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:
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claims from workers compensation policies issued under subsection 118(g) of the Workers Compensation Act 1971 (now repealed).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 CTP claims insurance business has been contracted to SGIC General Insurance Limited. Investments are managed by a number of external fund managers with the exception of the property portfolio, whose management was returned ‘in-house’ during 2000-01.
During the year, the Commission controlled the following company Southern Group Insurance Corporation Limited — a trustee company. See Note18 to the financial statements for further details on the controlled entities.
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:
The audit of the Commission proved to be satisfactory. No significant issues arose during the audit and other matters arising were satisfactorily resolved with management.
The Commission has tailored a governance structure to manage the dichotomous and specialised nature of its business activities. A cornerstone of its operations is management by external contract, with the Commission’s key contracts outlined in Note17 to the Financial Statements.
The Commission has established specific sub-committees of the Board to assist in meeting its governance responsibilities. These are the Audit Committee, Investment Committee, Claims Management Committee and the Remuneration Committee. Each committee has a specific charter and performs important monitoring and review functions in terms of ensuring the performance of the Commission’s external managers.
The Corporate Governance Statement describes the responsibilities and functions of the Commission’s Directors, the Committees, the internal control framework, as well as the business risks and ethical standards.
The audit considered the general internal control environment within which the Commission operates. Aspects covered included the reliability of identified key internal controls, the monitoring of performance and compliance with documented policies and procedures.
The key external management agreements commanded much of Audit’s attention. This extended to the basis of reporting, compliance and the effectiveness of monitoring and review mechanisms.
The overall assessment of the Commission’s internal control structure was that it 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 CTP operations represent the largest activity of the Commission’s overall business. Some of the more salient considerations are covered hereunder:
The net profit was $9.6 million ($17.2 million), having declined 44 percent. This reflected a combination of deterioration in the underwriting result and a fall in investment revenue (realised and unrealised).
The underwriting result was a loss of $ 72.4 million ($58.7 million) and reflects premium revenues less claims expenses (adjusted for recoveries relating to reinsurance and other underwriting costs).
Net claims expense increased by $5.8 million (2 percent), while net premiums fell by $5.2 million (2 percent).
While net investment revenues (including realised gains) increased to $74.7 million ($56.1 million) these gains were more than offset by a fall in unrealised investment gains as at 30 June. The latter fell by $20.8 million (65 percent) to $11.1 million ($32 million).
A useful indicator in analysing operating performance is the Claims Incurred Ratio, which is measured by the claims expense incurred as a percentage of premium revenues.
A trend analysis over a period of financial years for each year’s claims incurred expense reflects both the risks borne in the current reporting period and the reassessment of risks borne in all previous reporting periods (i.e. not already factored in those reporting periods’ provisions for claims incurred but not reported and claims incurred but not sufficiently recognised).
Accordingly, a focus on a trend over time rather than the experience of a single reporting period is likely to provide greater insight than the experience of a single reporting period.
Claims Incurred Ratios
From the graph above it can be seen that since 1997 the ratio has exceeded 100 percent meaning that claims incurred exceeded premium revenues. While the ratio has fallen marginally from 1997 it has remained relatively constant in the succeeding years. Even when the effect of reinsurance expense and related recoveries revenues are taken into account, the adjusted ratio (net claims incurred ratio) remains in excess of 100 percent for the period considered.
The Commission has maintained a relatively stable ratio of invested assets to claims liability over the previous 5years. This is measured by the relationship between the Claims Incurred Ratio (referred to above) and the Invested Assets to Outstanding Claims Ratio. Relatively high Claims Incurred Ratios will dictate that the Commission maximise its return on invested assets, in the absence of increases in premiums.
The graph above reflects the ratio of invested assets to claims liability over the 5 years from 1997. With a high claims incurred ratio, there is an ever-present requirement on the Commission to seek to maximise its return on invested assets, but to do so without jeopardising solvency levels.
While the ratio of invested assets to claims liability has decreased from 1997 it has remained relatively strong and was at 115 percent for the year ended 30 June 2001.
In this context, it is relevant to note that in January 2001 the Commission endorsed a revised strategic asset allocation representing a shortening in duration of the matching policy, which had been in place since January1996. The liability matching policy relates to the matching of the value of liabilities with interest rate movements and the level of fixed interest assets held.
This revision in the strategic asset allocation followed the findings on an independent actuarial review of aspects of the Commission’s investment policies.
As at 30 June 2001, the CTP Fund had reserves of $97.9 million ($88.3 million). After deducting the future income tax benefit of $24.2 million ($24.7 million), the reserves for solvency purposes are $94.4million ($79.7million).
This represents 9.1 percent (8.3 percent) of the total outstanding claims of $1.0 billion ($954.3 million). This solvency ratio is less than the industry standards set by the Australian Prudential Regulatory Authority (APRA), which currently sets this ratio at 15 percent. While the Commission is not required to comply with the APRA benchmark it is expected that, in the absence of a major capital injection from the Government, it would take some years before the Commission could attain these levels, if at all.