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 Official Public Account (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 judgements and estimates
Finance takes all reasonable steps to ensure that it has appropriate information regarding its claims exposures. The claim estimates and judgements are regularly evaluated and updated based on historical experience and other factors. However, given the uncertainty in the estimation process, it is likely that the final outcome will prove to be different from the original liability established.
Finance’s activities are classified into two main categories: Property (Property, Motor Vehicle, and Personal Accident and Travel) and Liability. Different actuarial methods and assumptions are applied at a more granular level taking into account the characteristics of the class of business, claim type and the extent of the development of each past accident period.
The estimation of IBNR and IBNER are generally subject to a greater degree of uncertainty where claims notification and settlement may not happen for many years after the event giving rise to the claim. For this reason, Liability classes of business typically display greater variability between the initial estimates and final outcomes.
Key actuarial assumptions
The key actuarial assumptions for the determination of the outstanding claims liabilities are set out in the table below:
| 30 June 2018 | 30 June 2017 | |||
| Property | Liability | Property | Liability | |
| Average discount rate | 2.0% | 2.2% | 1.9% | 2.0% |
| Average inflation rate | 2.4% | 3.4% | 2.2% | 3.5% |
| Average weighted term to settlement (years) | 1.6 | 2.7 | 1.5 | 2.1 |
| Expense rate | 1.4% | 1.6% | 1.8% | 1.5% |
| Risk margin | 16.0% | 19.0% | 16.4% | 13.4% |
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 economicindicators 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).
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 2017-2018 (2016-2017: nil), reflecting the capacity of the Australian Government to cost-effectively self-insure against infrequent large claims.
C1.1 Underwriting result
C1.2 Net claims incurred
The $10.5 million decrease in prior years net claims incurred is due to valuation releases arising from overall favourable claims experience in the Liability and Property claims categories.
C1.3 Reinsurance and other recoveries receivable
C1.4 Outstanding claims liability
Reconciliation of the movement in discounted outstanding claims liability
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.
The claims development table discloses amounts net of reinsurance and other recoveries to give the most meaningful insight into the impact on surplus/(deficit).
