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Note 6. Managing Uncertainties

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).

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Note 6.2. Financial Instruments

Note 6.2A: Categories of financial instruments
  2017 2016
  $'000 $'000
Financial Assets    
Held-to-maturity investments    
    Investments 62,169 58,655
Total held-to-maturity investments 62,169 58,655
     
Loans and receivables    
    Cash and cash equivalents 2,642 2,171
    Trade and other receivables 16,093 13,595
Total loans and receivables 18,735 15,766
     
Total financial assets 80,904 74,421
     
Financial Liabilities    
Financial liabilities measured at amortised cost    
    Trade creditors 6,456 5,666
    Other payables 366 510
    Outstanding claims 18,897 13,290
Total financial liabilities measured at amortised cost 25,719 19,466
     
Total financial liabilities 25,719 19,466

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Note 6.2B: Net gains or losses on financial assets
  2017 2016
  $'000 $'000
Held-to-maturity investments    
Interest revenue 1,493 1,218
Net gains on held-to-maturity investments 1,493 1,218
     
Financial assets at fair value through profit and loss    
Interest revenue - 140
Change in fair value - -
Net gains on financial assets at fair value through profit and loss - 140
     
Net gains on financial assets 1,493 1,358

The net income/expense from financial assets not at fair value through profit and loss is nil (2016: nil).

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Note 6.2C: Net gains or losses on financial liabilities
There was no income or expense from financial liabilities (2016: nil).

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Note 6.2D: Financial assets reclassified
During the year there has been no financial assets that have been reclassified.

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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.

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Note 6.3A: Sensitivity to insurance risk
TABLE A: Analysis of sensitivity of 30 June 2017 net provision to various changes in assumptions*
Item Amount Amount Change from final estimate Change from final estimate Note
2017 2016 2017 2017 2016 2016  
$'000 $'000 $'000 % $'000 %  
Net liability, including prudential margin 17,759 13,326 - 0.0 - 0.0 (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 +1% 17,791 13,382 32 0.2 56 0.4 (d)
Superimposed inflation -1% 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)

*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-.

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