C : General Business Disclosures

This section includes disclosures for operations which are significant in size and/or nature for Finance. In 2016–17, these areas include general insurance activities, the investment funds and superannuation.

C1 : General insurance activities

Finance provides insurance and risk management services to Australian General Government Sector entities. The classes of business cover include: Liability, Property, Motor Vehicle, and Personal Accident and Travel.

These services are funded from the Comcover Special Account (refer to Note F3.1).

Policy and measurement

 

Premium revenue

Premium revenue includes amounts charged but excludes GST. Premiums are recognised as revenue over the period insured which is from 1 July to 30 June each year.

Notional reinsurance expense

Finance pays a notional reinsurance charge of $5.0 million to the OPA which is recognised as an expense when paid.

Reinsurance and other recoveries

Reinsurance and other recoveries received or receivable in respect of gross claims paid and movements in reinsurance and other recovery assets are recognised as revenue in the year they occur.

Reinsurance and other recovery assets are actuarially assessed as the present value of the expected future receipts, calculated on the same basis as the outstanding claims liability.

Claims expense and outstanding claims liabilities

Claims expense represents claims payments and the movement in the gross outstanding claims liability.

The outstanding claims liability is actuarially assessed and measured at the central estimate of the present value of expected future payments of claims incurred at the reporting date with an additional risk margin to allow for inherent uncertainty in the central estimate. The expected future payments include those in relation to unpaid reported claims; claims incurred but not reported (IBNR); claims incurred but not enough reported (IBNER); and indirect expenses that are expected to be incurred in settling these claims. Changes in claims estimates are recognised in the surplus/deficit in the year in which the estimates are changed.

Assets backing general insurance liabilities

The balance of the Comcover Special Account and receivables from insurance activities are held to back general insurance liabilities. For further information in relation to the Comcover Special Account refer to Note F3.1.

 

Key actuarial assumptions

The key actuarial assumptions for the determination of the outstanding claims liabilities are set out in the table below:

	30 June 2017		30 June 2016
	Property	Liability	Property	Liability
Average discount rate	1.9%	2.0%	1.6%	1.7%
Average inflation rate	2.2%	3.5%	2.2%	3.5%
Average weighted term to settlement (years)	1.5	2.1	1.6	2.8
Expense rate	1.8%	1.5%	1.9%	3.1%
Risk margin	16.4%	13.4%	16.1%	19.6%

Process used to determine actuarial assumptions

 

Discount rate	To allow for the time value of money, projected payments are discounted at a risk free rate derived from market yields on Commonwealth Government securities at the reporting date.
Inflation rate	Claims inflation is incorporated into the resulting projected payments to allow for both expected levels of economic inflation and superimposed inflation. Economic inflation is based on economic indicators such as the consumer price index (CPI) and/or increases in average weekly earnings. Superimposed inflation is past claims inflation in excess of wage inflation. A review of past claims reveals no evidence of superimposed inflation.
Average weighted term to settlement	The average weighted term to settlement is based on historic payment patterns.
Expense rate	Claims handling expenses are calculated by reference to Finance’s claims handling remuneration agreements for direct expenses and internal costs for indirect expenses.
Risk Margin	The risk margin is assessed by examining the historical variability of the claims experience, considering industry studies and benchmarks, and applying actuarial judgement, especially in respect of uncertainties not reflected in the claims data. This assessment is performed for each class of business. Diversification benefit is allowed for, with consideration given to industry studies and benchmarks.

 

Sensitivity analysis

Finance has conducted a sensitivity analysis to quantify the impact of changes in the key underlying assumptions on the surplus/(deficit). The sensitivity analysis has been performed for each variable independently of all other changes and is net of reinsurance and other recoveries. The table below describes how a change in each assumption will affect the surplus/(deficit).

		30 June 2017		30 June 2016
		Property	Liability	Property	Liability
Assumption	Movement	$'000	$'000	$'000	$'000
Average discount rate	1%	1,607	6,776	1,716	6,635
	-1%	(1,647)	(6,987)	(1,788)	(7,007)
Average inflation rate	1%	(1,627)	(6,818)	(1,777)	(6,750)
	-1%	1,618	6,744	1,740	6,528
Average weighted term to settlement (years)	+ 1 years	(291)	(4,755)	(985)	(4,940)
	- 1 years	347	4,894	668	5,142
Expense rate	1%	1,071	3,246	1,080	2,352
	-1%	(1,071)	(3,246)	(1,080)	(2,352)
Risk margin	1%	(937)	(2,907)	(948)	(2,028)
	-1%	937	2,907	948	2,028

The movements are the absolute movement in the assumption (e.g. +1% increase in the expense rate for Property from 1.8% to 2.8%).

Insurance risk management

Finance is exposed to insurance risk, which is discussed below.

Objectives, policies and processes for managing insurance risk

Finance provides insurance and risk management services to deliver a net benefit to the Australian Government over the longer term. The transfer of insurance risk from participating general government sector entities offers the most comprehensive and cost effective approach to the management of risk exposures. The provision of a captive fund focuses on improving risk identification and management in entities and increases in transparency and accountability to the Australian Government and the public.

Key processes to manage insurance risk include:

• Detailed risk exposure surveys and benchmarking tools identifying insurable risks;
• Actuarial modelling of claims history, exposures and industry experience to provide an estimate of expected claims costs for the insured year and to assist in the determination of the annual premium collection;
• Claim management and investigation processes;
• Appointment of an independent actuary for valuation services of the outstanding claims liability;
• WoAG policy development and risk management education to improve risk awareness and capability of fund members; and
• Governance frameworks within Finance.

Concentration of insurance risk

No reinsurance policies were placed in 2016–17 (2015–16: nil), reflecting the capacity of the Australian Government to cost- effectively self-insure against infrequent large claims.

C1.1 Underwriting result

	Departmental
	30 June	30 June
	2017	2016
	$'000	$'000
Direct premium revenue
Premium revenue	140,290	125,149
Premium revenue eliminated on consolidation	1,176	1,163
Total direct premium revenue	141,466	126,312
Notional reinsurance expense	(5,000)	(5,000)
Net premium revenue	136,466	121,312
Net incurred claims
Insurance claims	(163,993)	(94,295)
Reinsurance and other recoveries revenue	1,823	1,504
Total net claims	(162,170)	(92,791)
Other underwriting expenses	(9,248)	(8,061)
Underwriting result	(34,952)	20,460
Revenue from government	9,067	10,151
Operating surplus/(deficit)	(25,885)	30,611

C1.2 Net claims incurred

	30 June 2017			30 June 2016
	Current year	Prior years	Total	Current year	Prior years	Total
	$'000	$'000	$'000	$'000	$'000	$'000
Gross claims incurred
Undiscounted	103,563	59,764	163,327	111,006	(25,830)	85,176
Discount and discount movement	(5,658)	2,180	(3,478)	(5,071)	10,356	5,285
Gross claims incurred discounted	97,905	61,944	159,849	105,935	(15,474)	90,461
Reinsurance and other recoveries
Undiscounted	(472)	(1,380)	(1,852)	(372)	(825)	(1,197)
Discount and discount movement	2	27	29	1	(308)	(307)
Reinsurance and other recoveries discounted	(470)	(1,353)	(1,823)	(371)	(1,133)	(1,504)
Net claims incurred	97,435	60,591	158,026	105,564	(16,607)	88,957
Claims handling expense			4,144			3,834
Total net claims			162,170			92,791

 

The $60.6 million increase in prior years net claims incurred is due to valuation increases arising from adverse claims experience in the Liability claims category exceeding favourable claims experience in the Property claims category

C1.3 Reinsurance and other recoveries receivable

	Departmental
	30 June	30 June
	2017	2016
	$'000	$'000
Reinsurance and other recoveries
Reinsurance and other recoveries	6,368	6,758
Discount to present value	(404)	(375)
Total reinsurance and other recoveries	5,964	6,383

C1.4 Outstanding claims liability

	Departmental
	30 June	30 June
	2017	2016
	$'000	$'000
Gross claims liability - undiscounted	393,671	301,843
Discount to present value	(15,363)	(12,136)
Gross claims liability - discounted	378,308	289,707
Claims handling expense	6,062	7,875
Gross central estimate	384,370	297,582
Risk margin	54,293	55,005
Outstanding claims liability	438,663	352,587
Risk margin adopted	14.1%	18.5%
Probability of adequacy of the risk margin	75%	75%

Reconciliation of the movement in discounted outstanding claims liability

	30 June 2017		30 June 2016
	Property	Liability	Total	Total
	$'000	$'000	$'000	$'000
Net outstanding claims liability at the beginning of the financial year	109,650	236,554	346,204	322,824
Incurred claims	35,801	61,634	97,435	105,564
Claims payments	(24,224)	(47,307)	(71,531)	(65,577)
Unwinding of discount	1,377	2,832	4,209	4,839
Risk margin release	(2,654)	(7,718)	(10,372)	(9,260)
Changes in assumptions and experience	(11,280)	78,034	66,754	(12,186)
Net outstanding claims liability at the end of the financial year	108,670	324,029	432,699	346,204
Reinsurance and other recoveries	368	5,596	5,964	6,383
Gross outstanding claims liability at the end of the financial year	109,038	329,625	438,663	352,587

C1.5 Claims development table

The following table shows the development of the estimated undiscounted outstanding claims relative to the ultimate expected claims for the 10 most recent accident years.

	Prior	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	Total
	$'000	$'000	$'000	$'000	$'000	$'000	$'000	$'000	$'000	$'000	$'000	$'000
Estimate of net ultimate claims costs
At end of accident year		48,840	45,062	50,778	121,801	61,550	66,779	114,162	102,138	91,686	86,286
One year later		47,451	43,312	48,922	108,067	70,345	63,441	106,114	119,144	87,813
Two years later		45,204	48,191	47,317	100,453	67,843	65,399	96,653	218,627
Three years later		48,962	45,043	70,257	91,789	68,396	62,028	89,631
Four years later		46,215	46,681	65,808	84,123	67,312	58,498
Five years later		47,361	47,758	65,956	82,395	62,705
Six years later		45,257	44,336	51,423	80,279
Seven years later		43,452	44,757	49,163
Eight years later		42,922	44,909
Nine years later		42,661
Estimate of net ultimate claims costs		42,661	44,909	49,163	80,279	62,705	58,498	89,631	218,627	87,813	86,286
Cumulative payments		(42,514)	(44,654)	(46,878)	(76,972)	(48,391)	(44,963)	(49,559)	(52,168)	(25,589)	(9,486)
Net claims liability - undiscounted	9,004	147	255	2,285	3,307	14,314	13,535	40,072	166,459	62,224	76,800	388,402
Discount to present value	(169)	(3)	(5)	(61)	(77)	(365)	(408)	(1,731)	(3,964)	(3,565)	(4,680)	(15,028)
Net claims liability - discounted	8,835	144	250	2,224	3,230	13,949	13,127	38,341	162,495	58,659	72,120	373,374
Claims handling expense												6,062
Net central estimate												379,436
Net risk margin												53,263
Total net outstanding claims liability												432,699
Reinsurance and other recoveries												5,964
Total gross outstanding claims liability												438,663

 

The claims development table discloses amounts net of reinsurance and other recoveries to give the most meaningful insight into the impact on surplus/(deficit).