Note 3. Financial Position

Accounting Policy

Receivables

Trade receivables and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as ‘receivables’. Receivables are measured at amortised cost using the effective interest method less impairment.

Accounting Policy

Reinsurance Receivables

Reinsurance receivables are recorded at discounted estimated value on paid claims and incurred claims not yet paid and recognised as a reduction in the claims expense.

Accounting Policy

Acquisition of Assets

Assets are recorded at cost on acquisition except as stated below. The cost of acquisition includes the fair value of assets transferred in exchange and liabilities undertaken. Non-financial assets are initially measured at their fair value plus transaction costs where appropriate.

Assets acquired at no cost, or for nominal consideration, are initially recognised as assets and income at their fair value at the date of acquisition, unless acquired as a consequence of restructuring of administrative arrangements. In the latter case, assets are initially recognised as contributions by owners at the amounts at which they were recognised in the transferor’s accounts immediately prior to the restructuring.

Property, Plant and Equipment

Asset Recognition Threshold

Purchases of property, plant and equipment (PP&E) are recognised initially at cost in the statement of financial position, except for purchases costing less than $2,000 (with the exception of leasehold improvements where the threshold is $50,000), which are expensed in the year of acquisition (other than where they form part of a group of similar items which are material in total).

The initial cost of an asset includes an estimate of the cost of dismantling and removing the item and restoring the site on which it is located. This is particularly relevant to 'make-good' provisions in property leases taken up by DVA where there exists an obligation to restore the property to its original condition. These costs are included in the value of DVA's leasehold improvements with a corresponding provision for the 'make-good' recognised.

Revaluations

Following initial recognition at cost, property plant and equipment are carried at fair value. Valuations are conducted with sufficient frequency to ensure that the carrying amounts of assets do not differ materially from the assets’ fair values as at the reporting date. The regularity of independent valuations depend upon the volatility of movements in market values for the relevant assets. DVA’s property, plant and equipment were last revalued by independent valuers as at 30 June 2017. A desktop revaluation was performed by independent valuers as at 30 June 2018.

Revaluation adjustments are made on an asset class basis. Any revaluation increment is credited to equity under the heading of asset revaluation reserve except to the extent that it reverses a previous revaluation decrement of the same asset class that was previously recognised in the surplus/deficit. Revaluation decrements for a class of assets are recognised directly in the surplus/deficit except to the extent that they reverse a previous revaluation increment for that class.

Any accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the asset is restated to the revalued amount.

Fair value for each class of asset are determined as shown below:

Depreciation

Depreciable property, plant and equipment assets are written-off to their estimated residual values over their estimated useful lives to DVA using, in all cases, the straight-line method of depreciation.

Depreciation rates (useful lives), residual values and methods are reviewed at each reporting date and necessary adjustments are recognised in the current, or current and future reporting periods, as appropriate.

Depreciation rates applying to each class of depreciable asset are based on the following useful lives:

Impairment

All assets were assessed for impairment at 30 June 2018. Where indications of impairment exist, the assets recoverable amount is estimated and an impairment adjustment made if the assets recoverable amount is less than its carrying amount.

The recoverable amount of an asset is the higher of its fair value less costs of disposal and its value in use. Value in use is the present value of the future cash flows expected to be derived from the assets. Where the future economic benefit of an asset is not primarily dependent on the assets ability to generate future cash flows, and the asset would be replaced if the entity were deprived of the asset, its value in use is taken to be its depreciated replacement cost.

Intangibles

DVA’s intangibles comprise internally developed and purchased software for internal use. These assets are carried at cost less accumulated amortisation and accumulated impairment losses.

Software is amortised on a straight-line basis over its anticipated useful life. The useful life of DVA’s software is usually 1 – 19 years (2016–17: 2 – 17 years).

All software assets were assessed for indications of impairment as at 30 June 2018.

Accounting Policy

Unearned Premiums

The provision for unearned premiums represents the estimated proportion of premiums written in the current year relating to cover provided in the subsequent year. DSHIS’s system allows for the unearned proportion to be calculated for each individual policy in accordance with AASB 1023 General Insurance Contracts.

Revenue in Advance

Revenue in advance is recognised where the revenue has been received prior to the period in which the revenue relates. DSHIS recognises revenue in advance at nominal value.

Accounting Policy

Liability Adequacy Test and Unexpired Risk Liability

AASB 1023 General Insurance Contracts requires the application of a liability adequacy test upon unearned premiums. Where this test indicates that DSHIS’s unearned premiums are insufficient to cover the expected future claims under the policies associated with those premiums, the difference is recognised in the Statement of Comprehensive Income as an Unexpired Risk Liability. The result of this test indicates that DSHIS unearned premiums are sufficient to cover expected future claims on unexpired policies at 30 June 2018 and as such, DSHIS has recognised no movement (2017: nil) and an unexpired risk liability of nil (2017: nil). The probability of adequacy applied in the test is different to the probability of adequacy adopted in determining the outstanding claims liability. No specific guidance exists for the risk margin to be used in determining the adequacy of premium liabilities. The use of the 75% basis as a regulatory benchmark in Australia, is consistent with market practices.

DSHIS has not taken into account the income from invested retained surpluses or agency commissions which are used to subsidise costs associated with the building insurance policy.

DSHIS’s unadjusted unearned premium liability as at 30 June 2018 was $21,475,000 (2017: $21,315,000) and future cash flows relating to future claims under the risk associated with those premiums as advised by DSHIS’s independent actuaries was $18,134,000 (2017: $19,470,00).

Outstanding Claims

The provision for outstanding claims has been determined on a case by case approach in respect of all claims reported. The liability for outstanding claims includes claims incurred but not yet paid, incurred but not reported (IBNRs), and incurred but not enough reported (IBNERs). The provision includes the expected administration costs of settling those claims. A report on the adequacy of the provision was prepared by independent actuaries as at 30 June 2018. The methods used to assess the outstanding liability were Projected Case Estimates (PCE) and Payment Per Claims Incurred (PPCI). This methodology meets Actuarial Standard PS 300 Valuation of General Insurance Claims.

Actuarial Methods

The methodology for the estimation of the net outstanding claims provision as at 30 June 2018 consists of:

1. Predicting future claim payment cash flows in respect of claims incurred prior to 30 June 2018. Separate predictions by claim type (Liability, Catastrophe and Other) are made in respect of each combination of accident quarter and financial quarter of payment. The future cash flow predictions are derived from several actuarial models of the various claim processes. That is, actuarial models are constructed for numbers of claims reported, average payments per claim incurred, development of case estimates and payments as a proportion of case estimates. The results of the models are blended based on their individual characteristics to produce a single estimate of the outstanding claims.
2. Initially all estimates are made in 30 June 2018 dollars, but subsequently are increased to allow for inflation from that date to the date of payment.
3. Liability for outstanding claims is estimated by:
   • discounting these inflated claim payments to allow for investment return at risk free rates;
   • adjusting for the effect of GST; and
   • adding an allowance to provide for associated claims administration expenses.
4. Gross and net liabilities are derived by making adjustments for both third party recoveries and reinsurance recoveries.
5. The estimate of liability is increased by a prudential margin.

Actuarial Assumptions

The following assumptions have been made in determining the net outstanding claims provision as at 30 June 2018:

1. Inflation rates: 2.79% for 2017–18;
2. Discount rates: 1.57% for 2017–18;
3. Claims administration expenses (CAE): 5% of gross outstanding claims liability;
4. Superimposed inflation: approximately 7.2% p.a. in the actuarial model with explicit superimposed inflation assumption;
5. Prudential margin: 12% of central estimate (including CAE) of outstanding claims liability for 75% probability of sufficiency;
6. Number of claims for the 2017–18 accident year: approximately 7,005; and
7. Average claim size (in actual values) for the 2017–18 accident year (net of all recoveries): approximately $3,678.

The following assumptions were made in determining the net outstanding claims provision as at 30 June 2017:

1. Inflation rates: 3.37% for 2016–17;
2. Discount rates: 1.63% for 2016–17;
3. Claims administration expenses (CAE): 5% of gross outstanding claim liability;
4. Superimposed inflation: approximately 6.1% p.a. in the actuarial model with explicit superimposed inflation assumption;
5. Prudential margin: 11% of central estimate (including CAE) of outstanding claims liability for 75% probability of sufficiency;
6. Number of claims for the 2016–17 accident year: approximately 8,378; and
7. Average claim size (in actual values) for the 2016–17 accident year (net of all recoveries): approximately $3,728.

Process for Determining Assumptions

The process for determining each of the assumptions is as follows:

1. Inflation rates: are taken as an average of CPI (housing) and AWE inflation expectations which are based on internal and external forecast of future rate;
2. Discount rates: derived from a yield curve fitted to the actual yields on Commonwealth Government bonds as at 30 June 2018;
3. Claims administration expenses: assumed based on industry experience;
4. Superimposed inflation: derived from actuarial models based on the long term average of past experience for all non-catastrophe claims;
5. Prudential margin: selected based on analysis of historical variability within the portfolio;
6. Number of claims in 2017–18 accident year: derived from actuarial models of past claim reporting patterns; and
7. Average claim size (in actual values) for 2017–18 accident year: derived as an outcome of all the actuarial models blended to form adopted estimates of outstanding claims and hence total ultimate costs and average claim sizes.

Insurance Risk Management

Insurance risk management policies and practices are disclosed at Note 7.2E — Risk Management.

Process for Determining Risk Margin

The risk margin required for a 75% level of sufficiency has been estimated using various statistical modelling techniques applied to the claim data. An actuarial model (the "chain ladder") has been fitted to 10,000 simulated claim data sets to determine 10,000 estimates of the outstanding claims and hence an approximate distribution of those amounts. The analysis is on the basis prescribed by the Australian Prudential Regulation Authority (APRA) in that it ignores asset risk but takes into account liability risk, including the inflation risk.