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2012

Annual Report

Contents

Chairman’s Report 2

CEO’s Report 3

About the VMIA 4

Report of Operations 7

VMIA Financial Report 33

Domestic Building (HIH) Indemnity Fund Financial Report 84

Corporate Information 101

Victorian Managed Insurance AuthorityABN 39 682 497 841

Level 30 / 35 Collins Street Melbourne Victoria 3000 PO Box 18409 Collins St East Victoria 8003

P: 03 9270 6900 F: 03 9270 6949

www.vmia.vic.gov.au

September 2012

The Hon. Robert Clark, MP Minister for Finance Level 26/121 Exhibition Street MELBOURNE VIC 3000

Dear Minister,

Victorian Managed Insurance Authority Annual Report 2011-12I am pleased to submit the Annual Report for the Victorian Managed Insurance Authority (VMIA) for the period 1 July 2011 to 30 June 2012, as required by Section 46 of the Financial Management Act 1994.

In accordance with Section 52 of the House Contracts Guarantee Act 1987, the VMIA has also included in its Annual Report:

(a) details of its administration of –

(i) the indemnity scheme established under the House Contracts Guarantee Act 1987; and

(ii) the Domestic Building (HIH) Indemnity Fund.

(b) the audited financial report of the Domestic Building (HIH) Indemnity Fund.

Yours Sincerely,

John Peberdy Chairman

Chairman’s Report

Major challenges including the continuing claims activity from the Black Saturday bushfires and flood losses, escalating healthcare claims and volatile global financial markets over the past year, have highlighted the important role that the VMIA plays in providing the State with risk management and insurance solutions.

Since my appointment as Chairman last September, I’ve noted how the organisation has responded to these and other external forces in a professional and considered manner.

To ensure that the organisation remains in touch with such challenging market conditions, it’s critical that we attract senior executives with the flexibility and capability to address circumstances as they arise, either on a day-to-day basis or in the medium to long term.

We’ve recently appointed several senior executives with a broad span of expertise necessary to meet the many challenges facing the insurance and risk sectors. These include a new Chief Executive Officer, Warren Hutcheon, who has more than 25 years in commercial insurance. Other key appointments include Victor Martindale as our Chief Financial Officer and Ian Patterson, as the VMIA’s first-ever Chief Information Officer, both of whom bring a wealth of expertise to these Key Executive roles.

Another critical component of the VMIA’s ability to keep up with emerging challenges is the need to embed a workplace culture based on our values of teamwork, respect and integrity, customer focus and passion for excellence.

Mirroring these cultural changes internally, is a conscious drive to ensure we’re working closely with our 4,500+ client base, ranging from State Government departments and agencies to public hospitals, medical research agencies and community service organisations.

The VMIA undertook wide-reaching reviews of the ways in which we engage with clients. The Board recently received a report on these reviews and is confident that clear opportunities to improve processes, systems and structure have been identified.

During the 2012 financial year, the VMIA’s capital position was impacted significantly by several external factors beyond our control. A substantial reduction in discount rates used in the actuarial valuation of our insurance liabilities resulted in a significant increase in the value of these liabilities. Further, the VMIA has accepted a substantial portfolio of runoff liabilities which directly impacted our underwriting performance.

Consequently, the VMIA’s Funding Ratio of 80% at financial year-end has fallen outside our preferred operating range of 85% to 115%. However, independent actuarial modelling has confirmed that the VMIA is in a strong position to recover to 100% funding over the medium term.

At a whole-of-Victorian Government level, the VMIA continued to provide high quality advice, particularly in regard to government reviews undertaken at both state and national level. The VMIA helped to shape Victoria’s position in regard to Federal Government reviews of:

• National Disaster Response & Recovery Arrangements (NDRRA) and the National Disaster Insurance Review (NDIR), which followed the Queensland floods in January 2011; and

• National Disability Insurance Scheme (NDIS) and the National Injury Insurance Scheme (NIIS).

While it was difficult to farewell two long-time Board members during the year – Susan Moffatt and Henry Pinskier – we welcomed Dr. John McNeil. John brings over 30 years experience and a broad range of involvements across the medical profession.

I also would like to thank Steve Marshall who as CEO of the VMIA for the past five years, established a sound and stable footing on which the organisation can grow.

It is an exciting time for the VMIA with complex challenges emerging on a daily basis.

I wish to thank each and every staff member and the Board for their efforts and look forward to working with these groups, along with the Minister for Finance and his office, and our many clients in the year ahead.


Page 2 | VMIA Annual Report 2012

CEO’s Report

It is my great pleasure to present my first Annual Report as CEO of the VMIA. Since arriving in February, I have been impressed by the knowledge and professionalism of our staff and their dedication to assisting our clients to protect their assets and the services they deliver to the people of Victoria.

A range of significant business influences is compelling us to adapt to a

new set of challenges. The global economic situation not only affects the VMIA’s investment return (this return subsidises our other income streams and enables us to keep premiums as low as possible), but also affects the discount rates used to value our insurance claims provision. More than 60% of the VMIA’s claims are long tail in nature, and the historically-low bond yields are placing upward pressure on the valuation of our long-tail liabilities. This has a detrimental impact on our Balance Sheet, Funding Ratio and Operating Result.

The combination of investment return significantly below our long-term target, increases in our long-tail claims provision and adverse events have impacted this year’s operating performance and caused a substantial deficit. This is despite the fact that our underlying, controllable business has performed well during the current financial year, as shown in the chart above.

Adverse weather conditions and prolonged periods of flooding from August 2010 to June 2012 have substantially increased our property claims payouts. While the VMIA acquires catastrophe reinsurance, our self-retention levels and the structure of our reinsurance program means that the cost of the recent floods will be mostly funded by us, with reinsurers bearing a smaller proportion of the total losses.

We recently introduced a ‘Balanced Scorecard’ to our planning and performance management frameworks to provide clarity and focus on the core areas of our business. The performance narrative in this Annual Report is structured on our five Balanced Scorecard segments: Clients, Government, People, Financial and Systems and Processes.

The focus on our Clients has been on understanding their needs and expectations for risk and insurance solutions, and ensuring we deliver the optimum value proposition.

We have conducted extensive surveys and focus groups with our clients. This has provided valuable opportunities to improve our service delivery model.

During the year, we also reviewed our claims operating model and are implementing changes to improve our management of large losses and catastrophic events.

We continue to help clients reduce their Total Cost of Risk (TCoR), and in particular the insurable components of their risk profile. We developed a new methodology to assess, document and measure the Total Cost of Insurable Risk (TCoIR) and piloted it with three major clients.

We continue to provide advice on risk and insurance related matters and have contributed to a number of Government reviews. We look forward to supporting clients to comply with a new Standing Direction issued by the Minister for Finance in May 2012 that will require entities to attest to the adequacy of their insurance arrangements in the 2012-13 financial year.

With regard to our People, we have rolled out an extensive culture change and leadership development program, including Values and Behaviours workshops and independent ‘pulse checks’. In response to the reviews we undertook in 2011-12, we will introduce enhancements to our business operating model that improve both client services and provide greater career development opportunities for our staff.

In the Financial area, we implemented a new general ledger system and developed a new set of metrics to allow us to ensure that our product lines are sustainable and appropriately priced.

With our Systems and Processes, we launched a web portal that enables our clients to directly access VMIA records relating to them. Much of the year was also devoted to the development of a new three-year Information Management Strategy, which will be implemented commencing 2012-13.

I would like to thank our staff for their tremendous effort during the past 12 months. It has been a challenging year, but with all the initiatives we now have in place, I am confident that we are well positioned to continue to provide a valuable service to the Government and to Victoria.

In accordance with the Financial Management Act 1994, I am pleased to present the VMIA’s Annual Report for the year ending 30 June 2012.

Warren Hutcheon CEO23 August 2012

VMIA Annual Report 2012 | Page 3

About the VMIA

The Victorian Managed Insurance Authority (VMIA) was established on 1 October 1996 as the State’s insurer and as a risk management adviser for the Victorian Government sector. The VMIA is a Public Financial Corporation whose operations are governed by the Victorian Managed Insurance Authority Act 1996 and amended by the Victorian Managed Insurance Authority (Amendment) Act 2001. It is also a body corporate with perpetual succession overseen by the VMIA’s Board.

The VMIA is successor at law to the State Insurance Office (SIO) and assumed certain claims liabilities of the SIO, as well as workers’ compensation liabilities of other government departments, that are being managed to finalisation. This includes asbestos-related claims.

In October 2005, the VMIA assumed responsibility for management of the run-off of the builders’ warranty claims for the Housing Guarantee Fund Ltd (HGF), the Domestic Building (HIH) Indemnity Fund and Homesafe Equities Pty Ltd.

In March 2010, the VMIA was assigned responsibility of providing Domestic Building Insurance to Victorian builders by the State Government of Victoria. The VMIA has arrangements in place to ensure continuity of insurance service to builders.

What the VMIA doesThe VMIA offers its services to more than 4,500 clients including: all Victorian Government departments, statutory authorities and agencies, more than 1,100 public health institutions, more than 2,700 community service organisations, and 550 cemetery trusts. The VMIA also provides cover for approximately 15,000 Victorian residential builders.

Our portfolio represents about $128 billion in State-insured assets, with an annual net premium revenue of $195 million and $2 billion in investments and other assets.

The functions of the VMIA, as set out in the Victorian Managed Insurance Authority Act 1996, (The Act) are:

• To assist departments and participating bodies to establish programs for the identification, quantification and management of risks.

• To monitor how departments and participating bodies manage risk.

• To act as an insurer for, or provide insurances to, departments and participating bodies.

• To provide indemnities to officers as referred to in The Act.• To provide insurance or indemnities to persons or bodies

in accordance with Section 25A of The Act.

• To provide risk management advice to the state and to provide risk management advice and training to departments and participating bodies.

• To carry out any functions conferred on it by the House Contracts Guarantee Act 1987.

• To carry out such other functions as are conferred on it by The Act or any other relevant Acts.

The VMIA provides a comprehensive range of insurance products and risk management services to its clients.

Insurance covers include: medical and professional indemnity, industrial special risks, public and products liability, motor vehicle, construction, directors and officers liability, personal accident, marine cargo and hull, construction risks, fine arts, aviation and travel and domestic building insurances.

When client losses occur, the VMIA manages claims and provides response and guidance in regard to recovery efforts in large loss scenarios.

Risk management services include risk management advice, Site Risk Surveys (SRSs), Risk Framework Quality Reviews (RFQRs) and Strategic Engineering Risk Assessments (SERAs).

The VMIA also provides training programs, seminars and educational events, including the VMIA’s biennial Risk Conference. A broad range of risk management education resources and publications are provided to increase clients’ risk capability.

Our Vision“Victoria manages its risk, enhances its value and improves the quality of life for Victorians”.

Our Mission“To take a leadership role in reducing Victoria’s total cost of risk.”

To achieve our vision we will:

• Nurture deep relationships with our clients, based on understanding and trust.

• Continuously develop and apply our expertise to deliver a wide range of best practice products and services.

• Provide integrated solutions that combine insurance services, risk management and advisory services.


Our ValuesWe are customer focused: Our clients are our priority. We listen carefully to understand our clients’ needs. We are responsive and proactive. We make a difference to our community and to the environment. We have a ‘can do’ attitude. We are open, honest and constructive in our advice. We enthusiastically and passionately deliver consistent service and advice.

We have a passion for excellence: We are accountable for what we do and how we do it. We show personal pride to produce the best possible result. We strive to improve and are open to new ideas and feedback. We are proud of our achievements and celebrate our successes. We learn from our experiences.

We work with respect and integrity: We foster a positive environment. We display and expect professionalism. We follow due process to resolve our differences. We are fair and consistent by treating everyone equally. We listen to opinions and show interest in one another. We follow through on actions and comments. We show empathy towards one another and our clients. We demonstrate trustworthiness.

We work together: We are unified in our purpose and support each other to achieve common goals. We recognise and value each other’s skills and experience. We interact with energy and enthusiasm. We share knowledge. We encourage positive participation and growth. We lead and encourage each other. We appreciate and embrace diversity.

Our Brand AttributesOur brand represents the “value proposition” we offer our clients, or “what VMIA stands for”. The VMIA aspires to be regarded as “an expert and trusted adviser”. Our key brand attributes are:

Security: Providing peace of mind, ensuring that we’ll be there when our clients need us.

It is about delivering on promises, being consistent, reliable and professional.

Trust: Going beyond commercial motivation, always acting in the interests of the State and our clients.

It’s about open and transparent relationships, and doing what we say we’ll do.

Understanding: Recognising that our clients have unique requirements, building relationships that allow us to understand those requirements and having the knowledge, breadth of products and flexibility to be able to provide tailored solutions.

Expertise: Maintaining and leveraging our specialist knowledge and experience in risk, insurance and Government, so that we can deliver comprehensive, integrated and effective solutions, and sharing our expertise through training, education and networking opportunities.

Value: Ensuring our clients have access to the advice and cover they need to protect their services and assets, at the most competitive rates available to sustain this protection.

VMIA’s Operating ModelThe VMIA has developed its business Operating Model around three distinct, yet integrated roles.The Model, as shown in the diagram below, has a core represented by our key functions – Adviser to Government, Risk Management Adviser and State Insurer.These integrated roles, which we have called ALERT, PREVENT and PROTECT.Supporting these roles are the essential corporate functions necessary to ENABLE the VMIA to deliver its services.The Model further integrates the VMIA’s Mission “To take a leadership role in reducing Victoria’s total cost of risk”, as it applies to the state and clients.

ENABLE

ENABLEEN

ABLE

Reduce Total Cost of Riskto CLIENTS

Reduce total cost of riskto GOVERNMENT

Adviser toGovernment

ALERT

RiskManagement

AdviserState

Insurer

PROTECTPREVENT

About the VMIA


About the VMIA

The Balanced Scorecard is a strategic planning and management model that aligns the organisation’s vision and strategy to business activities, to improve internal and external communications, and to monitor performance against strategic goals.

It was established by Harvard Business School as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics, to give managers and executives a more ‘balanced’ view of organisational performance.

The traditional Balanced Scorecard is built around four sectors – Client (or Customer) and the supporting functions of Financial, People and Processes. Due to the VMIA’s role of being the State’s insurer, we have added a fifth sector – Government.

The Client and Government sectors of the Balanced Scorecard are represented by the core of the Operating Model, which includes:

•StateInsurer•RiskManagementAdviser•AdvisertoGovernment.

To deliver these services it is essential that we have effective and efficient corporate services. These are represented by the remaining sectors of the Balanced Scorecard:

•People•SystemsandProcesses•Financial.

Balanced Scorecard approach to VMIA operations


Report of Operations

Corporate objectivesTable 1 provides a high level summary of the Corporate Plan objectives and annual milestones which the VMIA has pursued over the last four years.

In 2011-12, the VMIA introduced a ‘Balanced Scorecard’ approach to all planning and performance management. The following 2011-12 Corporate Objectives (and all contents in this Report of Operations) are based on the VMIA’s new Balanced Scorecard.

Table 1: VMIA progress against long-term Corporate Plan objectives

Previous 3-Year Corporate Plan 2008-11 New 3-Year Corporate Plan 2011-14

2008-11 Objectives

2008-09 Year 1 Outcomes



2011-12 Objectives


AlertDeliver timely quality advice to Government

Connected and built relationships with strategic partners.

Gained seat at the table for VPS strategic risk discussions.

VMIA’s advice included in strategic risk discussions.

GovernmentDeliver timely, quality advice to Government

VMIA’s advice is sought by Government and contributes to strategic risk discussions.1

PreventImplement quality risk management advice and support to clients

Identified clients’ agency and interagency risks.

Satisfied demand for risk management tools and services.

Improved risk integration and capability of VMIA’s clients.

Client (Risk Management)Provide quality risk management advice and support to clients

Clients regard VMIA as expert in the areas of insurance and risk with unique knowledge, responsibility and resources to support the VPS. More than 90% of clients scored 6 or more (out of 10) in a 2012 survey in relation to the quality of services delivered by VMIA.2

ProtectProvide tailored and appropriate insurance products and services

VMIA’s service offering clarified and opportunities for process improvement identified.

VMIA’s product improvements are aligned with client needs.

Government and clients recognise the value of VMIA’s captive model.

Client (State Insurer)Provide tailored and appropriate insurance products and services to clients

Develop and embed total cost of risk (TCoR) in the VPS

N/A N/A Foundations laid to begin development of TCoR understanding.

Develop and embed TCoR across the VPS

To reduce VMIA Clients’ total cost of insurable risk (TCoIR)

Still a relatively low understanding of TCoR, but >80% of clients agree with VMIA’s lead in this area.

1 Source of evidence to support the “Alert” / “Government” Corporate Plan outcomes is the annual survey of DTF staff satisfaction towards the VMIA’s services.

2 Source of evidence to support the “Prevent & Protect” / “Client” Corporate Plan outcomes is the annual VMIA Clients’ Engagement Survey and other independently- conducted market research.



Previous 3-Year Corporate Plan 2008-11 New 3-Year Corporate Plan 2011-14

2008-11 Objectives




2011-12 Objectives


Ensure client needs are understood and addressed

Client-centric model established.

Leveraging the client-centric model to deliver value to clients.

Clients are engaged and regard VMIA as a trusted expert adviser.

Ensure client needs are understood and addressed

Effectively engage key clients

Overall client satisfaction with VMIA services is in the top quartile.

A client engagement rating of (>50%) has been achieved for two consecutive years.

Enable VMIA capabilityEstablish and retain adequate internal capabilities

Capability framework being developed.

Staff training requirements are matched to accredited courses.

VMIA has a high performing culture, recognises leadership and innovation, and fosters staff performance.

PeopleEstablish and retain adequate internal capabilities

Six monthly staff surveys are showing VMIA’s culture is improving, 64% of staff are engaged and staff turnover is declining. There is an increased focus on effective leadership and workplace values and behaviours.3

Systems & ProcessesEstablish and retain adequate internal capabilities

A new Information Management Strategy has been developed which focuses on systems integration and online access to information.

FinancialOperate on a sustainable financial basis

Strong adverse external factors affected VMIA’s Balance Sheet, Operating Result and Funding Ratio, but controllable results were better than 2011-12 targets. VMIA’s practices remain appropriate for the foreseeable future.

3 Source of evidence to support the “Enable” / “People” Corporate Plan Outcomes is the annual VMIA Staff Engagement Survey.

Table 1: VMIA progress against long-term Corporate Plan objectives (continued)


Corporate KPIsTable 2: VMIA performance against 2011-12 Corporate KPIs

KPI 2010-11 Result 2011-12 Target 2011-12 Result

AlertOverall DTF satisfaction with quality of VMIA’s advice4

• 85.4%Government• >_80% • 85.7%

PreventIncrease in aggregated service delivery in risk services and client learning

Client satisfaction with risk management service delivery 9

• 44 RFQRs5 delivered• 121 SRSs6 delivered• 2,188 clients trained

(87.1% attendee satisfaction)7

• One major SERA8 delivered• 76% (mean survey score)

Client: Risk Management• 60 RFQRs• 120 SRSs• >_2,200 clients trained

(with >85% satisfaction)• >_500 clients accessing

online learning• >_380 unique organisations

attending VMIA training• 4 SERAs• >_75%

• 50 RFQRs delivered• 121 SRSs delivered• 2,275 clients trained

(with 89.1% satisfaction)• 593 clients accessing

online learning• 454 unique organisations

attended VMIA training• 3 SERAs delivered• 78% (mean survey score)

ProtectInsurance offerings >_20%

below market costs for comparable products10

Client satisfaction with insurance service delivery 9

Client satisfaction with claims management service delivery 9

• <80% of market price on comparable products, according to independent benchmarks

• 77% (mean survey score)


Client: State Insurer• <_80% of market price

• >_ 6 Strategic Insurance Reviews (SIRs) undertaken

• >_75%

• >_75%

• <80% market price on comparable products, according to independent benchmarks

• 6 x SIRs delivered • 6 x SIRs “Lites” delivered • 80% (mean survey score)


Protect Client engagement rating 9

Overall client satisfaction with VMIA products and services 9

• 54% client engagement (scores 8 -10 across combination of survey questions)

• 95% satisfaction (scores >_ 6 out of 10)

Client: State Insurer• >_ 50% engagement

• >_ 90% satisfaction

• 51% client engagement

• 97% satisfaction (scores >_ 6 out of 10)


4 Source of evidence to support the “Alert” / “Government” KPI results is the annual survey of DTF staff satisfaction towards VMIA’s services.5 RFQR: Risk Framework Quality Review.6 SRS: Site Risk Survey.7 Source of evidence to support the “Alert” / “Government” Client training KPI results is internal data gathered at the completion of each training course.8 SERA: Strategic Engineering Risk Assessment.9 Source of evidence to support all Client “Satisfaction,” “Understanding,” “Agreement” and “Engagement” KPI results is the annual VMIA Clients’ Engagement Survey and other independently-conducted market research.10 Source of evidence to support the Insurance Products Price Benchmarking KPI results is an independent market analysis conducted annually by Aon.


Table 2: VMIA performance against 2011-12 Corporate KPIs (continued)

KPI 2010-11 Result 2011-12 Target 2011-12 Result

Protect: TCoR Level of client understanding of TCoR

Level of client agreement with VMIA’s role in TCoR

• 90% of clients state they have a good or strong understanding of TCoR (scores >_ 6 out of 10)

• 87% of clients agree or strongly agree with VMIA’s role in TCoR (scores >_ 6 out of 10)

Client: TCoR• >_85%

• >_85%

• 85% TCoR understanding (scores >_6 out of 10)

• 86% client agreement with VMIA TCoR role (scores >_ 6 out of 10)

Enable Improve staff engagement rating12

• Staff engagement: N/A11

• 17.9% staff turnover• 3.2% absenteeism• 8.4% vacancy rate13

• 19.7% turnover (for staff with >3 years tenure)

People• >_ 70% staff engagement• <_ 12% staff turnover• <_ 3% absenteeism• <_ 5% vacancy rate• <_ 20% turnover (staff with

>3 years tenure)

• 64% staff engagement• 11.5% staff turnover• 2.9% absenteeism• 1.7% vacancy rate• 9.1% turnover (staff with

>3 years tenure)

Reduce abandoned calls to VMIA14 Time taken to respond to client queries:• Urgent priority <_ 24 hours• Medium priority <_ 3 days• Low priority <_ 5 daysComplaints responded to within agreed timeframes

Percentage of systems uptime

• 1.3% of phone calls abandoned

• N/A

• 10 complaints received, all addressed within agreed time

• N/A

Systems & Processes• <_ 1% abandoned calls

• Time taken to respond to client queries:

• >_ 70% Urgent in <_ 24 hours• 90% Medium in <_ 3 days• 100% Low in <_ 5 days• >_ 20% reduction in number

of complaints

• 100% systems uptime

• 1.3% abandoned calls

• 77% Urgent • 85% Medium • 86% Low • 22 complaints received, all

addressed in agreed time• 11 compliments received• 99.9% systems uptime

VMIA operates on a sustainable financial basis, demonstrated via:• Annual PFIO15 ($)

target achieved• Funding Ratio within

target range

• PFIO = ($47.5 million)

• Funding Ratio = 94%

Financial

• PFIO >_$9.8 million


• PFIO = $36.5 million



11 The annual measurement of staff engagement was not undertaken during the 2010 -11 year. 12 Source of evidence to support the “Enable” / “People” Staff Engagement KPI results is the annual VMIA Staff Engagement Survey.13 Vacancy rate: Counting rules changed in 2010-11 to include all vacant positions, whereas previous years only counted ‘active’ vacancies (i.e., those for which recruitment action was undertaken).14 Source of evidence to support the “Enable” / “Systems & Processes” Abandoned Phone Calls KPI result is internal data gathered on a monthly basis.15 PFIO: Performance From Insurance Operations, based on an updated definition in 2011-12.


Key 2011-12 achievementsIn 2011-12, the VMIA introduced a Balanced Scorecard approach to all of the organisation’s operations, future planning and performance reporting.

This structure has been adopted throughout this Report of Operations.

GOVERNMENT

Government is now recognised as an element of the VMIA’s Balanced Scorecard. In 2012-13, the VMIA will be engaging stakeholders to better understand and improve our government value proposition. Stakeholder satisfaction in this area of the Balanced Scorecard is measured through an annual survey of Department of Treasury and Finance (DTF) contacts. The target of a satisfaction rating greater than 80% has been met.

Heightened focus on risk and insurance The unprecedented level of flood and storm activity in 2010 and 2011 and increased demands on supplementary Commonwealth and State funding, provided the impetus for a number of insurance related reviews at the national and state levels which required the VMIA’s input. This heightened focus on insurance at local and national levels highlighted the need to consider insurance as part of a broader risk management approach and supports the VMIA’s mission to reduce the Total Cost of Risk.

A review of Victoria’s insurance arrangements was provided to the Commonwealth as part of the National Disaster Recovery and Relief Arrangements (NDRRA) review late last year with positive findings on Victoria’s practices. The outcomes of this review were published in March 2012 with follow up work required on some aspects of insurance coverage including insurance options on terrorism and insurance for State and Local Government roads. Recommendations from this review also include that all States investigate the feasibility of other securities-linked protections such as Catastrophe Bonds. The VMIA is working with DTF to follow up these recommendations and investigating potential impacts for 2012-13 premiums.

The VMIA will continue to contribute to and monitor developments of proposed policy reforms, in particular, the National Disability Insurance Scheme (NDIS) and National Injury Insurance Scheme (NIIS) life-long care schemes that have the potential to significantly impact the VMIA’s operations.

Strengthened reporting requirements for insurance arrangementsThe Standing Direction 4.5.5.1 Insurance issued in May 2012 by the Minister for Finance requires relevant entities to attest to the adequacy of their insurance arrangements from the 2012-13 annual reporting year. The VMIA will support clients through consultation on existing arrangements for level of limits, cover, deductibles and capability to manage claims. This work commenced in 2011-12 in partnership with clients to complete a series of focused strategic insurance reviews. These included practical workshops on risk profiling and risk retention and piloting tools developed specifically to support this work.

CLIENT

Corporate objectives in relation to client services are based on our core functions of providing insurance and risk advisory products and services. The traditional measurement of client services is through the annual client engagement survey.

Client Value PropositionA key priority of the VMIA is to improve how we service clients. A number of initiatives are being undertaken to clarify client needs and the value proposition of the VMIA for clients. These include research into services and products required by clients and how the VMIA can more effectively deliver services by improving business efficiencies. The outcomes from this project will inform a program of work to re-engineer the VMIA’s processes and organisational structure for implementation in 2012-13.

Total Cost of Risk (TCoR)In 2011-12, the VMIA continued our efforts to help clients reduce their Total Cost of Risk, with a strong emphasis on positively affecting the Total Cost of Insurable Risk (TCoIR). A new methodology to assess, document and measure TCoIR was piloted with three major clients involved in delivering health services and land management to the state.

From these trials, the VMIA has developed a methodology to measure current baseline TCoIR. This will enable the VMIA, in partnership with our major clients, to target those TCoIR segments that can be improved to reduce future TCoIR costs and measure the effectiveness of risk management interventions.



Strategic insurance reviewsIn 2011-12, the VMIA completed Strategic Insurance Reviews (SIRs) for six departments and a major statutory authority.

These SIRs were completed using the VMIA’s new risk- profiling and retention tools. These tools help clients assess their risk profile and consider the appropriate deductibles and coverage limits. The tools now form the core methodology for all SIRs conducted by the VMIA. This will also assist clients to better understand their insurance needs and the adequacy of their coverage.

During the year, six risk retention/risk profiling workshops were also held.

Improving insurance coverageThe VMIA commits to continuously improving the insurance covers we offer to clients. An initiative for 2012-13 includes examining the current insurance policy coverage, and testing them against financial sustainability.

Risk-Rated Premium Allocation ModelDuring the 2011-12 year, the VMIA introduced risk-based medical indemnity premiums allocated directly to hospitals as a means of improving risk management.

The VMIA is currently consulting with the Department of Health regarding possible modifications to the risk-based premium allocation model to ensure risk management remains a focus.

In line with maintaining a strong commitment to risk management, the VMIA will be further refining our premium allocation for other insurance classes during 2012-13.

2010-12 flood lossesLosses due to flooding continued to heavily impact on the VMIA’s property program throughout the year. In aggregate, losses due to flooding over the past 24 months have exceeded $250 million (including client self-insured deductibles), of which the VMIA has already paid almost $60 million. Payments will continue well into next year for substantial property damage to state roads, rail, hospitals and public parks’ assets.

The VMIA continues to support our clients to restore these assets and to reinstate services to the community as soon as possible.

The VMIA is working in partnership with our reinsurers to obtain a fair outcome on their contributions to these significant losses.

End-to-end review of claims management processDuring the year, the VMIA’s claims portfolio management was reviewed end-to-end to benchmark against external best practice. As a result, three actions are currently being implemented:

• The VMIA’s Claims Management Manual is being rewritten to document and articulate our claims management practices.

• Alignment of claims management resources with clients’ risk exposures on a policy class basis.

• Improved reporting and portfolio performance measurement.

Protecting Victoria’s domestic building sector The ongoing availability of a viable insurance scheme to cover new residential building projects is crucial to Victoria’s economy. Following commercial market collapses in 2010, the VMIA stepped in on behalf of the State and became the major provider and underwriter of Domestic Building Insurance (DBI), via its broker QBE Insurance. During the year, the VMIA raised 51,591 DBI certificates for projects valued at more than $10 billion. In 2011-12 we received 164 claims and paid out $2.4 million.

Client competency development and recognitionThe VMIA is focused on building risk and insurance competency across the VPS. Our program includes training courses, forums, facilitated roundtables, conferences and an array of research and publications. Attendance numbers at these and other functions organised by the VMIA continued to grow during the past year and our satisfaction rating remained at 89%. We also launched our own online learning platform during the year which has been well received. More than 500 individuals and agencies used this service during the year.

In 2011-12, we reached an agreement with the Australia and New Zealand Institute of Insurance and Finance (ANZIIF), to create a Diploma of Integrated Risk Management. The course structure and modules have been developed and registrations will be opening in late August 2012. As at 30 June, more than 120 VPS participants registered their interest in the Diploma.



Risk Management Research and DevelopmentThe VMIA operates a research and development program in partnership with our clients to nurture innovation, called the Risk Management Partnership Program (RMPP). In 2011-12, the RMPP achieved its highest throughput ever, with 20 discrete projects valued at $2.8 million (overall project budgets) completed, and $1.5 million program expenditure provided during the year.

PEOPLE

Culture changeThe VMIA’s corporate plan objective under People is to build an organisation characterised by outstanding leadership at all levels, committed skilled staff and a teamwork culture.

To help achieve this outcome, the VMIA has focused on implementing a more positive workplace culture at all levels of the VMIA. Organisationally the VMIA has introduced a Workplace Behaviours Policy and Guidelines that underpins and supports a new approach to enhancing our organisational culture, managing workplace issues and grievances, and enhancing the leadership skills of our managers.

In addition, the VMIA’s performance management framework was reviewed during the year. First, the mechanical processes for developing, registering and reviewing individual performance management plans were enhanced. Internally, the incentive frameworks for short-term recognition of exemplary efforts were also reviewed and are being considered by the Board as an overall revamp of the VMIA’s performance management framework.

The following programs were delivered during 2011-12, to enhance our workplace culture.

• “Workplace Behaviours Policy and Guidelines” learning sessions were held for all managers and staff across the organisation during the second half of the year.

• All executives have been trained to model desired values and behaviours. Workplace culture improvement KPIs are now in all executive’s performance management plans.

• Values and Behaviours now form part of every VMIA employee’s individual performance management plans.

• A 360 degree feedback program has been implemented for all managers.

• Best practice grievance processes, and staff training in relation to these processes have been introduced.

• Offsite workshops were held with our senior management group to develop strategies for enhancing leadership skills.

• Regular six-monthly “climate” pulse checks are now being undertaken with staff.

Chart 1: Annual Staff Turnover Rate (2010-11 vs 2011-12)

30%

25%25%

18%

24.4% 23.4%

15.1%

11.5%

12.4% 13.6%

20%

15%

10%Q1

Annual Staff Turnover Rate

Q2 Q3 Q4

2010-11

2011-12

The VMIA’s annual target for staff departures is less than 12%. In 2011-12, staff departures declined and the VMIA achieved its annual target. To enhance this target during 2011-12, the employment life cycle from recruitment to exit interviews was reviewed. As a result, a best practice approach was incorporated in processes such as recruitment, learning and development and exit interviews. In November 2011, a new in-depth onboarding process to induct new employees was implemented.



SYSTEMS AND PROCESSES

The VMIA is continually improving its systems and processes to reduce costs, improve performance and provide better customer service. To this end, the VMIA introduced and completed a number of significant initiatives in 2011-12.

Establishment of a Program Management OfficeThe VMIA’s newly created Program Management Office drives the strategic objectives of the VMIA and instils best practice project management governance and disciplines across the organisation. The Program Management Office will help the VMIA achieve its goals as it commences delivering a broad range of new and innovative initiatives that focus on transforming the VMIA into a more effective and responsive organisation.

Improving information managementIn 2011-12, the VMIA developed a comprehensive three-year Information Management strategy. The strategy aims to improve the quality of information provided by the VMIA, deliver new ways for clients to access information, and replace inefficient paper-based processes with electronic work-flows. Once delivered, the strategy will ensure the VMIA is more efficient and effective in the delivery of services.

An innovative initiative being trialled is equipping the VMIA’s mobile workforce with iPads, enabling them to securely access client-specific information from remote locations.

A new self-service portal for clients A new online portal was recently launched enabling clients to securely access their organisation’s specific risk and insurance information online. This self-service facility provides clients with the ability to update contact information and customise the portal to better meet their needs.

Geospatial asset mappingThe VMIA’s geospatial mapping system is continually being enhanced. All client assets are geospatially mapped across Victoria and hazards including bushfire, flood and earthquake-prone zones are overlaid across these mapped assets. Recently roads, rail lines and waterways have been added, greatly enhancing the VMIA’s ability to predict and view potential exposures.

Better understanding clients’ needsA new market research partner was selected to assist the VMIA to undertake comprehensive research into clients’ needs. This information will provide insights into how the VMIA can further improve our services to better meet these needs.



FINANCIAL SUMMARY

Five year summary of financial results

2011-12 $’000

2010-11 $’000

2009-10 $’000

2008-09 $’000

2007-08 $’000

Total revenue1 388,128 371,446 265,209 252,761 70,615

Less reinsurance, claims, commission and administration expenses 708,047 412,957 213,408 536,073 214,582

Operating (deficit)/surplus (319,919) (41,511) 51,801 (283,312) (143,967)

Net cash inflow from operating activities 62,434 127,515 87,713 97,035 131,388

Total assets 2,031,920 1,762,033 1,536,122 1,342,629 1,110,550

Total liabilities 2,367,106 1,844,371 1,581,949 1,456,857 941,466

Net (liabilities)/assets (335,186) (82,338) (45,827) (114,228) 169,084

1. Total revenue is detailed in Note 5 to the financial statements. These figures are subject to fluctuation in value year on year as they include reinsurance recoveries and

investment income. The low total income in the 2007-08 financial year was the result of investment losses.

Operational and budgetary objectives and performance against those objectives

The VMIA’s operating deficit of $319.9 million for 2011-12 was $326.6 million under the budgeted surplus of $6.7 million.

The 2011-12 unfavourable performance to budget can be attributed to the following key factors:

• Substantial increases in net claims incurred as a result of:

(i) Significant decline in discount rates ($165.9 million) driven by weaker global growth prospects, uncertainty in the capital markets and further central bank policy easing.

(ii) The impact of the $100.4 million transfer of the Department of Health’s claims run-off liabilities with effect from 1 January 2012.

(iii) Adverse development of the 2010-11 Victorian flood losses as well as the impact of smaller floods in both March and June 2012.

(iv) Increases in the mesothelioma settlement average claim size assumption by the VMIA’s independent actuary, as a result of a court’s precedent, contributing to the independent actuary’s expectation of a higher average claim size assumption for such future claims.

Some of the above mentioned increases in net claims incurred were partially offset by a reduction in the controllable medical indemnity costs for the most severe claims, driven by favourable experience and the reduction in the average claim size for such future claims.

• The premium deficiency of $47.3 million compared to budget, driven by deficiencies of $35.6 million in the 2012-13 medical indemnity premium pricing and $7.3 million in the Domestic Building Insurance premium.

• The net investment income of 4.27% ($62.9 million), being $41.1 million below the long term target investment return of 7.5% per annum ($104 million), as a result of uncertainty in global capital markets due to financial stress in the Eurozone and a deteriorating global growth outlook.



Summary of significant changes in financial positionAt balance sheet date, Total Assets grew by $269.9 million compared to 2010 -11, in line with increases in cash and cash equivalents of $63 million, investments of $65.5 million and trade receivables of $110.1 million. However, Total Liabilities increased by $522.7 million driven by the increases in gross insurance liabilities of $534.1 million (unearned premium of $104 million, unexpired risks of $41.7 million and claims liabilities of $388.4 million).

The overall cash position of $300.1 million at 30 June 2012 was a net increase of $63 million compared to 30 June 2011, driven by positive cash inflows from operating activities of $62.4 million and financing activities of $67.1 million, offset by investing activity outflows of $66.5 million.

The major contributing factor to the net increase in the cash position at 30 June 2012 was the State Government’s capital contributions of $67.1 million to support the Public Healthcare (medical indemnity) and the Domestic Building Insurance Programs’ operations. The VMIA also received a capital contribution of $25 million to support the funding position of the VMIA following the transfer of the Department of Health’s claims run-off liabilities with effect from 1 January 2012.

The operating deficit of $319.9 million for the year ended 30 June 2012 detracted further from the VMIA’s net worth position at 30 June 2011 of negative $82.3 million. However, the independent actuarial modelling undertaken in June 2012 indicated that the VMIA has a 74% probability of recovery from its 30 June 2012 Funding Ratio of 80% to the target of 100% within five years. As previously agreed with DTF, the VMIA is not required to submit a Capital Management Plan while the probability of recovery to the target Funding Ratio remains above 50%. However, the VMIA will continue to closely monitor, model and report its recovery probabilities on a quarterly basis.

Performance from insurance operationsPerformance from insurance operations (PFIO) is a measure of the underlying strength of the VMIA’s internal operations, calculated after removing the effects of external factors such as the variance between the actual and the expected long term investment return, changes in inflation and discount rates used in the claims liabilities actuarial valuation and legislative and other Government directed changes.

During 2011-12, the VMIA Board of Directors approved the alignment of the VMIA’s PFIO calculation methodology with the calculation methodologies of both TAC and WorkSafe by removing the impact of unbudgeted major claims and related premium. Further, the VMIA Board of Directors approved the inclusion in the PFIO calculation the operating performance of the Domestic Building Insurance Program. The VMIA Board also approved the exclusion of the impact of the movement in the unexpired risks liability, as this is dependent on inflation and discount rates, as well as the DTF’s pricing policy setting for the VMIA.

For 2011-12, the PFIO result was $36.5 million, outperforming the budget of $9.8 million.

Subsequent eventsNo material events affecting the VMIA have occurred between the balance sheet date and the date of this report.



Financial and non-financial key performance indicators

Pursuant to the Department of Treasury and Finance Corporate Planning and Performance Reporting Requirements for Government Business Enterprises, the VMIA provides the following historical summary of its key performance indicators.

Key performance indicator2011-12

Result2010-11

Result2009-10

Result2008-09

Result2007-08

Result

Financial KPI’sReturn on Assets (%)1 1.9% (2.9%) 4.8% (3.5%) 3.2%Return on Equity (%)1, 2 N/A N/A N/A (154.6%) 15.1%Performance from Insurance Operations (PFIO)

Actual ($ million updated definition)3 36.5 (47.5) 68.4 (42.4) 36.3Budget ($ million updated definition)3 9.8 38.4 51.0 25.4 28.9Actual ($ million previous definition)3 32.9 21.1 62.6 25.9 32.6Budget ($ million previous definition)3 20.9 42.4 48.6 24.6 27.2

Funding Ratio (%) (Capital Structure Ratio) 80.0% 94.0% 96.0% 89.0% 118.0%Salaries as percentage of profit (%)1 46.0% N/A 22.2% N/A 35.0%Revenue per employee ($ million)1, 4 0.30 N/A 0.58 N/A 0.34Return on investment portfolio – (before fees, %) 4.7% 11.6% 10.4% (12.2%) (7.2%)Return on investment portfolio – (after fees, %) 4.3% 11.1% 9.9% (12.4%) (7.4%)Non-financial KPI’sStaff engagement (%) 64.0% N/A 71.0% 66.0% 66.0%Number of complaints 22 10 73 26 157Staff turnover (%) 11.5% 18.0% 12.5% 12.0% 9.0%Timeliness of service – demonstrated by:Percentage of telephone calls answered 98.7% 98.6% 98.2% 94.7% 94.3%Percentage of urgent client queries answered within 24 hours 76.6% 95.6% N/A N/A N/APercentage of medium priority client queries answered within 3 days 85.4% 92.5% N/A N/A N/APercentage of low priority client queries answered within 5 days 85.8% 93.8% N/A N/A N/ANumber of full time equivalent staff (FTE) 121 117 117 113 106Salaries ($ million) 16.8 16.3 15.2 14.1 12.7

1. Return on Assets, Return on Equity, Salaries as percentage of profit and Revenue per employee are calculated based on the updated 2011-12 PFIO definition for all years.

2. As the average equity position for 2008-09 to 2011-12 is negative, this ratio does not represent a meaningful performance measure.

3. The PFIO result is provided under the current definition and the previous definition pursuant to the Department of Treasury and Finance Corporate Planning and Performance Reporting Requirements.

4. Revenue per employee is calculated based on the number of FTE’s at financial year end.



Governance and organisational structure

Minister responsible for the VMIA The Hon. Robert Clark, MP, Minister for Finance

VMIA Board

John Peberdy Suzanne Roberts Joan Fitzpatrick Ian Gaudion

Doug Kearsley (vacancy) John McNeil Brian Benger

Chief Executive Officer Warren Hutcheon

Executive Team

Dana Argyropoulos, Corporate Secretary Stephen Owen, Acting General Manager Strategy and Risk

Claudio Battilana, Chief Operating Officer Ian Patterson, Chief Information Officer

Hazel Greenhalgh, Manager Government Strategy and Stakeholder Relations

Catherine Proud, Executive Manager Human Resources

Victor Martindale, Chief Financial Officer Peter Ryan, Chief General Manager Claims / Chief Executive Officer Domestic Building Insurance

Corporate governanceThe Board is responsible for the management of the affairs of the VMIA and for exercising the powers conferred on the VMIA under its legislation, including the power of delegation. The powers and general functions are detailed in the Victorian Managed Insurance Authority Act 1996. The Directors are appointed by the Governor in Council on the recommendation of the Minister for Finance. The Minister for Finance determines the terms and conditions applying to the appointment of a Director. An employee of the VMIA is not eligible to be a Director.

Measuring the Board’s performancePerformance evaluations covering the Board and each Board Committee are conducted on a regular basis to identify potential areas for improvements. The Board recently participated in an externally facilitated Board performance review workshop. An outcome of the review confirmed that the Board’s Committee structure remains appropriate.



Board committeesThe Board has three committees: Audit and Risk Committee, Remuneration and Capability Committee and the Capital Committee. Each committee has a charter which sets out its respective roles and responsibilities. Each charter is reviewed annually by the relevant Committee and the Board.

Audit and Risk CommitteeMembers: Ian Gaudion (Chairman), Brian Benger, Doug Kearsley and John McNeil.

The VMIA conducts regular risk management reviews of its own operations and activities to ensure it identifies and addresses strategic and operational risk exposure.

This Committee assists the Board with effective and efficient external and internal audits, accounting policy as well as budgeting, reserving and financial reporting practices. It also has oversight of enterprise risk management practices (including business continuity planning for the VMIA’s own operations) and compliance with laws and regulations.

Under 2.2(f) of the Standing Directions of the Minister for Finance issued under the Financial Management Act 1994, at least two members of an Audit Committee must be independent. All members of the Committee meet this requirement.

Remuneration and Capability CommitteeMembers: Joan Fitzpatrick (Chairman), John Peberdy and Suzanne Roberts.

This Committee assists the Board with developing the remuneration, employment and other human resources policies and practices required to attract and retain high performance staff. This Committee also assists the Board with fulfilling its responsibilities to monitor the internal capabilities required to deliver strategic plans as well as the Corporate Plan and Annual Business Plan.

Capital CommitteeMembers: Brian Benger (Chairman), Doug Kearsley, Ian Gaudion, John Peberdy and Suzanne Roberts.

This Committee assists the Board with its responsibility for investment management, prudential standards and policies, and monitoring their effect on the VMIA’s capital, balance sheet risk, reinsurance, claims trends and liability risk.



The VMIA BoardJohn Peberdy, Chairman John Peberdy was appointed in September 2011. He is a member of the Remuneration and Capability Committee and Capital Committee.

Ian Gaudion, Deputy Chairman Ian Gaudion was appointed in October 2006. He is the Chairman of the Audit and Risk Committee and a member of the Capital Committee.

Suzanne Roberts, Director Suzanne Roberts was appointed in October 2004. She is a member of the Remuneration and Capability Committee and the Capital Committee.

Doug Kearsley, Director Doug Kearsley was appointed in January 2008. He is a member of the Audit and Risk Committee and the Capital Committee.

Joan Fitzpatrick, Director Joan Fitzpatrick was appointed in September 2005. She is Chairman of the Remuneration and Capability Committee.

Brian Benger, Director Brian Benger was appointed in December 2008. He is Chairman of the Capital Committee and a member of the Audit and Risk Committee.

John McNeil, Director John McNeil was appointed in February 2012. He is a member of the Audit and Risk Committee.

The VMIA Executive Team Warren Hutcheon, Chief Executive Officer Warren joined the VMIA in February 2012. He has extensive experience in the insurance industry, with more than 25 years in various positions at CGU Insurance. He held several senior management positions across its insurance and risk portfolios, with roles including Head of Commercial and Director, Strategic Initiatives.

Claudio Battilana, Chief Operating Officer Claudio joined the VMIA in November 2008. He has broad experience in the insurance and reinsurance sectors, including corporate insurance, underwriting, claims and legal.

Peter Ryan, Chief General Manager Claims/Chief Executive Officer Domestic Building Insurance Peter joined the VMIA in May 2007. He is a qualified lawyer and has worked as both a solicitor and a barrister. He is also an experienced commercial manager, having spent more than 20 years in claims management and dispute resolution in both the private and public sectors.

Stephen Owen, Acting General Manager Strategy and Risk Stephen joined the VMIA in July 2003. His past roles have been a mix of senior corporate and consulting roles with major organisations across private and public sectors. His experience includes general management, finance, insurance, risk management and governance (including enterprise risk management, business continuity planning and internal audit), and strategic and corporate finance.

Victor Martindale, Chief Financial Officer Victor joined the VMIA in May 2012. He is an insurance industry specialist and brings to the VMIA more than 15 years’ experience in CFO roles within the sector, including at Swiss Re (South Africa), OAMPS (part of the Wesfarmers Group) and most recently ACE Insurance.



Catherine Proud, Executive Manager Human Resources Catherine joined the VMIA in June 2011. She has provided strategic Human Resources Management capabilities to several government business enterprises, including VicForests and VicUrban.

Ian Patterson, Chief Information Officer Ian joined the VMIA in November 2011. He has extensive experience in Information & Communications Technology and Enterprise Information Management. He has held senior positions in the education, health and arts sectors, including the State Library of Victoria and the Australian Health Practitioner Regulation Agency. He holds qualifications in Education and Information Management.

Dana Argyropoulos, Corporate Secretary Dana joined the VMIA in November 2006. She has an extensive career in company secretariat positions and corporate governance, primarily within the banking and financial services sector.

Hazel Greenhalgh, Manager Government Strategy and Stakeholder Relations Hazel joined the VMIA in April 2008. She has qualifications in education and public policy, with a career spanning both private and public sectors. She has extensive experience in working with stakeholders to introduce reforms across government.

Occupational Health and SafetyThe VMIA has established an Occupational Health and Safety (OH&S) Committee which is chaired by the Executive Manager Human Resources. The Committee has developed a strategy that aims to ensure staff remains safe and healthy at work. During the year, there were no hazard reports, six incident reports and two WorkCover claims.

Employment and conduct principlesThe VMIA is committed to applying merit and equity principles when appointing staff. The selection processes ensure that applicants are assessed and evaluated fairly and equitably on the basis of the key selection criteria and other accountabilities without discrimination.

Additional information available on requestTo the extent applicable, the information required under Financial Reporting Direction 15B, Appendix 1, is available on request to the relevant Minister, Members of Parliament or the public.

Workforce data (full-time equivalent employees)

2011-12 2010-11 2009-10 2008-09

VMIA 121 117 117 113

Average age 44 44 44 43

Merit and equity policyThe VMIA has documented human resources policies including employment policies, principles and a code of conduct in accordance with the Public Administration Act 2004, and federal and state legislation which prohibit discrimination, victimisation and harassment. The VMIA’s human resources policies are reviewed annually to ensure that they reflect current legislative requirements and workplace practices.



ConsultanciesIn accordance with the requirements of the Financial Reporting Direction 22C, the following table lists expenditure on consultancies for 2011-12 where the cost of the engagement was in excess of $10,000, excluding GST.

Consultant

Purpose of consultancy

Start date

End date

Total approved fee (excl GST)

Expenditure 2011-12 (excl GST)

Future expenditure (excl GST)

Gray Puksand Pty Ltd Office relocation fit-out and architectural services

8 August 2011 31 October 2012 $139,600 $99,190 $40,410

Bevington Group Identify business systems and processes’ improvements

1 March 2012 29 June 2012 $127,200 $127,200 Nil

Zeal Group Pty Ltd Coordinated BCP scenario testing for clients

1 August 2011 28 February 2012 $101,250 $101,250 Nil

Access Macquarie Limited

Development of an Earthquake Scenario and workshop facilitation

12 June 2012 17 July 2012 $45,454 $45,454 Nil

Norman Disney Young Mechanical/electrical drawings for new office fit-out

10 April 2012 30 November 2012 $39,500 Nil $39,500

Oakton Consulting Feasibility assessment – Information Services

7 November 2011

23 December 2011 $35,000 $35,000 Nil

Aspex Consulting Occasional paper – Emerging Risk

5 March 2012 29 June 2012 $35,000 $35,000 Nil

Moray & Agnew Lawyers

Reviewed the VMIA’s web-hosting contracts

1 August 2011 23 December 2011 $30,000 $30,000 Nil

Monash University and Project Health

Occasional paper – Causes and Contributing Factors to Medical Indemnity Claims

1 August 2011 30 March 2012 $25,000 $25,000 Nil

Crosstrees Consulting Contribution to the development of Diploma of Integrated Risk Management

4 June 2012 28 September 2012 $24,000 $20,000 $4,000

Charter Keck Cramer Preparing construction cost estimates and tender submissions for new office fit-out

21 February 2012

30 November 2012 $22,300 $7,400 $14,900

Nicholas Barnett/ Insync Surveys

Reviewed Vision/Mission Statements and Values

19 March 2012 31 May 2012 $21,905 $21,905 Nil



Consultant

Purpose of consultancy

Start date

End date

Total approved fee (excl GST)

Expenditure 2011-12 (excl GST)

Future expenditure (excl GST)

KPMG Performed forensic examination of computer hard drive

5 March 2012 30 March 2012 $17,500 $17,500 Nil

Marshall Day Providing advice regarding acoustics in new office location

10 April 2012 30 November 2012 $14,500 Nil $14,500

Cranleigh Capital Management

Assisting with Strategic Corporate Planning engagement

1 September 2011

1 October 2011 $12,813 $12,813 Nil

United Group Ltd Negotiating ‘make-good’ arrangement for current office location

1 February 2012 30 November 2012 $12,000 Nil $12,000

In addition, in 2011-12, the total for the five consultancies engaged during the year, where the fees payable to the respective consultant were less than $10,000, was $24,847 (excluding GST).

Disclosure of major contractsIn 2009 -10, the VMIA entered into an agreement with QBE Insurance (Australia) Limited (QBE) which issues policies on the VMIA’s behalf. The agreement follows the decision by the Victorian Government in March 2010 to transition builders to a State underwritten Domestic Building Insurance Program, to be administered by the VMIA. The value of the contract was more than $10 million in 2011-12.

Contractual details have not been disclosed for those contracts which are exempt under the Freedom of Information Act 1982 and /or Government guidelines.

Freedom of Information accessVictoria’s Freedom of Information Act 1982 gives members of the public the right to apply for access to information held by Ministers, State Government departments, local councils, public hospitals, most government agencies and statutory authorities. For the period 1 July 2011 to 30 June 2012, the VMIA received nine Freedom of Information (FOI) requests. Of these requests two were granted in full, three were granted partial access, one was for documents that were not in existence and three applications were not yet finalised.

Making a requestPeople may apply for access to:• Documents relating to their own personal records.• Information relating to the activities of Government (providing it is not exempt material and not older than 5 July 1978).

A request can be made in writing with an application fee, which is non-refundable. The application fee from 1 July 2012 is $25.10. The only exception to this is that people suffering hardship can request the application fee to be waived. Fees and charges are levied in accordance with the Act.


Consultancies (continued)


The request should be addressed to:

The FOI Officer Victorian Managed Insurance Authority PO Box 18409 Collins Street East Melbourne Victoria 8003

Telephone enquiries can be made on (03) 9270 6912.

Compliance with the Victorian Industry Participation Policy Act 2003The Victorian Industry Participation Policy aims to boost employment and business growth in Victoria and applies to all government procurements and projects where the value exceeds $3 million in metropolitan Melbourne or $1 million in regional Victoria. In the reporting period, the VMIA did not have any procurements or projects that exceeded these amounts.

Compliance with the Building Act 1993The VMIA’s policy with respect to new building works, and the alteration of existing buildings, is to comply with the Building Act 1993 as if the VMIA is not exempt from compliance as a public authority (as provided in Section 217(3) of the Building Act 1993 ). The VMIA is unaware of any material non-compliance with the current building standards for buildings of their nature and age.

Compliance with the National Competition PolicyIn 1996, all Australian governments (Commonwealth, state and territory) agreed to review and, where appropriate, reform all existing legislative restrictions on competition. Under National Competition Policy, the guiding legislative principle is that legislation, including future legislative proposals, should not restrict competition unless it can be demonstrated that:

• the benefits of the restriction to the community as a whole outweigh the costs; and• the objectives of the legislation can only be achieved by restricting competition.

Competitive neutrality requires government businesses to ensure where services compete, or potentially compete with the private sector, any advantage arising solely from their government ownership be removed if they are not in the public interest. Government businesses are required to cost and price these services as if they were privately owned and thus be fully cost reflective. Competitive neutrality policy provides government businesses with a tool to enhance decisions on resource allocation. This policy does not override other policy objectives of government and focuses on efficiency in the provision of service.

The VMIA undertook a self-assessment against the Competitive Neutrality Policy Victoria in 2010 and determined that the activities of the VMIA are outside the scope of the policy. This was noted by the VMIA’s Board of Directors in February 2010. There have been no significant business changes that would alter that decision to date.

Compliance with the Whistleblowers Protection Act 2001The VMIA is committed to the objectives of the Whistleblowers Protection Act 2001. The VMIA does not tolerate its staff engaging in improper conduct or taking detrimental action, or taking reprisals against those who come forward to disclose such conduct.

The VMIA has established procedures to facilitate disclosure of improper conduct or detrimental action by the VMIA or its staff to the Protected Disclosure Coordinator within the VMIA. The Protected Disclosure Coordinator will determine whether it is a public interest disclosure and will be responsible for appointing an investigator, and coordinating and overseeing the investigation.

The Coordinator is also responsible for appointing a welfare manager to support the whistleblower and provide protection from any reprisals, maintaining a confidential filing system and collating and publishing statistics on disclosure rules.



Reporting proceduresDuring 2011-12 there were no disclosures or investigations of improper conduct or detrimental action made by staff to the VMIA or any referred by the Ombudsman or other person to the VMIA.

The VMIA provides information to staff on the legislation and procedures. A copy of the procedures can be obtained by calling the Protected Disclosure Coordinator, Peter Heard, on (03) 9270 6912. Alternatively, disclosures of improper conduct or detrimental action by the VMIA or its staff may also be made directly to the Ombudsman.

The Ombudsman of VictoriaLevel 9, 459 Collins Street (North Tower) Melbourne Victoria 3000Telephone: (03) 9613 6222Internet: www.ombudsman.vic.gov.auEmail: [email protected]

Further information can be obtained from the VMIA website www.vmia.vic.gov.au

Office based environmental impactsThe VMIA continues to have a commitment to actively reduce its environmental impact through an environmental management strategy, environmental policy and setting objectives to achieve its goals.

The objectives of the strategy include:• Reducing the amount of waste and maximising the amount reused and recycled.• Separating office waste into general and co-mingled recyclable waste.• Purchasing 25% green power.• Adopting ISO 14001 Environmental Management System (EMS) guidelines in the development of the environmental policy.• Complying with Victorian Government mandated targets.• Communicating environmental performance through regular reporting.• Encouraging staff to reduce environmental impacts.

In 2011-12 the VMIA maintained a reduced carbon footprint (to 2007-08 baseline year) by embedding into business as usual a number of environmental initiatives including:• Purchasing 25% green power, meeting the VMIA’s objective.• Maintaining awareness and promoting the benefits of double-sided printing and photocopying.• Providing duplex printing and copying as a default on selected printers.• Purchasing 100% recycled white copy paper.• Subscribing to Greenfleet carbon offsets.• Continuing the trend to reduce air travel resulting in a reduction in GHG emissions.• Recycling waste from the building by separating waste into general and co-mingled recyclable waste.• Maintaining water saving initiatives.



Directions of the Minister for Finance

Public Healthcare ProgramPursuant to section 25A of the Victorian Managed Insurance Authority Act 1996, I direct the Victorian Managed Insurance Authority (VMIA) to provide a full range of insurance to the Public Healthcare Program. The Public Healthcare Program covers the following entities:

1. Victorian Bush Nursing Hospitals.

2. Victorian Denominational Hospitals.

3. Victorian Privately Operated Public Hospitals.

4. Department of Human Services or Department of Health Funded Medical Research Agencies.

5. Victorian Mental Health Service Agencies.

6. Department of Human Services or Department of Health Funded Specialised Health Agencies.

7. Department of Human Services or Department of Health entities covered by the Rural General Practitioner Program.

8. Victorian Community Health Service Agencies.

9. Victorian Cemetery Trusts.

10. Community Emergency Response Teams.

11. Primary Care Partnership Agencies.

12. Post Acute Care Agencies.

13. Department of Human Services or Department of Health Funded Needle Syringe Exchange Agencies.

14. Department of Human Services or Department of Health Miscellaneous Healthcare Risks.

15. Former Public Healthcare Agencies that no longer operate.

16. Community Service Organisations.

17. Entities or persons engaged in the Direct Employment Project.

This direction is effective for one year from 1 July 2011 to 30 June 2012 (both dates inclusive), with the VMIA to determine the premium payable by the Public Healthcare Program.

The Hon. Robert Clark, MP, Minister for Finance.



Alliance Professional Indemnity InsurancePursuant to section 25A of the Victorian Managed Insurance Authority Act 1996, I direct the Victorian Managed Insurance Authority (VMIA) to provide professional indemnity insurance to bodies within a project alliance where those bodies can demonstrate the following:

a) That they have failed to obtain an appropriate level of insurance from a provider, other than from the Victorian Managed Insurance Authority (VMIA), for the duration of the project, or the duration of the project alliance or any related period thereafter.

b) Having failed to obtain appropriate project alliance insurance from an alternative provider, a representative of the project alliance has sought such cover from the Victorian Managed Insurance Authority.

c) The steps taken to obtain comparable cover from alternative providers upon request by the VMIA or the Department of Treasury and Finance.

The VMIA shall charge such bodies a commercial premium for the insurance provided in accordance with this Direction.

The VMIA shall provide the insurance on its usual terms, conditions and exclusions, subject to any deductibles, amendments or variations the VMIA agrees or deems necessary.

For the purposes of this direction, a project alliance refers to a commercial/legal framework between a department, agency, Government-backed enterprise or other Government-funded body, as owner-participant, and one or more private sector parties, for the purpose of delivering a capital works project where the project alliance has the following characteristics: agrees to a collective sharing of project risks’ no fault, no blame, no dispute arrangements’ three-limb compensation model, unanimous principle based decision-making on all key project issues and uses an integrated project team.

This direction is effective for one year from 1 July 2011 to 30 June 2012 (both dates inclusive).


Insurance for the members of the Victorian Bushfire Appeal Fund Advisory panelPursuant to section 25A of the Victorian Managed Insurance Authority Act 1996, I direct the Victorian Managed Insurance Authority (VMIA) to provide appropriate insurance to the following members of the Victorian Bushfire Appeal Fund Advisory Panel (the Panel members), and any additional members appointed during the period of this direction:

•TheHon.PatMcNamara(Chairman).•TheHon.RobertTickner.•MsChristineNixon.•MsPamWhite.

This direction is effective from 1 July 2011 until 30 June 2012 (both dates inclusive), with the VMIA to determine the premiums payable by the Panel members, as well as any policy terms and conditions as it sees fit.




Insurance for the members of the Victorian Flood Appeal Advisory panel membersPursuant to section 25A of the Victorian Managed Insurance Authority Act 1996, I, Robert Clark MP, direct the Victorian Managed Insurance Authority (VMIA) to provide appropriate insurance to the following members of the Victorian Flood Appeal Advisory Panel (the Panel):

•MrRonWalkerACCBE(Chairman).•ToniAslett.•PamWhite.•AlexandraGartmann.

This direction is effective from 19 January 2011 until 31 January 2012 (both dates inclusive), with the VMIA to determine the premiums payable by the Panel members, as well as any policy terms and conditions as it sees fit. The insurance is to be provided at a commercial rate. Insurance is to be applied retrospectively from 19 January 2011 when the Panel members were appointed.


Members of Growth Areas Infrastructure, Contribution Hardship Relief BoardPursuant to the relevant Ministerial Direction prepared under section 25A of the Victorian Managed Insurance Authority Act 1996, I direct you to provide insurance for the members of the Growth Areas Infrastructure Contribution Hardship Relief Board (the Board). The members of the Board are:

•MaryDunkley.•GrantParsons.•PhilipNolan.

This direction is effective from 26 October 2010 (when the Board members were announced) to 25 October 2013 (both dates inclusive).

The Victorian Managed Insurance Authority should determine the premium payable for this insurance, as well as any policy terms and conditions as it sees fit. The insurance is to be provided at a commercial rate.




Indemnity to Homeowners with Builders Warranty Cover Issued by Homesafe Equities Pty LtdI, Robert Clark MP, Minister for Finance, in accordance with section 25A(1)(b) of the Victorian Managed Insurance Authority Act 1996 and all other powers vested in me thereunder, hereby direct the Victorian Managed Insurance Authority (‘the Authority’) to establish, operate and administer, in accordance with this instrument, a scheme to issue indemnities to homeowners whose homes are covered by builders warranty bonds issued by Homesafe Equities Pty Ltd (‘Homesafe’) between 1 July 2003 and 26 April 2004 (‘the Homesafe bondholders’) to the extent of the indemnity provided to each homeowner by Homesafe under the Homesafe bondholder’s builders’ warranty bond.

The Authority shall indemnify the Homesafe bondholders subject to the following conditions: (a) the Authority shall not charge any premium or other fee to the Homesafe bondholders for the provision of an indemnity by the Authority; and (b) the Homesafe bondholders shall assign to the Authority all rights of recovery against Homesafe under the builders warranty cover issued by Homesafe.

The Authority shall provide indemnities to the Homesafe bondholders in accordance with this direction. The power of the Authority to provide such indemnities expires on 30 June 2012. The Treasurer indemnified the Authority on 29 November 2005 for the full costs (including the Authority’s reasonable administration costs) of providing an indemnity to Homesafe bondholders.


The VMIA also continues to provide cover under S25A for a three or five year term for the following entities/programs:

Heidi Museum of Modern Art 1 July 2009 – 30 June 2014Public Transport Industry Ombudsman 1 July 2009 – 30 June 2014Australian Synchrotron 1 July 2009 – 30 June 2014Government Rail Insurance Program inclusive of the Terrorism Indemnity 30 June 2009 – 30 June 2014Australian Grand Prix Corporation 1 Sept 2009 – 1 Sept 2012Emergency Resource Providers Support Scheme 1 July 2009 – 30 June 2014Royal Melbourne Showgrounds – Joint Venture 1 July 2009 – 30 June 2012Members of the Victorian Flood Appeal Advisory Panel 19 January 2011 – 31 January 2012Domestic Building Insurance 31 March 2010 – 30 June 2013



Attestation of compliance with Australian/New Zealand Risk Management StandardDirection 4.5.5 – Risk Management Compliance

In September 2007, the Minister for Finance issued Direction 4.5.5 on Risk Management Compliance which requires agencies to provide an annual attestation in their annual report that their risk identification and management plan is consistent with the Australian/New Zealand Risk Management Standard: AS/NZS ISO 31000:2009 or equivalent. Satisfactory risk management frameworks and processes currently operate within VMIA.

• Enterprise Risk Management has been progressively implemented across the organisation.

• A range of systems and controls are operating to ensure that a strong internal control system is in place supported by the internal audit program.

• Annual review processes are in place to ensure compliance with Ministerial Directions and the Financial Management Compliance Framework (FMCF).

• The Audit and Risk Committee reviewed VMIA’s attestation process and procedures and verified management’s view that VMIA’s risk management frameworks and processes are consistent with the key principles of the Australian/New Zealand Risk Management Standard: AS/NZS ISO 31000:2009. Based on this, the Board approved the Chair providing the following attestation:

I, John Peberdy, Chairman of the VMIA’s Board, certify that the Victorian Managed Insurance Authority has risk management processes in place consistent with the Australian/New Zealand Risk Management Standard (AS/NZS ISO 31000:2009) and an internal control system is in place that enables the Executive to understand, manage and satisfactorily control risk exposures. The Audit and Risk Committee verifies this assurance and that the risk profile of the Victorian Managed Insurance Authority has been critically reviewed within the last 12 months.

John PeberdyChairmanVictorian Managed Insurance Authority23 August 2012



Disclosure IndexThe Annual Report of the VMIA is prepared in accordance with all the relevant Victorian legislation and pronouncements. This index has been prepared to facilitate identification of compliance with statutory disclosure requirements.

Page

Charter and purpose

FRD 22C Manner of establishment and relevant Minister 1, 4, 18

FRD 22C Objectives, functions, powers and duties 4, 5

FRD 22C Nature and range of services provided 7-10

Management and structureFRD 22C Names of governing Board members and Chief Executive Officer 18, 20

FRD 22C Organisational structure 18

Financial and other informationFRD 15B Executive Officers’ disclosures 76-78

FRD 22C Workforce data and application of employment and conduct principles 21

FRD 22C Application and operation of the Freedom of Information Act 1982 23

FRD 22C Application and operation of the Whistleblowers Protection Act 2001 24

FRD 22C Compliance with the Building Act 1993 24

FRD 22C Compliance with National Competition Policy 24

FRD 22C Summary of financial results for the year with comparative results for the preceding four years 15

FRD 22C Summary of significant changes in financial position 16

FRD 22C, SD4.2(k) Operational and budgetary objectives for the year and performance against objectives 7-14

FRD 22C Subsequent events 16

FRD 22C Details of consultancy expenditure 22-23

FRD 12A Disclosure of major contracts 23

FRD 22C Occupational health and safety 21

FRD 22C Statement of availability of other information 21

FRD 24C Reporting of office-based environmental impact 25

FRD 10 Disclosure index 31-32

FRD 25 Victorian Industry Participation Policy disclosures 24

SD 4.5.5 Risk Management Compliance Attestation 30

SD 4.2.(j) Sign-off requirement 3



Page

VMIA Financial statements required under Part 7 of the Financial Management Act 1994

SD 4.2(c) Statement of compliance with Australian Accounting Standards and other authoritative pronouncements 38

SD 4.2(b) Comprehensive Operating Statement 34

SD 4.2(b) Balance Sheet 35

SD 4.2(a) Statement of Changes in Equity 36

SD 4.2(b) Cash Flow Statement 37

SD 4.2(b) Notes to the Financial Statements 38-80

SD 4.2(c) Compliance with Ministerial Direction 81

SD 4.2(c) Accountable Officer’s declaration 81

SD 4.2(d) Rounding of amounts 38

Other disclosures as required by FRDs in notes to the VMIA financial statements

FRD 21B Disclosures of Responsible Persons, Executive Officers and Other Personnel (Contractors with Significant Management Responsibilities) in the Financial Report

76-78

FRD 11 Disclosure of ex-gratia payments N/A

FRD 103D Non-current physical assets 41

FRD 106 Impairment of assets 42

FRD 110 Cash Flow Statement 37

FRD 112C Defined benefit superannuation obligations 75

FRD 119 Contribution by owners 36

Legislation

Victorian Managed Insurance Authority Act 1996 4, 18, 26, 27, 28, 30, 38, 89

Financial Management Act 1994 1, 3, 19, 38, 76, 81, 89, 94, 98

Freedom of Information Act 1982 23, 31

House Contracts Guarantee Act 1987 1, 4, 85

Whistleblowers Protection Act 2001 24, 31

Building Act 1993 24, 31

House Contracts Guarantee (HIH) Act 2001 85, 89

Victorian Industry Participation Policy Act 2003 24



Contents Page

Financial StatementsComprehensive Operating Statement 34Balance Sheet 35Statement of Changes in Equity 36Cash Flow Statement 37

Notes to the Financial StatementsNote 1 General information 38Note 2 Summary of significant accounting policies 38Note 3 Critical accounting judgements, assumptions and estimates 44Note 4 Insurance contracts – risk management policies and procedures 49Note 5 Revenue and income from continuing activities 51Note 6 Net claims incurred 52Note 7 Administration expenses 52Note 8 Cash and cash equivalents 53Note 9 Trade receivables 53Note 10 Non-trade receivables 53Note 11 Reinsurance and other recoveries – claims 54Note 12 Investments 54Note 13 Furniture, fittings, equipment and motor vehicles 55Note 14 Trade payables 56Note 15 Non-trade payables 56Note 16 Lease incentive liability 56Note 17 Gross unearned premium liability 57Note 18 Unexpired risks liability 57Note 19 Claims liabilities 59Note 20 Equity and reserves 64Note 21 Reinsurance program 64Note 22 Financial instruments 65Note 23 Commitments and contingencies 74Note 24 Superannuation benefits 75Note 25 Responsible persons 76Note 26 Auditor’s remuneration 79Note 27 Reconciliation of net cash inflow from operating activities 79Note 28 Transfer of Department of Health claims run-off liabilities 80Note 29 Subsequent events 80

Accountable Officer’s and Chief Finance and Accounting Officer’s Declaration 81Independent Auditor’s Report 82

VMIA Financial ReportFor the financial year ended 30 June 2012


Note

2012$’000

2011$’000

Gross premium earned 5(a) 228,106 213,153

Reinsurance incurred (33,442) (32,074)

194,664 181,079

Increase in unexpired risks liability 18(b) (41,720) (26,039)

Net premium earned 152,944 155,040

Gross claims incurred 6, 28 (579,857) (307,818)

Reinsurance and other recoveries 5(b), 6 90,699 19,478

Net claims incurred 6 (489,158) (288,340)

Gross commission paid (16,346) (17,435)

Increase in gross deferred acquisition costs 18(a) 5,734 7,487

Gross commission incurred (10,612) (9,948)

Other income 5(d) 3,203 6,387

Administration expenses 7 (39,206) (33,914)

Underwriting result (382,829) (170,774)

Investment income 5(c) 66,120 132,428

Investment management expenses (3,210) (3,164)

Net investment income 62,910 129,264

Comprehensive result (319,919) (41,511)

The Comprehensive Operating Statement should be read in conjunction with the accompanying Notes to the Financial Statements.

Comprehensive Operating StatementFor the financial year ended 30 June 2012


Note

2012$’000

2011$’000

ASSETSFinancial assets

Cash and cash equivalents 8 300,080 237,052

Trade receivables 9 42,340 -

Non-trade receivables 10 1,492 1,191

Investments 12 1,138,884 1,073,367

Total financial assets 1,482,796 1,311,610

Non-financial assets

Prepaid expenses 243 190

Trade receivables 9 282,036 214,237

Non-trade receivables 10 1,490 908

Furniture, fittings, equipment and motor vehicles 13 2,493 2,008

Gross deferred acquisition costs 18(a) 13,513 7,779

Unearned premium 11,106 7,308

Claims outstanding and incurred but not reported 11, 19(c) 238,243 217,992

Reinsurance and other assets 249,349 225,300

Total non-financial assets 549,124 450,422

Total assets 2,031,920 1,762,033

LIABILITIES

Trade payables 14 30,236 39,687

Non-trade payables 15 53,581 58,113

Employee benefit provisions 2,347 1,989

Provision for leasehold restoration 812 -

Lease incentive liability 16 1,490 -

Unearned premium 17 307,874 203,912

Unexpired risks 18(b) 78,859 37,139

Claims outstanding and incurred but not reported 19(a), 19(c) 1,891,908 1,503,531

Gross insurance liabilities 2,278,641 1,744,582

Total liabilities 2,367,106 1,844,371

Net liabilities (335,186) (82,338)

EQUITY

Contributed capital 20 145,771 78,700

Accumulated deficit 20 (480,957) (161,038)

Net worth 20 (335,186) (82,338)

Commitments for expenditure 23(c), 23(d) 39,094 25,930

Contingent assets and contingent liabilities 23(e) - -

The Balance Sheet should be read in conjunction with the accompanying Notes to the Financial Statements.

Balance Sheet As at 30 June 2012


Note

Contributed capital $’000

Accumulated deficit $’000

Catastrophe reserve

$’000

Solvency reserve

$’000

Total

$’000

Balance at 30 June 2010 73,700 (266,001) 55,000 91,474 (45,827)

Net deficit for the year - (41,511) - - (41,511)

Transfer to accumulated deficit - 146,474 (55,000) (91,474) -

Capital contribution by State Government 5,000 - - - 5,000

Balance at 30 June 2011 20 78,700 (161,038) - - (82,338)

Net deficit for the year - (319,919) - - (319,919)

Capital contributions by State Government 67,071 - - - 67,071

Balance at 30 June 2012 20 145,771 (480,957) - - (335,186)

The Statement of Changes in Equity should be read in conjunction with the accompanying Notes to the Financial Statements.

Statement of Changes in EquityFor the financial year ended 30 June 2012


Note

2012$’000

2011$’000

Cash flows from operating activities

Insurance premium and other revenue received 327,795 294,757

Reinsurance premium paid (37,240) (33,723)

Gross claims paid (244,852) (171,295)

Reinsurance and other recoveries received 28,405 9,484

Reimbursement of claims paid on behalf of others 25,924 50,879

Gross commission paid (16,346) (17,435)

Payments to employees and suppliers for services and goods (52,091) (25,593)

Dividends, distributions and other income received 5(c) 31,405 41,000

Interest received 5(c) 36,318 21,329

Goods and services tax paid (14,096) (17,476)

Stamp duty paid (22,788) (24,412)

Net cash inflow from operating activities 27 62,434 127,515

Cash flows from investing activities

Acquisition of furniture, fittings, equipment and motor vehicles (1,387) (804)

Proceeds on disposal of furniture, fittings, equipment and motor vehicles 544 655

Acquisition of investments (1,505,437) (1,966,214)

Proceeds on disposal of investments 1,439,803 1,913,692

Net cash outflow from investing activities (66,477) (52,671)

Cash flows from financing activities

Capital contributions by State Government 67,071 5,000

Net cash inflow from financing activities 67,071 5,000

Increase in cash and cash equivalents 63,028 79,844

Cash and cash equivalents at beginning of year 237,052 157,208

Cash and cash equivalents at end of year 8 300,080 237,052

The Cash Flow Statement should be read in conjunction with the accompanying Notes to the Financial Statements.

Cash Flow StatementFor the financial year ended 30 June 2012


1. General information

a) Reporting entity The financial report covers the VMIA as an individual reporting entity. The VMIA is a Public Financial Corporation, established on 1 October 1996 by the Victorian Managed Insurance Authority Act 1996 (VMIA Act 1996) to provide insourced risk management and multi-line insurance services to its clients across the State of Victoria.

The VMIA’s principal address is Level 30, 35 Collins Street, Melbourne, Victoria, 3000.

A description of the nature of the VMIA’s operations and its principal activities is included in the 2012 VMIA Annual Report.

b) Rounding All items are rounded and expressed in thousands of dollars in accordance with Ministerial Directions under the Financial Management Act 1994.

2. Summary of significant accounting policies

a) Statement of compliance The financial report is a general purpose financial report prepared on an accrual basis in accordance with the Financial Management Act 1994, applicable Australian Accounting Standards, in particular Australian Accounting Standard AASB 1023 General Insurance Contracts, including Interpretations and other mandatory professional requirements. For the purposes of compliance with the accounting standards, the Minister for Finance has determined that the Victorian Managed Insurance Authority (VMIA) is a not-for-profit entity. The impact of the not-for-profit requirements is summarised in Note 2(c) below. The financial report also complies with relevant Financial Reporting Directions (FRDs) issued by the Minister for Finance.

The financial report was authorised for issue by the Board of Directors on 23 August 2012.

b) Basis of preparation This financial report is prepared on the basis of historical cost with certain exceptions as described in the accounting policies below. Accounting policies are selected and applied in a manner which ensures that the resulting financial information satisfies the concepts of relevance and reliability, thereby ensuring that the substance of the underlying transactions and financial consequences of events are reported. The accounting policies set out below have been applied in preparing the financial report for the year ended 30 June 2012 and the comparative information presented for the year ended 30 June 2011.

The functional currency of the VMIA is the Australian dollar.

c) Not-for-profit requirements Australian Accounting Standards include requirements that apply specifically to not-for-profit entities that are not consistent with the International Financial Reporting Standards (IFRS) requirements. The Minister for Finance has determined that the VMIA is a not-for-profit entity. Consequently where appropriate, the VMIA applies those paragraphs in Australian Accounting Standards applicable to not-for-profit entities. In the case of the VMIA these paragraphs apply to the:

• Furniture, fittings, equipment and motor vehicles reflected in the Balance Sheet, if there is an impairment of the asset concerned.• Quantification of the commercial value of the stop loss reinsurance protection provided by the State for the medical

indemnity risks underwritten by the VMIA [refer to Note 3(iv)]. • Requirements of AASB 124 Related Party Disclosures which are reduced for non-for-profit entities. However, FRD21B

provides for additional disclosure.

Notes to the Financial StatementsFor the financial year ended 30 June 2012


d) Premium Premium includes amounts charged to policyholders but excludes Stamp Duty and Goods and Services Tax (GST). Premium is recognised in the Comprehensive Operating Statement when it has been earned. Premium is treated as earned from the date of attachment of risk and recognised over the policy period, which has been judged as closely approximating the pattern of risk.

e) Unexpired risks liability The adequacy of the unearned premium liability is assessed by the independent actuary by considering current estimates of all expected future cash flows relating to future claims covered by current insurance contracts and those for which a constructive obligation exists. The assessment is referred to as the Liability Adequacy Test (LAT) and is carried out in respect of each of the General Government Program (GGP), Public Healthcare Program (PHP) and Domestic Building Insurance Program (DBIP) insurance programs, with each of the program’s risks being managed together as a single portfolio. The Dust Diseases and Workers’ Compensation (DDWC) Program is in run-off, and thus no LAT assessment is required.

If the present value of the expected future cash flows relating to future claims, including an allowance for claims handling and policy administration expenses, plus an additional risk margin to reflect the inherent uncertainty in the central estimates (refer to Note 2(f)), exceeds the unearned premium liability and any other future premium cash flows less related deferred acquisition costs, then the unearned premium liability is deemed to be inadequate.

The entire shortfall is recognised immediately in the Comprehensive Operating Statement both gross and net of reinsurance, where relevant. The shortfall is recognised first by writing down any related deferred acquisition costs, with any excess being recorded in the Balance Sheet as an unexpired risks liability.

f) Claims incurred and claims liabilities Claims incurred include direct and indirect costs of settling claims. The claims liabilities, which are actuarially assessed, comprise: (i) claims reported but not yet paid; (ii) claims incurred but not reported; (iii) the anticipated costs of settling those claims and (iv) a risk margin.

The risk margin is applied to the net central estimate of the claims liabilities to achieve a 75% (2011: 75%) probability that the claims liabilities will be sufficient. To estimate the risk margin, the independent actuary considers the uncertainty associated with the actuarial models and assumptions, the quality of the data used, and the insurance and economic environments. Risk margins are set for each major insurance class and include a 25% (2011: 25%) allowance for diversification between insurance classes and programs. The risk margins utilised also take into account the effect of the stop loss reinsurance protection on the medical indemnity liabilities.

The claims liabilities are subject to independent actuarial valuation. The claims liabilities are measured at the central estimate of the present value of the expected future payments. The expected future payments include allowances for economic inflation and superimposed inflation, which reflect trends in court awards and increases in the level of compensation for injuries.

The expected future payments are then discounted to a present value using a risk free discount rate. The discount rates are derived from the market price of Commonwealth Government securities with terms to maturity that match, as closely as possible, the estimated future claims payments. Details of the inflation and discount rates are disclosed in Note 3. The effects of any adjustments resulting from the independent actuarial valuation of the claims liabilities are reflected in this financial report and disclosed in Note 19.

Since the claims liabilities are based on estimates, the ultimate settlement of claims and the related expenses may vary from the independent actuarial valuation.

g) Reinsurance and other recoveries Movements in reinsurance and other recoveries are recognised as income in the year they occur.



h) Reinsurance incurred

Premium ceded to reinsurers is recognised as an expense in accordance with the indemnity period of the corresponding reinsurance contract. Accordingly, a portion of the outward reinsurance premium is treated as retroceded unearned premium at the balance sheet date.

i) Net investment income Dividend income is recognised when the VMIA has the right to receive payment. Interest income is recognised on an accrual basis. Trust distributions are recognised when the market price is quoted ex-distribution for listed trusts or when the trustee declares a distribution for unlisted trusts. Changes in the fair value of investments (both realised and unrealised) are recognised as investment income.

j) Assets backing insurance liabilities The VMIA has determined that all assets, except for furniture, fittings, equipment and motor vehicles, are held to back insurance liabilities and are valued at fair value in the Balance Sheet.

The following policies apply to assets held to back insurance liabilities.

Financial assets are designated at fair value through profit or loss. Initial recognition is at cost in the Balance Sheet and subsequent measurement is at fair value with any resultant unrealised gains or losses recognised in the Comprehensive Operating Statement. Details of fair value for the different types of financial and non-financial assets are listed below:

• Cash on hand, cash at bank, and cash in transit are carried at the face value of the amounts deposited or drawn. The carrying amounts of cash assets represent their fair values.

• Equities, fixed interest securities, derivatives and unit trusts listed on an organised financial market are initially recognised at cost and the subsequent fair value is taken as the quoted bid price of the instrument at the balance sheet date.

• Unlisted fixed interest securities are recorded at amounts based on valuations using rates of interest equivalent to the yields obtainable on comparable investments at the balance sheet date.

• Units in unlisted financial instruments (trusts, companies and private equities) are recorded at fair value as determined by the fund manager or valuations by other skilled independent third parties. In determining fair values, observable market transactions of the units and the underlying assets are used where available and applicable. Some of the underlying assets of these financial instruments are valued using valuation models and techniques that include inputs which are not based on observable market data. The carrying amounts include accrued distributions.

• Derivative financial instruments are classified as financial assets and liabilities. They are initially recognised at fair value on the date on which a derivative contract is entered into. Derivatives are carried as assets when their net fair value is positive and liabilities when their net fair value is negative. Any gains or losses arising from changes in the fair value of derivatives after initial recognition, are recognised in the Comprehensive Operating Statement.

• Prepaid expenses and receivables are recognised at fair value and subsequently measured at amortised cost, using the effective interest rate method, less any accumulated impairment. The effective interest method is a method of calculating the amortised cost of a financial asset and allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset, or where appropriate, a shorter period.

• Reinsurance and other recoveries are measured at the present value of expected future receipts and are actuarially assessed on a similar basis to the claims liabilities (refer to Note 2(f)). The details of the discount and inflation rates are disclosed in Note 3.



All purchases and sales of financial assets that require delivery of the asset within the timeframe established by regulation or market convention are recognised at trade date, being the date on which the VMIA commits to buy or sell the asset.

Trade receivables represent receivables associated with premium, reinsurance and other recoveries, claims and commission. All other receivables are classified as non-trade receivables.

Amounts due from policyholders are recognised at fair value, being the amount receivable, which is reduced for any impairment. A provision for impairment of receivables is established when there is objective evidence that the VMIA will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the carrying amount of the assets and the present value of estimated future cash flows. The discount is calculated using a risk free discount rate. The impairment charge is recognised in the Comprehensive Operating Statement.

k) Foreign currency translation Transactions denominated in foreign currencies are converted at exchange rates on the dates of the respective transactions. Gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities measured at fair value are recognised in income.

Assets and liabilities denominated in foreign currencies are translated at exchange rates at the balance sheet date. Unrealised gains and losses are reflected in income in the year in which they are earned or incurred.

l) Assets Assets are recognised when control of a resource is obtained as a result of past events and from which future economic benefits are expected to flow.

m) Impairment The carrying amounts of the VMIA’s assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If there is any indication that an asset may be impaired, its recoverable amount is estimated. The recoverable amount is the higher of its net selling price and its value in use.

In assessing value in use, the expected future cash flows from the asset are discounted to their present value using a discount rate that reflects the current market assessment of the time value of money and the risks specific to the asset. An impairment loss is recognised as an expense whenever the carrying amount of an asset exceeds its recoverable amount.

n) Derecognition of financial assets and financial liabilities A financial asset is derecognised when control over the contractual rights that comprise the asset is lost and the substantive risks and benefits associated with the asset are consequently transferred. This occurs when the rights are realised, expire or are surrendered. A financial liability is derecognised when it is legally extinguished.

o) Offsetting financial instruments The VMIA offsets financial assets and liabilities and reports the net balance in the Balance Sheet where there is a legally enforceable right to set off, there is an intention to settle on a net basis or to realise the asset and settle the liability simultaneously, the maturity date for the financial asset and liability is the same and the financial asset and liability are denominated in the same currency.

p) Furniture, fittings, equipment and motor vehicles

Cost and valuation Furniture, fittings, equipment and motor vehicles are measured initially at cost and subsequently revalued at fair value less accumulated depreciation and impairment losses.

Leasehold improvements are measured at cost. The cost of leasehold improvements is capitalised as an asset and depreciated over the shorter of the remaining term of the lease or the estimated useful life of the improvements.



Depreciation Depreciation of furniture, fittings, equipment and motor vehicles is calculated on the straight line basis over the useful lives of the assets after appropriate allowance for the estimated resale value, as per the following:

Asset Useful Life

2012 2011

Computer hardware 4 years 4 years

Furniture 10 years 10 yearsLeasehold improvements end of lease end of lease

Motor vehicles 5 years 5 years

Office equipment 7.7 years 7.7 years

The estimated useful lives, residual values and depreciation method are reviewed at the end of each financial year.

Impairment Assets are reviewed annually for evidence of impairment in accordance with AASB 136 Impairment of Assets and FRD 106 Impairment of Assets. If there is an indication of impairment, the assets concerned are tested as to whether their carrying values exceeds their recoverable amounts. Where an asset’s carrying value exceeds its recoverable amount, the difference is written off by a charge to income.

q) Employee benefits Provision is made for benefits accruing to employees in respect of wages and salaries, annual leave and long service leave when it is probable that settlement will be required and the benefits are capable of being measured reliably.

Provisions for employee benefits expected to be settled within 12 months are measured at their nominal values.

Provisions for employee benefits which are not expected to be settled within 12 months are measured as the present value of the estimated future cash outflows to be made by the VMIA in respect of services rendered by employees up to the balance sheet date.

Entitlements to long service leave vest after seven years of continuous service. Non-vested benefits are recognised as non-current liabilities.

Related on-costs have also been included in respect of annual leave and long service leave. Contributions to complying superannuation funds are expensed when incurred.

r) Cash and cash equivalents Cash and cash equivalents comprise cash on hand, cash at bank, cash in transit and funds held on the short term money market (maturity date less than three months) as these funds are available to meet the VMIA’s financial commitments and are subject to an insignificant risk of changes in value.

s) Taxation The VMIA is exempt from income taxation. The VMIA is liable to pay Fringe Benefits Tax (FBT) and Goods and Services Tax (GST). Revenue and expenses are brought to account exclusive of GST. Receivables and payables are stated inclusive of GST. The amounts of GST recoverable from or payable to the Australian Taxation Office are included as part of receivables and payables. Cash flows which include GST are included in the Cash Flow Statement on a gross basis in accordance with AASB 107 Cash Flow Statements.



t) Lease incentive liabilityRent free periods and other lease incentives offered by the lessor to the VMIA under a lease agreement are initially recognised as lease incentive liability at the inception of the lease term. The lease incentive benefits are recognised as a reduction in rent expense in the Comprehensive Operating Statement on a straight line basis over the lease term.

u) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that may be applicable to the VMIA but are not mandatory for the year ended 30 June 2012. The VMIA has not and does not intend to adopt the following standards early.

• AASB 9 Financial Instruments which is applicable for reporting periods beginning on or after 1 January 2013. This standard simplifies the requirements for the classification and measurement of financial assets resulting from Phase 1 of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement (AASB 139 Financial Instruments: Recognition and Measurement). Details of the impact are still being assessed.

• AASB 13 Fair Value Measurement which is applicable for reporting periods beginning on or after 1 January 2013. This standard outlines the requirements for measuring the fair value of assets and liabilities and replaces the existing fair value definition and guidance in other AASBs. AASB 13 includes a “fair value hierarchy” which ranks the valuation technique inputs into three levels using unadjusted quoted prices in active markets for identical assets or liabilities, other observable inputs and unobservable inputs. The impact of this standard is expected to be moderate as expected disclosure for fair value measurements using unobservable inputs are relatively onerous compared to disclosure for fair value measurements using observable inputs. The extent of the impact is yet to be determined.

• AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 [AASB 1, 3, 4, 5, 7, 101, 102, 108, 112, 118, 121, 127, 128, 131, 132, 136, 139, 1023 and 1038 and Interpretations 10 and 12] which are applicable for reporting periods beginning on or after 1 January 2013. These amendments give effect to consequential changes arising from the issuance of AASB 9 Financial Instruments. No significant impact is expected from these consequential amendments.

• AASB 1053 Application of Tiers of Australian Accounting Standards which are applicable for reporting periods beginning on or after 1 July 2013. This standard establishes a differential financial reporting framework consisting of two tiers of reporting requirements for preparing general purpose financial statements. Details of the impact are still being assessed.

• AASB 2010-2 Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements which are applicable for reporting periods beginning on or after 1 July 2013. These amendments make changes to many Australian Accounting Standards, including Interpretations, to introduce reduced disclosure requirements to the pronouncements for application by certain types of entities. These changes do not affect financial measurement or recognition and thus are not expected to have any impact on the VMIA’s financial result or position. These amendments may reduce some note disclosure in the financial report, however, the extent of the impact is yet to be determined.

• AASB 2010 -7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) [AASB 1, 3, 4, 5, 7, 101, 102, 108, 112, 118, 120, 121, 127, 128, 131, 132, 136, 137, 139, 1023 and 1038 and Interpretations 2, 5, 10, 12, 19 and 127] which are applicable for reporting periods beginning on or after 1 January 2013. These consequential amendments are in relation to the introduction of AASB 9 Financial Instruments. Details of the impact are still being assessed.

• AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements [AASB 124] which are applicable for reporting periods beginning on or after 1 July 2013. These amendments change AASB 124, Related Party Disclosures by removing the disclosure requirements in AASB 124 in relation to individual key management personnel. No significant impact is expected from these consequential amendments.

• AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 [AASB 1, 2, 3, 4, 5, 7, 9, 2009-11, 2010-7, 101, 102, 108, 110, 116, 117, 118, 119, 120, 121, 128, 131, 132, 133, 134, 136, 138, 139, 140, 141, 1004, 1023 and 1038 and Interpretations 2, 4, 12, 13, 14, 17, 19, 13 and 132] which are applicable for reporting periods beginning on or after 1 January 2013. These amendments make consequential changes to a range of Australian Accounting Standards and Interpretations arising from the issuance of AASB 13. In particular, this standard replaces the existing definition and guidance of fair value measurements in other Australian Accounting Standards and Interpretations. Details of the impact are still being assessed.



• 2012-1 Amendments to Australian Accounting Standards – Fair Value Measurement – Reduced Disclosure Requirements [AASB 3, AASB 7, AASB 13, AASB 140 and AASB 141] which are applicable for reporting periods beginning on or after 1 July 2013. These amendments prescribe the reduced disclosure requirements in a number of Australian Accounting Standards as a consequence of the issuance of AASB 13 Fair Value Measurement. Details of the impact are still being assessed.

In addition to those accounting standards listed above, the AASB has also released a number of other Australian Accounting Standards and Interpretations. The application of these Australian Accounting Standards and Interpretations is not relevant or will have a minimal impact on the VMIA’s Financial Report. Consequently, these Australian Accounting Standards and Interpretations have not been specifically identified above.

v) Other incomeOther income includes rendering of services to the VMIA’s clients.

w) PayablesPayables represent liabilities for goods and services provided to the VMIA that are unpaid at the end of the financial year. Payables are recognised as the cost of the goods and services. Trade payables represent payables associated with premium, reinsurance and other recoveries, claims and commission. All other payables are classified as non-trade payables.

x) Leases A lease is a right to use an asset for an agreed period of time in exchange for payment. Leases are classified at their inception as either operating or finance leases based on the economic substance of the agreement so as to reflect the risks and rewards incidental to ownership. Leases in which the VMIA has substantially all the risks and rewards of ownership are classified as finance leases. All other leases are classified as operating leases.

Operating lease payments, including any contingent rentals, are recognised as an expense in the Comprehensive Operating Statement on a straight line basis over the lease term, except where another systematic basis is more representative of the time pattern of the benefits derived from the use of the leased asset.

y) Equity Additions to net assets which have been designated as contributions by owners are recognised as contributed capital in accordance with FRD 119 Contributions by Owners.

z) Commitments and contingencies Commitments are disclosed at their nominal value and are inclusive of GST. Contingent assets and contingent liabilities are not recognised in the Balance Sheet, but are disclosed by way of a note and, if quantifiable, are measured at nominal value. Contingent assets and liabilities are presented inclusive of GST.

3. Critical accounting judgements, assumptions and estimates The VMIA makes judgements, assumptions and estimates in respect of the liabilities and corresponding assets for claims arising from insurance and reinsurance contracts issued, which are subject to significant estimation uncertainty. These are regularly evaluated and are based on historical experience and expectations of future events that are believed to be reasonable. Note 22(a) sets out the VMIA’s investment valuations which are subject to estimation uncertainty. Note 2(f) and Note 2(g) set out the components considered in establishing the claims liabilities and reinsurance and other recoveries.

The VMIA’s activities are classified into five main segments being the Builders’ Warranty Program, the Domestic Building Insurance Program, the Dust Diseases and Workers’ Compensation Program, the General Government Program and the Public Healthcare Program. The VMIA administers the Builders’ Warranty Program for the Victorian State Government on a cost recovery basis. Under the Builders’ Warranty Program, the VMIA manages claims for householders that are indemnified in respect of certain builders’ warranty claims arising from warranties or bonds that had been issued by HIH Ltd. As the arrangements do not form part of the VMIA’s liabilities, they are not considered further in this note.



Description of the Programs for which the VMIA is liable and of the actuarial process for determining the value of the claims liabilities

(i) Domestic Building Insurance Program (DBIP) The VMIA commenced writing domestic building warranty insurance on 31 May 2010. Domestic building warranty insurance is a long tail class of insurance with premium earned over a period of eight years from policy inception. The estimation of claims liabilities for this program is based on a variety of actuarial techniques that analyse experience, trends, exposure data and industry data.

(ii) Dust Diseases and Workers’ Compensation Program (DDWC) This program covers pre-1985 workers’ compensation and public liability claims against the former State Electricity Commission of Victoria (SECV) and some other State Government entities. Most of these claims are for asbestos related diseases and are very long tail in nature. The estimation of claims liabilities for this program is based on a variety of actuarial techniques that analyse experience, trends, exposure data and industry data.

(iii) General Government Program (GGP) This program provides a range of general insurance to:

• Government departments. • Participating bodies. • Non-Government entities as directed by the Minister for Finance.

The claims liabilities consist of a combination of short tail property and longer tail liability risks. The estimation of claims liabilities for this program involves a variety of actuarial techniques that analyse experience, trends and other relevant factors.

Reinsurance recoveries including for major catastrophic events are allowed for based on recovery case estimates for reported claims and an assumed reinsurance recovery percentage for the incurred but not reported component.

(iv) Public Healthcare Program (PHP) This program provides a range of insurance to Victoria’s public health system, including a variety of eligible healthcare agencies and cemetery trusts which are funded by the Department of Health. It also includes the Community Services Organisations Program that provides a range of general insurance to Victoria’s eligible Community Service Organisations which are predominantly funded by the Department of Human Services.

The vast majority of the claims liabilities for this program relate to the medical indemnity class of insurance which for the current financial year also include pre 1 July 2003 claims run-off liabilities transferred from the Department of Health to the VMIA with effect from 1 January 2012 (refer to Note 28). The Treasurer, on behalf of the State of Victoria, has provided stop loss reinsurance protection that limits the VMIA’s liability for medical indemnity claims incurred in any one policy year to a maximum of 120% (2011: 120%) of the actuarially estimated claims expense for that year as used in the pricing of the insurance.

The estimation of claims liabilities for this program involves a variety of actuarial techniques that analyse experience, trends, exposure data and industry data. Separate modelling is undertaken for claims that are classified as “large” with the classification threshold being $758,000 at 30 June 2012 (2011: $718,000).



The following table summarises the main assumptions used by the independent actuary in estimating the net claims liabilities.

2012 2011

DBIP DDWC GGP PHP DBIP DDWC GGP PHP

Actuarial assumptions

Average weighted term to settlement 4.5 yrs 12.8 yrs 1.8 yrs 6.1 yrs 4.6 yrs 13.1 yrs 2.0 yrs 5.5 yrs

Large claim frequency - - - 1.5% - - - 1.5%

Number of incurred but not reported (IBNR) claims - 1,233 - - - 1,262 - -

Claims handling expense rate (CHE*) 6.0% 10.0% 2.5% 5.0% 6.0% 12.0% 2.6% 5.0%

Inflation rate 3.8% 3.8% 3.8% 3.8% 4.0% 4.0% 4.0% 4.0%

Discount rate 2.8% 4.0% 2.8% 3.0% 5.1% 5.6% 5.0% 5.2%

Superimposed inflation rate - 2.0% - 4.0% - 2.0% - 4.0%

Risk margin 23.5% 28.5% 21.5% 11.2% 25.7% 28.5% 25.8% 9.9%

(*) GGP CHE for working claims = 6% and GGP catastrophe property claims = 2%

If a field is left blank in the above table it is either not separately estimated in, or does not have a material impact on the valuation of the respective portfolio.

Process used to determine assumptions For DDWC, the number of incurred but not reported (IBNR) claims represent the expected number of asbestos claims that will ultimately be reported after the balance sheet date. Although the injuries are considered to have already occurred, asbestos related diseases may take decades to present and hence be reported to the VMIA.

For PHP, the large claim frequency as a proportion of separations (per 1,000) is calculated by reference to past experience of large claims and an understanding of the claims management philosophy.

For all VMIA programs: • The average weighted discounted term to settlement is calculated separately for each class of business based on

historical settlement patterns and is measured from the balance sheet date.

• The claims handling expense rates are calculated by reference to past experience of claims handling costs as a percentage of gross claims payments.

• The inflation assumption is set following consideration of the duration of the liabilities and by reference to both economic forecasts and historical experience for wage inflation. Short term wage inflation assumptions are set following consideration of a range of economic forecasts, while medium to long term wage inflation assumptions are set based on consideration of both economic forecasts and historical average rates of wage inflation.

• The discount rate is calculated as the weighted average of the interest rates on Commonwealth Government securities with terms to maturity that match, as closely as possible, the estimated future cash outflows.

• The superimposed inflation assumptions are set by reference to the superimposed inflation indicators present in the portfolio data and industry trends.

• The risk margins are estimated separately for each broad class of business taking into account both the historic volatility of each class, and internal and external risk factors that may impact the ultimate claims cost for each class.



Sensitivity analysis – insurance contractsThe independent actuary has conducted sensitivity analysis to quantify the impact of movements in key underlying variables on the claims liabilities at the balance sheet date. As the VMIA is not subject to income taxation, the impact (net of recoveries) on equity is the same as the impact on the comprehensive result for the financial year.

Financial impact of changes in assumptions on the comprehensive result

Variable

Sensitivity

%

Impact net of recoveries

$’000

Domestic Building Insurance Program

Inflation (3.75% p.a.) +0.50% 353

-0.50% (340)

Discount rate (2.75% p.a.) +0.50% (340)

-0.50% 353

Claims handling expense (6.0% of payments) +1.00% 156

-1.00% (156)

Risk margin (23.5% p.a.) +1.00% 134

-1.00% (134)

Claim frequency (1.0% of total certificates) +0.10% 1,654

-0.10% (1,654)

Average claim size ($44,000 per claim as at 30 June 2012) +10.00% 1,654

-10.00% (1,654)

Dust Diseases and Workers' Compensation Program

Inflation (3.75% p.a.) +0.50% 26,543

-0.50% (24,211)

Discount rate (4.0% p.a.) +0.50% (24,437)

-0.50% 27,079

Number of IBNR claims (1,233 claims) +10.00% 37,389

-10.00% (37,389)

Average claim size ($171,719 per claim as at 30 June 2012) +10.00% 37,389

-10.00% (37,389)

Claims handling expense (10.0% of claim payments) +1.00% 3,587

-1.00% (3,587)

Risk margin (28.5% p.a.) +1.00% 3,069

-1.00% (3,069)



Financial impact of changes in assumptions on the comprehensive result (continued)

Variable

Sensitivity

%

Impact net of recoveries

$’000

General Government Program

Inflation (3.75% p.a.) +0.50% 2,357

-0.50% (2,411)

Discount rate (2.75% p.a.) +0.50% (3,127)

-0.50% 3,100

Loss ratio for long tail classes (assumed loss ratio for Liability, Professional Indemnity +20.00% (18,578)

and Directors and Officers (PIDO) is 64% for the latest accident quarter) -20.00% 18,478

Claims handling expense (2.5% of payments) +1.00% 5,552

-1.00% (5,552)

Risk margin (21.5% p.a.) +1.00% 2,364

-1.00% (2,364)

Public Healthcare Program

Inflation (3.75% p.a.) +0.50% 8,529

-0.50% (7,684)

Discount rate (3.0% p.a.) +0.50% (27,374)

-0.50% 28,857

Claim frequency non-large claims for latest accident year +0.50% 4,811

(6.8% per 100 separations) -0.50% (3,594)

Claim frequency large claims +0.20% 9,232

(1.5% per 1,000 separations) -0.20% (7,728)

Average claim size large claims +5.00% 8,244

($2.5 million per claim as at 30 June 2012) -5.00% (7,897)

Superimposed inflation (4.0% p.a.) +0.50% 8,529

-0.50% (7,684)

Claims handling expense (5.0% of claim payments) +1.00% 9,153

-1.00% (9,153)

Risk margin (11.2% p.a.) +1.00% 8,588

-1.00% (8,588)



Variable Impact of movement in variable on the comprehensive result

Inflation and superimposed inflation rates

Expected future payments are increased to take account of the impact of inflation. Such increases include economic and superimposed inflation. Superimposed inflation assumptions are specific to the individual actuarial models adopted. An increase in an inflation assumption would increase the claims expense and reduce the comprehensive result. A decrease in an inflation assumption would decrease the claims expense and increase the comprehensive result.

Discount rate The claims liabilities are calculated by reference to expected future payments. These payments are discounted to adjust for the time value of money. An increase in the assumed discount rate would decrease the total claims incurred and increase the comprehensive result. A decrease in the assumed discount rate would increase the claims incurred and decrease the comprehensive result.

Claims handling expense rate

The claim liabilities include the professional and administrative costs of the future management and settlement of claims. This is usually calculated as a percentage of the settlement costs based on past experience. An increase in the claims handling expense rate would increase the total claims incurred and decrease the comprehensive result. A decrease in the claims handling expense rate would decrease the claims incurred and increase the comprehensive result.

Working loss ratio for claims liabilities

The working loss ratio is calculated as the cost of claims, excluding catastrophic claims, as a proportion of the premium for the year. An increase in the working loss ratio would increase the total claims incurred and decrease the comprehensive result. A decrease in the working loss ratio would decrease the total claims incurred and increase the comprehensive result.

Claim frequency (both large and small)

Claim frequency is calculated based on past experience. An increase in the frequency of claims would increase the total claims incurred and decrease the comprehensive result. A decrease in the frequency of claims would decrease the claims incurred and increase the comprehensive result.

Average claim size Estimated average claim size is primarily based on historical experience. An increase in the estimated average claim size would increase the total claims incurred and decrease the comprehensive result. A decrease in the estimated average would decrease the total claims incurred and increase the comprehensive result.

Number of IBNR claims

The number of IBNR claims is calculated based on past experience of claim notification patterns and information on the changes in the profile of risk over time. An increase in the estimate of the number of IBNR claims would increase the total claims incurred and decrease the comprehensive result. A decrease in the estimate of the number of IBNR claims would decrease the total claims incurred and increase the comprehensive result.

Risk margin A risk margin is applied to the claims liabilities to reflect the inherent uncertainty in the central estimate of the claims liabilities. The risk margin increases the probability that the claims liabilities are adequately provided up to a 75% probability of sufficiency. An increase in the risk margin would increase the total claims incurred and decrease the comprehensive result. A decrease in the risk margin would decrease the total claims incurred and increase the comprehensive result.

4. Insurance contracts – risk management policies and procedures The financial condition and operation of the VMIA is affected by a number of key risks including insurance risk, interest rate risk, credit risk, market risk, liquidity risk, financial risk and operational risk. The VMIA’s policies and procedures in respect of managing these risks are set out in this note.

(a) Objectives in managing risks arising from insurance contracts and policies mitigating these risks The VMIA’s purpose is to minimise the impact on the State and clients of the exposure to loss from adverse events

through the provision of risk management and insurance services. The VMIA does this in part by accepting the transfer of all or part of such exposures by way of insurance contracts protected by appropriate reinsurance arrangements. Insurance claims experience is inherently uncertain, which can lead to significant variability in losses experienced. The VMIA maintains prudential insurance policies that encompass all aspects of the VMIA’s operations including the reinsurance risk retention limits. These policies set out the VMIA’s processes and controls in respect of the management of both financial and non-financial insurance risks likely to be faced by the VMIA.



Key aspects of the processes established to mitigate risks include:

• The maintenance and use of detailed risk exposure surveys and collection of management information from insured entities which provide reliable data on the risks to which the VMIA is exposed.

• Actuarial models that use claims information derived from the claims experience of the VMIA with consideration of industry experience. The VMIA has claims data from 1995 for the General Government Program, 1958 for the Dust Diseases and Workers’ Compensation Program, from the 1950s for the Public Healthcare Program and 2010 for the Domestic Building Insurance Program. The VMIA also has industry data from 2002 for the DBI Program.

• Documented procedures which are followed for underwriting and pricing risk. • Exposures to natural disasters are modelled and the State’s accumulated risks are mainly protected by arranging

reinsurance to limit the losses arising from catastrophe events. The retention limits as set out in Note 21 are approved by the Board of Directors.

• Financial exposure to the long tail medical indemnity class of insurance has been mitigated by a stop loss arrangement provided by the State. The purpose of this arrangement is to minimise any capital strain that might arise from future deterioration of the claims experience. (Refer to Note 3(iv).)

• Only reinsurers with credit ratings equal to or in excess of the minimum rating specified in the VMIA Reinsurance Management Strategy are accepted as participants in the VMIA’s reinsurance program.

• The investment allocation strategy, as determined by the Victorian Funds Management Corporation (VFMC), to meet the investment objectives established by the Board of Directors to optimise the investment return within acceptable risk parameters.

(b) Terms and conditions of insurance business

Insurance contracts for DBIP Insurance contracts commence on the project contract’s start date and run for 6.5 years after the date of the projects’ completion. The terms and conditions of these insurance contracts are reviewed on an ongoing basis.

Insurance contracts for DDWC The DDWC portfolio is in run-off. The last DDWC insurance contract expired on 31 January 1995.

Insurance contracts for GGP and PHP Insurance contracts typically commence on 30 June and run for 12 months resulting in almost all premium being received in the first quarter of the financial year. The terms and conditions of these insurance contracts are established annually in advance of 30 June.

(c) Concentration of insurance risk The portfolio contains some diversity, but is geographically concentrated in Victoria, and as such is exposed to the potentially material catastrophes of the State, being earthquake, bushfire, storm and flood. Aggregate risk is modelled annually using a combination of data sorted by geospatial positioning and/or postcode reference using available catastrophe models. The reinsurance program provides protection in excess of the retention level, which is typically between $50 million and $100 million (2011: between $50 million and $100 million). The appropriateness of the retention levels is reviewed by the Board of Directors on an annual basis.

The VMIA provides medical indemnity insurance for all public hospitals in Victoria and many other healthcare providers. The VMIA is therefore exposed to the consequences of any factor which increases the cost of such cover, for example, legal precedents. As claims may not be settled for many years, such legal precedents can have a flow on effect on many claims. The stop loss protection provided by the State to the VMIA limits the potential ultimate cost for any one year in respect of such events.



(d) Interest rate risk The financial assets or liabilities arising from insurance or reinsurance contracts entered into are directly exposed to interest rate risk. Changes in interest rates affect the valuation of the VMIA’s insurance and reinsurance assets and liabilities.

(e) Credit risk The financial assets and liabilities arising from insurance and reinsurance contracts are stated in the Balance Sheet at fair value. There are no significant concentrations of credit risk.

5. Revenue and income from continuing activities

Note2012$’000

2011$’000

(a) Gross premium earnedGeneral Government Program 87,873 78,110

Public Healthcare Program 123,762 130,759

Domestic Building Insurance Program 16,471 4,284

Total gross premium earned 228,106 213,153

(b) Reinsurance and other recoveriesGeneral Government Program 97,479 3,327

Public Healthcare Program (6,803) 16,397

Dust Diseases and Workers' Compensation Program 23 (246)

Total reinsurance and other recoveries 6 90,699 19,478

(c) Investment incomeDividends and distributions 30,020 40,202

Interest 36,318 21,329

Other income 1,385 798

Fair value movements through profit and loss:

Realised (losses)/gains (1,005) 58,513

Unrealised (losses)/gains (598) 11,586

Total investment income 66,120 132,428

(d) Other incomeManagement and administration fees 3,203 6,387

Total revenue and income earned for the year 388,128 371,446



6. Net claims incurred

2012 2011

Current Prior Current Prior

year years Total year years Total

$’000 $’000 $’000 $’000 $’000 $’000

Gross claims incurred

Undiscounted 318,052 93,925 411,977 440,873 (83,514) 357,359

Discount movement (54,060) 221,940 167,880 (92,000) 42,459 (49,541)

Gross claims i ncurred 263,992 315,865 579,857 348,873 (41,055) 307,818

Reinsurance and other recoveries

Undiscounted (7,281) (37,931) (45,212) (48,433) 12,571 (35,862)

Discount movement 683 (46,170) (45,487) 16,393 (9) 16,384

Reinsurance and other recoveries (6,598) (84,101) (90,699) (32,040) 12,562 (19,478)

Net claims i ncurred 257,394 231,764 489,158 316,833 (28,493) 288,340

The 2012 financial year gross claims incurred amount includes a $100.4 million portfolio transfer to the VMIA of medical indemnity claims run-off liabilities, incurred by the Department of Health pre 1 July 2003 and other non-medical indemnity claims run-off liabilities incurred by the Department of Health pre 1 July 2005. Refer to Note 28 for further information.

The total net claims incurred for the 2012 financial year includes claims payments and actuarial adjustments for claims incurred prior to 2012 and claims incurred for the 2012 accident year.

7. Administration expenses

2012 2011 $’000 $’000

Loss on disposal of furniture, fittings, equipment and motor vehicles 16 53

Depreciation of furniture, fittings, equipment and motor vehicles 1,155 719

Salaries, wages and long service leave 16,833 16,334

Post employment benefit – defined contribution scheme expense 1,464 1,446

Post employment benefit – defined benefit scheme expense 50 87

Rental expenses relating to operating leases 2,225 2,058

Underwriting expenses 6,372 4,293

Professional services 1,691 1,314

Funding for clients’ risk management projects 1,523 743

Suppliers and other services 7,878 6,867

Total administration expenses 39,206 33,914



2012$’000

2011$’000

8. Cash and cash equivalents

Current

Cash on hand 1 1

Cash at bank 31,193 9,582

Cash in transit - 10,000

Investments in short term money market 268,886 217,469

Cash and cash equivalents 300,080 237,052

9. Trade receivables

Current

Reinsurance recoveries – financial 42,340 -

Premium receivables – non-financial (statutory) 282,036 214,237

Total trade receivables 324,376 214,237

Statutory receivables comprise premium owing by various Victorian Government agencies.

The usual credit period for receivables is 30 days. No interest is charged on invoices not paid within the credit terms. No premium receivables were past due at 30 June 2012 (2011: Nil). No provision for doubtful debts has been made as there is no risk to recoverability of receivables.

10. Non-trade receivables

Current

Outstanding investment settlements – financial - 1,168

Other receivables – financial (contractual) 1,492 23

GST recoverable – non-financial (statutory) 1,490 908

Total non-trade receivables 2,982 2,099



2012$’000

2011$’000

11. Reinsurance and other recoveries – claims

Expected future recoveries in respect of outstanding claims (undiscounted) 260,626 286,486

Discount to present value (22,383) (68,494)

Reinsurance and other recoveries – claims 238,243 217,992

Current 36,134 61,348

Non-current 202,109 156,644

Total reinsurance and other recoveries – claims 238,243 217,992

The majority of the reinsurance and other recoveries relate to the General Government Program.

12. Investments

Australian listed investments 25,074 25,811

Debt securities 410,060 407,503

Australian managed investments 485,877 434,353

Managed investments – foreign currency 211,536 200,034

Financial derivatives (net) 6,337 5,666

Total investments 1,138,884 1,073,367

Current 14,443 22,154

Non-current 1,124,441 1,051,213

Total investments 1,138,884 1,073,367

The VMIA’s investments are classified into Current and Non-current in accordance with maturity dates. All equity investments are classified as Non-current.

Investments are reported at fair value in accordance with the details contained in Note 2(j). Information on the financial risk management of the above investments is disclosed in Note 22.



2012$’000

2011$’000

13. Furniture, fittings, equipment and motor vehicles

Furniture, office equipment and computer hardware at fair value 806 695

Accumulated depreciation (553) (404)

253 291

Motor vehicles at fair value 2,017 1,815

Accumulated depreciation (493) (484)

1,523 1,331

Leasehold improvements at fair value 2,899 1,956

Accumulated depreciation (2,181) (1,570)

717 386

Total 5,721 4,466

Accumulated depreciation (3,227) (2,458)

Carrying amount at 30 June 2,493 2,008

Reconciliation:Reconciliations of the carrying amounts of each class are set out below:

Furniture, office equipment and

computer hardwareLeasehold

improvements Motor vehicles Total$’000 $’000 $’000 $’000

Carrying amount at 30 June 2010 374 549 1,708 2,631

Additions 4 73 727 804

Disposals (4) - (704) (708)

Depreciation expense (83) (236) (400) (719)


Additions 117 943 1,139 2,199

Disposals - - (559) (559)

Depreciation expense (155) (612) (387) (1,154)


Leasehold improvements additions include a make good provision of $812,000 with no cash consideration.



2012$’000

2011$’000

14. Trade payables

Current

Trade payables – financial 5,183 403

Deposits held to meet future claim payments – financial (i) 25,053 39,284

Total trade payables 30,236 39,687

(i) This relates to deposits held to fund claims the VMIA manages on behalf of the Department of Health/Department of Human Services for the below deductible exposures. The VMIA commenced the medical indemnity insurance for the State with effect from 1 July 2003.

The average credit terms for trade payables is 30 days. No interest is usually charged on invoices not paid within the credit terms.

For details of the fair value of the trade payables and of the interest bearing components refer to Note 22(a) and Note 22(b)(iii).

15. Non-trade payables

Current

Outstanding investment settlements – financial 840 -

GST, Stamp Duty and other statutory charges – non-financial (statutory) 46,735 35,632

Accruals and other payables – non-financial 6,006 22,481

Total non-trade payables 53,581 58,113

16. Lease incentive liability

Current 171 -

Non-current 1,319 -

Total lease incentive liability 1,490 -

The VMIA has negotiated a lease incentive benefit equivalent to 20 months of rent in relation to the new leased office premises at 161 Collins Street, Melbourne, Victoria, 3000. This benefit will be recognised over the lease term of seven years with the corresponding reduction in the lease incentive liability over time.



2012$’000

2011$’000

17. Gross unearned premium liability

Gross unearned premium liability at beginning of year 203,912 178,998

Deferral of premium on contracts written in current year 266,882 201,834

Earning of premium written in prior years (162,920) (176,920)

Total gross unearned premium liability at end of year 307,874 203,912

Current 261,423 177,422

Non-current 46,451 26,490

Total gross unearned premium liability at end of year 307,874 203,912

18. Unexpired risks liability

The Liability Adequacy Test (LAT) (Note 2(e)) was undertaken by the independent actuary for all applicable insurance provided by the VMIA. The VMIA’s independent actuary has compared the unearned premium liability, discounted at the pricing discount rate of 7.5% p.a. for the year ending 30 June 2013, to the present value of expected future cash flows, discounted at the risk free rates of between 2.8% p.a. and 3.0% p.a. at 30 June 2012, relating to current insurance contracts comprising the sum of the following:

(i) The net present value of future claim settlement costs arising from unearned premium and premium for which there is a constructive obligation at 30 June 2012.

(ii) Allowance for expenses to administer policies after the renewal date. (iii) A risk margin to provide a 75% probability of sufficiency which has been set to be consistent with the valuation of

claims liabilities.(iv) Gross deferred acquisition costs.

Insurance premium charged by the VMIA is based on the expected net future claims costs for the policy year discounted at the expected long term investment rate of return, reinsurance, administration and risk management costs, and a charge for the capital required to support the business. The result of the LAT was a $2.7 million deficiency (2011: Nil) for the General Government Program (GGP), $76.2 million (2011: $37.1 million) for the Public Healthcare Program (PHP) and $7.3 million (2011: $9.9 million) for the Domestic Building Insurance Program (DBIP). In recognising the deficiency pertaining to the GGP and PHP, an unexpired risks liability of $78.9 million (2011: $37.1 million) is recognised in the Balance Sheet. The deficiency pertaining to DBIP has been written off against gross deferred acquisition costs.

The deficiencies at 30 June 2012 do not result in any related reinsurance assets.



(a) Calculation of program deficiencies

2012DBIP$’000

GGP$’000

PHP$’000

Net unearned premium liability 65,136 67,990 131,340

Net present value of future policy costs (41,799) (57,857) (171,037)

Risk margin (9,824) (12,803) (36,492)

Gross deferred acquisition costs recognised (20,826) - -

Gross deficiency (7,313) (2,670) (76,189)

Write down of deferred gross acquisition costs (7,313) - -

Net deficiency - (2,670) (76,189)

Gross deferred acquisition costs recognised in Balance Sheet (i) 13,513 - -

2011

Net unearned premium liability 38,585 51,933 112,787

Net present value of future policy costs (24,509) (41,095) (148,636)

Risk margin (6,297) (9,007) (1,290)

Gross deferred acquisition costs recognised (17,727) - -

Gross deficiency (9,948) - (37,139)

Gross deferred acquisition costs written down (9,948) - -

Net deficiency - - (37,139)

Gross deferred acquisition costs recognised in Balance Sheet (i) 7,779 - -

(i) The increase in gross deferred acquisition costs recognised in the Comprehensive Operating Statement during the financial year amounted to $5.734 million (2011: $7.487 million).

(b) Unexpired risks liability

2012$’000

2011$’000

Unexpired risks liability at beginning of year 37,139 11,100

Recognition of unexpired risks liability – current year 78,859 37,139

Release of unexpired risks liability – prior years (37,139) (11,100)

Increase in unexpired risks liability 41,720 26,039

Unexpired risks liability at end of year (ii) 78,859 37,139

(ii) The unexpired risks liability at end of year is recognised in the Balance Sheet.



19. Claims liabilities

(a) Gross claims liabilities compositionThe claims liabilities contained in the financial report are obtained through independent actuarial valuation.

2012$’000

2011$’000

Undiscounted central estimate 2,013,339 1,855,528

Discount to present value (440,883) (609,384)

Discounted value of central estimate 1,572,456 1,246,144

Claims handling costs 81,316 69,048

Risk margin 238,136 188,339

Gross claims liabilities 1,891,908 1,503,531

Current 291,497 227,390

Non-current 1,600,411 1,276,141

Gross claims liabilities 1,891,908 1,503,531

(b) Risk marginThe objective of the risk margin is to achieve a 75% probability that the claims liabilities will be sufficient. Risk margin assumptions are disclosed in Note 3.



(c) Reconciliation of movement in discounted claims liabilities

Gross$’000

Reinsurance and other

recoveries$’000

Net$’000

Claims liabilities at 30 June 2010 1,306,592 (205,160) 1,101,432

Effect of changes in economic assumptions (8,671) 1,870 (6,801)

Effect of changes in other assumptions (88,209) 19,472 (68,737)

Effect of claims moving one year closer to settlement 55,826 (8,779) 47,047

Claims incurred in current accident year 348,872 (32,041) 316,831

Claims incurred charged to comprehensive result 307,818 (19,478) 288,340

Net claim payments during the year (110,879) 6,646 (104,233)


Effect of changes in economic assumptions 178,171 (13,635) 164,536

Effect of changes in other assumptions (1,735) (62,061) (63,796)

Effect of claims moving one year closer to settlement 65,840 (8,311) 57,529

Claims incurred in current accident year 337,581 (6,692) 330,889

Claims incurred charged to comprehensive result 579,857 (90,699) 489,158

Net claim payments during the year (191,480) 70,448 (121,032)


Gross claims incurred include $100.4 million of claims run-off liabilities transferred from the Department of Health with effect from 1 January 2012 (refer to Note 28).



(d) Claims development tables

The following tables show the development of net undiscounted claims liabilities relative to the ultimate expected cost of claims for the three most recent accident years. As all claims for the Dust Diseases and Workers’ Compensation Program were incurred prior to these accident years, the table has been modified for that program.

Domestic Building Insurance Program

Net claims development table

2010$’000

2011$’000

2012$’000

Total$’000

Original estimate of ultimate net claims incurred at end of accident year 1,608 31,679 28,783

One year later 1,608 31,323

Two years later 1,609

Current estimate of ultimate net claims incurred 1,609 31,323 28,783 61,715

Cumulative payments (436) (2,127) (117) (2,680)

Net claims liabilities – undiscounted 1,173 29,196 28,666 59,035

Unearned liabilities (44,789)

Total net claims liabilities – undiscounted 14,246

Discount (1,613)

Claims handling expenses 758

Risk margin 3,147

Net claims liabilities at 30 June 2012 16,538

Dust Diseases and Workers’ Compensation Program


Total$’000

Three years previous 685,230

Two years previous 703,439

One year previous 688,654

Current estimate of ultimate net claims incurred 682,802

Cumulative payments (since 1999) (169,996)

Net claims liabilities – undiscounted 512,806

Discount (233,793)

Claims handling expenses 27,901

Risk margin 87,604




General Government Program

Net claims development table2004$’000

2005$’000

2006$’000

2007$’000

2008$’000

2009$’000

2010$’000

2011$’000

2012$’000

Total$’000

Original estimate of ultimate net claims incurred at end of accident year 27,882 24,603 22,938 25,514 21,695 66,858 35,610 155,046 54,017

One year later 16,912 18,418 15,752 57,175 16,990 66,292 29,501 175,815

Two years later 11,355 11,405 15,165 53,073 15,806 73,650 27,682

Three years later 9,044 9,360 14,951 49,917 14,689 84,444

Four years later 9,766 10,843 28,018 48,517 12,674

Five years later 8,050 10,781 24,693 47,261

Six years later 8,094 10,184 24,166

Seven years later 7,727 8,866

Eight years later 7,785Current estimate of ultimate net claims incurred 7,785 8,866 24,166 47,261 12,674 84,444 27,682 175,815 54,017 442,709

Cumulative payments (7,210) (7,565) (22,547) (44,576) (6,406) (38,823) (10,263) (68,564) (1,261) (207,217)Net claims liabilities – undiscounted 575 1,301 1,619 2,685 6,268 45,620 17,418 107,250 52,756 235,492

2003 and prior years 1,361


Discount (11,828)


Risk margin 50,900




Public Healthcare Program


2004$’000

2005$’000

2006$’000

2007$’000

2008$’000

2009$’000

2010$’000

2011$’000

2012$’000

Total$’000

Original estimate of ultimate net claims incurred at end of accident year - - 125,320 126,340 103,208 125,003 148,717 186,932 197,860

One year later - 97,976 95,931 118,865 98,283 122,674 148,175 182,807

Two years later 99,420 105,257 99,868 112,915 123,112 130,463 144,714

Three years later 80,591 103,496 86,399 115,041 140,246 124,942

Four years later 83,274 105,267 83,314 122,865 133,844

Five years later 79,593 103,059 74,306 107,421

Six years later 65,568 103,260 74,479

Seven years later 61,211 100,028

Eight years later 59,297Current estimate of ultimate net claims incurred 59,297 100,028 74,479 107,421 133,844 124,942 144,714 182,807 197,860 1,125,393

Cumulative payments (32,964) (44,184) (37,769) (36,950) (18,153) (13,878) (2,838) (828) (131) (187,694)Net claims liabilities – undiscounted 26,333 55,844 36,710 70,471 115,691 111,064 141,876 181,980 197,729 937,699

2003 and prior years 51,110


Discount (171,267)


Risk margin 96,484




20. Equity and reserves

2012$’000

2011$’000

Contributed capital 145,771 78,700

Accumulated deficit (480,957) (161,038)

Net worth (335,186) (82,338)

During the 2011 financial year the VMIA’s capital policy was revised and incorporated into the Prudential Insurance Standard for Victorian Public Sector Insurance Agencies (the Standard). In line with the requirements of the Standard, the State Government’s Risk Preference Statement (RPS) was updated, providing for a funding level range of between 85% and 115%. With the updated RPS, the VMIA was no longer required to maintain separate Catastrophe and Solvency Reserves. Consequently, the VMIA transferred these reserves to the Accumulated Deficit during the 2011 financial year.

The Net Worth of the VMIA at 30 June 2011 and 2012 shows a deficit position. However, the VMIA remains a going concern as the VMIA is supported by the State Government’s guarantee to pay amounts payable by the VMIA as per Note 23(a).

At 30 June 2011, the VMIA’s Funding Ratio of 94% was within the funding level range allowed under the RPS. At 30 June 2012, the VMIA’s Funding Ratio of 80% was outside the lower boundary of the funding level range of 85%. However, independent actuarial modelling has confirmed that the VMIA is in a strong position to recover to 100% funding over the next five years.

During the 2012 financial year the VMIA received $67.1 million in capital contributions from the State Government. The capital contributions are in support of the insurance operations of the Public Healthcare (medical indemnity) Program, with $33.2 million, and the DBI Program, with $8.9 million. The VMIA also received a capital contribution of $25 million from the State Government to support the funding position of the VMIA as an outcome of accepting certain Department of Health claims run-off liabilities, with further information provided in Note 28.

There is no minority interest in the equity of the VMIA. The equity is not represented by share capital with a specified par value.

21. Reinsurance program The VMIA provides insurance to State Government Departments, participating bodies and other entities as defined under the VMIA Act 1996. The VMIA has a policy of purchasing reinsurance to limit financial exposure to the State, as follows:

• Industrial Special Risks – $2.05 billion (2011: $2.05 billion) excess of the VMIA $50 million (2011: $50 million) retention, any one event, including the Government Rail Insurance Program Industrial Special Risks.

• Public and Product Liability – $700 million (2011: $700 million) excess of the VMIA $50 million (2011: $50 million) retention, any one occurrence, and in the annual aggregate separately for Product Liability and Bushfire Liability.

• Principal Controlled Construction Risks – Material Damage and Public Liability – $97.5 million (2011: $47.5 million) for property damage in excess of the VMIA $2.5 million (2011: $2.5 million) retention, any one contract, and $295 million for Public Liability (2011: $245 million) in excess of the VMIA $5 million (2011: $5 million) retention, any one occurrence.

• Government Rail Insurance Program – Public and Product Liability – $250 million (2011: $250 million) excess of the VMIA $100,000 (2011: $100,000) retention, any one occurrence.

In addition, to protect against the potential for a series of losses which in aggregate exceed $100 million in any one year (2011: $100 million), the VMIA has obtained Aggregate Stop Loss reinsurance of $100 million (2011: $100 million) in excess of an aggregate of $100 million (2011: $100 million) of insured losses incurred under the VMIA’s Industrial Special Risks, Principal Controlled Construction Risks and Public and Products Liability policies, on a proportional basis of 42.5% (2011: 60%) plus a further $50 million in excess of aggregate of $150 million on a proportional basis of 15% (2011: Nil).



22. Financial instrumentsThe VMIA’s operating activities expose it to a variety of financial risks including market risk (being equity price risk, foreign currency risk and interest rate risk), credit risk and liquidity risk. The VMIA’s investment activity is undertaken pursuant to the VMIA Act 1996, the Borrowing and Investment Powers Act 1987, the ‘Prudential Statement for Victorian Public Sector Investments’, the ‘Prudential Standard: VFMC and the Centralised Investment Model’ and an Order in Council dated 1 February 2009.

The Order in Council defines the responsibilities of the VMIA and the VFMC. The VMIA is responsible for setting the investment objectives after considering such matters as capital needs, income and expenditure requirements, future projections of assets and liabilities and risk preferences of the Treasurer. The VFMC has the responsibility to develop and implement suitable investment strategies and ensure that its systems encompass strong internal controls and good corporate governance. The investment strategy that is determined by the VFMC is documented in a detailed Investment Risk Management Plan (IRMP) which is approved by the Treasurer.

Each quarter the VFMC Board of Directors certifies to the Department of Treasury and Finance that investments have been managed within the abovementioned framework and in accordance with the IRMP. The VFMC reports on investment performance including comparison to market benchmarks on a monthly basis. The VMIA Board of Directors review investment performance reports on a quarterly basis.

The Department of Treasury and Finance ensures that appropriate structures exist to manage investment risk and undertakes the prudential supervision of the VFMC.

The administration of the investment portfolio is managed by the VFMC internally and through specialist fund managers and a custodian. The custodian holds the investments and conducts settlements pursuant to instructions from the specialist fund managers.

The investment portfolio is summarised in Note 12.

DerivativesThe use of derivatives forms part of the investment strategy set by the VFMC.

The VFMC restricts the managers of the VMIA’s direct investment portfolio and of the trusts in which the VMIA invests by permitting the use of derivative investments only in the following circumstances:

(i) Hedging to protect the value of the assets against any significant decline in investment markets.

(ii) As a means of making adjustments to the asset allocation while minimising transaction costs.

(iii) Entering or exiting a position at an advantageous price.

The VFMC does not permit fund managers to use derivatives to gear or leverage portfolios or create net short positions, that is, positions not covered by physical stock creating potential for unlimited downside. At 30 June 2012 the VMIA had exposure to Australian Fixed Interest futures, Australian Share Price Index futures, International Equity futures, swaps and forward foreign exchange contracts. These exposures are valued at fair value as determined by their market value at balance sheet date.

(a) Financial instruments classificationThe financial instruments are classified with reference to the source of inputs used to derive their fair value. This classification uses the following hierarchy:

(i) Level 1 – fair value is determined by using quoted prices (unadjusted) in active markets for identical assets or liabilities.

(ii) Level 2 – fair value is determined by using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices).

(iii) Level 3 – fair value is determined by using inputs for the asset or liability that are not based on observable market data.



(a) Financial instruments classification (continued)

Level 1 Level 2 Level 3 TotalNote $’000 $’000 $’000 $’000

2012

Financial assets

Investments 12 133,825 979,035 26,024 1,138,884

Trade receivables 9 - 42,340 - 42,340

Non-trade receivables 10 - 1,492 - 1,492

Cash and cash equivalents 8 300,080 - - 300,080

Total financial assets 433,905 1,022,867 26,024 1,482,796

Financial liabilities

Trade payables 14 - 30,236 - 30,236

Non-trade payables 15 840 - - 840

Total financial liabilities 840 30,236 - 31,076

2011

Financial assets

Investments 12 149,924 897,180 26,263 1,073,367

Non-trade receivables 10 1,168 23 - 1,191

Cash and cash equivalents 8 237,052 - - 237,052

Total financial assets 388,144 897,203 26,263 1,311,610


Trade payables 14 - 39,687 - 39,687

Total financial liabilities - 39,687 - 39,687

The VFMC manages unlisted financial instruments on behalf of the VMIA that are not traded in active markets. Hence, their fair values at the balance sheet date are based on prices advised by the external fund managers as well as valuations determined by appropriately skilled independent third parties.

For certain unlisted financial instruments, the valuation techniques adopted by independent third parties include the use of discounted cash flows, multiples’ based analysis, comparison with similar transactions and other valuation techniques considered appropriate. The resultant valuations are subject to estimation uncertainty. Given this inherent subjectivity, the underlying assumptions are reviewed by the investment managers on an ongoing basis to ensure these valuations reflect the appropriate estimates of the economic conditions at the balance sheet date. The carrying amount of such investments as at balance sheet date is $224.3 million (2011: $211.9 million), comprising Level 3 and some Level 2 investments.

However, it is reasonably possible that outcomes of these assumptions by external investment managers, within the next financial year, could be different from the current model assumptions and could require a material adjustment to the carrying amount of these financial instruments.




The disclosure below provides details of the inputs and assumptions used in the current valuation models. Further detailed information has been provided where available. A significant majority of these investments are held via third party investment vehicles, and as such the VMIA is not privy to the detailed assumptions used to value the underlying investment assets. The disclosure is provided at the investment portfolio asset class level, which is consistent with the way the VMIA receives the information from the VFMC and undertakes its monitoring function.

(i) Infrastructure investmentsThe valuation of unlisted infrastructure investments is primarily based on the discounted cash flow methodology. Assumptions which may be subject to estimation uncertainty include the risk free rate, risk premium, asset utilisation rates, capital expenditure forecasts and estimated future cash flows.

The carrying amount of these investments as at 30 June 2012 is $17.2 million (2011: $14.2 million).

Among the infrastructure investments are unit holdings in VFMC trusts or equity holdings in VFMC companies which include:

(1) An equity holding in a UK airport which had an independent valuation completed utilising the discounted cash flow methodology by discounting forecast cash flows by an estimated cost of equity. Forecast cash flows have been derived from a model provided by the airport’s management in line with the approved business plan.

Assumptions and interdependencies in the valuation model include the discount rate of 10.25% (2011: 10.35%) applied by the valuer to discount forecast cash flows, passenger volumes, mix of passengers, operating costs, capital expenditure forecast, gearing level forecast and the UK tax rate.

The VMIA’s carrying balance of its investment as at 30 June 2012 is $6.9 million (2011: $6.2 million).

(2) Exposure to an Australian gas pipeline which had an independent valuation completed utilising the discounted cash flow methodology by discounting forecast cash flows by an estimated cost of equity. Forecast cash flows have been derived from a model reflecting the latest economic and operating assumptions, including updated capital expenditure and operating budgets.

Assumptions and interdependencies in the valuation model include the discount rate of 9.20% (2011: 9.60%) applied by the valuer to discount forecast cash flows, renewal of existing contracts upon expiry at the level of volume and pricing assumed in the forecasts, operating costs, capital expenditure forecasts and maintenance of the current capital structure.

The VMIA’s carrying balance of its investment as at 30 June 2012 is $8.1 million (2011: $8.0 million).

(ii) Private equity investments Private equity investments comprise both domestic and international exposures to venture capital, buyout, special situations and expansion capital sectors.

The valuation of unlisted private equity investments is primarily based on multiples of earnings, discounted cash flow, market equivalents and other market accepted methodologies. Assumptions which may be subject to estimation uncertainty include the identification of appropriate comparables, estimated future profits, risk free rate, risk premium, estimated future cash flows and future economic and regulatory conditions.





(iii) Property investmentsProperty investments comprise unlisted property trusts with exposure to the domestic commercial property market.

The valuation of unlisted property investments is primarily based on discounted cash flow, capitalisation and direct comparison methodologies. Assumptions which may be subject to estimation uncertainty include the identification of appropriate comparables, estimated future profits, risk free rate, risk premium, estimated future cash flows and future economic and regulatory conditions.


(iv) Diversified fixed income investmentsDiversified fixed interest investments comprise investments in government, government related, corporate and securitised bonds, loans and other debt instruments, primarily from Australian issuers but with some limited exposure to international issuers, and fixed interest and currency instruments through externally managed unlisted pooled vehicles and segregated portfolios.

The valuation of diversified fixed interest investments is primarily based on third party pricing servicers, brokers, market makers and valuation methodologies determined to be appropriate by the manager or their independent valuation agent. Such methodologies applied may include discounted cash flow, amortised cost and direct comparison.

Assumptions which may be subject to estimation uncertainty include the appropriate credit spread and other risk premium, future risk free rate, future cash flows, identification of appropriate comparables and future economic and regulatory conditions.

The VMIA’s carrying balance of its investment as at 30 June 2012 is $3.1 million (2011: Nil).

(v) Non-traditional strategies(1) Insurance investments

The VMIA has exposure through its unit holding in the VFMC trust to a portfolio of US life insurance policies which are valued by an independent valuer.

The portfolio of policies is valued using the actuarial asset share method. The actuarial asset share method is based on the assumptions of probabilities of insureds’ mortality and premium payments on the valuation date.

Other assumptions and interdependencies in the valuation model include the weighted average discount rate of 18.9%, life expectancy estimates obtained from qualified providers and expected premium payments based on the ‘back solving’ premiums optimisation method.

The VMIA’s carrying balance of its investment as at 30 June 2012 is $14 million (2011: $19.6 million).

(2) Fixed interest investments

Non-traditional fixed interest strategies comprise investments in hedge funds and other non-traditional investments that do not fit within the definition of other asset classes but which provide diversification benefits to the total portfolio. Investments are made through externally managed unlisted pooled vehicles.

The valuation of non-traditional fixed interest investments is primarily based on prices quoted on an exchange or traded in a dealer market. For less liquid securities, valuation methodologies are set out by each manager. Depending on the investment, the methodologies applied include discounted cash flow, amortised cost, direct comparison and other market accepted methodologies. The investment manager may choose to appoint independent valuation agents to seek independent price verification.

Assumptions which may be subject to estimation uncertainty include the appropriate credit spread and other risk premium, future risk free rate, future cash flows, identification of appropriate comparables and future economic and regulatory conditions.

The VMIA’s carrying balance of these investments as at 30 June 2012 is $54.4 million (2011: $68.2 million).




(v) Non-traditional strategies (continued)

Level 3 fair value hierarchy reconciliation of investments2012$’000

2011 $’000

Balance at beginning of year 26,263 -

Transfers into Level 3 hierarchy due to reassessment of inputs - 39,187

Acquisitions 30,581 27,327

Disposals (25,819) (26,941)

Returns of capital (705) -

New issues and conversions 478 -

Losses on disposal recognised in Comprehensive Operating Statement (4,774) (13,310)

Balance at end of year 26,024 26,263

(b) Market risk

(i) Equity price riskThe VMIA is exposed to equity price risk. This arises from investments held at fair value through profit and loss. The VFMC limits price risk through diversification of the equity investment portfolio. The majority of the underlying equity investments are publicly traded on recognised exchanges.

The listed equity sensitivity analysis below has been determined for the directly held Australian equities, which are listed on the Australian Stock Exchange and effective exposure to futures, which are listed on the Sydney Futures Exchange. International equities and Australian equities that are held through trusts are included in the analysis of unlisted investment prices. The VMIA does not hold any direct investments in international equities. The following details the VMIA’s sensitivity to a 15% (2011: 10%) increase or decrease in markets based on exposures at the balance sheet date and assumes that the change takes place at the beginning of a financial year and remains constant to the balance sheet date. The percentage movement represents the sensitivity rate the VFMC uses when monitoring equity price risk and approximates one standard deviation of investment return variability for equities’ prices. It is also the percentage that the custodian reports to the VMIA management to monitor equity price risk.

Impact on comprehensive result and equity from a movement in equity prices2012$’000

2011$’000

Listed investment prices

Decrease of 15% (2011 : 10%) (24,537) (21,620)

Increase of 15% (2011 : 10%) 24,537 21,620

Unlisted investment prices

Decrease of 15% (2011 : 10%) (88,546) (51,213)

Increase of 15% (2011 : 10%) 88,546 51,213

(ii) Foreign currency riskForeign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The VMIA is exposed to foreign exchange rate risk through its investments which are denominated in foreign currencies.

The VFMC invests globally on the VMIA’s behalf to optimise the investment return and minimise risk in achieving the VMIA’s investment return objectives. The VMIA’s international investments include investments denominated in both Australian and foreign currencies. The VFMC has established controls to manage currency exposure including limiting the foreign exchange risk through the use of forward exchange contracts. The VFMC’s policy, approved under the IRMP, is to adopt a neutral hedged position of 50% of international equities exposure and 100% of other international asset exposure.



(b) Market risk (continued)

(ii) Foreign currency risk (continued)In accordance with AASB 7 Financial Instruments, the foreign currency risk disclosure has been prepared on the basis of the VMIA’s direct investment and not on a look-through basis for investments held indirectly through unit trusts. Consequently the disclosure of currency risk does not include the currency risk profile of the VMIA arising from the investments in trusts, which in turn have exposure to currency risk.

The table below summarises the VMIA’s exposure to foreign currency risk and the management of that exposure using forward exchange contracts in force at the balance sheet date.

Investments in foreign currency

$’000

Forward contract cover

$’000

Net exposure

$’000

2012

British Pound 12,313 (30,303) (17,990)

Euro 20,700 (39,964) (19,264)

Japanese Yen 9,137 (22,980) (13,843)

US Dollar 410,640 (329,240) 81,400

Other 20,552 (35,734) (15,182)

Total 473,342 (458,221) 15,121

2011

British Pound 12,554 (30,306) (17,752)

Euro 45,437 (57,509) (12,072)

Japanese Yen 10,327 (21,337) (11,010)

US Dollar 172,214 (179,678) (7,464)

Other 40,687 (33,761) 6,926

Total 281,219 (322,591) (41,372)

The sensitivity analysis below has been determined based on the exposure to foreign exchange rates at the balance sheet date and the 10% increase and decrease in the Australian Dollar against the relevant foreign currencies, taking place at the beginning of the financial year and being held constant to the balance sheet date.

Impact on comprehensive result and equity from a movement in foreign exchange2012$’000

2011$’000

Increase of 10% 1,375 (3,761)

Decrease of 10% (1,680) 4,597

(iii) Interest rate riskInterest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fixed interest and indexed linked investments are subject to changes in fair value, being the impact on quoted bid prices, if interest rates change. Additionally any other assets and liabilities valued by discounting future cash flows will also be subject to interest rate risk. An increase in interest rates results in a decrease in the value of investments, while a decrease in interest rates increases the value of investments.




(iii) Interest rate risk (continued)The VFMC and its fund managers seek to manage interest rate risk through an asset allocation strategy for the investment portfolio, which acts as an economic hedge against the VMIA’s insurance liabilities. As interest rates move, to the extent these assets and liabilities can be matched, increases or decreases in claims incurred arising from the remeasurement of the claims liabilities will be offset by increases or decreases in the fair value of interest bearing investments.

A summary of the VMIA’s exposure to interest rate risk on financial instruments follows:

Variable rate Fixed interest rate Period to maturity Total

Note $’000

Under 1 year$’000

1-5 years$’000

Over 5 years

$’000 $’000

2012

Financial assets

Debt securities 12 228,182 6,448 85,296 90,134 410,060

Interest rate derivatives 299,882 - - - 299,882

Cash and cash equivalents 8 66,514 233,565 - - 300,079

Financial assets exposed to interest rate risk 594,578 240,013 85,296 90,134 1,010,021


Trade payables 14 25,053 - - - 25,053

Interest rate derivatives 298,682 2,323 - - 301,005

Financial liabilities exposed to interest rate risk 323,735 2,323 - - 326,058

Net exposure 270,843 237,690 85,296 90,134 683,963

2011

Financial assets

Debt securities 12 251,422 10,651 80,188 65,242 407,503


Cash and cash equivalents 8 65,948 171,103 - - 237,051

Financial assets exposed to interest rate risk 555,330 181,754 80,188 65,242 882,514


Trade payables 14 39,284 - - - 39,284


Financial liabilities exposed to interest rate risk 276,160 - - - 276,159

Net exposure 279,170 181,754 80,188 65,242 606,355




(iii) Interest rate risk (continued)The following sensitivity analysis has been determined based on the direct exposure to interest rates at the balance sheet date as detailed above. Interest bearing investments held through trusts have been excluded from this analysis. The analysis assumes the stipulated change taking place at the beginning of the financial year and is held constant to the balance sheet date. A 0.5% (2011: 0.5%) increase or decrease in interest rates is used by the independent actuary in the claims sensitivity analysis of the discount rate in Note 3. The same percentage has been used in this sensitivity analysis to present the impact on interest bearing investments. These movements are attributable to the VMIA’s exposure to interest rates on its variable rate investments and payables, and the fair value movement on its fixed rate investments.

2012$’000

2011$’000

Impact on comprehensive result and equity from a movement in Australian interest rates

Increase of 0.5% (12,978) (11,319)

Decrease of 0.5% 12,985 11,326

(c) Credit riskCredit risk arises from the potential default of a counterparty on their contractual obligations resulting in a financial loss to the VMIA. Financial assets of the VMIA which have been recognised at fair value on the Balance Sheet comprise cash and cash equivalents, trade receivables, non-trade receivables and investments. The total credit risk exposure to the VMIA is therefore the carrying amount and is detailed in Note 22(a).

The following analysis excludes trade receivables and non-trade receivables in respect of claims due from other Government entities. The reinsurance recoveries of $30.845 million from two reinsurers classified as trade receivables are past their due date. No other financial assets are past their due date, are impaired, or have been renegotiated (also refer to Note 4(e)).

Credit risk of the investment portfolio is managed by the VFMC and its appointed fund managers under instructions from the VFMC. The appointed fund managers, through the VFMC, manage credit risk by diversifying the exposure among counterparties and operating in liquid markets. The VMIA does not have any significant concentration of investment counterparty credit risk on an industry, regional or foreign country basis.



(c) Credit risk (continued)

Financial assets are held with counterparties with the following Standard & Poor’s credit ratings:

NoteAAA

$’000AA+/AA-

$’000A+/A- $’000

BBB+/BBB- $’000

Not rated $’000

Total $’000

2012

Debt securities 12 138,097 107,038 50,410 98,063 16,452 410,060

Trade receivables (i) 9 - 14,389 27,951 - - 42,340

Non-trade receivables 10 - - - - 1,492 1,492

Cash and cash equivalents (ii) 8 - 31,193 - - - 31,193

Net exposure 138,097 152,620 78,361 98,063 17,944 485,085

2011

Debt securities 12 177,139 97,630 35,520 89,699 7,515 407,503

Non-trade receivables 10 - - - - 1,191 1,191

Cash and cash equivalents (ii) 8 - 19,582 - - - 19,582

Net exposure 177,139 117,212 35,520 89,699 8,706 428,276

(i) Statutory receivables of insurance premium from various Victorian Government agencies have been excluded in the above analysis as the credit risk is minimal.

(ii) Cash and cash equivalents in the above analysis exclude cash on hand and deposits with the Treasury Corporation of Victoria for which the credit risk is minimal.

(d) Liquidity risk

Liquidity risk is the risk that the VMIA will encounter difficulty in meeting its financial obligations as they fall due.

The VFMC uses a combination of cash and futures portfolios plus a largely liquid portfolio of investments to ensure sufficient liquidity is available at all times to meet the VMIA’s operating requirements. The VMIA is cash flow positive with insurance premium, investment income and other income receipts exceeding claim payments, reinsurance premium, commission and administration expense payments.

The VMIA’s trade payables include certain interest bearing balances being funds, advanced to the VMIA, to fund the payment of claims the VMIA manages on behalf of the Department of Health/Department of Human Services and other clients. There is no contractual maturity date for these payables of $25.1 million (2011: $39.3 million) and therefore no maturity analysis is provided as they are expected to mature as claims are paid. All other trade payables and non-trade payables are incurred in the ordinary course of trade and are expected to be settled within 30 days.

The fair value of the trade payables, being amounts advanced by the Department of Health/Department of Human Services plus interest credited less claims paid to date approximates their fair value. There are no special terms or conditions affecting the nature and timing of the financial instruments not otherwise disclosed in this financial report.



23. Commitments and contingencies

(a) Statutory GuaranteeThe due satisfaction of amounts payable by the VMIA as a result of or in connection with liabilities of the VMIA is guaranteed by the Government of Victoria. The VMIA’s financial objective is to operate essentially as a stand-alone entity. To this end the VMIA seeks to hold sufficient capital to maintain an acceptable probability that with appropriate reinsurance, it will be able to fund its liabilities as they fall due and not have to rely on its guarantee from the Government of Victoria. It is not anticipated that the VMIA will call on the Statutory Guarantee other than in exceptional circumstances.

(b) Guarantee feePursuant to Section 27 of the VMIA Act 1996, the Government of Victoria has guaranteed amounts payable by the VMIA as a result of or in connection with liabilities of the VMIA. In accordance with Section 27(3) of the VMIA Act 1996 the VMIA must, in respect of this Statutory Guarantee, pay to the Treasurer for payment into the Consolidated Fund from any surplus for the year ended on the preceding 30 June such amount as the Treasurer determines after consultation with the VMIA. The VMIA has not received any Treasurer’s determination in relation to the payment of a guarantee fee for the financial year ended 30 June 2012 (2011: Nil).

(c) Capital commitmentsThe VMIA has uncalled capital commitments to investments totalling $25.436 million as at 30 June 2012 (2011: $22.500 million).

(d) Operating lease commitments

2012$’000

2011$’000

Commitments in relation to operating leases contracted for at 30 June but not recognised as liabilities are:

Not later than one year 2,134 2,003Later than one year but not later than five years 7,746 1,427Later than five years 3,778 -

13,658 3,430

Operating lease commitments relate to two office premises leases (with lease term ending 30 November 2012 and lease term ending 31 May 2019) and office equipment. The VMIA does not have an option to purchase leased assets at the expiry of the lease periods.

(e) ContingenciesThe VMIA has no known contingent assets or liabilities (2011: Nil).



24. Superannuation benefitsEmployees of the VMIA are entitled to receive superannuation benefits and the VMIA contributes to both defined benefit and defined contribution plans. The defined benefit plan provides benefits based on years of service and final average salary. The VMIA does not recognise any defined benefit liability in respect of this plan because the entity has no legal or constructive obligation to pay future benefits relating to its employees. The VMIA’s only obligation is to pay superannuation contributions as they fall due. The Department of Treasury and Finance recognises and discloses the State’s defined benefit liabilities in its financial report. Superannuation contributions paid or payable during the financial year are included as part of employee benefits in the VMIA’s Comprehensive Operating Statement.

The name, details and amounts expensed in relation to the employee superannuation funds are as follows:

2012$’000

2011$’000

Defined benefit fund:

ESSSuper 50 87

Defined contribution funds:

VicSuper 764 713

AustralianSuper 180 121

Other 520 612

1,514 1,533

There were no superannuation contributions outstanding at 30 June 2012 (2011: Nil).



25. Responsible personsIn accordance with the Ministerial Directions issued by the Minister for Finance under the Financial Management Act 1994, the following disclosure is made regarding responsible persons for the financial year.

(a) Responsible personsThe names of persons who were responsible persons at any time during the financial year are as follows:

Responsible Minister: The Hon. R. Clark, MP.

Governing Board: J. Peberdy (Chairman from 6 September 2011), I. Gaudion (Acting Chairman until 5 September 2011), B. Benger, J. Fitzpatrick, D. Kearsley, S. Moffatt (resigned 28 February 2012), H. Pinskier (resigned 24 September 2011), J. McNeil (appointed 7 February 2012) and S. Roberts.

Accountable Officers: S. Marshall (Chief Executive Officer, resigned 9 September 2011), C. Battilana (Acting Chief Executive Officer, 10 September 2011 to 7 November 2011), P. Ryan (Acting Chief Executive Officer, 8 November 2011 to 12 February 2012), W. Hutcheon (Chief Executive Officer, appointed 13 February 2012).

(b) Remuneration of responsible personsThe number of responsible persons during the financial year is shown below in their relevant total income bands:

30 June 2012 30 June 2011

Directors$0 – $10,000 1 -$10,001 – $20,000 1 -$20,001 – $30,000 1 -$30,001 – $40,000 4 6$40,001 – $50,000 1 1$60,001 – $70,000 1 1Accountable Officers$100,001 – $110,000 1 -$150,001 – $160,000 1 -$400,001 – $410,000 - 1

The Directors’ remuneration shown in the above table is as determined by the Minister for Finance.

Remuneration details of the Minister for Finance are reported in the financial report of the Department of Premier and Cabinet.

The remuneration, including the superannuation guarantee contribution, received or receivable by responsible persons from the VMIA amounted to $558,048 (2011: $720,263).



(c) Other transactions of responsible persons and their related entitiesDuring the financial year, no responsible person received or became entitled to receive any benefit (other than remuneration disclosed in the financial report) from a contract between the VMIA and that responsible person or firm or company of which that responsible person is a member or has a substantial interest.

Any transactions or issues that involve related parties listed below are dealt with on normal commercial terms and conditions and without reference to the Director concerned.

Ms Fitzpatrick is the Chief Executive Officer and Director of the Australian New Zealand Institute of Insurance and Finance (ANZIIF). The VMIA accesses a number of education and training services and products offered through ANZIIF for professional development opportunities for the VMIA staff. Ms Fitzpatrick is also a Director of Create Foundation for which the VMIA provides insurance on normal commercial terms and conditions under the Community Services Organisations’ Program.

ANZIIF

2012$

2011$

Education and training services expenditure 86,127 16,394

Dr Pinskier is a Director of RivusTV Pty Ltd. The VMIA has entered into a contract with RivusTV Pty Ltd for the lease of a hardware and software platform. The contract has been negotiated on normal commercial terms and conditions.

RivusTV Pty Ltd

Lease of hardware and software platform 7,708 9,130

Mr Peberdy is a Director of the Country Fire Authority. The VMIA provides insurance to the Country Fire Authority on normal commercial terms and conditions. The VMIA also remits to the Country Fire Authority the Fire Service Levy statutory contributions.

Country Fire Authority

Gross premium written 3,708,357 3,179,570Gross claims paid 8,655,465 6,950,701Fire Service Levy statutory contributions paid 820,114 536,388

Mr McNeil is a Director of the Austin Health and Orygen Youth (Mental) Health. The VMIA provides insurance to the Austin Health and Orygen Youth (Mental) Health on normal commercial terms and conditions. The VMIA did not collect any premium from or pay claims to Orygen Youth (Mental) Health.

Austin Health

Gross premium written 3,954,836 281,121Gross claims paid 1,589,498 4,044,582



(d) Remuneration of executive officers

The number of officers with executive responsibility, other than the Chief Executive Officer, and their total remuneration during the financial year is shown in the first two columns in the table below in the relevant income bands. The base remuneration is shown in the third and fourth columns and is exclusive of bonus payments, long service leave payments, redundancy payments and retirement benefits. The total annualised employee equivalent (AAE) is based on working 38 ordinary hours per week during the financial year. The AAE provides a measure of full time equivalent executive officers during the financial year.

Total remuneration Base remunerationIncome band 2012 2011 2012 2011

$0 – $100,000 2 3 2 3

$120,000 – $129,999 1 - 2 -

$140,000 – $149,999 1 - - -

$150,000 – $159,999 - - 1 1

$160,000 – $169,999 - - 1 -

$170,000 – $179,999 1 - 1 1

$180,000 – $189,999 1 1 1 -

$190,000 – $199,999 1 - - -

$200,000 – $209,999 - 1 - 1

$210,000 – $219,999 1 - - -

$230,000 – $239,999 - 1 - 1

$250,000 – $259,999 - - 1 -

$260,000 – $269,999 - - - 1

$270,000 – $279,999 - 1 - 1

$280,000 – $289,999 - - 1 -

$290,000 – $299,999 1 - - -

$300,000 – $309,999 - 1 - -

$310,000 – $319,999 - 1 - -

$330,000 – $339,999 1 - - -

Total number 10 9 10 9

Total annualised employee equivalent (AAE) 7.2 6.7 7.2 6.7

Total amount $1,753,950 $1,622,891 $1,559,487 $1,444,818

During the 2012 financial year there were 10 executive officers at the VMIA. Two executive officers have ceased employment and three commenced part way through the financial year. As a result, the base and total remuneration of two executive officers was less than the $100,000 reportable threshold.



26. Auditor’s remuneration

2012$

2011$

Audit of the VMIA’s Financial Report 132,944 127,854

The remuneration paid or payable to the Victorian Auditor-General’s Office for auditing the VMIA’s financial report was $132,944 (2011: $127,854). No remuneration was paid to the Victorian Auditor-General’s Office for any other services.

27. Reconciliation of net cash inflow from operating activities

2012$’000

2011$’000

Comprehensive result (319,919) (41,511)

Loss on disposal of furniture, fittings, equipment and motor vehicles 15 53

Depreciation of furniture, fittings, equipment and motor vehicles 1,155 719

Realised loss/(gain) on disposal of investments 1,005 (58,513)

Unrealised loss/(gain) on investments 598 (11,586)

Interest paid to Department of Health (1,486) (2,625)

Changes in operating assets and liabilities:Increase in receivables (111,022) (12,457)

(Increase)/decrease in prepaid expenses (53) 149

Increase in gross deferred acquisition costs (5,734) (7,487)

Increase in reinsurance and other assets (24,049) (1,649)

(Decrease)/increase in payables and provisions (12,135) 14,530

Increase in gross insurance liabilities 534,059 247,892

Net cash inflow from operating activities 62,434 127,515



28. Transfer of Department of Health claims run-off liabilities As a result of the State Government’s policy objective to centralise appropriate financial assets and liabilities with the relevant State Government financial entities as a means of prudent financial risk management, the Minister for Finance requested that the VMIA accepts the transfer of the Department of Health’s claims run-off liabilities onto the VMIA’s Balance Sheet. The VMIA accepted the medical indemnity claims run-off liabilities incurred by the Department of Health pre 1 July 2003 and other non-medical indemnity claims run-off liabilities incurred by the Department of Health pre 1 July 2005, with effect from 1 January 2012. The independent actuarial valuation of the claims run-off liabilities transferred to the VMIA at 31 December 2011 was $100.4 million. On 22 June 2012, the VMIA received a capital contribution of $25 million from the State Government to support the funding position of the VMIA as an outcome of accepting these claims run-off liabilities.

29. Subsequent eventsNo material events affecting the VMIA have occurred between the balance sheet date and the date of this report.



Accountable Officer’s and Chief Finance and Accounting Officer’s declarationWe certify that the attached financial report for the Victorian Managed Insurance Authority has been prepared in accordance with Standing Direction 4.2 of the Financial Management Act 1994, applicable Financial Reporting Directions, Australian Accounting Standards including Interpretations and other mandatory professional reporting requirements.

We further state that, in our opinion, the information set out in the Comprehensive Operating Statement, Balance Sheet, Statement of Changes in Equity, Cash Flow Statement and notes to and forming part of the financial statements, presents fairly the financial transactions during the year ended 30 June 2012 and the financial position of the Victorian Managed Insurance Authority at 30 June 2012.

We are not aware of any circumstances that would render any particulars included in the financial statements to be misleading or inaccurate.

We authorise the attached financial report for issue on 23 August 2012.


Warren Hutcheon Victor Martindale Chief Executive Officer Chief Financial Officer (Accountable Officer) (Chief Finance and Accounting Officer)

MELBOURNE 23 AUGUST 2012

VMIA Financial ReportFor the financial year ended 30 June 2012


| VMIA Annual Report 2012

Contents Page

Financial StatementsComprehensive Operating Statement 86Balance Sheet 86Statement of Changes in Equity 87Cash Flow Statement 88

Notes to the Financial StatementsNote 1 Summary of significant accounting policies 89Note 2 Revenue 92Note 3 Net claims paid 92Note 4 Movement in claims provision 92Note 5 Operating expenses 92Note 6 Cash and cash equivalents 93Note 7 Payables and provisions 93Note 8 Contingent liabilities 93Note 9 Auditor’s remuneration 93Note 10 Related parties 94Note 11 Cash flow information 95Note 12 Financial instruments 95

Accountable Officer’s and Chief Finance and Accounting Officer’s Declaration 98Independent Auditor’s Report 99

Domestic Building (HIH) Indemnity Fund Financial Report For the financial year ended 30 June 2012


Domestic Building (HIH) Indemnity Fund In 2001 the Victorian Government implemented a package to assist those homeowners whose builders’ warranty insurance cover had been adversely affected by the collapse of the HIH Insurance Group. The Parliament passed the House Contracts Guarantee (HIH) Act 2001 and amended the House Contracts Guarantee Act 1987 to:

(i) Establish a State indemnity scheme to take over builders’ warranty HIH claims.

(ii) Established the Domestic Building (HIH) Indemnity Fund (the Fund).

(iii) Allow for the costs of the scheme to be met by contributions from the building industry and the Government; and

(iv) Provide for an additional building levy of 0.032 cents in every dollar of the cost of domestic building work to all domestic building work over $10,000 for which a building permit is sought. The levy was repealed on 30 June 2010.

The scheme has been administered on behalf of the State by the former Housing Guarantee Fund Limited (HGF) up until 1 February 2006. From 1 February 2006, the Victorian Managed Insurance Authority (VMIA) is responsible for the administration of the scheme. The VMIA processes claims from homeowners who held valid builders warranty insurance policies with either FAI or HIH that were issued between May 1996 and March 2001. The types of claims are either:

• Where the domestic building work was not able to be completed.

• Where for a period of six and a half years after completion of the domestic building work, construction defects occur that are attributable to the builder’s workmanship.

The maximum indemnity on any single claim is $100,000.

The VMIA has maintained the procedures for handling and resolving claims and apportioning costs that were in operation at the former HGF.

As at 30 June 2012 there were four open claims (2011: 31).



Notes

2012$

2011$

Income

Revenue 2 221,823 960,578

Expenses

Net claims paid 3 (1,238,053) (2,093,584)

Decrease in claims provision 4 1,601,000 622,000

Operating expenses 5 (300,541) (543,853)

Comprehensive result 284,229 (1,054,859)

The Comprehensive Operating Statement should be read in conjunction with the accompanying Notes to the Financial Statements.

Balance SheetAs at 30 June 2012

Notes

2012$

2011$

Financial assets

Cash and cash equivalents 6 3,368,209 4,723,935

Receivables 5,176 15,465

Total financial assets 3,373,385 4,739,400

Total assets 3,373,385 4,739,400

Liabilities

Payables and provisions 7 735,034 2,385,278

Total liabilities 735,034 2,385,278

Net assets 2,638,351 2,354,122

Equity

Accumulated surplus 2,638,351 2,354,122

Total equity 2,638,351 2,354,122

The Balance Sheet should be read in conjunction with the accompanying Notes to the Financial Statements.

Comprehensive Operating StatementFor the financial year ended 30 June 2012


2012

Equity at1 July 2011

$

Total Comprehensive

Result$

Equity as at30 June 2012

$

Accumulated surplus 2,354,122 284,229 2,638,351

2011

Equity at1 July 2010

$

Total Comprehensive

Result$

Equity as at30 June 2011

$

Accumulated surplus 3,408,981 (1,054,859) 2,354,122

The Statement of Changes in Equity should be read in conjunction with the accompanying Notes to the Financial Statements.

Statement of Changes in EquityFor the financial year ended 30 June 2012


Notes

2012$

2011$

Cash flows from operating activities

Building levies received 46,126 1,439,594

Claims paid (1,330,537) (2,260,524)

Other operating payments (349,785) (499,111)

Net recoveries 8,554 9,872

GST recovered 97,297 187,308

Interest received 172,619 271,308

Net cash outflow from operating activities 11 (1,355,726) (851,553)

Cash and cash equivalents at beginning of year 4,723,935 5,575,488

Cash and cash equivalents at end of year 6 3,368,209 4,723,935

The Cash Flow Statement should be read in conjunction with the accompanying Notes to the Financial Statements.

Cash Flow StatementFor the financial year ended 30 June 2012


1. Summary of significant accounting policies

(a) Statement of complianceThe Domestic Building (HIH) Indemnity Fund (the Fund) was administered by the Housing Guarantee Fund Limited (HGF) until 1 February 2006. From that date it has been administered by the Victorian Managed Insurance Authority (VMIA), which was established under the Victorian Managed Insurance Authority Act 1996 and is within the portfolio of the Minister for Finance.

The financial report is a general purpose financial report which has been prepared on an accrual basis in accordance with the Financial Management Act 1994, Australian Accounting Standards, Interpretations and other mandatory professional requirements. For the purposes of compliance with the accounting standards, the Minister for Finance has determined that the Fund is a not-for-profit entity. The financial report also complies with relevant Financial Reporting Directions (FRDs) issued by the Department of Treasury and Finance.

The financial report was authorised for issue by the Board of the VMIA on 23 August 2012.

(b) Basis of preparationThe financial report is prepared on the basis of historical cost. Cost is based on the fair values of the consideration given in exchange for assets.

In the application of accounting standards, management is required to make judgements, estimates and assumptions about the carrying value of assets and liabilities that are not readily determined from other sources. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revisions and future periods if the revision affects both current and future periods.

Accounting policies are selected and applied in a manner which ensures that the resulting financial information satisfies the concepts of relevance and reliability, thereby ensuring that the substance of the underlying transactions and financial consequences of other events are reported. The accounting policies set out below have been applied in preparing the financial statements for the period ended 30 June 2012 and the comparative information presented for the period ended 30 June 2011.

(c) Objective of the FundThe Fund was established under the House Contracts Guarantee (HIH) Act 2001, and is the Government’s assistance package for homeowners affected by the collapse of the HIH Insurance Group.

The address of the Victorian Managed Insurance Authority, the administrator of the Fund, and the principal place of business of the Fund is: Level 30, 35 Collins Street, Melbourne VIC 3000.

(d) Contingent liabilities

Claims handling costsIn the prior financial year, the costs expected to be incurred in future periods to manage the settlement of claims were reported as contingent liabilities. However, in the current financial year, these costs are reported as part of the claims provision, as these can be reliably measured. Claims handling costs are measured as the present value of expected future payments, being direct and indirect costs. These liabilities are based on an assessment by management of the staff and other resources required for the future handling of claims. This assessment is then provided to the internal actuary. These costs take into account inflation in the periods during which the outstanding claims are anticipated to be settled. The expected future payments have been discounted to present value at balance sheet date using a risk free rate.



(e) Measurement of claims reportedThe Fund has a policy of measuring the cost of reported claims at the present value of expected future payments. The VMIA’s actuary estimates these future payments based on existing claims history. The expected future payments are then discounted using risk-free rates. In the current financial year, the claims handling costs also form part of the claims provision, as these can be reliably measured.

Given the lapse of time since the HIH insolvency and the terms of the original policies for which the Fund provides indemnity, it is believed that almost all claims for which indemnity will be provided have been notified to the Fund at the balance sheet date. Accordingly the claims provision represents the discounted value of all future claim payments. Management uses the services of the internal actuary to undertake the valuation of the claims provision.

The assumptions adopted for measuring claims reported is an inflation rate of 0% (2011: 0%) and a discount rate of 0% (2011: 4.8%) due to the expectation that all claims will be fully paid by 30 June 2013. The Fund will continue to operate beyond this date.

(f) Payables and provisionsThese amounts represent liabilities for goods and services provided to the Fund prior to the end of the financial year and which are unpaid. With the exception of claims the amounts unsecured are usually paid within 30 days of recognition. Claims are paid on completion of work, as such there is no contractual date for the payment of the liabilities.

(g) Cash and cash equivalentsCash and cash equivalents comprise of cash at bank as these funds are available to meet the Fund’s financial commitments.

(h) ReceivablesReceivables consist mainly of amounts owing from GST input taxation credits. Receivables that are contractual are classified as financial instruments and recognised at fair value.

(i) Goods and services tax (GST)Revenue and expenses are brought to account exclusive of GST. The net amount of GST recoverable from or payable to the Australian Taxation Office (ATO) is included as part of receivables or payables respectively. Cash flows relating to GST are included in the Cash Flow Statement on a gross basis in accordance with AASB 107 Statement of Cash Flows. The GST relating to the claims settlements is recognised as an expense.

(j) Income taxationThe Fund is exempt from income taxation. Accordingly, no provision for income taxation is made in these financial statements.

(k) RevenueInterest revenue is recognised as it accrues taking into account the interest rates applicable to the financial assets. Building levies are recognised on the basis of total levies receivable from the Building Commission during the year. Recoveries pertaining to paid claims are recognised as they are received.



(l) New accounting standards and interpretationsCertain new Accounting Standards and Interpretations have been published that were not mandatory for the year ended 30 June 2012. The Fund has not and does not intend to adopt the following standards early:

• AASB 9 Financial Instruments which is applicable for the reporting periods beginning on or after 1 January 2013. This standard simplifies the requirements for the classification and measurement of financial assets resulting from Phase 1 of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement (AASB 139 Financial Instruments: Recognition and Measurement). Details of the impact are still being assessed.

• AASB 13 Fair Value Measurement which is applicable for reporting periods beginning on or after 1 January 2013. This standard outlines the requirements for measuring the fair value of assets and liabilities and replaces the existing fair value definition and guidance in other Australian Accounting Standards. AASB 13 includes a “fair value hierarchy” which ranks the valuation technique inputs into three levels using unadjusted quoted prices in active markets for identical assets or liabilities, other observable inputs and unobservable inputs. The impact of this Standard is expected to be minor.

• AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 [AASB 1, 3, 4, 5, 7, 101, 102, 108, 112, 118, 121, 127, 128, 131, 132, 136, 139, 1023 and 1038 and Interpretations 10 and 12] which is applicable for reporting periods beginning on or after 1 January 2013. These amendments give effect to consequential changes arising from the issuance of AASB 9 Financial Instruments. No significant impact is expected from these consequential amendments on the Fund.

• AASB 1053 Application of Tiers of Australian Accounting Standards which are applicable for reporting periods beginning on or after 1 July 2013. This Standard establishes a differential financial reporting framework consisting of two tiers of reporting requirements for preparing general purpose financial statements. Details of the impact are still being assessed.

• AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) [AASB 1, 3, 4, 5, 7, 101, 102, 108, 112, 118, 120, 121, 127, 128, 131, 132, 136, 137, 139, 1023 and 1038 and Interpretations 2, 5, 10, 12, 19 and 127] which is applicable for reporting periods beginning on or after 1 January 2013. These amendments may impact on numerous Standards following the introduction of the new Standard, AASB 9 Financial Instruments. No significant impact is expected from these consequential amendments on the Fund.

• AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements [AASB 124]. This Standard amends AASB 124 Related Party Disclosures by removing the disclosure requirements in AASB 124 in relation to individual key management personnel. No significant impact is expected from these consequential amendments on the Fund.

• AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 [AASB 1, 2, 3, 4, 5, 7, 9, 2009-11, 2010-7, 101, 102, 108, 110, 116, 117, 118, 119, 120, 121, 128, 131, 132, 133, 134, 136, 138, 139, 140, 141, 1004, 1023 and 1038 and Interpretations 2, 4, 12, 13, 14, 17, 19, 13 and 132]. This amending Standard makes consequential changes to a range of Standards and Interpretations arising from the issuance of AASB 13. In particular, this Standard replaces the existing definition and guidance of fair value measurements in other Australian Accounting Standards and Interpretations. No significant impact is expected from these consequential amendments on the Fund.

In addition to the Accounting Standards listed above, the AASB also released a number of other Australian Accounting Standards and Interpretations. These Australian Accounting Standards and Interpretations are not relevant to the Fund and thus have not been specifically identified above.



Note

2012$

2011$

2. RevenueOperating activitiesBuilding levies 49,204 689,270Interest revenue 172,619 271,308Total revenue 221,823 960,578

3. Net claims paidClaims paid 1,238,053 2,091,987Cost of recoveries - 1,597Net claims paid 1,238,053 2,093,584

4. Claims provisionOpening claims provision 2,275,000 2,897,000Net claim payments 3 (1,238,053) (2,093,584)Change in claims estimates (362,947) 1,471,584Movement in claims provision (1,601,000) (622,000)Closing claims provision 7 674,000 2,275,000

5. Operating expensesVMIA management fee 235,210 488,868Other operating expenses 65,331 54,985Total operating expenses 300,541 543,853



Note

2012$

2011$

6. Cash and cash equivalentsCurrent assets

Cash at bank 3,368,209 4,723,935

7. Payables and provisionsCurrent liabilitiesPayables 61,034 110,278Claims provision* 674,000 2,275,000

735,034 2,385,278* As at 30 June 2012 there were four open claims (2011: 31).

8. Contingent liabilitiesEstimates of the potential financial effect of contingent liabilities that may become payable:CurrentClaims handling costs 1(d) - 271,000

Non-currentPayable to State Government* 2,638,351 2,083,122

* Funding for the cost of settling claims was planned to be provided through equal contributions from the State Government and by a levy on new building permits. Any surplus remaining upon finalisation of the Fund’s operations is expected to be paid back to the State Government and is disclosed as a contingent liability as at 30 June 2012.

9. Auditor’s remuneration

Audit of the Fund’s financial statements – Victorian Auditor General’s Office 25,300 27,785



10. Related partiesThe VMIA is engaged by the State of Victoria to administer and manage the claims from homeowners who held valid builders’ warranty insurance policies with either FAI or HIH that were issued between May 1996 and March 2001. The VMIA’s responsible persons oversee the administration of the Fund.

In accordance with the Ministerial Directions issued by the Minister for Finance under the Financial Management Act 1994, the following disclosures are made regarding the responsible persons for the financial year.

(a) Responsible personsThe names of persons who were responsible persons at any time during the financial year are as follows:

Responsible Minister: The Hon. R. Clark, MP.

Governing Board: J. Peberdy (Chairman from 6 September 2011), I. Gaudion (Acting Chairman until 5 September 2011), B. Benger, J. Fitzpatrick, D. Kearsley, S. Moffatt (resigned 28 February 2012), H. Pinskier (resigned 24 September 2011), J. McNeil (appointed 7 February 2012) and S. Roberts.

Accountable Officer: S. Marshall, Chief Executive Officer (resigned 9 September 2011), C. Battilana (Acting Chief Executive Officer, 10 September 2011 to 7 November 2011), P. Ryan (Acting Chief Executive Officer, 8 November 2011 to 12 February 2012), W. Hutcheon, Chief Executive Officer (from 13 February 2012).

(b) Remuneration of responsible personsThe Hon. R. Clark, MP, did not receive any remuneration from the Fund. Remuneration details of Ministers are reported in the financial report of the Department of Premier and Cabinet.

(c) Retirement benefits of responsible personsThere were no retirement benefits paid by the Fund in connection with the retirement of the responsible persons of the Fund.

(d) Other transactions of responsible persons and their related entitiesDuring the financial year, no responsible person received or became entitled to receive any benefit from a contract between the Fund and that responsible person or firm or company of which that responsible person is a member or has a substantial interest.

(e) Remuneration of executive officersNo executive officers received any remuneration from the Fund.

(f) Other transactions with related entities The management fee earned by the VMIA for the current financial year in connection with the administration of the Fund was $235,210 (2011: $488,868). It represented operational and administration expenses incurred by the VMIA in administering the Fund.

At financial year end, the management fee payable to the VMIA is $35,734 (2011: $110,278).



2012$

2011$

11. Cash flow information

Reconciliation of cash flows from operating activities to the comprehensive result for the financial year:Comprehensive result 284,229 (1,054,859)Changes in assets and liabilities

Decrease in receivables 10,289 780,564

Decrease in payables and provisions (1,650,244) (577,258)

(1,639,955) 203,306

Net cash inflow/(outflow) from operating activities (1,355,726) (851,553)

12. Financial instrumentsFinancial instruments are initially measured at cost which includes transaction costs, when the related contractual rights and obligations exist. Subsequent to initial recognition these instruments are measured as set out below.

Recognised financial instrument Accounting policy Terms and conditions

Financial assets

Cash and cash equivalents Cash is carried at its recoverable amount. Cash is at call and earns interest at a rate determined by reference to the official bank rate.

Receivables Receivables are carried at their nominal amounts.

Receivables are expected to be collected within 30 days.


Payables Payables are recognised at amounts to be settled in the future whether invoiced to the Fund or not.

Payables are ordinarily settled within 30 days.

The financial instruments are classified by reference to the source of inputs used to derive their fair value. This classification uses the following three level hierarchy:

(i) Level 1 – fair value is determined by using quoted prices (unadjusted) in active markets for identical assets or liabilities.

(ii) Level 2 – fair value is determined by using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices).

(iii) Level 3 – fair value is determined by using inputs for the asset or liability that are not based on observable market data.

Cash and cash equivalents are classified as Level 1 financial instruments. All receivables and payables are classified as Level 2 financial instruments.

There are no financial instruments not recognised in the financial statements at balance sheet date.

The Fund is not subject to price risk or foreign currency risk.



Interest rate riskThe Fund’s exposure to interest rate risk, which is the risk that a financial instrument’s value will fluctuate as a result of changes in market interest rates, is as follows:

Variable interest rate Non-interest bearing

2012$

2011$

2012$

2011$

Financial assetsCash and cash equivalents 3,368,209 4,723,935 - -

Receivables - - 5,176 15,465

Financial liabilities at amortised cost

Payables - - 61,034 110,278

Sensitivity disclosure analysisInterest rate risk is insignificant as funding receipts are held in interest bearing deposits at call for the payment of claims as they fall due.

The following sensitivity analysis has been determined based on the direct exposure to interest rates at the balance sheet date. The analysis assumes the stipulated change taking place at the beginning of the financial year and is held constant throughout the financial year. A 0.5% increase or decrease in interest rates has been used to present the impact on interest bearing investments. These movements are attributable to the Fund’s exposure to interest rates on its variable rate cash and cash equivalent deposits.

2012$

2011$

Impact on comprehensive result and equity from a movement in Australian interest rates

Increase of 0.5% 16,841 23,620

Decrease of 0.5% (16,841) (23,620)



Credit riskCredit risk arises from the financial assets of the Fund which comprise cash and cash equivalents and receivables with the potential default of any counterparty.

The Fund’s maximum exposure to credit risk at balance sheet date is the carrying amount of those assets disclosed in the Balance Sheet.

No financial assets are either past due or impaired. All cash and cash equivalent balances are held with a financial institution with a S&P rating of AA.

The credit risk in respect of receivables is minimal as the debtor is a Federal Government entity.

Liquidity riskLiquidity risk arises if the Fund is unable to meet its financial obligations as they fall due. Expected cash flows are monitored in detail to ensure adequate funding is received in advance to meet future payment obligations as they fall due. Liquidity risk is deemed to be minimal as cash and cash equivalents are held at call with an authorised deposit taking institution.

Net fair valuesAll financial assets and liabilities recognised in the financial statements are carried at amounts that approximate their net fair values. The net fair values of cash and cash equivalents and non-interest bearing monetary financial assets and financial liabilities of the Fund approximate their carrying amounts. No financial assets or financial liabilities are readily traded on organised markets in a standardised form.




Accountable Officer’s and Chief Finance and Accounting Officer’s declarationThe attached financial statements for the Domestic Building (HIH) Indemnity Fund have been prepared in accordance with Standing Direction 4.2 of the Financial Management Act 1994, applicable Financial Reporting Directions, Australian Accounting Standards including Interpretations, and other mandatory professional reporting requirements.

We further state that, in our opinion, the information set out in the Comprehensive Operating Statement, Balance Sheet, Statement of Changes in Equity, Cash Flow Statement and accompanying Notes to the Financial Statements, presents fairly the financial transactions during the year ended 30 June 2012 and the financial position of the Fund as at 30 June 2012.

At the time of signing, we are not aware of any circumstances that would render any particulars included in the financial statements to be misleading or inaccurate.

We authorise the attached financial statements for issue on the 23 August 2012.


Warren Hutcheon Victor Martindale Chief Executive Officer Chief Financial Officer (Accountable Officer) (Chief Finance and Accounting Officer)

MELBOURNE 23 AUGUST 2012


| VMIA Annual Report 2012

Victorian Managed Insurance AuthorityLevel 30, 35 Collins Street Melbourne 3000

Phone: 03 9270 6900 Fax: 03 9270 6949 E-mail: [email protected] Internet: www.vmia.vic.gov.au

Responsible MinisterThe Hon. Robert Clark, MP Minister for Finance

Board of DirectorsChairman, John Peberdy

Brian BengerJoan FitzpatrickDoug KearsleySuzanne RobertsIan GaudionJohn McNeil

Chief Executive OfficerWarren Hutcheon

Investment Funds ManagerVictorian Funds Management Corporation Level 13, 101 Collins Street Melbourne 3000

BankerWestpac Banking Corporation Level 10, 360 Collins Street Melbourne 3000

External AuditorVictorian Auditor-General’s Office Level 24, 35 Collins Street Melbourne 3000

Internal AuditorKPMG 147 Collins Street Melbourne 3000

ActuaryFinity Consulting Pty Limited Level 3, 30 Collins Street Melbourne 3000

Corporate InformationAs at 30 June 2012

VMIA Annual Report 2012 | Page 101Page 101 | VMIA Annual Report 2011

www.vmia.vic.gov.au