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Note 7. Managing Uncertainties

This section analyses how DVA manages financial risks within its operating environment.

Note 7.1. Contingent Assets and Liabilities

Note 7.1A: Departmental — Contingent Assets and Liabilities
  Indemnities Total
  2018 2017 2018 2017
  $'000 $'000 $'000 $'000
Contingent liabilities        
Balance from previous period 33,900 35,024 33,900 35,024
Re-measurement 5,608 (1,124) 5,608 (1,124)
Total contingent liabilities 39,508 33,900 39,508 33,900
Net contingent liabilities 39,508 33,900 39,508 33,900

Quantifiable Contingencies

The indemnity of $39,508,000 (2017: $33,900,000) represents the net assets of Defence Service Homes Insurance Scheme being an indemnity offered to policy holders by the Australian Government under the Defence Service Homes Act 1918.

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Note 7.1B Administered — Contingent Assets and Liabilities

Quantifiable Administered Contingencies

DVA has no contingent liabilities in respect of claims for damages/costs (2017: nil).

Unquantifiable Administered Contingencies

As at 30 June 2018 DVA had no legal claims against it that DVA is defending which could give rise to gains or losses.

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Note 7.2. Financial Instruments

    2018 2017
  Notes $'000 $'000
Note 7.2A: Categories of Financial Instruments
Financial Assets      
Held-to-maturity investments      
Investments 3.1D 64,297 62,169
Total held-to-maturity investments   64,297 62,169
Loans and receivables      
Cash and cash equivalents 3.1A 7,974 6,413
Trade receivables 3.1B 2,335 840
Premiums and recoveries receivables 3.1C 15,606 15,490
Other receivables 3.1B 574 633
Total loans and receivables   26,489 23,376
Total financial assets   90,786 85,545
Financial Liabilities      
Financial liabilities measured at amortised cost      
Payables — suppliers 3.3A 58,912 20,297
Gross outstanding claims 3.4A 14,710 18,897
Other payables — reinsurance premiums 3.3C 388 366
GST payables 3.3C 23
Total financial liabilities measured at amortised cost   74,033 39,560
Total financial liabilities   74,033 39,560

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    2018 2017
  Notes $'000 $'000
Net income/expense from financial assets not at fair value through the profit or loss is nil (2017: nil).
Note 7.2B: Net Gains or Losses from Financial Assets      
Held-to-maturity investments      
Interest revenue 1.1C 1,518 1,493
Net gains on held-to-maturity investments   1,518 1,493
Net gains on financial assets   1,518 1,493
Note 7.2C: Net Gains or Losses from Financial Liabilities
There was no income or expense from financial liabilities.

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Note 7.2D: Risk Management

Insurance Risks

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 7.2E: Sensitivity to Insurance Risk

TABLE A: Analysis of sensitivity of 30 June 2018 net provision to various changes in assumptions
Item Amount Change from final estimate Note
2018 2017 2018 2018 2017 2017
$'000 $'000 $'000 % $'000 %
Net liability, including prudential margin 14,286 17,759 (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 (56) –0.4 (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)

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  1. (a) Net provisions, including prudential margin:
  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) 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:

  1. (b) adding/ subtracting 1% p.a. to each future assumed inflation rate.
  2. (c) adding/ subtracting 1% p.a. to each future assumed discount rate.
  3. (d) adding/ subtracting 1% to superimposed inflation assumption.
  4. (e) increasing/ reducing Incurred But Not Reported (IBNR) claims in each of the Payment Per Claims Incurred (PPCI) models by 10%.

This table has been revised to improve the transparency of the reconciliation of net outstanding claims.

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 DVA's underwriting standards.

Pricing of risks is controlled by use of in-house pricing models relevant to the market in which DVA operates. Experienced underwriters and actuaries maintain historical pricing and claims analysis and these are combined with a knowledge of current developments in the market.

Concentration risk

DVA manages exposure to concentration risk by issuing policies across all Australian locations. Reinsurance is purchased to reduce potential exposure to catastrophe losses.

Claims management and claims provisioning risk

DVA's approach to determining the outstanding claims provision and the related sensitivities are set out in Note 1.1C Insurance Activities and Note 7.2E Sensitivity to Insurance Risk.

DVA 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; and
  • the aggregate outstanding claims provision for DVA 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 1.1C.

Reinsurance counterparty risk

DVA reinsures a portion of risks underwritten to control exposure to insurance losses, reduce volatility and protect capital. DVA'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 DVA's reinsurance management strategy
  • reinsurance arrangements are regularly reassessed to determine their effectiveness based on current exposures, historical losses and potential future losses, and
  • 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 counterparties' credit rating falls below A–. DVA currently has no receivables with reinsurance counterparties below A–.

Note 7.3. Administered — Financial Instruments

    2018 2017
  Notes $'m $'m
Note 7.3A: Categories of Financial Instruments      
Financial Assets      
Loans and receivables      
Cash and cash equivalents 4.1A 57 77
Total loans and receivables   57 77
Available-for-sale financial assets      
Investments in Commonwealth entities 4.1C 1,463 1,430
Total available-for-sale financial assets   1,463 1,430
Total financial assets   1,520 1,507
Financial Liabilities      
Financial liabilities measured at amortised cost      
Health care payables 4.3B 50 47
Grants payables   1
Other payables   30 49
Total financial liabilities measured at amortised cost   81 96
Total financial liabilities   81 96

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Note 7.4. Fair Value Measurement

Note 7.4A: Fair Value Measurement
  Fair value
measurements at the end
of the reporting period
  2018 2017
  $'000 $'000
Non-financial assets    
   Leasehold improvements 19,694 14,873
   Property, plant and equipment 588 1,076
Total non-financial assets 20,282 15,949
Total fair value measurements of assets in the statement of financial position 20,282 15,949

A single non-financial asset was measured at fair value on a non-recurring basis as at 30 June 2018 $1,350,000 (2017: $1,350,000) as DVA has declared this asset as held for sale. DVA controls a property at Greenslopes, Queensland. The property is subject to a Heritage Code and identified as a "Heritage Place — Cultural", in the Brisbane City Council Plan, which restricts the development potential of the property. This restriction is not regarded as being entity specific and would transfer to a market participant in a hypothetical transaction. The added value of the improvements is considered negligible with asbestos contamination impairing the building asset.

DVA's assets are held for operational purposes and not held for the purposes of deriving a profit. The current use of all non-financial assets is considered their highest and best use.

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