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

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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)

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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