The Motor Accident Commission (the Commission) operates in accordance with the Motor Accident Commission Act 1992 (formerly the State Government Insurance Commission Act 1992).
Pursuant to section 18 of the Motor Accident Commission Act 1992, the Commission’s Charter, which the Minister must prepare in consultation with the Commission, may limit the functions or powers of the Commission. The Charter specifies that the Commission is empowered to undertake the following classes of insurance:
compulsory third party (CTP) insurance (in accordance with the Motor Vehicles Act 1959);
mortgage insurance, credit risk insurance, credit enhancements, and guarantees and residual value insurance;
financial risk insurance.
The latter two classes of insurance are in ‘run-off’ mode.
In addition, the Commission is responsible for the management and finalisation of the ‘Old Act, Workers Compensation Fund’, transferred to the Commission in accordance with the SGIC (Sale) Act 1995. This Fund relates to unresolved claims from workers compensation policies issued under subsection 118(g) of the Workers Compensation Act 1971 (now repealed).
The functional structure of the Commission, excluding the controlled entities, is as follows:
With the exception of the CTP insurance business, no new policies were underwritten by the Commission for all other insurance activities. These activities are in ‘run-off’ mode and will cease once the Commission’s obligations under the existing policies have expired or have been settled.
The administration and management of the claims and investments of the CTP insurance business have been contracted to SGIC General Insurance Limited and Legal and General Financial Services Limited respectively. Refer to Note 19 to the financial statements for further information.
During the year, the Commission controlled the following company and joint venture:
Southern Group Insurance Corporation Limited — a trustee company. See Note 20 to the financial statements for further details on the controlled entities.
The Commission also has a 25 percent interest in a partnership agreement with the former South Australian Timber Corporation called Scrimber whose principal activity was the development of synthetic timber products (refer Note 22).
Operating profit after Abnormal Items and Income Tax was $18.5 million ($24.8 million loss).
A dividend of $10 million (nil) is payable to the South Australian Government.
Operating profit after Abnormal Items and Income Tax was $17 million ($26 million loss).
Premium revenue increased by $20.5 million to $257.7 million due mainly to premium increases effective 1 July 1999 and 28 October 1999.
An increase of $50.8 million in the gross provision for outstanding claims as a result of actuarial assessment (refer Note 1(e) and 15).
A decrease in actual investment revenue of $16.3 million mainly as a result of a reduction in rental income.
An unrealised gain of $32 million in the market value of investments (an unrealised loss of $4.4 million).
Subsection 28(3) of the Motor Accident Commission Act 1992 provides for the Auditor-General to audit the accounts and financial statements of the Commission in respect of each financial year.
The audit program covered all major financial systems of the Commission and was directed primarily at obtaining sufficient evidence to enable an audit opinion to be formed on the Commission’s financial statements. The following aspects of financial activities were included in the audit program:
investment assets
investment income
accounts payable
receivables
claims payable
premiums
management agreements (CTP)
provisions for outstanding claims
actuarial assessments
reinsurance and other recoveries.
During the year, Audit attended meetings with management to confirm and discuss Audit management letters issued. All Audit management letters were forwarded to the Chief Executive with a copy to the Chairman of the Audit Committee. Satisfactory responses have been received with respect to the issues raised by Audit.
To assist the Directors of the Commission to discharge their duties in relation to corporate governance, an Audit Committee has been established. The Committee comprises four non-executive Directors of the Commission and met on four occasions during 1999-2000.
As stated in the Commission’s ‘Charter for Audit Committee’ the objective of the Committee is to assist the Board in fulfilling its responsibilities.
In addition, the ‘Charter for Audit Committee’ details functions to be undertaken by the Audit Committee including the review of all significant accounting policy, valuation and reporting changes, as well as the review of performance under both the Claims Management and the Investment Management Agreements.
As part of the annual financial statement process, the Directors of the Commission have prepared a Corporate Governance Statement which deals with the responsibilities and functions of the Directors, the Sub Committees of the Commission, and which describes the internal control framework of the Commission, as well as business risks and ethical standards.
With respect to the internal control framework, the Statement declares that the Directors are responsible for the establishment and maintenance of the overall internal control framework of the Commission.
As part of the review process with respect to the annual financial statements, the Directors received representations from management concerning the discharge of their responsibilities. These representations are in the form of a ‘Letter of Representation’ and include specific comment with respect to the financial records assets, liabilities, compliance with the law and other disclosure issues in relation to the financial statements.
As part of the audit process, consideration was given to the general control environment in which the Commission operates. The audit assessment covered the key internal controls in place, their application and monitoring and whether the performance of these activities was in compliance with the policies and procedures established by the Commission.
Audit also undertook a review of the performance and monitoring procedures and controls in place over the Management Agreements between the Commission and SGIC General Insurance Limited (part of the NRMA Group) for the CTP Claims Administration and Legal and General Financial Services Limited (managed by Colonial First State Investment Managers Ltd) for the CTP Investments.
The overall assessment of the Commission’s financial control structure was that it was satisfactory.
For the CTP aspects of the Commission’s operations, the audit findings were satisfactory.
An Audit review directed towards establishing whether adequate procedures were in place to monitor the performance under the Claims Management and Investment Management Agreements between the Commission and the appointed managers was also undertaken. The Audit review noted that the reports received from both the claims and the investment managers were both regular and consistent with the requirements of the respective Management Agreements.
The results of the audit in relation to the non-CTP aspects of the Commission’s operations were satisfactory.
The audit review of the Commission’s CIS environment was focused on the procedures and controls surrounding the CTP related systems. In addition, there was an overall assessment of the controls over access to the systems and security of program changes.
The overall assessment was that the CIS control environment was satisfactory.
As required by subsection 36(1)(a)(iii) of the Public Finance and Audit Act 1987, the audit of the Motor Accident Commission included an assessment of the controls exercised in relation to the receipt, expenditure and investment of money, the acquisition and disposal of property and the incurring of liabilities.
Audit formed the opinion that the controls exercised by the Motor Accident Commission in relation to the receipt, expenditure and investment of money; the acquisition and disposal of property; and the incurring of liabilities, were sufficient to provide reasonable assurance that the financial transactions of the organisation were conducted properly and in accordance with the law.
The Commission, in preparing financial statements in accordance with the Act and Charter, must comply with a range of legislative requirements, including the requirement to report as if it were a listed public company. (Note 1 to the financial statements provides details of the basis upon which the statements have been prepared).
In addition to preparing the financial statements of the Commission and the consolidated economic entity, separate financial statements are required for the CTP Fund.
As reflected in Note 2 to the financial statements, the operating profit consists of two inter-related components:
Underwriting result - this is determined as premium revenue less claims expense (after the cost and recoveries associated with reinsuring a portion of the insurance portfolio’s risk with a third party) and other underwriting costs.
Investment revenue - this includes amounts received, together with realised and unrealised gains and losses.
In 2000 there was an underwriting loss before abnormal items of $58.9 million ($61.1 million) but there was a profit before income tax and abnormal items of $31.2 million ($7.8 million). This result was achieved with a net investment revenue of $58.2 million ($76.1 million) and an increase in market value of investments of $31.9 million (a decrease of $7.2 million).
The underwriting result for the CTP Fund was an underwriting loss before abnormal items of $58.7 million ($61.6 million). This loss was predominantly due to an increase in net claims expense of $12.3 million and an increase in other underwriting expenses of $5.4 million. The approved increase in premiums, effective July 1999 and October 1999, was the predominant reason for the increase in premium revenue of $20.5 million. The following table illustrates key indicators for CTP insurance over the past four years.
Claim Loss and Total Expense Rations - CTP Insurance
|
1999-2000 |
1998-99 |
1997-98 |
1996-97 |
|
Percent |
Percent |
Percent |
Percent |
Claim Loss Ratio |
104.5 |
108.4 |
108.1 |
114.5 |
Total Expense Ratio |
18.4 |
17.7 |
17.5 |
18.2 |
Underwriting Ratio |
122.9 |
126.1 |
125.6 |
132.7 |
The claims loss ratio represents net claims incurred divided by net premiums earned, the total expense ratio represents underwriting expenses divided by net premiums earned, and the underwriting ratio represents the sum of the two rates.
The investment operations and the associated investment income of an insurance organisation are an inseparable part of its operations, and are as important as the underwriting operations. Inherent in the profit planning of an insurance organisation and the pricing of insurance products is an assumption about the use of funds available for investment and an estimated return on those funds. During the year investment revenue for the Commission totalled $61.2 million ($79.4 million).
Insurers formulate an investment strategy to complement their insurance business. Funds are invested so that income on investments, together with maturities, meets the ongoing cash flow needs of the organisation. As part of this process, insurers need to consider the underlying operational risks when determining the investment mix.
Losses as a result of sales of investments during the year amounted to $3.4 million (profit of $7.1 million). This was off set by an unrealised market movement profit of $31.9 million (loss of $7.2 million).
As stated in Note 1 to the financial statements, investments, other than those in controlled entities, are valued at net market value (ie net of the expected costs of disposal). Changes in the net market values of investments at the balance date from their net market values at the previous balance date (or cost of acquisition, if acquired during the financial year) are recognised as revenue or expense in the profit and loss account.
This accounting policy, required by Australian Accounting Standards Board AASB 1023 ‘Financial Reporting of General Insurance Activities’ and known as ‘market value accounting’, means the Commission’s investment revenue comprises both realised income (such as dividends, interest, rental from properties etc) and unrealised market value movements. (Note 3 to the financial statements refers to this matter).
Market movements can be subject to great fluctuations when comparing the market value on a year by year basis. By way of an example, over the last three years market movements for the CTP Fund have resulted in unrealised losses of $8.3 million being reflected through the profit and loss account in 1997-98, unrealised losses of $4.4 million in 1998-99 and unrealised profits of $32 million in 1999-2000. Overall, the Commission recorded an unrealised market movement profit of $31.9 million for 1999-2000 (loss of $7.2 million).
Given such fluctuations, it is important to emphasise that any gains and losses recognised in the Commission’s financial statements for the investments held at reporting date are unrealised. Until such time as the investments are sold, no gain or loss is actually received or incurred by the Commission. In the intervening period, market fluctuations may result in a change in the market value of those investments which could either offset, or contribute to, the unrealised gains and losses previously recognised. In addition, even if an investment is recognised as having incurred an unrealised loss for reporting purposes, the underlying investment may well continue to generate income for the Commission; fixed interest securities provide an example of this.
In assessing the operating revenue, the unrealised profits or losses from the Commission’s investments and their contribution to the operating result need to be considered. (As required by the Accounting Standard this is reflected in Note 3 to the financial statements).
The contribution to the Commission’s consolidated profit by the controlled entity is highlighted in Note 20 to the financial statements.
For the CTP Fund, proceeds from the sale of investments decreased by $160.8 million while payments for investments increased by $31.4 million. These movements were the main contributors to net cash used in operating activities decreasing to $99.5 million.
The Commission has entered into contracts with SGIC General Insurance Limited and Legal and General Financial Services Limited for the management of the CTP claims and investment activities respectively.
SGIC General Insurance Limited, as the manager of CTP claims, provides a claims management service that ‘would be reasonably expected of an insurer and subject to the requirements of the Commission’. As described in Note 19 to the financial statements, the fee for the provision of this service is based on a ‘base fee’ indexed by the Consumer Price Index. The management fee for 1999-2000 amounted to $13.9 million ($13.8 million). In addition, under specified conditions, the manager is also entitled to an incentive fee of a percentage of the net underwriting result.
The agreement also specifies performance criteria and the reporting requirements to the Commission.
The Investment Management Agreement is with Legal and General Financial Services Limited (LGFS). Due to the takeover of LGFS by the Colonial Group, the agreement is now managed by Colonial First State Investment Managers Ltd (CFSIM). Responsibility for the performance of CFSIM remains with LGFS.
The Investment Management Agreement provides for the manager to provide ‘skilled investment advice and manage the investment of the portfolio in accordance with the mandate’.
The mandate of the investment manager specifies the terms and conditions for the management of the portfolio and outlines:
authorised investments and requirements;
investment objectives, limits and target benchmarks;
performance and the evaluation of performance.
During 1999-2000 the Commission paid $3 million ($3.3 million) for the management of the investment portfolio.