vmia annual report 2013 - parliament of victoria · po box 18409 collins st east victoria 8003 p:...

2013

Annual Report

VM

IA A

nnual Report 2013

Contents

Chairman’s Report 2

CEO’s Report 3

About the VMIA 4

Report of Operations 7

VMIA Financial Report 35

Domestic Building (HIH) Indemnity Fund Financial Report 94

Corporate Information 111

Victorian Managed Insurance AuthorityABN 39 682 497 841

Level 10 / 161 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 2013

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

Dear Minister,

Victorian Managed Insurance Authority Annual Report 2012-13I am pleased to submit the Annual Report for the Victorian Managed Insurance Authority (VMIA) for the period 1 July 2012 to 30 June 2013, 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 our Annual Report:

(a) details of our administration of 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

One of the most pleasing results over the past financial year was that the Victorian Managed Insurance Authority (VMIA) improved our capital position against a background of volatility in global financial markets, and continued financial settlements for losses resulting from historical natural events such as bushfires and floods.

I am pleased to inform that at 30 June 2013 the Funding Ratio was 95% and within our preferred operating range due to improved investment returns and the revaluation of our long term claims liabilities. Independent actuarial modelling also indicates that the VMIA is in a solid financial position to recover to 100% Funding Ratio within five years.

As part of capital management, the VMIA undertook a detailed review of our reinsurance management strategy. Reinsurance plays a key role in assisting the Victorian Government in protecting the State’s balance sheet. It is anticipated that findings from the review will stand us in a strong position as we seek to renew our reinsurance program for 2013-14.

Another component of the Board’s focus on capital management involved the VMIA supporting the Victorian Funds Management Corporation (VFMC) in undertaking a review of our investment strategy. After modelling of our claims liabilities, we assisted the VFMC to develop an investment strategy better suited to the ‘long tail’ nature of the majority of the VMIA’s claims liabilities.

The VMIA has been very active in our role as adviser to government on matters involving risk management and insurance. The Commonwealth’s National Disaster Relief and Recovery Arrangements (NDRRA) September 2012 independent assessment report complimented Victoria on our reinsurance arrangements, saying they were comprehensive and had an appropriately diverse spread of reinsurers. The report also found that Victoria’s coverage of state owned assets compared favourably with other states and met the Commonwealth’s expectations.

Throughout 2012-13, the VMIA provided advice on other major reviews including the National Disability Insurance Scheme (DisabilityCare Australia), and the National Injury Insurance Scheme (NIIS), as well as a review of the consumer protection framework surrounding Domestic Building Insurance (DBI) in Victoria.

It is worth noting that since the VMIA was directed to provide DBI in May 2010, the organisation has delivered an effective and efficient service. In an independent report organised by the Essential Services Commission in May 2013, the VMIA was found to successfully balance the need to remain within the framework of the government mandate while providing a commercial market offering. The report also found that the premiums set by the VMIA were sufficient to cover expenses and that the portfolio’s underwriting was based on sound commercial standards.

The VMIA’s 2012-13 Annual Business Plan provided clearer visibility of the key drivers and influencers of our performance, which enables the VMIA’s Board and management to improve reporting and governance. This has resulted in better analysis of our financial and performance data and a more targeted and timely response.

Sadly, the Board farewelled Director Suzanne Roberts after nearly 10 years of service to the organisation. Her counsel and guidance to senior management in the development of various Human Resources practices and policies were enormous. Staff and management alike thank Suzanne for her contributions in making the VMIA a better place to work as well as a provider of excellent client services. We also welcomed a new Director – Ms Therese Ryan, an experienced professional and non-executive director who has worked across a range of industry sectors.

On behalf of my fellow directors, I would like to thank everyone at the VMIA for their perseverance and commitment during the previous 12 months. It is only through such dedication shown to our diverse range of 4,500 clients, along with executing strategic risk management and insurance programs, that allows the Board to be confident that we will continue to provide the best service possible over the coming year and deliver on our Mission to take a lead role in reducing the total cost of risk for the State.


1. Funding Ratio inclusive of $55M Catastrophe Reserve to September 2010.2. Target Range changed in September 2010 based on the Government’s updated Risk Preference Statement.

Page 2 | VMIA Annual Report 2013

CEO’s Report

In my first full 12 months as CEO, I reflect on a year of challenges and achievements.

The majority of key performance measures have been achieved and we are well positioned to deliver on our Mission to take a leadership role in reducing Victoria’s total cost of risk. It is pleasing to see significant improvement in our financial results as these

support our objective of providing financially sustainable products and services for government.

The controllable elements of our financial result are measured as performance from insurance operations (PFIO) and gross general and administration expense ratios. Both measures are favourable to budget. As the state’s insurer we insure more than 4,500 entities and $144 billion in assets. In addition, we cover 15,000 builders via the Domestic Building Insurance portfolio and manage the majority of dust diseases claims for the state. Our insurance portfolio is varied and complex.

Our geospatial platform, developed in-house, is leading practice. This tool allows us to map the value and location of client assets, and provides detailed information on our exposures to our reinsurers. It also allows us to take a proactive approach to understanding risks posed from natural hazards to state managed assets.

Property and Liability insurance play an important part in the VMIA’s role of protecting client assets and exposures. Key drivers of major claims include natural events and class actions relating to floods and bushfires. These claims are complex and require considerable resources and a long term commitment to resolution. Professional indemnity is emerging as a growing driver of claims. Medical indemnity represents more than 60% of our claims liabilities and it is pleasing to note we are seeing some favourable trends in this portfolio.

A key focus during the reporting period has been providing support to clients in implementing the Ministerial Standing Direction 4.5.5.1 – Insurance. Requirements under this Direction include consideration of the risk profile and objectives, past claims experience, the availability and cost of insurance, and the type and scale of risks that an organisation is prepared to accept. This provides greater clarity and transparency around the use of insurance as one means of transferring risk and will lead to a better understanding of insurance and of the residual costs of retaining different levels of risk.

In our role as adviser to government we have been able to provide a consolidated view of information relating to risk and insurance to inform thinking on key policy issues such as the National Disability Insurance Scheme.

Our new operating model and balanced scorecard approach to strategic planning and performance management has significantly improved the way the VMIA delivers services with a greater focus on clients’ risk and insurance needs, and improved claims capability. A streamlined claims management system has led to greater efficiencies and productivity improvements and increased client satisfaction with an end-to-end claims management process.

In line with our commitment to improve understanding of risk management, we were part of a joint initiative with the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) to introduce a Risk Diploma program for the public sector. The program offers modules covering risk management, general insurance and integrated management of specific risk exposures. We also held a one day forum Weathering Heights. This focused on climate change and associated risks. This event was well attended along with our risk and insurance training programs that registered more than 2,200 participants during 2012-13.

Significant progress has been made on staff learning and development, organisational culture and leadership capability which I am pleased to advise has supported a material increase in staff alignment and engagement results.

During the year, we welcomed Kay Clancy as Executive General Manager, People, Culture and Capability. We also farewelled Claudio Battilana, Executive General Manager Operations, whose leadership and passion for making a difference will be missed.

2012-13 was an extremely challenging year that provided the VMIA with opportunities to work more closely with our clients and other key stakeholders. Our staff have continued to deliver a high level of risk management and insurance services to our clients. I would like to personally thank all staff for their significant contributions during a period of major change, as well as our board whose direction and support enabled the VMIA to achieve our key objectives.

In accordance with the Financial Management Act 1994, I am pleased to present the VMIA’s Annual Report for the year ended 30 June 2013.

Warren Hutcheon CEO30 August 2013

VMIA Annual Report 2013 | 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. 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 directed responsibility of providing Domestic Building Insurance (DBI) 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 approximately $144 billion in State insured assets, with an annual gross premium written of $310 million and $2.3 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 risk management by departments and participating bodies.

• To act as an insurer for, or provide insurances services 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.• 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 and risk management products and services to our 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 insurance.

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

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

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.’


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.

We are accountable: We set clear expectations. Our objectives are visible to our people and our clients. We empower our people to do their job. We are accountable for what we do and how we do it. We follow through on actions. We accept responsibility for our decisions and actions.

The VMIA’s Operating ModelThe VMIA has developed our 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’s Insurer.We have called these integrated roles Alert, Prevent and Protect.Supporting these roles are the essential corporate functions necessary to enable the VMIA to deliver our 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.

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:

• State’s Insurer• Risk Management Adviser• Adviser to Government.

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• Systems and Processes• Financial.

Balanced Scorecard approach to the VMIA’s operations


Report of Operations

Corporate objectivesDuring the 2011 financial year the VMIA introduced a Balanced Scorecard approach to all planning and performance management activities. The following tables show a high level summary of the VMIA’s performance journey against its Corporate Plan objectives and annual milestone targets pursued over the last two financial years. All other performance contents in this Report of Operations are also based on the VMIA’s Balanced Scorecard.

Table 1: The VMIA’s progress against long term Corporate Plan objectives

Three Year Corporate Plan Objectives

2011-12 Year 1 Outcomes


GovernmentTo be regarded as a trusted adviser on risk and insurance

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

The VMIA’s technical advice continued to be sought in 2012-13 on a range of topics1.

Client (Risk Management)To build risk management capability and maturity across the State through the provision of high quality risk management advice, support and training

Clients regard the VMIA as expert in the areas of insurance and risk with unique knowledge, responsibility and resources to support the Victorian public sector (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 the VMIA.

The VMIA continually assesses new forms of insurance coverage to address changing client needs and emerging risks, to bring new products to market.

During the year, following independent review by insurance experts, the VMIA implemented a range of claims management best practice, including ‘fast-tracking’ of routine claims and enhanced major loss response protocols.

The VMIA received high satisfaction ratings in regard to its risk management, insurance and claims management services2.Client (State Insurer)

To support the State and clients through the provision of effective and sustainable insurance products and services

To reduce the Total Cost of Risk (TCoR) and Total Cost of Insurable Risk (TCoIR) to the State via effective risk prevention, transfer, mitigation and management

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

This was an area of substantial change and effort during the year. The implementation of the new Standing Direction 4.5.5.1 – Insurance by the Minister for Finance, required the VMIA to assist clients in comprehensively reviewing their own insurance arrangements, to ensure they were complying with the Minister’s Direction. This work directly affects TCoIR across the VPS.

While the level of understanding of the TCoR concept is still relatively low across the VPS, 81% of clients welcomed the VMIA’s assistance with implementing the Minister’s Direction.

PeopleTo build and sustain a high performance culture that delivers innovative client outcomes through exceptional leadership, a diverse workforce and collaborative teamwork

Six monthly staff surveys show that the 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.

The June 2013 Staff Engagement Survey3 showed 71% of staff were engaged (up 7 percentage points on 2012 results) and 60% felt aligned with VMIA’s goals (up 11 percentage points on 2012 results).

1 Source of evidence to support the ‘Government’ Corporate Plan Outcomes is the annual survey of DTF staff attitudes towards the VMIA’s services.2 Source of evidence to support the ‘Client’ Corporate Plan Outcomes is the annual the VMIA Client Engagement Survey and other independently-conducted market research.3 Source of evidence to support the ‘People’ Corporate Plan Outcomes is the annual the VMIA Staff Engagement Survey.

1

2

3



Three Year Corporate Plan Objectives



Systems and ProcessesTo provide ready access to high quality, well governed systems and processes that enhance the VMIA’s efficiency and effectiveness

A new Information Management Strategy has been developed which focuses on systems integration and web-based remote access to online data.

All initiatives under the first year of the Information Management Strategy were either delivered or substantially advanced.

FinancialTo maintain a sustainable financial model that protects the State’s Comprehensive Operating Statement and Balance Sheet from unforeseen shocks and losses, and reduces the cost of services to the State

Strong adverse external factors affected the VMIA’s Balance Sheet, Operating Result and Funding Ratio, but the Actual 2011-12 PFIO of $36.5M was better than the budget of $9.8M. The VMIA’s capital management and financial settings remain appropriate for the foreseeable future.

From a financial performance perspective, 2012-13 was a very successful year. All four of the VMIA’s main financial KPIs ended the year ahead of budget, as covered in greater detail elsewhere in this Annual Report.

Table 1: The VMIA’s progress against long term Corporate Plan objectives (continued)


Corporate KPIsTable 2: The VMIA’s performance against 2012-13 Corporate KPIs

KPI 2011-12 Result 2012-13 Target 2012-13 Result

GovernmentDTF satisfaction with quality and timeliness of advice provided4

• 85.7% • >_80.0% • 87.1%

DTF satisfaction with Domestic Building Insurance (DBI) management and service within the Ministerial Direction

• 91.7% • >_85.0% • 88.3%

ClientDelivery of risk management, insurance and claims management services according to Service Level Agreements (SLAs) with clients

• 50 Risk Framework Quality Reviews (RFQRs) delivered

• 121 Site Risk Surveys (SRSs) delivered

• 3 Strategic Engineering Risk Assessments (SERAs) delivered

• N/A6

• >_90.0% achievement of SLA delivery targets and timeframes met

• Due to timing change of SLAs (from calendar to financial year) and restructuring of the VMIA’s Client Service Model, no SLAs were applied to clients in 2012-13

Delivery of the Risk Management Partnership Program (RMPP) according to yearly budgets and delivery targets

• 100% of budgeted RMPP projects delivered

• <_ +_ 5.0% variation from individual project budgets

• More than 40% of the total budget available for RMPP in 2012-13 was committed

Acceptance by the VMIA’s Board (in March 2013) of the new Medical Indemnity (MI) Strategy

• N/A5 • Deadline to be achieved and 100% acceptance

• A new three-year strategy to address MI claims was endorsed by the VMIA’s Board

Cost of the VMIA’s insurance premiums compared with commercial market rates7

• <80.0% of market price on comparable products, according to independent benchmarks

• >_20.0% below market rates

• Independent benchmarking shows that on average, the VMIA’s rates were around 20% below comparable market rates

Extent of clients’ insurances covered by the VMIA

• N/A • >_20.0% more coverage than 2011-12 Baseline

Level of client understanding of TCoR

• 85.0% of clients state they have a good or strong understanding of TCoR (scores >_ 6 out of 10)

• >_85% • The 2013 Annual Client Survey showed 65.0% of clients state they have a good or strong understanding of TCoR


4 Source of evidence to support the ‘Government’ KPI results is the annual survey of selected DTF staff attitudes towards the VMIA’s services.5 N/A for 2011-12 means that this was a new KPI introduced in 2012-13.6 N/A for 2012-13 means that a different method of measuring this KPI was adopted in 2012-13.7 Source of evidence to support the Insurance Products Price Benchmarking’ KPI results is an independent market analysis conducted annually by Aon.


Table 2: The VMIA’s performance against 2012-13 Corporate KPIs (continued)


Client Level of client satisfaction with the VMIA’s TCoR and TCoIR performance

• 86.0% of clients agree or strongly agree with the VMIA’s role in TCoR (scores >_ 6 out of 10)

• N/A• The former method of

measuring this KPI was not tested in 2012-13. Instead, it was replaced with a new measure ‘Clients’ support for the VMIA’s efforts to assist their compliance with Ministerial Direction 4.5.5.1 –Insurance Attestation’

• A baseline of 81.0% client satisfaction with ‘the VMIA’s support in assisting clients to comply with Ministerial Direction 4.5.5.1– Insurance Attestation’

Client Engagement rating8 • 51.0% Client Engagement (scores 8 - 10 on a combination of survey questions)

• >_51.0% • 50.0%

Client satisfaction with overall VMIA service delivery

• 81.0% satisfaction (mean survey score)

• >_75.0% • 78.0%

Client satisfaction with risk management service delivery


• >_75.0% • 80.0%

Client satisfaction with insurance service delivery


• >_75.0% • 79.0%

Client satisfaction with claims management service delivery


• >_75.0% • 77.0%

Total number of attendees at the VMIA’s client learning programs, and level of attendee satisfaction

• 2,275 clients trained (with 89.1% Satisfaction)

• >_2,200 clients trained • 2,286 clients trained (with 85.0% satisfaction)

Number of persons accessing the VMIA’s online client learning programs

• 593 persons accessing online learning

• >_500 persons • 720 persons accessing online learning

Number of unique clients attending the VMIA’s learning programs

• 454 unique organisations attended the VMIA’s training

• >_400 unique clients • 424 unique organisations attended the VMIA’s training

Actuarial release for controllable components of Medical Indemnity and non-Medical Indemnity claims liability valuations

• N/A • +_ 2.0% of projection based on annual valuation

• Actuarial release = 9.3% ($101.3M/$1,090.4M)

Controllable Underwriting Result for Dust Diseases and Workers’ Compensation (DDWC)

• N/A • Actual result within +_ 10.0% of annual budget

• Actual PFIO Underwriting Profit = $17.5M; Budgeted PFIO Underwriting Loss =$9.3M; favourable variance = $26.7M or 288.7%


8 Source of evidence to support all client ‘Engagement’; ‘Satisfaction’: ‘Understanding’ and ‘Agreement’ KPI results is the annual VMIA Client Survey and other independently-conducted market research.



Client Payment timing for DBI claims • N/A • >_90.0% of DBI claims

paid in 90 days [for defects claims] and 60 days [for non-completion claims]

• 61.0% defects claims paid <_ 90 days• 69.0% non-completion claims paid

<_ 60 days

PeopleChange Management Program has been delivered against target dates and milestones

• N/A • >_90.0% achievement of target dates for all program deliverables

• All ‘People’ aspects of the VMIA’s Transformation Program earmarked for delivery in 2012-13 were delivered on time

Capability development programs (for leadership, staff and the organisation) have been implemented against target dates and milestones


• All planned aspects of the VMIA’s internal Capability Development Program earmarked for delivery in 2012-13 were delivered on time

Staff Engagement rating • 64.0% staff engagement • >_65.0% • 71.0%

Annualised Staff Turnover Rate • 11.5% staff turnover • <_ 15.0% • 12.8%

Absenteeism Rate • 2.9% absenteeism • <_ 3.0% • 2.8%

Vacancy Rate • 1.7% vacancy rate • <_ 5.0% • 4.6%

Turnover for staff who have been with the VMIA longer than three years

• 9.1% turnover (for staff with >3 years tenure)

• <_ 20.0% • 14.6%

Systems and ProcessesChange Management Program has been delivered against target dates and milestones


• All ‘Systems and Processes’ aspects of the VMIA’s Transformation Program earmarked for delivery in 2012-13 were delivered on time

Full (unqualified) Risk Management Attestation in the Annual Report

• N/A • Nil qualifications on Risk Management Attestation

• Full unqualified Risk Management attestation made in 2013 Annual Report (refer to page 32)

Full (unqualified) Insurance Attestation in the Annual Report

• N/A • Nil qualifications on Insurance Attestation






Systems and Processes Complaints responded to within agreed timeframes

• 22 complaints received, all addressed in agreed time

• 11 compliments received

• N/A • 25 complaints received, all addressed within agreed time

• 23 compliments received from clients

The VMIA’s Internal Business Units’ satisfaction with Information Services

• N/A • >_70.0% staff satisfaction

• 78.5% staff satisfaction

IT systems uptime • 99.9% systems uptime • N/A • 99.9% systems uptime

PFIO Gross General and Administration Expense Ratio

• 16.9% • <_ 15.7% • 14.2%

FinancialPerformance from Insurance Operations (PFIO)

• $36.5M • Deficit no greater than -$2.7M

• $47.5M surplus

Funding Ratio • 80.0% • >_89.0% • 95.0%

Capital Structure Ratio • 116.5% • <_ 108.0% • 103.2%

PFIO Claims Ratio • 114.5% • <_ 132.0% • 108.4%

Return on Investments • 4.3% • >_7.5% • 14.9%

Return on Assets • 1.9% • >_0.0% • 2.2%

Salaries as percentage of Gross Premium Written

• 5.8% • <_ 6.0% • 6.3%

Gross Premium Written per employee

• $2.4M • >_$2.0M • $2.5M

Reinsurance Management Strategy (REMS) meets VMIA needs

• N/A • REMS reviewed regularly

• A comprehensive triennial review of the VMIA’s reinsurance strategy and program was conducted in 2012-13

The VMIA’s Internal Business Units’ satisfaction with Financial Services

• N/A • >_70.0% staff satisfaction

• 75.6% staff satisfaction




Key achievementsThe VMIA uses a Balanced Scorecard approach to all of our operations, future planning and performance reporting that is structured in five segments: Government, Clients, Systems and Processes, People and Financial.

GOVERNMENT

The VMIA’s strategic direction is to consolidate and analyse risk and insurance knowledge that may inform government policy, for the benefit of the Victorian community. In so doing, the VMIA’s objective is to be regarded as a trusted adviser on risk and insurance.

Advice to Government During the 2013 financial year, the VMIA engaged with key stakeholders and provided input to strategic policy development in the provision of technical advice on a range of issues that have positively impacted on risk and insurance outcomes for the State. These included the Domestic Building Consumer Protection Framework, the National Disability Insurance Scheme (DisabilityCare Australia) and the National Injury Insurance Scheme.

Standing Direction 4.5.5.1 – InsuranceIn May 2012, the Minister for Finance introduced a new Standing Direction 4.5.5.1 – Insurance. The Direction states that Public Sector entities required to insure with the VMIA under the Victorian Managed Insurance Authority Act 1996 must attest in their annual report that as part of their annual insurance renewal process and in consultation with the VMIA, they have made a judgement on the amount of risk they can bear and, where they decide to bear that risk, ensure they are able to meet the financial impacts from existing resources.

Review of insurance arrangementsIn September 2012, the Federal Department of Finance and Deregulation released the Phase Two Review of the Insurance Arrangements of States and Territories under the Natural Disaster Relief and Recovery Arrangements (NDRRA). As part of the review it required ‘States and Territories to have their property insurance arrangements independently assessed to ensure that they are adequate’. The independent assessment that was done for Victoria found that ‘insurance arrangements are appropriate, cost-effective for both the State and the Commonwealth, and meet the obligations under the Determination to minimise the financial exposure of taxpayers at both levels of government.’

Domestic Building Insurance – Premium Validation ReviewIn May 2013, the Essential Services Commission released its report: Domestic Building Insurance, Premium Validation Review, noting that the VMIA premiums are both sufficient to cover our expenses, risks and long-term claim costs and are not set above the level required by the VMIA to cover our expenses, risks and the long-term claim costs.

CLIENT

The VMIA provides a range of risk management and insurance services to our clients who cover the general government and public healthcare sectors. In addition, the VMIA’s clients include community service organisations, cemetery trusts, rural general practitioners and builders via the Domestic Building Insurance portfolio.

Standing DirectionA major activity undertaken during the past financial year was assisting clients as part of their annual insurance renewal process to attest in accordance with Standing Direction 4.5.5.1 – Insurance. Key components of this requirement include the need for clients to determine the appropriate level of insurance in consultation with the VMIA. These clients also are required to maintain a register of insurance and indemnities and make them available to the VMIA on request. They also are expected to record the valuation and basis for valuation of self-insured retained losses and provide information on claims management capability, resources, structures and processes for any self-insured retained losses to the VMIA.

The VMIA’s support to our clients in complying with the requirements of Standing Direction 4.5.5.1 – Insurance, generated interest in support tools such as Strategic Insurance Reviews, registers of indemnities and calculators for valuation of self-insured retained losses.

The introduction of this new Direction has led to a further integration of insurance into the broader risk management framework the VMIA provides to our clients.


InsuranceThe VMIA continued to provide cost effective and comprehensive insurance solutions to our range of clients across the Victorian public sector, including public and products liability, medical and professional indemnity, industrial special risks, directors and officers liability, personal accident, marine cargo and hull, contract works, fine arts, aviation, travel and motor vehicle.

During the 2103 financial year the VMIA had gross premium written of $309.5 million and insured approximately $144 billion of client assets.

The VMIA’s insurance products cover most property and liability risks that affect government bodies. Insurance coverage specifically excludes workers’ compensation, transport accident and personal injury. The three broad insurance coverage categories include:

• Insurance and risk management services to approximately 140 government agencies, departments, statutory authorities and State-owned business enterprises.

• Insurance and risk management services are provided to Victorian public hospitals, many State-funded community health centres and medical research bodies, approximately 2,700 community service organisations, including welfare groups, kindergartens as well as a medical indemnity program for rural general practitioners.

• The Government Rail Insurance Program includes coverage for the private sector franchisees operating the metropolitan rail and tram networks, the regional passenger rail services operated by a State-owned business enterprise, and all associated infrastructure.

The VMIA also continued to secure from local and offshore reinsurance markets, the most cost effective reinsurance protection for our portfolio.

The VMIA also continued our focus on providing cost-effective insurance underwriting to support the State and reviewed the availability of appropriate market coverage for those areas where the VMIA does not provide cover or in instances where the client’s current cover may be enhanced by reducing the total cost of insurable risk (TCoIR).

Total Cost of Insurable RiskTCoIR is a different way of thinking about risk and exposures. Simply put, the TCoIR measures both the cost of transferring insurable risks to insurers and the cost of risks retained and controlled internally by a client.

Moves to further develop and refine our approach to TCoIR reinforce the VMIA’s Mission to take a leadership role in reducing Victoria’s total cost of risk. While the TCoIR model is not new, the VMIA has taken active steps to refine and improve the model incorporating the specific requirements of the Victorian public sector.

Medical Indemnity risk-rated premium The risk-rated premium model has been developed and implemented for insurance policies incepting on 30 June 2013 in partnership with the Victorian Department of Health. The model allocates the state-wide medical indemnity insurance premium pool to individual hospitals and health service providers. The model is designed to increase awareness of medical indemnity liabilities and encourage continued improvement of service provision in individual hospitals and health service providers through risk management and patient safety initiatives.

Risk servicesUnder the Victorian Managed Insurance Authority Act 1996, the VMIA assists clients in establishing programs for the identification, quantification and management of risks and monitoring risk management. The VMIA has a support role in assisting clients with their implementation of enterprise risk management through technical risk expertise and advice on risk management standards and leading practice. The VMIA has developed a number of overarching principles and a range of guidance material in support of the client’s attestation process for Standing Direction 4.5.5 – Risk Management Compliance.

An important tool employed to assist clients is the Risk Framework Quality Review (RFQR) which assesses a client’s risk management framework maturity against the VMIA’s Risk Management Framework Maturity Model, and the requirements of the Australian/New Zealand Standard for Risk Management – ISO AS/NZS 31000:2009.




The VMIA also offers a range of risk management services including enterprise and strategic risk advice, independent tailored risk reviews and research, business continuity advice and in-depth site surveys of clients’ operations to identify potential risk exposures as well as to provide possible solutions to these issues.

The VMIA also sought to extend the range of learning products we now offer online by implementing a formal risk management tertiary learning stream, via the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) that will lead to a professional Diploma accreditation for clients’ risk management practitioners.

Natural disaster claims Over the last four years, there have been numerous extraordinary natural events leading to major claims in Victoria. The first occurred on 7 February 2009, an event most commonly referred to as ‘Black Saturday’, when bushfire devastated a wide area resulting in loss of life and major property losses. The VMIA’s insurance payments in respect of Black Saturday total $132.4 million at 30 June 2013. Two major claims relating to this event, the East Kilmore and Murrindindi (Marysville) class actions, are not expected to resolve until 2014.

The remaining events are all weather-related where there were 15 separate rain/flood events during the 2011 and 2012 financial years resulting in substantial losses. As at 30 June 2013, the VMIA has paid $116.3 million with remaining claims liabilities of $70.0 million ($186.3 million in total).

Introduction of streamlined claims modelFollowing extensive consultation with clients and a review of the insurance claims process, the VMIA introduced a streamlined claims processing model in September 2012. In the first three months of operation, this approach handled 127 claims and finalised arrangements within 64 days of being opened. In the 12 months prior to commencement of this new model, there were 507 claims with the same criteria requiring an average of 132 days for completion.

Domestic Building InsuranceIn line with the Ministerial Direction under section 25A of the Victorian Managed Insurance Authority Act 1996, the VMIA continued to provide Domestic Building Insurance (DBI) to domestic builders during the 2013 financial year. During the year, the VMIA issued 52,534 DBI certificates for projects valued at more than $10.6 billion.


PEOPLE

In keeping with the VMIA’s commitment to work more closely with our clients, the organisation also set out to ensure that our workforce is qualified, healthy, diverse and highly motivated to deliver critical business outcomes.

Learning and Development StrategyA new People Strategy and a complementary Learning and Development Strategy were established during the 2013 financial year and include such deliverables as strengthening leadership capability at all levels across the organisation and building skills that encourage continuous improvement and employee engagement. In addition, the Learning and Development strategy also delivers innovative and client-focused solutions which in turn help to drive a capable and dynamic workforce. This approach seeks to grow capability across the organisation.

Client TrainingTraining provided is a mixture of progressive learning (building upon previous lessons) to single issue or topic training, as required by clients, identified through consultation with clients, or from research undertaken by the VMIA. This training is designed to continually assist attendees improve upon their risk management capability, maturity and expertise. During the 2013 financial year, the VMIA organised 74 training sessions and workshops for more than 2,200 clients.

ForumThe VMIA hosted a one day forum in October 2012 addressing the rising impact of natural disasters on the state. Weathering Heights featured a range of international and local speakers and industry experts addressing the impact and influence of weather-related events on the State and their organisations.

Corporate valuesThe VMIA is committed to continuing to embed values that are consistent with the Code of Conduct for Victorian public sector employees in the workplace culture and organisational processes. The VMIA’s values – client focused, passion for excellence, respect and integrity, working together and accountability play a major role in shaping the culture and reflect the way we work.

SYSTEMS AND PROCESSES

As a leader in risk management and insurance for Victoria, the VMIA aspires to achieve and maintain the highest levels of governance, stewardship and accountability.

Geospatial capabilityWith the support of our key clients, the VMIA continued to enhance our geospatial asset register which uses latitude and longitude data to map insured assets, including road and rail, geospatially across the state. Potential hazards such as bushfires and floods can be overlaid to help the VMIA understand and manage the state’s exposures.

Better document managementA new Document Management Strategy has been adopted. The aim of this strategy is to promote an effective shared information environment that provides the organisation with greater efficiency, governance, reliability, access, storage security and document disposal across differing platforms.

Improving information management A range of enhanced information management systems and processes were implemented during the 2013 financial year. Similarly, an automated data quality checking tool was installed and is progressively improving the VMIA’s data quality.

Secure online client connectionThe VMIA introduced further enhancements to a secure online connection for clients on the website that gives them access to the most current information quickly and easily at their convenience. The secure login area hosts bespoke documents and information specific to each client.




FINANCIAL SUMMARY

Five year summary of financial results

2013 $’000

2012 $’000

2011 $’000

2010 $’000

2009 $’000

Total revenue1 562,065 388,128 371,446 265,209 252,761

Less reinsurance, claims, commission and administration expenses 318,063 708,047 412,957 213,408 536,073

Operating surplus/(deficit) 244,002 (319,919) (41,511) 51,801 (283,312)

Net cash inflow from operating activities 66,576 62,434 127,515 87,713 97,035

Total assets 2,334,501 2,031,920 1,762,033 1,536,122 1,342,629

Total liabilities 2,409,085 2,367,106 1,844,371 1,581,949 1,456,857

Net liabilities (74,584) (335,186) (82,338) (45,827) (114,228)

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.

Operational and budgetary objectives and performance against those objectives

The VMIA’s operating surplus of $244.0 million for the 2013 financial year, was a favourable variance of $253.4 million when compared to the budgeted deficit of $9.4 million.

The favourable performance for the 2013 financial year when compared to budget is attributable to the following:

• Net investment income of 14.9% ($226.2 million), being $109.9 million above the long term annualised target investment return of 7.5% ($116.3 million), as a result of significant interventions by global Central Banks providing ample liquidity to support equity markets.

• Substantial decrease in gross claims incurred as a result of:

(i) Release from the expected claims liabilities to allow for the impact of increases in discount rates;

(ii) Release from the expected claims liabilities in respect of the medical indemnity portfolio due primarily to a reduction in the expected claim frequency;

(iii) Release from the expected claims liabilities for asbestos claims as a result of lower numbers of claims reported than expected and reductions in the assumed average claim sizes to reflect the emerging experience; and

(iv) Offset by an increase in Domestic Building Insurance claims incurred to reflect significantly higher than expected numbers of non-completion claims reported over the past 12 months.


Summary of significant changes in financial positionAt the balance sheet date, total assets grew by $302.6 million in line with increases in investments of $266.6 million and reinsurance and other assets of $31.0 million. Total liabilities increased by $42.0 million, driven by the increases in gross insurance liabilities of $34.5 million.

During the 2013 financial year, the VMIA generated a net cash inflow of $66.6 million from operating activities. The majority of this cash inflow and the $16.6 million capital contribution received from the State Government were invested in the VMIA’s investment portfolio managed by the Victorian Funds Management Corporation.

The VMIA’s net worth position improved from a negative $335.2 million at 30 June 2012 to a negative $74.6 million at 30 June 2013, in line with the operating surplus of $244.0 million plus the $16.6 million capital contribution received in June 2013.

The Funding Ratio at 30 June 2013 was 95%, an increase of 15% when compared to the 30 June 2012 position of 80%, however, still 5% below the 100% target.

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, the impact of the net movement in the unexpired risks liability and legislative and other Government-directed changes.

For the 2013 financial year, the PFIO result was $47.5 million, outperforming the budget of negative $2.7 million, due primarily to the net claims incurred favourable variance.

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




Key financial 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 financial performance indicators.

Key financial performance indicators 2013 2012 2011 2010 2009

Performance from Insurance Operations (PFIO)Actual ($ million) 47.5 36.5 (47.5) 68.4 (42.4)Budget ($ million) (2.7) 9.8 38.4 51.0 25.4

Funding Ratio (%) 95% 80% 94% 96% 89%Return on Investments (before fees) 15.5% 4.7% 11.6% 10.4% (12.2%)Return on Investments (after fees) 14.9% 4.3% 11.1% 9.9% (12.4%)Return on Assets (%)1 2.2% 1.9% (2.9%) 4.8% (3.5%)Return on Equity (%)1, 2 N/A N/A N/A N/A (154.6%)Salaries as percentage of gross premium written (%) 6.3% 5.8% 6.8% 7.3% 8.3%Gross premium written per employee ($ million) 2.5 2.4 2.0 1.8 1.5Number of full time equivalent staff at end of year (FTE) 125 121 117 117 113Gross premium written ($ million) 309.5 288.1 238.6 208.5 170.7

1. Return on Assets and Return on Equity are calculated based on the PFIO.

2. As the average equity position for the period between the 2009 and 2013 financial year is negative, this ratio does not represent a meaningful performance measure.


Governance and organisational structure

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

The VMIA Board

John Peberdy Joan Fitzpatrick Doug Kearsley Suzanne Roberts

Brian Benger Ian Gaudion John McNeil Therese Ryan

Chief Executive Officer Warren Hutcheon

Executive Team

Dana Argyropoulos, Corporate Secretary Victor Martindale, Executive General Manager, Finance

Claudio Battilana, Executive General Manager, Operations (Until 16 May 2013)

Ian Patterson, Chief Information Officer

Kay Clancy, Executive General Manager, People, Culture and Capability

Catherine Proud, Executive Manager, Human Resources (Until 30 November 2012)

Hazel Greenhalgh, Executive Manager, Government Relations

Peter Ryan, Executive 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 of the Board including the Board’s Committees are conducted regularly. The purpose of the evaluations is to identify areas of improvement in respect of the Board’s role and overall performance in meeting its legislative and strategic responsibilities.




Board committeesThe Board has three committees: Audit and Risk Committee, Remuneration and Capability Committee and 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 our own operations and activities to ensure we identify and address 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 this Committee meet this requirement.

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

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 on the strategic plans contained in the VMIA’s 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 claims liabilities 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.

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.

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

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

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

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

Therese Ryan, Director Therese Ryan was appointed in August 2012. She is a member of the Remuneration and Capability 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.

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.

Claudio Battilana, Executive General Manager, Operations Claudio joined the VMIA in November 2008. He has broad experience in the insurance and reinsurance sectors, including corporate insurance, underwriting, claims and legal. (Until 16 May 2013).

Kay Clancy, Executive General Manager, People, Culture and Capability Kay joined the VMIA in September 2012, bringing more than 20 years of banking and insurance experience and has held senior executive roles in business change, process re-engineering and insurance service operations. She is a graduate of the Australian Institute of Company Directors (AICD).

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




Victor Martindale, Executive General Manager, Finance 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, OAMPS (part of the Wesfarmers Group) and most recently ACE Insurance.

Ian Patterson, Chief Information Officer Ian joined the VMIA in November 2011. He has extensive experience in Information and 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.

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. (Until 30 November 2012).

Peter Ryan, Executive 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.

Occupational Health and SafetyThe VMIA has established an Occupational Health and Safety (OH&S) Steering Committee which is chaired by the Executive General Manager, People, Culture and Capability. The Committee aims to ensure the health and safety of staff and visitors to the VMIA. During the year, there were no hazard reports, two incident reports and no 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.

Workforce data (full time equivalent employees)

2013 2012 2011 2010 2009

Full time equivalent employees 125 121 117 117 113

Average age 44 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 resource policies are reviewed annually to ensure that they reflect current legislative requirements and workplace practices.


Consultancy expenditureIn accordance with the requirements of Financial Reporting Direction 22C, the following table lists expenditure on consultancies for the 2013 financial year 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 2012

(excl GST)

Expenditure 2013

(excl GST)

Future expenditure

(excl GST)

Gray Puksand Pty Ltd

Office relocation fit-out and architectural services

8 August 2011

31 October 2012

$143,020 $99,190 $43,830 -

Charter Keck Cramer

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

21 February 2012

30 November 2012

$24,775 $7,400 $17,375 -

Norman Disney Young

Mechanical/electrical drawings for new office fit-out

10 April 2012

30 November 2012

$46,300 - $46,300 -

Bevington Group

Identify business system and process improvements

1 July 2012

7 September 2012

$101,175 - $101,175 -

Gray Puksand Pty Ltd

Additional architectural services beyond the original scope of works

1 July 2012

31 May 2013

$53,048 - $53,048 -

Aspex Consulting

Medical indemnity strategy development

1 November 2012

20 May 2013

$96,636 - $96,636 -

PwC Medical indemnity premium review

1 January 2013

30 September 2013

$85,000 - $50,000 $35,000

Sweeney Research Pty Ltd

Provide market research services, annual client survey

31 March 2013

26 June 2013

$27,550 - $27,550 -

Usability One Online strategy development

15 May 2013

23 August 2013

$101,593 - $69,798 $31,795

In addition, during the 2013 financial year, the total for the three consultancies engaged, where the fees payable to the respective consultant were less than $10,000, was $12,000 (excluding GST).




Disclosure of major contractsDuring the 2010 financial year 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 scheme to be administered by the VMIA. The value of the contract was more than $10 million in the 2013 financial year.

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 accessThe Freedom of Information Act 1982 allows the public a right of access to documents held by the VMIA. For the year ended 30 June 2013, the VMIA received seven applications. Of these requests, six were non personal requests and one was from a member of the general public. Of the total requests received by the VMIA, the majority were acceded to, one went to internal review with none progressing to the appeal stage.

Making a requestAccess to documents may be obtained through written request to the Freedom of Information Officer, as detailed in section 17 of the Freedom of Information Act 1982. In summary, the requirements for making a request are:• it should be in writing;• it should identify as clearly as possible which document is being requested; and• it should be accompanied by the appropriate application fee (the fee may be waived in certain circumstances).

Requests for documents in the possession of the VMIA should be addressed to:

Freedom of Information OfficerVictorian Managed Insurance AuthorityPO Box 18409Collins Street EastMelbourne Victoria 8003

Access charges may also apply once documents have been processed and a decision on access is made. Such charges may include coverage for photocopying and search and retrieval charges.

Further information regarding Freedom of Information can be found at www.foi.vic.gov.au.

Additional information 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.


Compliance with the Victorian Industry Participation Policy Act 2003The Victorian Industry Participation Policy Act 2003 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 regard 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:

• benefits of the restriction to the community as a whole outweigh the costs; and• 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 to date that would alter that decision.




Compliance with the Protected Disclosure Act 2012 (formerly the Whistleblowers Protection Act 2001)The VMIA is committed to the objectives of the Protected Disclosure Act 2012. The VMIA does not tolerate 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 staff to the Protected Disclosure Coordinator within the VMIA. The Protected Disclosure Coordinator will determine whether it is a public interest disclosure and is 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 the 2013 financial year 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 any other person to the VMIA under the Whistleblowers Protection Act 2001, or from February 2013 to the Independent Broadbased Anti-corruption Commission (IBAC) under the Protected Disclosure Act 2012.

The VMIA provides information to staff on the Protected Disclosure Act 2012 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 staff may also be made directly to IBAC.

IBACGPO Box 24234 Melbourne Victoria 3001Telephone: 1300 735 135

Internet: www.ibac.vic.gov.auEmail: [email protected]: (03) 8635 6444

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

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

The objectives of the strategy include:• Reducing the amount of waste and maximising the amount reused and recycled.• Separating office waste into organic, co-mingled recyclable and landfill streams.• Purchasing 25% green power.• Adopting ISO 14001 Environmental Management System guidelines in the development of the environmental policy.• Encouraging staff to reduce environmental impacts.


Directions of the Minister for Finance

Public Healthcare PortfolioPursuant 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 portfolio. The Public Healthcare portfolio 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 portfolio.

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 2012 to 30 June 2013 (both dates inclusive), with the VMIA to determine the premium payable by the Public Healthcare portfolio.

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




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:

• The Hon. Pat McNamara (Chairman).• The Hon. Robert Tickner. • Ms Christine Nixon. • Ms Pam White.

This direction is effective from 1 July 2012 until 30 June 2013 (both dates inclusive), with the VMIA to determine the premium payable by the Panel members, as well as any policy terms and conditions as it sees fit.


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:

• Mary Dunkley.• Grant Parsons. • Philip Nolan.

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.



Members of the Land Tax 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 Land Tax Hardship Relief Board (the Board). The members of the Board are:

• Paula Thorne.• Trudy Hart.• Kevin O’Dea.• Steven Stevens.• Justine Jacono.

This direction is effective from 20 April 2013 (shortly prior to the Board’s first meeting for 2013) to 30 June 2016 (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.


Australian Grand Prix CorporationPursuant to section 25A of the Victorian Managed Insurance Authority Act 1996, I direct the Victorian Managed Insurance Authority (VMIA) to provide appropriate insurance to those entities that the Australian Grand Prix Corporation is contractually obliged or had provided an undertaking to insure in respect to the Motorcycle Grand Prix and Formula One Grand Prix.

This direction is effective from 1 September 2012 until 1 September 2015 (both dates inclusive), with the VMIA to determine the premium payable, as well as any policy terms and conditions as it sees fit. The insurance is to be provided at a commercial rate.




Cemetery TrustsPursuant 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 Victorian Cemetery Trusts.

This direction is effective for five years from 1 July 2012 to 30 June 2017 (both dates inclusive), with the VMIA to determine the premium payable by the Victorian Cemetery Trusts.


The VMIA also continues to provide cover under section 25A 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 2014Emergency Resource Providers Support Scheme 1 July 2009 – 30 June 2014Members of the Victorian Flood Appeal Advisory Panel 19 January 2011 – 30 June 2013Domestic 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 the 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 the VMIA’s attestation process and procedures and verified management’s view that the 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 Chairman 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 Authority30 August 2013



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, 20

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

FRD 22C Nature and range of services provided 4-16

Management and structure

FRD 22C Names of Governing Board members and Chief Executive Officer 20-22

FRD 22C Organisational structure 20

Financial and other information

FRD 15B Executive Officers’ disclosures 86-88

FRD 22C Workforce data and application of employment and conduct principles 23

FRD 22C Application and operation of the Freedom of Information Act 1982 25

FRD 22C Application and operation of the Whistleblowers Protection Act 2001 27

FRD 22D Application and operation of the Protected Disclosure Act 2012 27

FRD 22C Compliance with the Building Act 1993 26

FRD 22C Compliance with National Competition Policy 26

FRD 22C Summary of financial results for the year with comparative results for the preceding four years 17

FRD 22C Summary of significant changes in financial position 18

FRD 22C, SD4.2(k) Operational and budgetary objectives for the year and performance against objectives 7-19

FRD 22C Subsequent events 18

FRD 22C Details of consultancy expenditure 24

FRD 12A Disclosure of major contracts 25

FRD 22C Occupational health and safety 23

FRD 22C Statement of availability of other information 25

FRD 24C Reporting of office based environmental impact 27

FRD 10 Disclosure index 33-34

FRD 25 Victorian Industry Participation Policy disclosure 26

SD 4.5.5 Risk Management Compliance Attestation 32

SD 4.5.5.1 Insurance Compliance Attestation N/A

SD 4.2.(j) Sign off requirement 3, 91



Page

The 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 41

SD 4.2(b) Comprehensive Operating Statement 36

SD 4.2(b) Balance Sheet 37

SD 4.2(b) Statement of Changes in Equity 38

SD 4.2(b) Cash Flow Statement 39

SD 4.2(b) Notes to the Financial Statements 40-90

SD 4.2(c) Compliance with Ministerial Direction 91

SD 4.2(c) Accountable Officer’s and Chief Finance and Accounting Officer’s declaration 91

SD 4.2(d) Rounding of amounts 40

Other disclosure as required by FRDs in notes to the VMIA’s financial statements

FRD 11 Disclosure of ex-gratia payments N/A

FRD 21B Disclosure of Responsible Persons, Executive Officers and Other Personnel (Contractors with Significant Management Responsibilities)

88

FRD 103D Non-current physical assets 46, 61

FRD 106 Impairment of assets 45, 46

FRD 110 Cash Flow Statement 39

FRD 112C Defined benefit superannuation obligations 85

FRD 119 Contribution by owners 72

Legislation

Victorian Managed Insurance Authority Act 1996 4, 13, 14, 15, 20, 28, 29, 30, 31, 40, 99

Financial Management Act 1994 1, 3, 21, 40, 41, 86, 91, 99, 104, 108

Public Administration Act 2004 23

Freedom of Information Act 1982 25, 33

House Contracts Guarantee Act 1987 1, 4, 95

Whistleblowers Protection Act 2001 27, 33

Protected Disclosure Act 2012 27, 33

Building Act 1993 26, 33

House Contracts Guarantee (HIH) Act 2001 95, 99

Victorian Industry Participation Policy Act 2003 26

Borrowing and Investment Powers Act 73



Contents Page

Financial StatementsComprehensive Operating Statement 36Balance Sheet 37Statement of Changes in Equity 38Cash Flow Statement 39

Notes to the Financial StatementsNote 1 General information 40Note 2 Summary of significant accounting policies 41Note 3 Critical accounting judgements, assumptions and estimates 48Note 4 Insurance contracts – risk management policies and procedures 54Note 5 Premium and income from continuing activities 56Note 6 Net claims incurred 57Note 7 Administration expenses 58Note 8 Cash and cash equivalents 58Note 9 Trade receivables 59Note 10 Non-trade receivables 59Note 11 Investments 60Note 12 Furniture, fittings, equipment and motor vehicles 61Note 13 Reinsurance and other recoveries – claims 62Note 14 Trade payables 62Note 15 Non-trade payables 62Note 16 Provisions 63Note 17 Lease incentive liability 63Note 18 Gross unearned premium liability 63Note 19 Unexpired risks liability 64Note 20 Claims liabilities 65Note 21 Net worth 72Note 22 Reinsurance program 72Note 23 Financial instruments 73Note 24 Commitments and contingencies 84Note 25 Superannuation benefits 85Note 26 Responsible persons 86Note 27 Reconciliation of net cash inflow from operating activities 89Note 28 Reconciliation of movements in investments 90Note 29 Transfer of Department of Health claims run-off liabilities 90Note 30 Subsequent events 90

Accountable Officer’s and Chief Finance and Accounting Officer’s Declaration 91Independent Auditor’s Report 92

VMIA Financial ReportFor the financial year ended 30 June 2013


Notes

2013 $’000

2012$’000

Gross premium earned 5(a) 269,382 228,106

Reinsurance incurred (38,193) (33,442)

231,189 194,664

Decrease/(increase) in unexpired risks liability 19(b) 24,710 (41,720)

Net premium earned 255,899 152,944

Gross claims incurred 6, 20(c), 29 (243,770) (579,857)

Reinsurance and other recoveries 5(b), 6, 20(c) 59,441 90,699

Net claims incurred 6, 20(c) (184,329) (489,158)

Gross commission paid (17,401) (16,346)

Reinsurance commission paid (1,233) (1,621)

(Decrease)/increase in gross deferred acquisition costs 19(a) (2,485) 5,734

Commission incurred (21,119) (12,233)

Other income 5(d) 2,124 3,203Administration expenses 7 (34,818) (37,585)

Underwriting result 17,757 (382,829)

Investment income 5(c) 231,118 66,120

Investment management expenses (4,873) (3,210)

Net investment income 226,245 62,910

Comprehensive result 244,002 (319,919)

VMIA has no other comprehensive income to report for the year ended 30 June 2013 (2012: $Nil).

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 2013


Victorian Auditor-General Note

2013$’000

2012$’000

ASSETSFinancial assets

Cash and cash equivalents 8 32,582 31,194

Trade receivables 9 20,070 42,340

Non-trade receivables 10 107 1,492

Investments 11, 28 1,674,384 1,407,770

Total financial assets 1,727,143 1,482,796

Non-financial assets

Prepaid expenses 446 243

Trade receivables 9 308,794 282,036

Non-trade receivables 10 1,018 1,490

Furniture, fittings, equipment and motor vehicles 12 5,746 2,493

Gross deferred acquisition costs 19(a) 11,028 13,513

Unearned premium 18,628 11,106

Claims outstanding and incurred but not reported 13, 20(c) 261,698 238,243

Reinsurance and other assets 280,326 249,349

Total non-financial assets 607,358 549,124

Total assets 2,334,501 2,031,920

LIABILITIES

Trade payables 14 16,841 30,236

Non-trade payables 15 74,643 53,581

Provisions 16 2,848 3,158

Lease incentive liability 17 1,590 1,490

Unearned premium 18 348,754 307,874

Unexpired risks 19(b) 54,149 78,859

Claims outstanding and incurred but not reported 20(a), 20(c) 1,910,260 1,891,908

Gross insurance liabilities 2,313,163 2,278,641

Total liabilities 2,409,085 2,367,106

Net liabilities (74,584) (335,186)

EQUITY

Contributed capital 21 162,371 145,771

Accumulated deficit 21 (236,955) (480,957)

Net worth 21 (74,584) (335,186)

Commitments for expenditure 24(c), 24(d) 78,342 39,094

Contingent assets and contingent liabilities 24(e) - -

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

Balance Sheet As at 30 June 2013


Note

Contributed capital $’000

Accumulated deficit $’000

Total

$’000

Balance at 30 June 2011 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 21 145,771 (480,957) (335,186)

Net surplus for the year - 244,002 244,002

Capital contribution by State Government 16,600 - 16,600

Balance at 30 June 2013 21 162,371 (236,955) (74,584)

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 2013


Note

2013$’000

2012$’000

Cash flows from operating activities

Insurance premium received 351,381 324,272

Other income 2,336 3,523

Reinsurance premium paid (45,715) (37,240)

Gross claims paid (257,026) (244,852)

Reinsurance and other recoveries received 56,938 28,405

Reimbursement of claims paid on behalf of others 1,530 25,924

Gross commission paid (19,140) (16,346)

Payments to employees and suppliers for services and goods (38,100) (52,091)

Dividends, distributions and other investment income received 5(c) 29,874 31,405

Interest received 5(c) 28,324 36,318

Goods and Services Taxation paid (17,324) (14,096)

Stamp Duty paid (26,502) (22,788)

Net cash inflow from operating activities 27 66,576 62,434

Cash flows from investing activities

Acquisition of furniture, fittings, equipment and motor vehicles 12 (4,881) (1,387)

Proceeds on disposal of furniture, fittings, equipment and motor vehicles 532 544

Acquisition of investments 28 (1,400,159) (1,557,335)

Proceeds on disposal of investments 28 1,322,719 1,440,284

Net cash outflow from investing activities (81,788) (117,894)

Cash flows from financing activities

Capital contributions by State Government 21 16,600 67,071

Net cash inflow from financing activities 16,600 67,071

Increase in cash and cash equivalents 1,388 11,611

Cash and cash equivalents at beginning of year 31,194 19,583

Cash and cash equivalents at end of year 8 32,582 31,194

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 2013


1. General information

a) Reporting entity The financial report covers the Victorian Managed Insurance Authority (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 10, 161 Collins Street, Melbourne, Victoria, 3000.

A description of the nature of the VMIA’s operations and its principal activities is included in the 2013 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.

c) Changes in presentation In order to provide readers with more useful information, the following changes in presentation have been made to the financial report in comparison to prior years. The changes in presentation provide further detail to enhance the disclosure of the underlying items within the notes that support key transactions and balances on the principal financial statements. The comparatives, where practical to do so, have been amended to align with the disclosure changes:

I. Presentation of the Comprehensive Operating Statement – includes the reclassification of ‘Reinsurance commission paid’ as a separate line item on the Comprehensive Operating Statement which now falls within the ‘Commission incurred’ sub-total as opposed to being disclosed as ‘Administration expenses’.

II. Presentation of the Balance Sheet – ‘Employee benefit provisions’ and ‘Provision for leasehold restoration’ have been combined into a line item called ‘Provisions’ on the Balance Sheet, however, a note to support these provisions has been included in the financial statements, which was not previously done.

III. Presentation of the Cash Flow Statement, notes supporting such and composition of ‘Cash and cash equivalents’ – investments in the short term money market are now included in the ‘Investments’ balance as opposed to the ‘Cash and cash equivalents’ balance, hence the derivation in terms of cash flow movements and the final total on the Cash Flow Statement has had a change in presentation.

IV. Note 7 ‘Administration expenses’ – presentation has been amended to provide further a dissection of ‘Suppliers and other services’ and ‘Underwriting expenses’. ‘Auditor’s remuneration’ is also no longer disclosed in a separate note and has been disclosed as a separate line item in Note 7 ‘Administration expenses’.

V. Note 11 ‘Investments’ – presentation has been amended to disclose current and prior year roll forwards of balances including opening balances, purchases of investments, sales of investments and unrealised fair value gains/(losses) through income. Investments are also now disclosed by asset class. The investments in the short term money market have also been brought into this note, reclassified from being part of ‘Cash and cash equivalents’ in prior years.

VI. Note 12 ‘Furniture, fittings, equipment and motor vehicles’ – presentation has changed to disclose computer hardware, furniture and office equipment as separate asset classes. Additional disclosure is also included in relation to ‘Proceeds on disposal’ and ‘Profit/(loss) on disposal’.

VII. Note 15 ‘Non-trade payables’ – presentation has changed to disclose Goods and Services Taxation and Stamp Duty as separate line items.

VIII. Note 16 ‘Provisions’ – new note to disclose current and prior year roll forwards of balances, including opening balances, amounts charged/(credited) to income and provisions utilised during the year. The note also discloses provisions based on their nature, being ‘Annual leave’, ‘Long service leave’, ‘Other employee benefits’ and ‘Leasehold restoration’.

Notes to the Financial StatementsFor the financial year ended 30 June 2013


IX. Note 23(a) ‘Financial instruments – Classification of financial instruments’ – contains additional disclosure on the classification of investments within the fair value hierarchy and includes disclosure at an investment asset class level.

X. Note 28 ‘Reconciliation of movements in investments’ – new note to disclose movements in investing activities to support the Cash Flow Statement.

In prior years the VMIA disclosed information at a program level in the financial report including the Domestic Building Insurance Program, Dust Diseases and Workers’ Compensation Program, General Government Program and Public Healthcare Program. During the year, the VMIA changed to reporting at a line of business level and no longer supports reporting at a program level. Accordingly, the following notes to the financial statements that were disclosed at a program level in prior years are now disclosed at a line of business level, including Domestic Building Insurance, Dust Diseases and Workers’ Compensation, Liability, Medical Indemnity, Property and Other. The comparatives, where practical to do so, have been amended to align with the disclosure changes:

I. Note 3 ‘Critical accounting judgements, assumptions and estimates’.

II. Note 4(b) ‘Insurance contracts – risk management policies and procedures’.

III. Note 5(a) ‘Gross premium earned’.

IV. Note 5(b) ‘Reinsurance and other recoveries’.

V. Note 19 ‘Unexpired risks liability’.

VI. Note 20(d) ‘Claims liabilities – Net claims development tables’.

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 (AAS), in particular 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 VMIA is a not-for-profit entity. The impact of the not-for-profit requirements is summarised in Note 2(b) 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 30 August 2013.

b) 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 Disclosure which limits the disclosure by non-for-profit entities. However, FRD 21B Disclosure of Responsible Persons, Executive Officers and Other Personnel (Contractors with Significant Management Responsibilities) provides for additional disclosure.



c) 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 2013 and the comparative information presented for the year ended 30 June 2012.

The functional currency of the VMIA is the Australian Dollar.

d) 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 2013. 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 2015. This standard simplifies 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. Disclosure for fair value measurements using unobservable inputs are relatively detailed compared to disclosure for fair value measurements using observable inputs. Consequently, the standard may increase the disclosures required assets measured using depreciated replacement cost.

• AASB 1053 Application of Tiers of Australian Accounting Standards which is 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. The Victorian Government is currently considering the impacts of Reduced Disclosure Requirements (RDRs) for certain public sector entities and has not decided if RDRs will be implemented in the Victorian public sector.

• AASB 119 Employee Benefits is applicable for reporting periods beginning on or after 1 July 2013. In this revised standard, for defined benefit superannuation plans, there is a change to the methodology in the calculation of superannuation expenses, in particular there is now a change in the split between superannuation interest expense (classified as transactions) and actuarial gains and losses (classified as ‘Other economic flows – other movements in equity’) reported on the Comprehensive Operating Statement. No significant impact is expected from these consequential amendments.

• AASB 2011-10 Amendments to Australian Accounting Standards arising from AASB 119 which are applicable for reporting periods beginning on or after 1 January 2013. Details of the impact are still being assessed.

• 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 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 2011-8 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 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 Standards and Interpretations. Details of the impact are still being assessed.

• AASB 2011-10 Amendments to Australian Accounting Standards arising from AASB 119 which are applicable for reporting periods beginning on or after 1 January 2013. Details of the impact are still being assessed.

• 2012-6 Amendments to Australian Accounting Standards, mandatory effective date of AASB 9 and Transition Disclosures (AASB 9, AASB 2009-11,AASB 2010-7, AASB 2011-7 and AASB 2011-8) which are applicable for reporting periods beginning on or after 1 January 2013. Details of the impact are still being assessed.

• 2012-5 Amendments to Australian Accounting Standards arising from Annual Improvements 2009-11 Cycle (AASB 1, AASB 101,AASB 116, AASB 132 and AASB 134 and Interpretation 2) which are applicable for reporting periods beginning on or after 1 January 2013. 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. These Australian Accounting Standards and Interpretations are either not applicable or will have minimal impact on the VMIA’s Financial Report and thus have not been specifically identified above.

e) Premium Premium includes amounts charged to policyholders but excludes Stamp Duty and Goods and Services Taxation (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.

f) Outward reinsurance premium 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.

g) 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 Domestic Building Insurance, Liability, Medical Indemnity, Property and Other portfolios, with each line of business’ risks being managed together as a single portfolio. The Dust Diseases and Workers’ Compensation (DDWC) portfolio 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(h)], 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.



h) Claims incurred and claims liabilitiesClaims 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% (2012: 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 line of business and include a 25% (2012: 25%) allowance for diversification between insurance lines of business. 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 20.

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

i) Reinsurance and other recoveries Movements in reinsurance and other recovery assets are recognised in income in the year they occur.

j) 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.

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

l) Foreign currency translation Transactions denominated in foreign currency 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.



m) LeasesA 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.

n) Taxation The VMIA is exempt from income taxation. The VMIA is liable to pay Fringe Benefits Taxation (FBT) and Goods and Services Taxation (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 non-trade receivables and non-trade payables. Cash flows which include GST are included in the Cash Flow Statement on a gross basis in accordance with AASB 107.

o) AssetsAssets 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.

p) ImpairmentThe 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 in income whenever the carrying amount of an asset exceeds its recoverable amount.

q) 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.

r) Offsetting financial instrumentsThe 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.

s) 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.



t) 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. 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.

DepreciationDepreciation 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:

Useful life

Asset 2013 2012

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 exceed their recoverable amounts. Where an asset’s carrying value exceeds its recoverable amount, the difference is written off as a charge to income.

u) Assets backing insurance liabilities The VMIA has determined that all assets, except for furniture, fittings, equipment and motor vehicles, are held to back the 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 in accordance with FRD 116 Financial Instruments – Public Finance Corporations and AASB 1023 General Insurance Contracts. Initial recognition is at cost in the Balance Sheet and subsequent measurement is at fair value with any resultant 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 recovery assets are measured at the present value of expected future receipts and are subject to an independent actuarial valuation on a similar basis to the claims liabilities [refer to Note 2(h)]. 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 the 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.

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

w) 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.

x) Lease incentive liability Rent free periods and other lease incentives offered by the lessor to the VMIA, under a lease agreement, are initially recognised as a 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.



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 2(h) and Note 2(i) set out the components considered in establishing the claims liabilities and reinsurance and other recovery assets.

Note 23(a) sets out the VMIA’s investment valuations that are subject to estimation uncertainty.

The VMIA’s activities are classified into six main lines of business being Domestic Building Insurance, Dust Diseases and Workers’ Compensation, Liability, Medical Indemnity, Property and Other.

Descriptions of the lines of business and the actuarial process for determining the value of the claims liabilities

(i) Domestic Building Insurance (DBI) 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 line of business is based on a variety of actuarial techniques that analyse experience, trends, exposure data and industry data.

(ii) Dust Diseases and Workers’ Compensation (DDWC) This line of business 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 line of business is based on a variety of actuarial techniques that analyse experience, trends, exposure data and industry data.

(iii) Liability, Property and OtherThese lines of business provide 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 long tail liability risks. The estimation of claims liabilities for these lines of business 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 ceded outstanding claims for reported claims and amounts calculated by the VMIA’s independent actuary for the incurred but not reported and incurred but not enough reported components.



(iv) Medical IndemnityThis line of business includes 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 29). 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% (2012: 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 line of business 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 $767,000 at 30 June 2013 (2012: $758,000).

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

2013 DBI DDWC LiabilityMedical

Indemnity Property Other

Actuarial assumptions

Average weighted term to settlement 4.1 yrs 12.2 yrs 3.9 yrs 6.0 yrs 1.2 yrs 3.7 yrs

Large claim frequency - - - 1.5% - -

Claim frequency per total certificates 1.3% - - - - -

Number of incurred but not reported (IBNR) claims - 1,135 - - - -

Claims handling expense (CHE)* rate 8.0% 10.0% 1.8% 5.0% 2.3% 6.0%

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

Discount rate 3.4% 4.5% 3.2% 3.7% 3.2% 3.2%

Superimposed inflation rate - 2.0% - 4.0% - -Risk margin 23.5% 28.5% 29.1% 18.9% 25.8% 28.7%

(*) Liability, Property and Other CHE for working claims = 6% and Property Catastrophe claims = 2%

2012 DBI DDWC LiabilityMedical

Indemnity Property Other

Actuarial assumptions

Average weighted term to settlement 4.5 yrs 12.8 yrs 4.0 yrs 6.1 yrs 0.9 yrs 2.6 yrs

Large claim frequency - - - 1.5% - -

Claim frequency per total certificates 1.0% - - - - -

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

Claims handling expense (CHE)* rate 6.0% 10.0% 2.0% 5.0% 2.2% 5.6%

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

Discount rate 2.8% 4.0% 2.8% 3.0% 2.8% 2.8%

Superimposed inflation rate - 2.0% - 4.0% - -

Risk margin 23.5% 28.5% 29.0% 11.2% 15.9% 28.6%

(*) Liability, Property and Other CHE for working claims = 6% and Property Catastrophe 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 line of business.



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

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

For all the VMIA lines of business: • 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 with reference to past experience of claims handling expenses as a percentage of gross claims payments.

• The inflation rate is set following consideration of the duration of the claims liabilities and with reference to both economic forecasts and historical experience for wage inflation. Short term wage inflation rates are set following consideration of a range of economic forecasts, while medium to long term wage inflation rates 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 rates are set with 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

Inflation rate (3.75% p.a.) +0.50% 575

-0.50% (556)

Discount rate (3.4% p.a.) +0.50% (556)

-0.50% 575

Claims handling expense rate (8.0% of claim payments) +1.00% 285

-1.00% (285)

Risk margin (23.5% p.a.) +1.00% 249

-1.00% (249)

Claim frequency (1.3% of total certificates) +0.10% 2,424

-0.10% (2,424)

Average claim size ($42,000 per claim as at 30 June 2013) +10.00% 3,079

-10.00% (3,079)

Dust Diseases and Workers' Compensation

Inflation rate (3.75% p.a.) +0.50% 21,903

-0.50% (20,070)

Discount rate (4.5% p.a.) +0.50% (20,195)

-0.50% 22,265

Superimposed inflation rate (2.0% p.a.) +0.50% 21,903

-0.50% (20,070)

Number of IBNR claims (1,135 claims) +10.00% 33,146

-10.00% (33,146)

Average claim size ($170,000 per claim as at 30 June 2013) +10.00% 33,146

-10.00% (33,146)

Claims handling expense rate (10.0% of claim payments) +1.00% 3,170

-1.00% (3,170)

Risk margin (28.5% p.a.) +1.00% 2,713

-1.00% (2,713)


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

Variable

Sensitivity

%


$’000

Liability


-0.50% (1,114)

Discount rate (3.2% p.a) +0.50% (1,117)

-0.50% 1,153

Ultimate claims ratio (assumed ultimate claims ratio +20.00% 6,269

for Liability is 45% for the latest accident year) -20.00% (6,273)


-1.00% (3,383)

Risk margin (29.1% p.a.) +1.00% 475

-1.00% (475)

Medical Indemnity


-0.50% (19,765)

Discount rate (3.7% p.a.) +0.50% (28,674)

-0.50% 30,180

Superimposed inflation rate (4.0% p.a.) +0.50% 17,158

-0.50% (19,765)

Claim frequency non-large claims for the latest accident year +0.50% 8,229

(6.8% per 100 separations) -0.50% (8,361)

Claim frequency large claims for the latest year +0.20% 15,515

(1.5% per 1,000 separations) -0.20% (15,516)

Average claim size for large claims +5.00% 16,912

($2.8 million per claim as at 30 June 2013) -5.00% (17,126)


-1.00% (9,894)

Risk margin (18.9% p.a.) +1.00% 8,718

-1.00% (8,718)




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

Variable

Sensitivity

%


$’000

Property

Inflation rate (3.75% p.a.) +0.50% (50)

-0.50% 40

Discount rate (3.2% p.a) +0.50% (286)

-0.50% 263


-1.00% (1,334)

Risk margin (25.8% p.a.) +1.00% 725

-1.00% (725)

Other


-0.50% (1,464)

Discount rate (3.2% p.a) +0.50% (1,434)

-0.50% 1,490

Ultimate claims ratio for long tail classes (assumed ultimate claims ratio for Professional +20.00% 1,593

Indemnity and Directors and Officers is 60% for the latest accident year) -20.00% (1,593)

Claims handling expense rate (6.0% of claim payments) +1.00% 774

-1.00% (774)

Risk margin (28.7% p.a.) +1.00% 606

-1.00% (606)



Variable Impact of movement in variable on the comprehensive result

Inflation and superimposed inflation rates

Expected future claim 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 net claims incurred.

Discount rate Claims liabilities are calculated with reference to expected future claim payments. These claim payments are discounted to take into account the time value of money. An increase in the assumed discount rate would decrease net claims incurred.

Claim frequency (both large and small)

Claim frequency is calculated based on past experience. An increase in the frequency of claims would increase net claims incurred.

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 net claims incurred.

Average claim size Estimated average claim size is based primarily on historical experience. An increase in the estimated average claim size would increase net claims incurred.

Ultimate claims ratio for long tail classes

Ultimate claims ratio for long tail classes is the ultimate net claims incurred divided by the gross ultimate premium.

Claims handling expense (CHE) rate

Claims liabilities include the professional and administrative costs pertaining to the future management and settlement of claims. This is calculated as a percentage of the gross claim payments based on past experience. An increase in the CHE rate would increase gross claims incurred.

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 net claims incurred.

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 Liability, Property and Other lines of business, 1958 for the Dust Diseases and Workers’ Compensation line of business, from the 1950s for the Medical Indemnity line of business and 2010 for the Domestic Building Insurance (DBI) line of business. The VMIA also has industry data from 2002 for the DBI line of business.


• 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 22 are approved by the Board of Directors.

• Financial exposure to the long tail medical indemnity class of insurance has been mitigated by the stop loss reinsurance protection 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 Strategic Asset Allocation, as determined by the Victorian Funds Management Corporation (VFMC), to meet the VMIA’s Investment Objective approved by the Board of Directors to optimise the investment return within acceptable risk parameters.

(b) Terms and conditions of insurance business

Insurance contracts for DBI Insurance contracts commence on the project contract’s start date and run for 6.5 years after the date of the project’s 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 Liability, Medical Indemnity, Property and Other 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 (2012: $50 million to $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 affect on many claims. The stop loss reinsurance 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. Premium and income from continuing activities

Note2013$’000

2012$’000

(a) Gross premium earnedDBI 27,404 16,471

Liability 33,691 28,628

Medical Indemnity 131,187 102,692

Property 48,205 48,468

Other 28,895 31,847

Total gross premium earned 269,382 228,106

(b) Reinsurance and other recoveriesDBI 25 -

DDWC 173 23

Liability 50,926 -

Medical Indemnity 1,985 (14,023)

Property 3,524 -

Other 2,808 104,699

Total reinsurance and other recoveries 6 59,441 90,699

The General Government Program and certain Public Healthcare Program reinsurance recoveries were not reported at a line of business level in 2012 and are therefore reported as Other.

(c) Investment incomeDividends and distributions 29,084 30,020

Interest 28,324 36,318

Other investment income 790 1,385

Fair value movements through income:

Realised gains/(losses) 39,361 (1,005)

Unrealised gains/(losses) 133,559 (598)

Total investment income 231,118 66,120

(d) Other incomeManagement and administration fees 2,124 3,203

Total premium and income earned for the year 562,065 388,128



6. Net claims incurred

2013 2012

Currentyear

$’000

Prioryears$’000

Total$’000

Currentyear

$’000

Prioryears$’000

Total$’000

Gross claims incurred

Undiscounted 338,643 (47,046) 291,597 318,052 93,925 411,977

Discount movement (73,882) 26,055 (47,827) (54,060) 221,940 167,880

Total gross claims i ncurred 264,761 (20,991) 243,770 263,992 315,865 579,857

Reinsurance and other recoveries

Undiscounted (10,452) (68,575) (79,028) (7,281) (37,931) (45,212)

Discount movement 1,035 2,677 3,712 683 (46,170) (45,487)

Impairment - 15,874 15,874 - - -

Total reinsurance and other recoveries (9,417) (50,024) (59,441) (6,598) (84,101) (90,699)

Total net claims i ncurred 255,344 (71,015) 184,329 257,394 231,764 489,158

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 29 for further information.

The total net claims incurred for the 2013 financial year includes claim payments and actuarial adjustments for claims incurred prior to 2013 and claims incurred for the 2013 accident year.



7. Administration expenses 2013 2012 $’000 $’000

Auditor’s remuneration 137 133 Depreciation of furniture, fittings, equipment and motor vehicles 1,036 1,155 Funding for clients’ risk management projects 1,074 1,523 (Profit)/loss on disposal of furniture, fittings, equipment and motor vehicles (67) 15 Operating lease expenditure 2,525 2,225 Professional services 883 1,558 Post employment benefits – defined contribution plans 1,618 1,464 Post employment benefits – defined benefit plan 78 50 Salaries, wages and long service leave 19,500 16,833Suppliers and other services Information services 2,564 2,578 Strategic risk expenses 1,583 3,160 Other 1,773 5,920 2,140 7,878Underwriting expenses Insurance fire service levy 1,418 1,326 Insurance other services 696 2,114 3,425 4,751

Total administration expenses 34,818 37,585

The remuneration paid or payable to the Victorian Auditor-General’s Office for auditing the VMIA’s financial report was $136,780 (2012: $132,944). No remuneration was paid to the Victorian Auditor-General’s Office for any other services.

8. Cash and cash equivalents

Current

Cash on hand 1 1

Cash at bank 32,581 31,193

Total cash and cash equivalents 32,582 31,194



9. Trade receivables2013$’000

2012$’000

Current

Reinsurance recoveries – financial 20,070 42,340

Premium receivables – non-financial (statutory) 308,794 282,036

Total trade receivables 328,864 324,376

Credit terms for reinsurance receivables vary. No interest is charged on reinsurance receivable invoices not paid within the credit terms. No reinsurance receivables were past due at 30 June 2013 (2012: $29,341,000).

Statutory receivables comprise insurance premium owing by various Victorian Government Departments and agencies.

The usual credit terms for insurance premium receivables is 30 days. No interest is charged on insurance premium invoices not paid within the credit terms. No insurance premium receivables were past due at 30 June 2013 (2012: Nil).

No provision for doubtful debts has been made as there is no risk of non-recovery of trade receivables.

10. Non-trade receivables

Current

Non-trade receivables – financial (contractual) 107 1,492

Goods and Services Taxation recoverable – non-financial (statutory) 1,018 1,490

Total non-trade receivables 1,125 2,982



11. Investments

Opening balancePurchases/ investments

Sales/ redemptions

Unrealised fair value gain/(loss) through income Closing balance

Fair value at 30 June 2013 $’000 $’000 $’000 $’000 $’000

Australian equities 138,832 70,558 (79,962) 23,509 152,937

Diversified fixed interest 194,044 152,898 (90,813) 1,371 257,500

Inflation linked bonds 203,629 116,731 (77,948) (3,502) 238,910

Infrastructure 29,845 42,021 (2,735) 6,366 75,497

International equities 350,594 331,330 (322,628) 85,982 445,278

Non-traditional strategies 86,015 25,715 (13,386) 9,803 108,147

Private equity 18,471 21,812 (1,495) 8,207 46,995

Property 117,454 53,255 (26,462) 1,702 145,949

Short term money market funds 268,886 600,056 (665,892) 121 203,171

Total fair value at 30 June 2013 1,407,770 1,414,376 (1,281,321) 133,559 1,674,384

Fair value at 30 June 2012

Australian equities 119,553 177,896 (147,395) (11,222) 138,832

Diversified fixed interest 189,470 39,810 (45,135) 9,899 194,044

Inflation linked bonds 202,322 85,822 (97,437) 12,922 203,629

Infrastructure 20,062 13,640 (4,748) 891 29,845

International equities 365,305 599,484 (608,709) (5,486) 350,594

Non-traditional strategies 66,704 48,354 (17,067) (11,976) 86,015

Private equity 7,358 10,677 (427) 863 18,471

Property 102,593 15,870 (4,520) 3,511 117,454

Short term money market funds 217,469 565,782 (514,365) - 268,886

Total fair value at 30 June 2012 1,290,836 1,557,335 (1,439,803) (598) 1,407,770

2013$’000

2012$’000

Current 193,549 283,329

Non-current 1,480,834 1,124,441

Total investments at fair value 1,674,384 1,407,770

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(u). Information on the financial risk management of the above investments is disclosed in Note 23.Purchases/investments does not agree to acquisitions of investments in Note 28 as such includes outstanding settlements of $14.217 million (2012: Nil).Sales/redemptions does not agree to proceeds on disposal of investments in Note 28 as such does not include realised gains on disposal of investments of $39.361 million (2012: realised loss of $1.005 million) and realised gains paid as interest to clients of $2.037 million (2012: $1.486 million).



12. Furniture, fittings, equipment and motor vehicles

Computer hardware, furniture, leasehold improvements, motor vehicles and office equipment at fair value:

Computer hardware Furniture

Leasehold improvements

Motor vehicles

Office equipment Total

$’000 $’000 $’000 $’000 $’000 $’000

Fair value at 30 June 2011 56 120 386 1,331 115 2,008

Cost 105 366 1,956 1,815 224 4,466

Accumulated depreciation (49) (246) (1,570) (484) (109) (2,458)

Additions - - 943 1,139 117 2,199

Disposals - - - (559) - (559)

Depreciation expense (19) (68) (612) (388) (68) (1,156)Fair value at 30 June 2012 37 52 717 1,523 164 2,492

Cost 99 367 2,899 2,017 339 5,721

Accumulated depreciation (62) (315) (2,182) (494) (175) (3,228)

Additions - 903 3,105 736 137 4,881

Disposals - - (127) (465) - (592)

Depreciation expense (19) (144) (404) (391) (78) (1,036)

Fair value at 30 June 2013 18 811 3,291 1,403 224 5,746

Cost 76 934 3,675 1,893 357 6,935

Accumulated depreciation (58) (123) (384) (490) (134) (1,189)

2012

Proceeds on disposal - - - 544 - 544

Loss on disposal - - - (15) - (15)

2013

Proceeds on disposal 15 9 - 508 - 532

Profit on disposal 15 9 - 43 - 67

Leasehold improvement additions during the financial year ended 30 June 2012 included a make good provision of $812,000 with no cash consideration.

Leasehold improvement disposals during the financial year ended 30 June 2013 of $127,000 comprised the partial reversal of the 2012 make good provision with no cash consideration.

All computer hardware, furniture, leasehold improvements, motor vehicles and office equipment are non-current assets.



13. Reinsurance and other recoveries – claims 2013$’000

2012$’000

Reinsurance and other recoveries in respect of claims liabilities (undiscounted) 286,685 260,626

Discount to present value (24,987) (22,383)

Total reinsurance and other recoveries – claims 261,698 238,243

Current 71,514 36,134

Non-current 190,184 202,109

Total reinsurance and other recoveries – claims 261,698 238,243

14. Trade payables

Current

Trade payables – financial (i) 8,890 5,183

Deposits held to meet future claim payments – financial (ii) 7,951 25,053

Total trade payables 16,841 30,236

(i) Certain of the VMIA’s reinsurance policies incept at 4pm on 30 June each year and accordingly such ceded premium written is raised as a financial liability at 30 June each year.

(ii) 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 underwriting 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 trade payables and of the interest bearing component refer to Note 23(a) and Note 23(b)(iii).

15. Non-trade payables

Current

Accruals and other payables – financial 5,319 5,610

Outstanding investment settlements – financial 15,057 840

Goods and Services Taxation – non-financial (statutory) 26,167 22,797

Stamp Duty – non-financial (statutory) 28,100 24,334

Total non-trade payables 74,643 53,581



16. Provisions

Annual leave

Conditional long service

leave

Unconditional long service

leave

Other employee

benefitsLeasehold restoration Total

$’000 $’000 $’000 $’000 $’000 $’000

Balance as at 30 June 2011 847 261 785 96 - 1,989

Charged/(credited) to income 231 127 216 17 812 1,403

Provision utilised during the year (102) - (132) - - (234)

Balance as at 30 June 2012 976 388 869 113 812 3,158

Charged/(credited) to income 169 142 82 47 - 440

Provision utilised during the year (156) - (109) (113) (372) (750)

Balance as at 30 June 2013 989 530 842 47 440 2,848

Current 989 - 842 47 - 1,878

Non-current - 530 - - 440 970

Total provisions 989 530 842 47 440 2,848

2013$’000

2012$’000

17. Lease incentive liability

Current 269 171

Non-current 1,321 1,319

Total lease incentive liability 1,590 1,490

During 2012 the VMIA 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 is being recognised over the lease term of seven years with the corresponding reduction in the lease incentive liability over time.

18. Gross unearned premium liability

Gross unearned premium liability at beginning of year 307,874 203,912

Deferral of premium on contracts written in current year 299,578 266,882

Earning of premium written in prior years (258,698) (162,920)

Total gross unearned premium liability at end of year 348,754 307,874

Current 295,564 261,423

Non-current 53,190 46,451

Total gross unearned premium liability at end of year 348,754 307,874

The majority of the VMIA’s insurance policies with its clients incept at 4pm on 30 June year and accordingly the majority of such gross premium written is unearned at 30 June each year.



19. Unexpired risks liability

The Liability Adequacy Test (LAT) (Note 2(g)) was undertaken by the independent actuary for all applicable insurance underwritten by the VMIA. The VMIA’s independent actuary has compared the net unearned premium liability at 30 June 2013 to the present value of expected future cash flows, discounted at the risk free rates of between 3.2% p.a. and 3.7% p.a. at 30 June 2013 (2012: between 2.8% p.a. and 3.0% p.a.), 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 2013;

(ii) Allowance for expenses to administer the 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 the

claims liabilities; and(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 $21.5 million (2012: $7.3 million) premium deficiency for the Domestic Building Insurance (DBI) portfolio, Nil (2012: $2.3 million) for the Liability portfolio, $54.1 million (2012: $76.2 million) for the Medical Indemnity portfolio and Nil (2012: $0.4 million) for the Other portfolio. In recognising the premium deficiency pertaining to the Liability, Medical Indemnity and Other portfolios, an unexpired risks liability of $54.1 million (2012: $78.9 million) is recognised in the Balance Sheet. The premium deficiency pertaining to the DBI portfolio has been written off against gross deferred acquisition costs.

(a) Calculation of premium deficiencies

2013DBI

$’000Liability

$’000

Medical Indemnity

$’000Property

$’000Other$’000

Net unearned premium liability 83,523 23,498 146,135 34,668 12,069

Net present value of future policy costs (58,700) (17,704) (165,117) (27,143) (9,211)

Risk margin (13,795) (5,098) (35,167) (4,349) (2,379)

Gross deferred acquisition costs recognised (32,526) - - - -

Gross premium deficiency (21,498) - (54,149) - -

Gross deferred acquisition costs written down 21,498 - - - -

Net premium deficiency - - (54,149) - -

Gross deferred acquisition costs recognised in Balance Sheet (i) 11,028 - - - -

2012

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

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

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

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

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

Gross deferred acquisition costs written down 7,313 - - -

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

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



(i) The decrease in gross deferred acquisition costs recognised in the Comprehensive Operating Statement during the financial year amounted to $2.5 million (2012: $5.7 million increase).

(ii) During the financial year ended 30 June 2012 the Liability, Property and Other lines of business were grouped under Other for the LAT.

(b) Unexpired risks liability

Current2013$’000

2012$’000

Unexpired risks liability at beginning of year 78,859 37,139

Movement in unexpired risks liability (credited)/charged to income (24,710) 41,720

Unexpired risks liability at end of year (ii) 54,149 78,859

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

20. Claims liabilities

(a) Gross claims liabilitiesUndiscounted central estimate 2,020,505 2,013,339

Discount to present value (487,604) (440,883)

Discounted value of central estimate 1,532,901 1,572,456

Claims handling costs 78,969 81,316

Risk margin 298,390 238,136

Total gross claims liabilities 1,910,260 1,891,908

Current 288,900 291,497

Non-current 1,621,360 1,600,411

Total gross claims liabilities 1,910,260 1,891,908

(b) Risk marginThe objective of the risk margin is to achieve a 75% probability that the claims liabilities will be sufficient. The 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 2011 1,503,531 (217,992) 1,285,539

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/(credited) to income 579,857 (90,699) 489,158

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


Effect of changes in economic assumptions (69,614) 3,264 (66,349)

Effect of changes in other assumptions (4,364) (46,591) (50,956)

Effect of claims moving one year closer to settlement 52,987 (6,697) 46,290

Claims incurred in current accident year 264,761 (9,417) 255,344

Claims incurred charged/(credited) to income 243,770 (59,441) 184,329

Net claim payments during the year (225,418) 35,986 (189,432)


The claims liabilities are valued by the VMIA’s independent external actuary.

Gross claims incurred in the 2012 financial year included $100.4 million pertaining to claims run-off liabilities transferred from the Department of Health with effect from 1 January 2012 (refer to Note 29).




(d) Net claims development tables

The following tables show the development of net undiscounted claims liabilities relative to the ultimate expected cost of claims for the 10 most recent accident years. As all claims for the Dust Diseases and Workers’ Compensation portfolio were incurred prior to these accident years, a modified table has been disclosed for that portfolio.

Domestic Building Insurance2010$’000

2011$’000

2012$’000

2013$’000

Total$’000

Original estimate of ultimate net claims incurred at end of accident year 1,608 31,679 28,783 33,730

One year later 1,608 31,323 34,447

Two years later 1,609 36,046

Three years later 1,728

Current estimate of ultimate net claims incurred 1,728 36,046 34,447 33,730 105,951

Cumulative payments (541) (8,865) (6,585) (701) (16,692)

Net claims liabilities – undiscounted 1,187 27,181 27,862 33,029 89,259

Unearned liabilities (62,923)

Total net claims liabilities – undiscounted 26,336

Discount to present value (3,254)

Claims handling expenses 1,846

Risk margin 5,858

Net claims liabilities at 30 June 2013 30,786

Dust Diseases and Workers’ CompensationTotal

$’000Four years previous 685,230

Three years previous 703,439

Two years previous 688,654

One year previous 682,802

Current estimate of ultimate net claims incurred 648,608

Cumulative payments (since 1999) (176,223)

Net claims liabilities – undiscounted 472,385



Risk margin 77,428




Liability2004$’000

2005$’000

2006$’000

2007$’000

2008$’000

2009$’000

2010$’000

2011$’000

2012$’000

2013$’000

Total$’000


One year later 22,401 8,524 11,411 12,042

Two years later 5,963 22,253 9,148 10,929

Three years later 7,339 3,324 21,361 5,830

Four years later 3,433 7,126 3,033 19,076

Five years later 4,584 3,052 6,122 2,601

Six years later 1,848 4,195 2,319 6,234

Seven years later 2,023 2,266 2,544

Eight years later 2,276 3,020

Nine years later 2,236Current estimate of ultimate net claims incurred 2,236 3,020 2,544 6,234 2,601 19,076 5,830 10,929 12,042 14,407 78,920

Cumulative payments (1,855) (2,106) (2,572) (6,405) (1,187) (16,711) (958) (1,006) (124) (35) (32,959)Net claims liabilities – undiscounted 381 914 (28) (171) 1,414 2,365 4,872 9,923 11,919 14,372 45,961

2003 and prior years 2,572




Risk margin 13,812




Medical Indemnity2004$’000

2005$’000

2006$’000

2007$’000

2008$’000

2009$’000

2010$’000

2011$’000

2012$’000

2013$’000

Total$’000

Original estimate of ultimate net claims incurred at end of accident year - - 125,320 126,340 103,208 125,003 148,717 186,932 197,860 200,994

One year later - 97,976 95,931 118,865 98,283 122,674 148,175 182,807 170,682

Two years later 99,420 105,257 99,868 112,915 123,112 130,463 144,714 166,419

Three years later 80,591 103,496 86,399 115,041 140,246 124,942 119,391

Four years later 83,274 105,267 83,314 122,865 133,844 134,301

Five years later 79,593 103,059 74,306 107,421 129,468

Six years later 65,568 103,260 74,479 109,593



Nine years later 63,310Current estimate of ultimate net claims incurred 63,310 96,220 68,338 109,593 129,468 134,301 119,391 166,419 170,682 200,994 1,258,717

Cumulative payments (40,552) (59,444) (39,776) (41,858) (25,244) (22,180) (6,996) (3,804) (396) (59) (240,310)Net claims liabilities – undiscounted 22,758 36,776 28,563 67,734 104,225 112,121 112,395 162,614 170,286 200,935 1,018,407

2003 and prior years 30,246

Total net claims liabilities – undiscounted 1,048,653



Risk margin 164,703

Net claims liabilities at 30 June 2013 1,036,489



Property2004$’000

2005$’000

2006$’000

2007$’000

2008$’000

2009$’000

2010$’000

2011$’000

2012$’000

2013$’000

Total$’000


One year later 39,408 14,099 145,466 45,686

Two years later 5,340 28,938 13,125 140,568


Four years later 3,844 36,140 4,715 24,278

Five years later 3,757 3,971 36,165 3,849

Six years later 5,284 3,757 3,772 35,942




Cumulative payments (4,707) (3,757) (4,752) (35,942) (3,849) (21,953) (11,625) (101,838) (14,573) (11,592) (214,588)Net claims liabilities – undiscounted - - (199) - - 2,325 488 38,730 31,113 (824) 71,633

2003 and prior years -




Risk margin 18,723




Other2004$’000

2005$’000

2006$’000

2007$’000

2008$’000

2009$’000

2010$’000

2011$’000

2012$’000

2013$’000

Total$’000


One year later 20,508 6,958 18,732 15,117

Two years later 4,503 36,333 5,554 18,920


Four years later 4,716 5,590 6,396 45,296

Five years later 2,440 4,493 5,298 5,199

Six years later 962 2,263 4,970 6,278




Cumulative payments (1,567) (1,815) (3,468) (4,367) (4,107) (18,290) (2,469) (14,054) (1,715) (582) (52,435)Net claims liabilities – undiscounted 73 694 439 1,911 1,092 27,006 3,842 4,866 13,402 12,819 66,142

2003 and prior years 136




Risk margin 17,865



21. Net worth

2013$’000

2012$’000

Contributed capital 162,371 145,771

Accumulated deficit (236,955) (480,957)

Net worth (74,584) (335,186)

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%.

The Net Worth of the VMIA at both 30 June 2012 and 2013 show a deficit position. However, the VMIA remains a going concern as it is supported by the State Government’s guarantee to pay amounts payable by the VMIA as per Note 24(a).

At 30 June 2013, the VMIA’s Funding Ratio of 95% was above the lower boundary of the funding level range of 85%. This confirms independent actuarial modelling that the VMIA is in a strong position to recover to a Funding Ratio of 100% over the next five years.

During the 2013 financial year the VMIA received a State Government capital contribution of $16.6 million (2012: $67.1 million). The capital contribution of $16.6 million (2012: $33.2 million) was in support of the insurance operations of the Medical Indemnity portfolio. During the 2012 financial year the VMIA received a capital contribution of $8.9 million in respect of the DBI portfolio, however no such capital contribution was received during the 2013 financial year. During the 2012 financial year the VMIA received a capital contribution of $25.0 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 29.

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

22. 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 (2012: $2.05 billion) excess of the State $50 million (2012: $50 million) retention, any one event, including the Government Rail Insurance Program Industrial Special Risks.

• Public and Product Liability – $700 million (2012: $700 million) excess of the State $50 million (2012: $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 (2012: $97.5 million) for property damage in excess of the State $2.5 million (2012: $2.5 million) retention, any one contract, and $295 million for Public Liability (2012: $295 million) in excess of the State $5 million (2012: $5 million) retention, any one occurrence.

• Government Rail Insurance Program – Public and Product Liability – $250 million (2012: $250 million) excess of the State $100,000 (2012: $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 (2012: $100 million), the VMIA has purchased Aggregate Stop Loss reinsurance of $100 million (2012: $100 million) in excess of an aggregate of $100 million (2012: $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% (2012: 42.5%) plus a further $50 million in excess of aggregate of $150 million on a proportional basis of 15% (2012: 15%).




23. 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 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.

Every six months 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 comparisons to market benchmarks on a monthly basis. The VMIA Board of Directors reviews 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 11.

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; and

(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 2013, 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 the balance sheet date.

(a) Classification of financial instruments The 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 (i.e., unobservable inputs).


(a) Classification of financial instruments (continued)

Level 1 Level 2 Level 3 Total2013 Note $’000 $’000 $’000 $’000

Financial assetsCash and cash equivalents 8 32,582 - - 32,582 Trade receivables 9 - 20,070 - 20,070 Non-trade receivables 10 - 107 - 107

Investments

Australian equities 11 29,469 123,459 9 152,937

Diversified fixed interest 11 698 237,307 19,495 257,500

Inflation linked bonds 11 - 238,910 - 238,910

Infrastructure 11 - 27,310 48,187 75,497

International equities 11 125,498 319,780 - 445,278

Non-traditional strategies 11 - 11,229 96,918 108,147

Private equity 11 - - 46,995 46,995

Property 11 - - 145,949 145,949

Short term money market funds 11 203,171 - - 203,171

Total financial assets 391,418 978,172 357,553 1,727,143

Financial liabilitiesTrade payables 14 - 16,841 - 16,841

Non-trade payables 15 20,376 - - 20,376

Total financial liabilities 20,376 16,841 - 37,217





Level 1 Level 2 Level 3 Total

2012 Note $’000 $’000 $’000 $’000

Financial assetsCash and cash equivalents 8 31,194 - - 31,194

Trade receivables 9 - 42,340 - 42,340

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

Investments

Australian equities 11 24,794 114,038 - 138,832

Diversified fixed interest 11 915 189,269 3,860 194,044

Inflation linked bonds 11 352 203,277 - 203,629

Infrastructure 11 - 21,766 8,079 29,845

International equities 11 107,764 242,388 442 350,594

Non-traditional strategies 11 - 72,372 13,643 86,015

Private equity 11 - 18,471 - 18,471

Property 11 - 117,454 - 117,454

Short term money market funds 11 268,886 - - 268,886

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 6,450 - - 6,450 Total financial liabilities 6,450 30,236 - 36,686

2013 2012Level 3 fair value hierarchy reconciliation of investments $’000 $’000

Balance at beginning of year 26,024 26,263 Transfers into Level 3 fair value hierarchy due to reassessment of inputs 329,300 - Acquisitions 904 30,581 Disposals - (25,819)Return of capital 56 (705)New issues and conversions (441) 478 Gains/(losses) on disposal credited/(charged) to income 1,710 (4,774)Balance at end of year 357,553 26,024



Transfers between fair value hierarchy categories An amount of $329 million (2012: Nil) was transferred from Level 2 to Level 3 during the financial year based on management’s reassessment of the significance of unobservable valuation inputs that had been used to derive the fair value of those investments. This reassessment arose from an in depth review during the 2013 financial year which was able to access new information about those investment valuations and confirm the absence of current observable inputs to adjust unit trust prices (for example, relating to market liquidity) or evidence current observable unit trust prices. Management’s review was also informed by expert advice from a number of independent sources, including the VMIA’s fund manager and custodian, as well as expert accounting advice. The in depth review identified unobservable valuation inputs that were significant to the fair valuations of those investments and as required by AASB 7 Financial Instruments: Disclosures the investments have been transferred to Level 3 within the fair value hierarchy.

Investments subject to estimation uncertaintyThe investments managed by the VFMC on behalf of the VMIA include unlisted financial instruments that are not traded in an active market. 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.

Where valuation techniques including discounted cash flows, analysis based on multiples, comparison with similar transactions and other appropriate valuation techniques have been employed in valuing investments, the valuations are inherently subject to estimation uncertainty. Given this inherent subjectivity, the underlying inputs and assumptions are reviewed on an ongoing basis to ensure that the valuations reflect the best estimates of the economic conditions at the balance sheet date. The value of these investments subject to estimation uncertainty is set out in the table below.

It is reasonably possible that the outcomes, within the next financial year, could be different from the inputs and assumptions used in the current valuation models 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 pooled investment vehicles, and as such the VMIA is not privy to the detailed inputs and assumptions used to value the underlying investment assets.

Investment classes subject to estimation uncertainty2013 $’000

2012 $’000

Australian equities 9 -

Diversified fixed interest 19,495 3,118

Infrastructure 48,187 17,198

Non-traditional strategies 96,918 68,399

Private equity 46,995 18,115

Property 145,949 117,454

Balance at end of year 357,553 224,284





(i) Diversified fixed interest Diversified 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 valuations of diversified fixed interest investments are based primarily 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.

Key inputs and assumptions which are subject to estimation uncertainty include the appropriate credit spread and other risk premium, risk free discount rate, future cash flows, identification of appropriate comparables and future economic and regulatory conditions.

(ii) Infrastructure Infrastructure investments comprise both domestic and international exposures to transport, social, energy and other infrastructure assets through unlisted pooled vehicles and unlisted trusts.

The valuations of unlisted infrastructure investments are based primarily on the discounted cash flow methodology. Key inputs and assumptions which are subject to estimation uncertainty include the choice of risk free discount rates, in the main ranging between 8.8% p.a. to 11.3% p.a. (2012: 9.2% p.a. to 10.3% p.a.), risk premium, asset utilisation rates (for example, this includes airline passenger volumes and mix of passangers at a foreign airport, and also includes assuming the renewal of existing gas transmission contracts upon their expiry at volumes and pricing assumed in the forecast for another investment), capital expenditure and operating cost forecasts and other estimated future cash flows dependent on the longer term general economic forecasts and the forecast performance of applicable underlying assets (including for example, gearing level forecasts, expected foreign taxation rates, long term retail price indices, counterparty risks and group taxation relief).

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

Insurance investments include an unlisted trust with exposure to a portfolio of US life insurance policies.

The valuation of insurance investments is based on the discounted cash flow methodology. The portfolio of US life insurance policies is valued by an independent valuer 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 16.4% p.a. (2012: 18.9% p.a.), life expectancy estimates obtained from qualified providers and expected premium payments based on the back solving premiums optimisation method.

(2) Fixed interest investmentsNon-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 valuations of non-traditional fixed interest investments are based primarily 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.

Key inputs and assumptions which are subject to estimation uncertainty include the appropriate credit spread and other risk premium, risk free discount rate, future cash flows, identification of appropriate comparables and future economic and regulatory conditions.



(iv) Private equityPrivate equity investments comprise both domestic and international exposures to venture capital, buyout, special situations and expansion capital sectors. The investments include externally managed unlisted pooled vehicles and trusts.

The valuations of unlisted private equity investments are based primarily on multiples of earnings, discounted cash flow, market equivalents and other market accepted methodologies. Key inputs and assumptions which are subject to estimation uncertainty include the identification of appropriate comparables, estimated future profits, risk free discount rate, risk premium, estimated future cash flows and future economic and regulatory conditions.

(v) PropertyProperty investments comprise externally managed unlisted property trusts with exposure to domestic and international commercial, industrial, retail and the development property market.

The valuations of unlisted property investments are based primarily on discounted cash flow, capitalisation and direct comparison methodologies. Key inputs and assumptions which are subject to estimation uncertainty include the identification of appropriate comparables, estimated future profits, risk free discount rate, risk premium, estimated future cash flows and future economic and regulatory conditions.

(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 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% (2012: 15%) increase or decrease in markets based on exposures at the balance sheet date and assumes that the change takes place at the beginning of the financial year and remains constant to the balance sheet date. This 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 prices2013$’000

2012$’000

Listed investment prices

Decrease of 15% (23,480) (24,537)

Increase of 15% 23,480 24,537

Unlisted investments prices

Decrease of 15% (137,386) (88,546)

Increase of 15% 137,386 88,546




(b) Market risk (continued)

(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.

In accordance with AASB 7 Financial Instruments: Disclosures, 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.

2013

Investments in foreign currency

$’000

Forward exchange contract cover

$’000

Net exposure

$’000

British Pound 15,234 (40,204) (24,970)

Euro 22,459 (73,117) (50,658)

Japanese Yen 12,764 (31,197) (18,433)

US Dollar 619,337 (512,034) 107,303

Other 21,966 (46,012) (24,046)

Total 691,760 (702,564) (10,804)

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



(ii) Foreign currency risk (continued)

The sensitivity analysis below has been determined based on the exposure to foreign exchange rates at the balance sheet date and the 10% (2012: 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 exchange rates2013$’000

2012$’000

Increase of 10% 982 1,375

Decrease of 10% (1,201) (1,680)

(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.

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 claim liabilities will be offset by increases or decreases in the fair value of interest bearing investments.




(iii) Interest rate risk (continued)

A summary of the VMIA’s exposure to interest rate risk on financial instruments follows:

Variable rate

Fixed interest rate period to maturity

Non interest bearing Total

2013 Note $’000

Under 1 year$’000

1-5 years$’000

Over 5 years

$’000 $’000 $’000

Financial assets

Cash and cash equivalents 8 32,582 - - - - 32,582

Trade receivables 9 - - - - 20,070 20,070

Non-trade receivables 10 - - - - 107 107

Debt securities 257,165 11,765 89,068 63,947 - 421,945

Short term money market funds 11 24,361 178,810 - - - 203,171

Interest rate derivatives 334,170 - - - 140 334,310

Financial assets exposed to interest rate risk 648,278 190,575 89,068 63,947 20,317 1,012,185


Trade payables 14 7,951 - - - 8,890 16,841

Non-trade payables 15 - - - - 20,376 20,376

Interest rate derivatives 335,983 - - - 228 336,211

Financial liabilities exposed to interest rate risk 343,934 - - - 29,494 373,428

Net exposure 304,344 190,575 89,068 63,947 (9,177) 638,757

2012

Financial assets

Cash and cash equivalents 8 31,194 - - - - 31,194

Trade receivables 9 - - - - 42,340 42,340

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

Debt securities 228,182 6,448 85,296 90,134 - 410,060

Short term money market funds 11 35,321 233,565 - - - 268,886

Interest rate derivatives 299,882 - - - - 299,882

Financial assets exposed to interest rate risk 594,579 240,013 85,296 90,134 43,832 1,053,854


Trade payables 14 25,053 - - - 5,183 30,236

Non-trade payables 15 - - - - 6,450 6,450

Interest rate derivatives 298,682 2,323 - - - 301,005

Financial liabilities exposed to interest rate risk 323,735 2,323 - - 11,633 337,691

Net exposure 270,844 237,690 85,296 90,134 32,199 716,163





(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% (2012: 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.

Impact on comprehensive result and equity from a movement in Australian interest rates

2013 $’000

2012$’000

Increase of 0.5% (15,369) (12,978)

Decrease of 0.5% 15,377 12,985

(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 23(a).

The following analysis excludes trade receivables and non-trade receivables in respect of amounts due from other Government entities. Refer to Note 9 for details of trade receivables that 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 amongst 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:

2013 NoteAAA

$’000AA+/AA-

$’000A+/A- $’000

BBB+/BBB- $’000

Not rated $’000

Total $’000

Cash and cash equivalents (i) 8 - 32,581 - - - 32,581

Trade receivables (ii) 9 - 2,290 17,780 - - 20,070

Non-trade receivables 10 - - - - 107 107

Debt securities 201,020 84,534 32,284 92,965 11,142 421,945

Net exposure 201,020 119,405 50,064 92,965 11,249 474,703

2012

Cash and cash equivalents (i) 8 - 31,193 - - - 31,193

Trade receivables (ii) 9 - 14,389 27,951 - - 42,340

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

Debt securities 138,097 107,038 50,410 98,063 16,452 410,060

Net exposure 138,097 152,620 78,361 98,063 17,944 485,085

(i) Cash and cash equivalents in the above analysis exclude cash on hand.

(ii) Statutory receivables of insurance premium from various Victorian Government agencies have been excluded in the above analysis as the credit risk is minimal.

(iii) The above analysis excludes short term money market funds with the Treasury Corporation of Victoria for which the credit risk is minimal.

(d) Liquidity riskLiquidity 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 trade payables of $8.0 million (2012: $25.1 million) and therefore no maturity analysis is provided as they are expected to be expunged as claims are paid. These interest bearing trade payables, being amounts advanced by the Department of Health/Department of Human Services plus interest credited less claims paid to date, approximate their fair value.

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.

There are no special terms or conditions affecting the nature and timing of the financial instruments not otherwise disclosed in this financial report.




24. 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 2013 (2012: Nil).

(c) Capital commitmentsThe VMIA has uncalled capital commitments in respect of investments totalling $66.744 million as at 30 June 2013 (2012: $25.436 million).

(d) Operating lease commitments

Commitments in relation to operating leases contracted for at 30 June but not recognised as liabilities are:

2013$’000

2012$’000

Not later than one year 2,019 2,134 Later than one year but not later than five years 7,717 7,746Later than five years 1,862 3,778

11,598 13,658

Operating lease commitments relate to office premises and office equipment. The VMIA does not have the option to purchase leased assets at the expiry of the lease periods.

(e) ContingenciesThe VMIA has no known contingent assets or contingent liabilities (2012: Nil).



25. 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 administration expenses in Note 7.

The name, details and amounts expensed in relation to the employee superannuation funds are as follows:

2013$’000

2012$’000

Defined benefit fund:

ESSSuper 78 50

Defined contribution funds:

VicSuper 783 764

AustralianSuper 200 180

Other 635 520

1,696 1,514

There were no superannuation contributions outstanding at 30 June 2013 (2012: Nil).



26. Responsible personsIn accordance with the Ministerial Directions issued by the Minister for Finance under the Financial Management Act 1994, the following disclosure is made with regard to 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:

Governing Board: J. Peberdy (Chairman), B. Benger, J. Fitzpatrick, I. Gaudion, D. Kearsley, J. McNeil, S. Roberts (tenure ended 30 June 2013) and T. Ryan (appointed 22 August 2012).

Accountable Officer: W. Hutcheon (Chief Executive Officer).

(b) Remuneration of responsible personsThe number of responsible persons during the financial year is shown below in their relevant total income bands:

2013 2012

Directors$0 – $10,000 - 1$10,001 – $20,000 - 1$20,001 – $30,000 1 1$30,001 – $40,000 6 4$40,001 – $50,000 - 1$60,001 – $70,000 - 1$80,001 – $90,000 1 -Accountable Officers$100,001 – $110,000 - 1$150,001 – $160,000 - 1$420,001 – $430,000 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 $727,973 (2012: $558,048).



(c) Other transactions of responsible persons and their related entitiesDuring the 2013 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 under the Community Services Organisations’ portfolio. The VMIA did not collect any premium from or pay any claims to Create Foundation.

ANZIIF

2013$

2012$

Education and training services expenditure 83,199 86,127

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. VMIA also remits to the Country Fire Authority the Fire Service Levy statutory contributions.

Country Fire Authority

Gross premium written 3,666,718 3,708,357Gross claims paid 12,904,131 8,655,465Fire Service Levy statutory contributions paid 476,636 820,114

Mr McNeil is a Director of the Austin Health and Orygen Youth Health. The VMIA provides insurance to the Austin Health and Orygen Youth Health on normal commercial terms and conditions.

Austin Health

Gross premium written 5,827,886 3,954,836Gross claims paid 1,247,598 1,589,498

Orygen Youth Health

Gross premium written 87,707 88,355Gross claims paid - -

Ms Ryan is a Director of VicForests. The VMIA provides insurance to VicForests on normal commercial terms and conditions. Ms Ryan is also a Director of Good Shepherd Youth and Family Services, Good Shepherd Microfinance and Fitted for Work for which the VMIA provides insurance under the Community Services Organisations’ portfolio. The VMIA did not collect any premium from or pay any claims to these three entities.

VicForests

Gross premium written 298,837 265,439Gross claims paid - -



(d) Remuneration of executive officers

The number of officers with executive responsibility, other than the Chief Executive Officer [refer to Note 26(b)], 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 2013 2012 2013 2012

$0 – $100,000 - 2 1 2

$120,000 – $129,999 - 1 - 2

$130,000 – $139,999 1 - 1 -

$140,000 – $149,999 - 1 - -

$150,000 – $159,999 - - - 1

$160,000 – $169,999 - - 1 1

$170,000 – $179,999 - 1 1 1

$180,000 – $189,999 2 1 - 1

$190,000 – $199,999 - 1 - -

$200,000 – $209,999 1 - - -

$210,000 – $219,999 - 1 2 -

$230,000 – $239,999 - - 1 -

$240,000 – $249,999 1 - - -

$250,000 – $259,999 1 - - 1

$260,000 – $269,999 1 - 1 -

$270,000 – $279,999 1 - - -

$280,000 – $289,999 - - 1 1

$290,000 – $299,999 - 1 - -

$330,000 – $339,999 1 1 - -

Total number 9 10 9 10

Total annualised employee equivalent (AAE) 7.3 7.2 7.3 7.2

Total amount 2,079,661 1,753,950 1,786,597 1,559,487

During the 2013 financial year there were nine executive officers employed at the VMIA. Three executive officers have ceased employment and one commenced employment part way through the financial year. As a result, the base remuneration of one executive officer was less than the $100,000 reportable threshold.

(e) Payments to contract personnelDuring the 2013 financial year the VMIA did not contract any personnel that were charged with significant management responsibilities that requires disclosure in accordance with FRD 21B Disclosure of Responsible Persons, Executive Officers and Other Personnel (Contractors with Significant Management Responsibilities).



27. Reconciliation of net cash inflow from operating activities

2013$’000

2012$’000

Comprehensive result 244,002 (319,919)

(Profit)/loss on disposal of furniture, fittings, equipment and motor vehicles (67) 15

Depreciation of furniture, fittings, equipment and motor vehicles 1,036 1,155

Reversal of prior year make good provision 127 -

Realised (gain)/loss on disposal of investments (39,361) 1,005

Unrealised (gain)/loss on investments (133,559) 598

Interest paid to clients (2,037) (1,486)

Change in fair value of investments as a result of outstanding settlements (14,217) -

Changes in operating assets and liabilities:Increase in trade receivables (4,488) (110,139)

Decrease/(increase) in non-trade receivables 1,857 (883)

Increase in prepaid expenses (203) (53)

Decrease/(increase) in gross deferred acquisition costs 2,485 (5,734)

Increase in reinsurance and other recoveries (30,977) (24,049)

Decrease in trade payables (13,395) (9,451)

Increase/(decrease) in non-trade payables 21,062 (4,532)

(Decrease)/increase in provisions (310) 358

Increase in lease incentive liability 100 1,490

Increase in gross insurance liabilities 34,522 534,059

Net cash inflow from operating activities 66,577 62,434



28. Reconciliation of movements in investments

2013$’000

2012$’000

Movement in investments 266,614 116,934

(Increase)/decrease in fair value of investments (189,174) 117

Movement in investments arising from cash flows 77,440 117,051

Comprising:

Acquisition of investments 1,400,159 1,557,335

Proceeds on disposal of investments (1,322,719) (1,440,284)

77,440 117,051

The increase (2012: decrease) in the fair value of investments of $189.174 million (2012: decrease of $0.117 million) comprises realised and unrealised gains on investments and interest paid to clients of $174.957 million (2012: loss of $0.117 million) and the increase in outstanding settlements pertaining to investments of $14.217 million (2012: Nil).

29. 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 accept 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 with effect from 1 January 2012 was $100.4 million. On 22 June 2012, the VMIA received a capital contribution of $25.0 million from the State Government to support the funding position of the VMIA as an outcome of accepting these claims run-off liabilities.

30. 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 2013 and the financial position of the Victorian Managed Insurance Authority at 30 June 2013.

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 30 August 2013.


Warren Hutcheon Victor Martindale Chief Executive Officer Chief Financial Officer (Accountable Officer) (Chief Finance and Accounting Officer)

MELBOURNE 30 AUGUST 2013

VMIA Financial ReportFor the financial year ended 30 June 2013


| VMIA Annual Report 2013

Contents Page

Financial StatementsComprehensive Operating Statement 96Balance Sheet 96Statement of Changes in Equity 97Cash Flow Statement 98

Notes to the Financial StatementsNote 1 Summary of significant accounting policies 99Note 2 Revenue 102Note 3 Net claims paid 102Note 4 Claims provision 102Note 5 Operating expenses 102Note 6 Cash and cash equivalents 103Note 7 Payables and provisions 103Note 8 Contingent liabilities 103Note 9 Auditor’s remuneration 103Note 10 Related parties 104Note 11 Cash flow information 105Note 12 Financial instruments 105

Accountable Officer’s and Chief Finance and Accounting Officer’s Declaration 108Independent Auditor’s Report 109

Domestic Building (HIH) Indemnity Fund Financial Report For the financial year ended 30 June 2013


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) Establish 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; or

• 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 2013 there were 2 open claims (2012: 4).



Notes

2013$

2012$

Income

Revenue 2 113,669 221,823

Expenses

Net claims paid 3 (503,536) (1,238,053)

Decrease in claims provision 4 1,000 1,601,000

Operating expenses 5 (99,353) (300,541)

Comprehensive result (488,220) 284,229

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

Balance SheetAs at 30 June 2013

Notes

2013$

2012$

Financial assets

Cash and cash equivalents 6 2,859,853 3,368,209

Receivables 3,532 5,176

Total financial assets 2,863,385 3,373,385

Total assets 2,863,385 3,373,385

Liabilities

Payables and provisions 7 713,254 735,034

Total liabilities 713,254 735,034

Net assets 2,150,131 2,638,351

Equity

Accumulated surplus 2,150,131 2,638,351

Total equity 2,150,131 2,638,351

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 2013


2013

Equity at1 July 2012

$

Total Comprehensive

result$

Equity as at30 June 2013

$

Accumulated surplus 2,638,351 (488,220) 2,150,131

2012

Equity at1 July 2011

$

Total Comprehensive

result$

Equity as at30 June 2012

$

Accumulated surplus 2,354,122 284,229 2,638,351

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 2013


Notes

2013$

2012$

Cash flows from operating activities

Building levies received 16,473 46,126

Claims paid (542,168) (1,330,537)

Other operating payments (122,663) (349,785)

Net recoveries - 8,554

GST recovered 43,201 97,297

Interest received 96,801 172,619

Net cash outflow from operating activities 11 (508,356) (1,355,726)

Cash and cash equivalents at beginning of year 3,368,209 4,723,935

Cash and cash equivalents at end of year 6 2,859,853 3,368,209

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 2013


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 28 August 2013.

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.

The functional currency of the Fund is the Australian Dollar.

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 year ended 30 June 2013 and the comparative information presented for the year ended 30 June 2012.

Despite the operating loss of $488,220 and the negative operating cash flows of $508,356 for the period, management has concluded that the going concern assumption of the Fund remains appropriate based on having sufficient cash and cash equivalents to cover remaining reported and anticipated future claim payments. Management also holds the expectation that the Fund will operate for at least the next 12 months.

c) Objective of the FundThe Fund was established under the House Contracts Guarantee (HIH) Act 2001 to deliver 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 10, 161 Collins Street, Melbourne, VIC 3000.



d) Contingent liabilities

Claims handling costsPrior to 2012 the costs expected to be incurred in future periods to manage the settlement of claims were reported as contingent liabilities. Since 2012 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% (2012: 0%) and a discount rate of 0% (2012: 0%) as the impact of discounting is not considered to be material. 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 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 Taxation (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 received and an estimation of outstanding receivable from the Building Commission as at 30 June 2013.

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 may be applicable to the Fund but are not mandatory for the year ended 30 June 2013. The Fund 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 2015. 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. Disclosure for fair value measurements using unobservable inputs are relatively detailed compared to disclosure for fair value measurements using observable inputs. Consequently, the standard may increase the disclosures required assets measured using depreciated replacement cost.

• AASB 1053 Application of Tiers of Australian Accounting Standards which is 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. The Victorian Government is currently considering the impacts of Reduced Disclosure Requirements (RDRs) for certain public sector entities and has not decided if RDRs will be implemented in the Victorian public sector.

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 minimal impact on the Fund’s Financial Report. Consequently, these Australian Accounting Standards and Interpretations have not been specifically identified above.



2. Revenue

Notes

2013$

2012$

Operating activitiesBuilding levies 16,868 49,204Interest revenue 96,801 172,619Total revenue 113,669 221,823

3. Net claims paidClaims paid 503,536 1,238,053Net claims paid 503,536 1,238,053

4. Claims provisionOpening claims provision 674,000 2,275,000Net claim payments 3 (503,536) (1,238,053)Change in claims estimates 502,536 (362,947)

Movement in claims provision (1,000) (1,601,000)

Closing claims provision 7 673,000 674,000

5. Operating expensesVMIA management fee 87,618 235,210Other operating expenses 11,735 65,331Total operating expenses 99,353 300,541



6. Cash and cash equivalents

2013$

2012$

Current asset

Cash at bank 2,859,853 3,368,209

7. Payables and provisionsCurrent liabilitiesPayables 40,254 61,034Claims provision* 673,000 674,000

713,254 735,034

* As at 30 June 2013 there were 2 open claims (2012: 4).

8. Contingent liabilitiesNon-currentPayable to State Government* 2,150,131 2,638,351

* 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 2013.

9. Auditor’s remuneration

Audit of the Fund’s financial statements – Victorian Auditor General’s Office 25,654 25,300



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), I. Gaudion, B. Benger, J. Fitzpatrick, D. Kearsley, J. McNeil, S. Roberts (tenure ended 30 June 2013) and T. Ryan (appointed 22 August 2012).

Accountable Officer: W. Hutcheon (Chief Executive Officer).

(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 $87,618, which includes the external audit fees of $25,654 (2012: $235,210 and $25,300 external audit fee). 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 $40,254 (2012: $35,734).



11. Cash flow information

2013$

2012$

Reconciliation of cash flows from operating activities to the comprehensive result for the financial year:Comprehensive result (488,220) 284,229Changes in assets and liabilities

Decrease in receivables 1,644 10,289

Decrease in payables and provisions (21,780) (1,650,244)

(20,136) (1,639,955)

Net cash inflow/(outflow) from operating activities (508,356) (1,355,726)

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

a) 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 and estimation of outstanding receivables are carried at their nominal amounts.

Receivables are expected to be collected within 30 days.

b) Financial liabilities

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); and

(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

2013$

2012$

2013$

2012$

Financial assetsCash and cash equivalents 2,859,853 3,368,209 - -

Receivables - - 3,532 5,176

Financial liabilities at amortised cost

Payables - - 40,254 61,034

Sensitivity disclosure analysisInterest rate risk is insignificant as 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.

Impact on comprehensive result and equity from a movement in Australian interest rates2013

$2012

$

Increase of 0.5% 14,299 16,841

Decrease of 0.5% (14,299) (16,841)



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 2013 and the financial position of the Fund as at 30 June 2013.

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 28 August 2013.


Warren Hutcheon Victor Martindale Chief Executive Officer Chief Financial Officer (Accountable Officer) (Chief Finance and Accounting Officer)

MELBOURNE 28 AUGUST 2013


| VMIA Annual Report 2013

Victorian Managed Insurance AuthorityLevel 10, 161 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 McNeilTherese Ryan

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 2013


This Annual Report is printed on Impact 100% recycled paper. It is FSC certified, acid free and carbon neutral. It is manufactured using a chlorine free process and has ISO 14001 EMS certification.

www.vmia.vic.gov.au

vmia annual report 2013 - parliament of victoria · po box 18409 collins st east victoria 8003 p:...

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