Total financial assets   1,507 1,366
Financial Liabilities      
Financial liabilities measured at amortised cost      
Health care payables 4.3B 47 60
Other payables   49 38
Total financial liabilities measured at amortised cost   96 98
Total financial liabilities   96 98

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Note 7.4. Fair Value Measurement

Note 7.4A: Fair Value Measurement
  Fair value
measurements at the end
of the reporting period
  2017 2019
  $'000 $'000
Non-financial assets    
   Leasehold improvements 14,873 17,047
   Property, plant and equipment 1,076 1,662
Total non-financial assets 15,949 18,709
Total fair value measurements of assets in the statement of financial position 15,949 18,709

A single non-financial asset was measured at fair value on a non-recurring basis as at 30 June 2017 $1,350,000 (2016: $1,350,000) as DVA has declared this asset as held for sale. DVA controls a property at Greenslopes, Queensland. The property is subject to a Heritage Code and identified as a "Heritage Place—Cultural", in the Brisbane City Council Plan, which restricts the development potential of the property. This restriction is not regarded as being entity specific and would transfer to a market participant in a hypothetical transaction. The added value of the improvements is considered negligible with asbestos contamination impairing the building asset.

DVA's assets are held for operational purposes and not held for the purposes of deriving a profit. The current use of all non-financial assets is considered their highest and best use.

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