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Note 6. Managing uncertainties

Defence Service Homes Insurance Scheme
Notes to and forming part of the Financial Statements

for the period ended 30 June 2018

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 2018 (nil at 30 June 2017).

Unquantifiable Contingencies

The Scheme had no unquantifiable contingencies as at 30 June 2018 (nil at 30 June 2017).

Note 6.2. Financial Instruments

  2018 2017
  $'000 $'000
Note 6.2A: Categories of financial instruments    
Financial Assets    
Held-to-maturity investments    
    Investments 64,297 62,169
Total held-to-maturity investments 64,297 62,169
     
Loans and receivables    
    Cash and cash equivalents 3,198 2,642
    Trade and other receivables 16,114 16,093
Total loans and receivables 19,312 18,735
     
Total financial assets 83,609 80,904
     
Financial Liabilities    
Financial liabilities measured at amortised cost    
    Trade creditors 6,272 6,456
    Other payables 411 366
    Outstanding claims 14,710 18,897
Total financial liabilities measured at amortised cost 21,393 25,719
     
Total financial liabilities 21,393 25,719

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  2018 2017
  $'000 $'000
Note 6.2B: Net gains or losses on financial assets    
Held-to-maturity investments    
   Interest revenue 1,518 1,493
Net gains on held-to-maturity investments 1,518 1,493
     
Net gains on financial assets 1,518 1,493

The net income/expense from financial assets not at fair value through profit and loss is nil (2017: nil).

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Note 6.2C: Net gains or losses on financial liabilities
There was no income or expense from financial liabilities (2017: nil).
 
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.

Note 6.3A: Sensitivity to insurance risk

TABLE A: Analysis of sensitivity of 30 June 2018 net provision to various changes in assumptions1
Item Amount Change from final estimate Note
2018 2017 2018 2018 2017 2017
$'000 $'000 $'000 % $'000 %
1.  Figures extracted from PricewaterhouseCoopers report (Table 36), Defence Service Homes Insurance Scheme Outstanding Claims Liability as at 30 June 2018.
Net liability, including prudential margin 14,286 17,759 0.0 0.0 (a)
               
Inflation +1% 14,346 17,791 60 0.4 32 0.2 (b)
Inflation –1% 14,226 17,729 (60) –0.4 (30) –0.2 (b)
               
Discount +1% 14,205 17,674 (81) –0.6 (85) –0.5 (c)
Discount –1% 14,370 17,846 84 0.6 87 0.5 (c)
               
Superimposed inflation +1% 14,347 17,791 61 0.4 32 0.2 (d)
Superimposed inflation –1% 14,226 17,727 (60) –0.4 (32) –0.2 (d)
               
10% more IBNR claims in PPCI models 14,366 17,857 80 0.6 98 0.6 (e)
10% less IBNR claims in PPCI models 14,206 17,661 (80) –0.6 (98) –0.6 (e)

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

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  2018 2017
  $'000 $'000
Estimated Gross Outstanding Claims 15,463 20,645
less: Estimated Outstanding Recoveries 1,177 2,886
Net Outstanding claims (incl GST and claims administration expense) 14,286 17,759
less: GST 754 1,749
Net Outstanding claims (incl claims administration expense) 13,532 16,010
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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