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Defence Service Homes Insurance Scheme
Notes to and forming part of the Financial Statements
for the year ended 30 June 2017
This section analyses how DSHIS manages financial risks within its operating environment.
Note 6.1. Contingent Assets and Liabilities
Quantifiable Contingencies
The Scheme had no quantifiable contingencies as at 30 June 2017 (nil at 30 June 2016).
Unquantifiable Contingencies
The Scheme had no unquantifiable contingencies as at 30 June 2017 (nil at 30 June 2016).
Note 6.2. Financial Instruments
Accounting Policy
Financial Assets
The Scheme classifies its financial assets as held-to-maturity investments.
Held-to-Maturity Investments
Non derivative financial assets with fixed or determinable payments and fixed maturity dates that the Scheme has the positive intent and ability to hold to maturity are classified as held-to-maturity investments. Held-to-maturity investments are recorded at amortised cost using the effective interest method less impairment, with revenue recognised on an effective yield basis.
Effective Interest Method
The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset, or, where appropriate, a shorter period.
Income is recognised on an effective interest rate basis.
Impairment of Financial Assets
Financial assets are assessed for impairment at each balance date.
Financial Liabilities
Other Financial Liabilities
Supplier and other payables are recognised at amortised cost. Liabilities are recognised to the extent that the goods or services have been received (and irrespective of having been invoiced). For outstanding claims, refer to Note 3.1B.
The net income/expense from financial assets not at fair value through profit and loss is nil (2016: nil).
There was no income or expense from financial liabilities (2016: nil). |
During the year there has been no financial assets that have been reclassified. |
Note 6.3. 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.
*Figures extracted from PricewaterhouseCoopers report (Table 36), Defence Service Homes Insurance Scheme Outstanding Claims Liability as at 30 June 2017.
Notes: |
||
(a) Net provision, 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 expense) | 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: | ||
(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%. |
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 3.1B.
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 3.1B.
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 counterparty's Credit rating falls below A-. The Scheme currently has no receivables with reinsurance counterparties below A-.
Accounting Policy
Reinsurance Arrangements
The Scheme purchases reinsurance each year for dwelling per risk, catastrophe risk and legal liability risk. Premium ceded to reinsurers is recognised as an expense and is measured at nominal value in accordance with the pattern of reinsurance service received.
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