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SOUTH AUSTRALIAN GOVERNMENT CAPTIVE INSURANCE CORPORATION

 

 

FUNCTIONAL RESPONSIBILITY AND STRUCTURE

 

Establishment

 

The South Australian Government Captive Insurance Corporation (SAICORP) is a subsidiary corporation of the Treasurer, established pursuant to Regulations under the Public Corporations Act 1993, and provides a formal structure for administration of the Government’s insurance and risk management arrangements.  SAICORP is governed by a Board, which comprises of five members, who are appointed by the Treasurer, as responsible Minister.

 

All government departments and statutory authorities, unless exempted by the Treasurer, are insured with SAICORP, with an Agency Agreement setting out the cover provided and the level of excess (deductible) required to be met by the agencies.  A premium is charged to agencies based on risk factors and risk management practices in place.

 

Functions

 

The main functions of SAICORP are:

·                     Undertake and carry on in South Australia and elsewhere the business of insurers, re-insurers and co-insurers of all or any risks of the Crown.

·                     Provide advice on issues relating to the insurance and risk management of the Government.

·                     Manage the Government’s insurance and risk management arrangements.

·                     Carry out any other function conferred on the subsidiary by the Treasurer.

 

The Corporation is subject to the control and direction of the Treasurer, as its Minister.

 

Structure

 

As stated in Note 32, the Government Financing Authority (Insurance) Amendment Act 2006, which expands the functions of the South Australian Government Financing Authority (SAFA) to act as a captive insurer of the Crown came into operation on 1 July 2006.  As a consequence of the Public Corporations (Dissolution of South Australian Government Captive Insurance Corporation) Regulations 2006 promulgated under the Public Corporations Act 1993, SAICORP was dissolved on 1 July 2006 and its assets, rights and liabilities transferred to SAFA.

 

An administrative amalgamation of the SAFA and SAICORP branches of the Department of Treasury and Finance was approved by the Under Treasurer in December 2005.  The new SAFA/SAICORP branch was responsible for supporting both the SAFA Advisory Board and the SAICORP Board until the dissolution of SAICORP occurred on 1 July 2006.

 

The structure of SAICORP at 30 June 2006 is illustrated in the following organisation chart.

 

The Legal Unit, comprising officers out-posted from the Crown Solicitor’s Office, enables the in-house management of large medical malpractice and other litigious claims.

 

South Australian Government Insurance and Risk Management Fund

 

The South Australian Government Insurance and Risk Management (SAGIRM) Fund is a Special Deposit Account operated by SAICORP to record all activities associated with the operation of the Government’s insurance and risk management arrangements.

 

The SAGIRM Fund has two sections:

 

Section 1 — records transactions associated with the operation of SAICORP since its inception. Costs such as premiums for reinsurance; insurable losses and claims arising since 1 July 1994; and administration expenses are met from the premium contributions from agencies and other income derived from activities, for example, investment earnings.

 

Section 2 — records the payment of losses and claims arising before 1 July 1994 and the cost of activities which fall outside the insurance covers provided under Section 1.  This section is administered by SAICORP and is funded by appropriation from the Consolidated Account to cover the cost of payments made.  As a result Section 2 has a substantial unfunded liability ($69 million) as at balance date.

 

 

AUDIT MANDATE AND COVERAGE

 

Audit Authority

 

Audit of the Financial Report

 

Subsection 13(3) of the Schedule to the Public Corporations Act 1993 and subsection 31(1)(b) of the Public Finance and Audit Act 1987, provide that the Auditor-General may, at any time, and must in respect of each financial year, audit the accounts and financial statements of SAICORP.

 

Assessment of Controls

 

Subsection 36(1)(a)(iii) of the Public Finance and Audit Act 1987 provides for the Auditor-General to assess the controls exercised by SAICORP in relation to the receipt, expenditure and investment of money, the acquisition and disposal of property and the incurring of liabilities.

 

This assessment also considers whether those controls are consistent with the prescribed elements of the Financial Management Framework as required by Treasurer’s Instruction 2 Financial Management Policies.

 

Scope of Audit

 

The audit program covered major financial systems and was directed primarily to obtaining sufficient evidence to enable an audit opinion to be formed with respect to the financial statements and internal controls.

 

During 2005-06, specific areas of audit attention included:

 

·                     corporate governance arrangements

·                     premium revenue - premium setting, invoicing, receipting and receivables

·                     outstanding claims management and settlement

·                     investment monitoring

·                     financial accounting

·                     information technology.

 

 

AUDIT FINDINGS AND COMMENTS

 

Audit Opinions

 

Audit of the Financial Report

 

In my opinion, the financial report presents fairly in accordance with the Treasurer’s Instructions promulgated under the provisions of the Public Finance and Audit Act 1987, applicable Accounting Standards and other mandatory professional reporting requirements in Australia, the financial position of SAICORP as at 30 June 2006, the results of its operations and its cash flows for the year then ended.

Assessment of Controls

 

In my opinion, the controls exercised by SAICORP in relation to the receipt, expenditure and investment of money, the acquisition and disposal of property and the incurring of liabilities, except for the matter raised in relation to Policy and Procedure Manual, as outlined under ‘Audit Communications to Management’, are sufficient to provide reasonable assurance that the financial transactions of SAICORP have been conducted properly and in accordance with law.

 

Audit Communications to Management

 

Matters arising during the course of the audit were detailed in a management letter to the General Manager, SAICORP.  Response to the management letter was generally considered to be satisfactory.  The major matter raised with SAICORP and the related response is contained herein.

 

Policy and Procedure Manual

 

For a number of years I have reported that SAICORP has been preparing a single Policy and Procedure Manual.  In 2004-05 the manual was still to be finalised.

 

A follow-up of this matter in 2005-06 revealed that, given the proposed amalgamation of SAICORP and SAFA,  a decision had been made that SAICORP’s policies and procedures should form part of SAFA Policy and Procedure Manuals.

 

Response

 

In a response dated 21 July 2006, SAFA advised that interim policies and delegations have been established for the insurance function of SAFA and approved by the Acting Treasurer.  These will be integrated into SAFA’s Policy Manual, which is reviewed on an annual basis and submitted to the Treasurer for approval.

 

 

INTERPRETATION AND ANALYSIS OF FINANCIAL REPORT (SECTION 1)

 

The implementation of Australian equivalents to International Financial Report Standards (AIFRS) occurred in 2005-06.  Data for both 2005-06 and 2004-05 has been prepared using AIFRS.  Earlier data has not.  Note 3 to the financial statements sets out adjustments arising from the adoption of AIFRS.

 

Highlights of Financial Report

 

2006

2005

Percentage

 

$’million

$’million

Change

UNDERWRITING RESULT

 

 

 

Premium revenue

31.0

30.6

1

Outwards reinsurance expense

(7.9)

(9.4)

(16)

Net claims incurred

(29.7)

(30.9)

(4)

Net underwriting expenses

(0.2)

(0.3)

(33)

Underwriting Result

(6.8)

(10.0)

(32)

INVESTMENT RESULT

 

 

 

Interest and distributions

13.5

10.8

25

Unrealised gains

19.3

13.5

43

Investment Revenue

32.8

24.3

35

General and administration expense

(1.0)

(0.9)

11

Operating Profit Before Income Tax Equivalents

25.0

13.4

87

Income tax equivalent expense

(7.5)

(3.9)

92

Operating Profit After Income Tax Equivalents

17.5

9.5

84

ASSETS

 

 

 

Current assets

101.9

81.7

25

Non-current assets

155.3

133.1

17

Total Assets

257.2

214.8

20

LIABILITIES

 

 

 

Current liabilities

26.8

20.6

30

Non-current liabilities

140.3

121.6

15

Total Liabilities

167.1

142.2

18

EQUITY

90.2

72.6

24

Income Statement

 

Net Premium Revenue

 

Net premium revenue is premium revenue less the cost of the outwards reinsurance program (catastrophe reinsurance program).  A structural analysis of premium revenues for the seven years to 2006 is presented in the following chart.  The decline in Outwards reinsurance expense since 2004 is in line with the cost of reinsurance in the global market and reinsurance of Forestry SA standing timber no longer being required.

 

 

Net Claims Incurred

 

The claims expense amount reflects the movement of the outstanding claims liabilities and cash payments made during the year.

 

The net claims incurred is made up of a combination of an estimate of claim costs relating to risks borne in the year of report, and an adjustment relating to the reassessment of claim costs for risks borne in previous years.  The following chart shows that net claims incurred decreased slightly in 2006.  This is discussed below in ‘Outstanding Claims’.

 

 

Investment Revenue

 

The performance on investments by SAICORP’s external fund managers over the past two years is as follows:

 

 

                  2006

                 2005

 

Balance

Investment

Balance

Investment

Investment Class

at 30.06.06

Performance

at 30.06.05

Performance

 

$’000

Percent p.a.

$’000

Percent p.a.

Cash Management Fund

1 460

5.8

11 741

5.7

Fixed Interest Securities

58 339

2.9

51 841

8.0

Inflation Linked Bond

11 894

6.9

9 256

11.8

Australian Equities

78 233

20.4

71 593

27.0

International Equities - Hedged

15 669

17.6

10 753

13.2

International Equities - Unhedged

37 166

20.2

30 016

0.3

Listed Property Trust

24 065

17.9

20 362

18.9

As a consequence of the above investment results, SAICORP reported investment revenue of $32.7 million in 2005-06 of which unrealised market value movements contributed $19.3 million.  The impact that returns on individual investment classes have had on investment revenues over the previous three years are as follows:

 

 

The chart shows that investment revenues were significantly influenced by the performance of Australian and international equity markets.

 

Further discussion on investments can be found later under the heading ‘Investments’.

 

Operating Profit Before Income Tax Equivalents

 

SAICORP’s operating profit before income tax equivalents was $25 million, an increase of $11.6 million over the previous year.  This increase is due to increased revenue from investments (primarily the result of investment market value movements) and an improved underwriting result (primarily the result of an increase in Net Premium Revenue).

 

The operating profit before income tax equivalents of SAICORP has fluctuated over the past seven years as demonstrated in the following chart.  This has been heavily influenced by the claims expense and investment revenues in any given year.

 

Segment Reporting

 

Note 4 to the financial statements describes the types of general insurance underwritten by SAICORP.  The note also reports the underwriting result by the major lines of insurance business.

 

Balance Sheet

 

Outstanding Claims

 

SAICORP’s liabilities as recorded in the Balance Sheet are dominated by the provision for outstanding claims.  SAICORP uses case estimation for calculating the liability for reported claims because of the variability inherent in claims for all classes of business.  Independent actuaries are engaged to review the overall methodology used to calculate the outstanding claims liability in accordance with Accounting Standards, as it is an inherently subjective number.  The recommendations of the actuary were used in the preparation of the financial statements.

 

The outstanding claims liability of $158.5 million as at 30 June 2006 was made up as follows:

 

 

2006

2005

 

$’000

$’000

Reported claims by case estimation

78 917

68 801

IBNR claims (including IBNER claims)

40 220

32 411

Adjustment for present value allowing for inflation and discounting

5 083

7 886

Provision for administration expenses

6 119

5 389

Prudential margin

28 196

23 256

 

158 535

137 743

 

A structural analysis of outstanding claim liabilities for medical malpractice and other claims for the current year and the six preceding years is shown in the following chart.  The increase in outstanding claims in 2006 is due to the net effect of increases in case estimates for reported and IBNR claims and changes in the assumed discount rates (increase of 0.7 percent for medical malpractice claims, short tail and long tail classes) used for calculating the value of the liabilities.  Medical malpractice claims continue to dominate the claims liabilities.

 

 

Investments

 

Investments increased by $21.3 million to $227 million ($206 million).  This increase is due mainly to the purchase of additional investments and appreciation in value of SAICORP’s Australian and overseas equity investments.

Cash Flow Statement

 

The following table summarises the net cash flows for the four years to 2006.

 

 

2006

2005

2004

2003

 

$’million

$’million

$’million

$’million

Net Cash Flows

 

 

 

 

 

 

 

 

 

Operations

9.3

11.1

11.3

4.9

Investing

-

(10.0)

(9.2)

(7.0)