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2016

Victorian Managed Insurance Authority

Annual Report

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 6949www.vmia.vic.gov.au

6 September 2016

The Hon. Robin Scott MP Minister for Finance Level 5 1 Macarthur Street East Melbourne VIC 3002

Dear Minister

Victorian Managed Insurance Authority Annual Report 2016

I am pleased to submit the Annual Report for the Victorian Managed Insurance Authority (VMIA) for the period 1 July 2015 to 30 June 2016, in accordance with the Financial Management Act 1994.

Yours sincerely

John Peberdy Chairperson

i

http://www.vmia.vic.gov.au

Our VISION is to help build a safe, strong,

resilient Victoria.

Our MISSION is to help

government be prepared for risk.

Chairperson and Chief Executive Officer’s report 2

Report of operations 5

Financial Report 27

Disclosure index 93

Corporate information 95

Contents

2 | VMIA Annual Report 2016

In 2015-16 VMIA achieved strong results through collaborating with our clients and agencies to help the Victorian Government prepare for and manage risk.

VMIA’s collaborative approach has delivered successful outcomes across the business and is reflected in our client satisfaction score of 82% (up from 72% in 2014-15).

This is the first year of delivering VMIA’s Corporate Plan 2015-20. It is pleasing to report progress made against objectives in all key result areas including prevention, recovery and financial sustainability.

A key focus in 2015-16 has been supporting clients to meet the requirements of the updated Victorian Government Risk Management Framework, especially by working closely with the Department of Treasury and Finance to develop educational materials and tools.

Strengthening collaboration between public sector agencies and supporting the identification and management of interagency risks underpins VMIA’s role to help the public sector prevent, prepare for and reduce harm to Victorian people and places.

Our investment in health sector risk initiatives, such as the introduction of fetal surveillance and the PRactical Obstetric Multi-Professional Training (PROMPT) program, is showing positive results in long-term claims data.

Chairperson and Chief Executive Officer’s report

VMIA Annual Report 2016 | 3

VMIA has also expanded coverage of Victorian schools through the School Councils Insurance Program, working with the Department of Education and Training to deliver improved cover to more than 1,000 public schools, at a reduced cost to the State.

Our Domestic Building Insurance program has implemented a range of changes that strengthen protection for Victorian homeowners. Online service delivery enables consumers to check relevant details of their coverage easily, and new triggers for involvement of Domestic Building Insurance through Victorian Civil and Administrative Tribunal orders have been well received.

VMIA’s financial performance remains strong, driven by several factors. VMIA performed favourably against its budget for the year, due primarily to a variance in net claims incurred. Benign weather and a lack of catastrophic events contributed to fewer claims. Improved claims management performance resulted in better outcomes for the scheme and our clients. This performance was achieved despite investment returns that were less favourable than expected due to the impact of global market volatility.

Profitability was strong and our funding ratio at 30 June 2016 was 117%, which is within our preferred range. VMIA’s performance from insurance operations, a measure of the underlying strength of our internal operations, was $307.4 million. Our financial position enabled us to make a dividend and capital repayment to government, to be reinvested in important government programs and initiatives.

VMIA measures its performance against a balanced scorecard model incorporating our operations across government, our services to clients, people measures, our systems and processes, and financial performance.

In 2015-16 VMIA achieved its intended objectives across four of the five elements of this model. However our staff engagement score of 62% was lower than the target of 65%. We recognise the importance of improving staff engagement and a program of work is underway to address this issue.

On behalf of the Board and Executive, we wish to thank everyone at VMIA and our partners for their effort in delivering significant benefits to the Victorian community.

Our business year started under the direction of Chief Executive Officer Paul O’Connor before John Brennan commenced as Acting Chief Executive Officer in January. Our new Chief Executive Officer, Colin Radford, joined in July 2016. We thank Paul and John for their assistance in a smooth leadership transition.

At the Board level there were a number of changes as we farewelled Ian Gaudion and welcomed Christine Christian and Toby Hemming.

In accordance with the Financial Management Act 1994 we are pleased to present VMIA’s Annual Report for the financial year ended 30 June 2016.

John Peberdy Chairperson30 August 2016

Colin Radford Chief Executive Officer30 August 2016


Report of operationsAbout VMIA 7

Governance and organisational structure 8

Year in review 11

Key achievements 11

Progress against 2015-16 Annual Business Plan 13

Financial summary 14

Directions of the Minister for Finance 17

Risk attestation 21

Compliance 22


Who we are The Victorian Managed Insurance Authority (VMIA) was established on 1 October 1996 as Victoria’s insurer and risk management advisor to the Victorian government sector. VMIA is a statutory authority whose operations are governed by the Victorian Managed Insurance Authority Act 1996. It is a body corporate with perpetual succession overseen by VMIA’s Board of Directors. The Minister for Finance is the responsible minister.

In March 2010, the Victorian Government directed VMIA to assume responsibility for providing Domestic Building Insurance (DBI) to builders.

What we doAs a Victorian statutory authority reporting to the Minister for Finance, VMIA’s core business is service delivery on our statutory charter in four key result areas:

• Prevention – helping the state prepare for, prevent or reduce the impact of harm

• Recovery – helping our clients restore services and recover quickly

• Assurance – helping improve risk governance and management

• Financial sustainability – operating effectively and efficiently.

VMIA works with the Victorian public sector to:

• help establish programs to identify and manage risks

• provide risk management advice and training

• be its insurer or provide insurance services.

At a whole-of-government level we:

• provide risk management advice to the state

• monitor public sector risk management

• provide insurance or indemnities to public officers.

Our clientsVMIA’s clients include departments, statutory authorities and other state-controlled entities.

Our work also extends to some business and community organisations delivering services on behalf of government.

Our clients include:

• 7 Victorian Government departments

• 174 departmental portfolio agencies (statutory authorities and state-owned enterprises)

• 22 rail operators

• 301 hospitals, community health centres and medical research bodies

• approximately 200 rural doctors

• approximately 500 cemetery trusts

• approximately 2,100 community service organisations

• approximately 1,000 school councils

• more than 15,000 registered residential builders.

VMIA’s insurance programs cover clients’ assets valued at $188 billion and protect Victoria’s liability exposures. If client insured losses occur, VMIA manages claims and provides guidance on recovery efforts in large-loss situations.

About VMIA

Our focus is to help the public sector prevent, prepare for, or reduce harm to Victorian people and places.

Report of operations


Governance and organisational structure

Board and executive management

VMIA BoardAs at 30 June 2016, the VMIA Board comprised the following Directors:

Christine Christian

Therese Ryan

Deputy Chairperson

Toby Hemming

Doug Kearsley

John Peberdy

Chairperson

John McNeil

Mark Valena

Robyn Worthington

Executive teamAs at 30 June 2016, the VMIA Executive Leadership Team comprised the following members:

Chief Executive

Officer

John Brennan (Acting)

General Manager, Domestic Building

Insurance

Efy Karagiannis

General Manager,

Operations

Doug Berge

General Manager,

People and Change

Laurinda Gardner (Acting)

General Manager,

Government

Kelly Humphreys

General Manager, Finance

Victor Martindale

General Manager, Corporate Risk and

Governance

Peter Heard

General Manager, Medical

Indemnity

Andrew Davies

General Counsel

Peter Ryan

Service delivery Business partners



Governance and organisational structure (continued)Corporate governanceThe Board is responsible for the management of the affairs of VMIA and for exercising the powers conferred on VMIA under the Victorian Managed Insurance Authority Act 1996 (VMIA Act), including the power of delegation. The powers and general functions are detailed in the VMIA Act. The Directors are appointed by the Governor in Council on the recommendation of the Minister for Finance.

The Board comprises eight independent Directors. The Board has an appropriate balance of skills and knowledge to effectively discharge its statutory responsibilities.

The Order in Council gazetted on 14 May 2015 declared VMIA as a reorganising body under section 7 of the State Owned Enterprises Act 1992 and gives the Treasurer the power to direct VMIA to pay dividends and/or repay capital to the state after consulting with the Minister for Finance and VMIA’s Board.

Foundations for management and oversightThe Board has adopted a formal charter which lays the foundations for management and oversight. The Board is responsible for setting and reviewing the strategic direction of VMIA and monitoring the implementation of that strategy by management.

The Chief Executive Officer is responsible for the day-to-day management of VMIA with powers and delegations authorised, from time to time, by the Board.

Board committeesThe Board has four committees: • Audit Committee • Capital Committee• Remuneration and Capability Committee• Risk Committee.

Each committee assists the Board with the specified responsibilities set out in each committee charter, as delegated and approved by the Board.

VMIA is committed to embedding risk management practices to support the achievement of corporate objectives and fulfil its corporate governance obligations. During 2015-16, the three Board committees responsible for the oversight of risk-related matters were the Audit Committee, Capital Committee and Risk Committee (formerly the Risk and Strategy Committee).

Audit CommitteeMembers: • Mark Valena (Chairperson)• Ian Gaudion (until 16 October 2015) • Doug Kearsley (appointed 26 October 2015)• Therese Ryan • John Peberdy (appointed 26 October 2015)• Robyn Worthington (until 26 October 2015).

The Audit Committee, as a delegate of the Board, is responsible for the review and oversight of the integrity of the accounting and financial reporting processes of VMIA and the external and internal audits of VMIA. The committee makes recommendations to the Board that include the financial report of VMIA and compliance with applicable laws, regulations and the Standing Directions of the Minister for Finance.

Capital CommitteeMembers: • Doug Kearsley (Chairperson)• John Peberdy• Christine Christian (appointed 20 April 2016)• Mark Valena.

The Capital Committee, as a delegate of the Board, is responsible for making recommendations to the Board that include capital management, prudential management, and monitoring the effect of premium pricing on capital, investment risk on capital, insurance and reinsurance risk on capital, claims trends and claims liabilities risk. The committee also monitors the performance of the fund manager, Victorian Funds Management Corporation, in accordance with VMIA’s investment strategy and investment objective.



Governance and organisational structure (continued)Remuneration and Capability CommitteeMembers:• Therese Ryan (Chairperson)• Ian Gaudion (until 16 October 2015)• Toby Hemming (appointed 26 October 2015)• John McNeil• Robyn Worthington.

The Remuneration and Capability Committee, as a delegate of the Board, is responsible for the oversight of the organisational structure, capability and performance, succession planning and the remuneration policies and outcomes for VMIA. This committee also assesses the alignment of the capability of VMIA to its strategic objectives and performance framework and monitors organisational engagement.

Risk Committee Members:• Robyn Worthington (Chairperson, appointed

26 October 2015)• John Peberdy (appointed interim Chairperson

from 27 August 2015 to 26 October 2015)• Doug Kearsley• John McNeil• Toby Hemming (appointed 26 October 2015).

The Risk Committee, as a delegate of the Board, is responsible for the review and oversight of VMIA’s risk management policy, practices and systems. This committee assists the Board in its setting of the risk appetite and tolerance levels within which VMIA operates. This committee also provides oversight of the risks associated with management’s implementation of VMIA’s corporate plan. The Risk Committee was formerly the Risk and Strategy Committee until August 2015.

VMIA BoardJohn Peberdy, Chairperson John Peberdy was appointed in September 2011. He is a member of the Audit Committee and Capital Committee. He was a member of the Risk Committee until 26 October 2015 and the interim Chairperson of the Risk Committee from 27 August 2015 to 26 October 2015.

Therese Ryan, Deputy Chairperson Therese Ryan was appointed in August 2012. She is the Chairperson of the Remuneration and Capability Committee and a member of the Audit Committee.

Christine Christian, Director Christine Christian was appointed in February 2016. She is a member of the Capital Committee.

Toby Hemming, Director Toby Hemming was appointed in October 2015. He is a member of the Remuneration and Capability Committee and Risk Committee.

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

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

Mark Valena, Director Mark Valena was appointed in October 2013. He is the Chairperson of the Audit Committee and a member of the Capital Committee.

Robyn Worthington, Director Robyn Worthington was appointed in February 2015. She is the Chairperson of the Risk Committee and a member of the Remuneration and Capability Committee. She was a member of the Audit Committee until 26 October 2015.



The updated Victorian Government Risk Management Framework has created a solid platform to drive collaboration and shared approaches to managing risk across the public sector. VMIA has coordinated opportunities for collaboration in risk management across departments and portfolio agencies, through initiatives such as the risk management forum and interagency risk forum, which attracted more than 200 senior leaders from across the state.

The theme of collaboration was amplified by our increased client learning opportunities, which has seen foundation courses in risk management for boards and executives expanded into a leadership series focusing on interagency risk, risk culture and corporate planning. These courses have been delivered in facilitated workshops to build risk management capability across the state, including regional centres. In 2015-16 more than 1,400 client representatives attended training and seminars organised by VMIA.

In response to client feedback VMIA has also commenced offering education seminars via webinar. Utilising different communication channels has enabled VMIA to deliver services to a wider range of clients.

Supporting Victorian Government departments and agencies to build their risk management governance capabilities is a key priority for VMIA. In 2015-16 VMIA worked closely with clients at a departmental level to gain a deeper understanding of risk management and insurance arrangements to provide a strategic oversight of organisation-specific and interagency risk. This strategic oversight also offered clients direction on opportunities for improvement and practical solutions to achieve better risk management outcomes.

VMIA has piloted an online risk maturity assessment tool, which will enable public sector entities to self-assess their risk maturity and identify opportunities for improvement.

Working closely with the Department of Treasury and Finance we have developed a risk prevention investment framework which provides a robust method to prioritise our investment into projects delivering the greatest impact or addressing the areas of greatest need.

The past year has seen investment in a number of risk initiatives and partnerships to improve patient safety in public healthcare.

As part of our commitment to prevent and reduce harm to patients, VMIA has developed seminars and workshops focusing on lessons from losses to highlight opportunities for improvement across the health sector.

Long-term trend data in claims is showing that investment in these health risk initiatives – such as the introduction of fetal surveillance and the PRactical Obstetric Multi-Professional Training (PROMPT) program – are delivering positive results.

In its role as insurer for the state’s assets and service providers, VMIA has delivered improved value to the Victorian community through better insurance cover and products. VMIA commenced its School Councils Insurance Program, working together with the Department of Education and Training to deliver improved insurance cover to more than 1,000 public schools. The provision of insurance to these clients offers increased protection for many schools, at a lower cost to Victoria.

Other insurance offerings were improved to deliver better cover for departments and participating bodies for losses arising from acts of terrorism or cyber attacks.

Delivering greater value through online processes and better management of technology has been a key focus of VMIA’s commitment to delivering sustainable services. Large-scale data projects and business system reviews have offered new opportunities for VMIA to conduct its operations more efficiently and effectively. These systems also provide a platform for enhanced collaboration with clients to address shared risk management issues.

Year in review

VMIA’s commitment to collaborating with clients and key stakeholders has seen great value delivered to the Victorian community in 2015-16. VMIA’s successful performance has been reflected in our client satisfaction survey result of 82%, up from 72% the previous year.

Key achievements


The updated Victorian Government Risk Management Framework has provided a platform to drive collaboration and shared approaches to managing risk across the Victorian public sector.


Our refreshed approach to service delivery has yielded benefits in other areas. The Domestic Building Insurance team worked closely with Consumer Affairs Victoria and Victorian building regulators to improve consumers’ knowledge of their rights and obligations. A series of videos in several languages has improved access for Victoria’s multicultural community and a streamlined website improves accessibility to key information and resources. Automated search facilities enable website users to search for builders with current eligibility for domestic building insurance and properties to confirm that certificates of insurance have been issued by VMIA. Consumer protection has also been improved with the introduction of Victorian Civil and Administrative Tribunal orders as a new claims trigger for Domestic Building Insurance, allowing earlier access to cover for affected homeowners.

VMIA’s corporate planning reflects our key focus areas of prevention, recovery, assurance and financial sustainability. The past year has seen strong performance across all of these areas as the organisation transitioned to a new service delivery model to meet the objectives of its five-year corporate plan.

The roll-out of Thrive, a program focused on leadership and cultural renewal, has also seen positive improvements in nurturing VMIA’s leaders and retaining key talent. VMIA recognises that more work is needed to improve staff engagement and further activity has been planned to address this.

Our financial performance remains strong. VMIA generated an operating surplus of $113.9 million for the financial year ended 30 June 2016 and a funding ratio of 117%. This ratio is within the preferred range of 82.5% to 117.5%.

In 2016, VMIA’s gross written premium was $377.4 million and its performance from insurance operations, a measure of the underlying strength of VMIA’s internal operations, was $307.4 million. VMIA paid a dividend of $72.5 million to the state in December 2015 and repaid contributed capital of $296.5 million to the state in June 2016.

VMIA also performed favourably against its budget for the year, due primarily to a net claims incurred favourable variance and despite the investment return being below the long-term expected return.

Key achievements (continued)


Supporting Victorian Government departments and agencies to build their risk management governance capabilities is a key priority for VMIA


The following table outlines details of the main key performance indicators (KPIs) published in VMIA’s 2015-16 Annual Business Plan, and the actual performance against the targets for the year ended 30 June 2016.

Table 1: Progress against Annual Business Plan main operational KPIs

Progress against 2015-16 Annual Business Plan

Key result area: Prevention

Description Indicator 2015-16 target 2015-16 result

Support clients to meet the requirements of the Victorian Government Risk Management Framework (VGRMF)

Commence VGRMF education and training programs

31 December 2015

Achieved by 29 February 2016

Client satisfaction with VMIA’s support on the VGRMF

High satisfaction Achieved (78%)

Invest in patient safety initiatives Fund patient safety initiatives 30 June 2016 Achieved

Department of Health and Human Services’ satisfaction with support provided

High satisfaction Achieved (83%)


Key result area: Recovery


Collaborate with the Victorian Government Solicitor’s Office (VGSO) to help establish a whole-of-government litigation risk reporting framework

Support VGSO to help establish a whole-of-government litigation risk reporting framework

30 June 2016 Achieved

Key result area: Financial sustainability


Deliver the people and change implementation plan

Maintain current levels of employee engagement in a time of change

Engagement score ≥65%

Not achieved (62%)

Key result area: Assurance


Undertake a stocktake of risk management and insurance arrangements in public sector entities

Pilot with the Department of Treasury and Finance

31 December 2015

Achieved by 29 February 2016


Table 2: Five-year summary of financial results

2016 $’000

2015 $’000

2014 $’000

2013 $’000

2012 $’000

Total income1 437,068 566,573 593,913 562,065 388,128

Less reinsurance, claims, commission and administration expenses 323,159 163,666 374,128 318,063 708,047

Operating surplus/(deficit) 113,909 402,907 219,785 244,002 (319,919)

Net cash inflow from operating activities 200,015 189,9792 168,721 66,577 62,434

Total assets 2,654,019 2,861,821 2,699,388 2,334,501 2,031,920

Total liabilities 2,361,002 2,313,713 2,554,187 2,409,085 2,367,106

Net assets/(liabilities) 293,017 548,108 145,201 (74,584) (335,186)

1. Total income 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.

2. Figure not comparable with previous Annual Report as net cash inflow from operating activities has decreased by $8.230 million following reclassification of gains and losses pertaining to equity swaps from interest to realised gains and losses.

Financial performanceVMIA’s financial objective is to maintain a sustainable financial model that protects the state’s Comprehensive Operating Statement and Balance Sheet from unforeseen losses and reduces the cost of services to the state.

VMIA’s operating surplus of $113.9 million for the 2016 financial year was a favourable variance of $84.6 million compared to the budgeted surplus of $29.3 million. As at 30 June 2016 the funding ratio was 117% and was 7% better in absolute terms than the budgeted funding ratio of 110%.

The favourable performance for the 2016 financial year compared to budget is due primarily to net claims incurred being substantially lower than budget due mainly to the following:

• release from the expected net claims liabilities

in respect of the medical indemnity portfolio due primarily to a 12% reduction in the assumed average size of above cap incurred but not reported child claims; and

• release from the expected net claims liabilities in respect of the property portfolio due primarily to the absence of any new catastrophe events; offset by

• increase in net claims liabilities to allow for the impact of decreases in discount rates and amendments to the Wrongs Act 1958.

Financial summary




Significant changes in financial positionAt 30 June 2016 total assets were lower than the prior year by $207.8 million due primarily to a decrease in investments of $197.3 million driven by the capital repayment of $296.5 million made to the state. Total liabilities increased by $47.3 million, driven by an increase in gross insurance liabilities of $73.3 million offset by decreases in outstanding investment settlements of $14.4 million and trade payables of $16.8 million.

During the 2016 financial year VMIA generated a net cash inflow of $200.0 million from operating activities. This cash inflow from operating activities contributed towards funding the dividend of $72.5 million and the capital repayment of $296.5 million.

VMIA’s equity position decreased from $548.1 million at 30 June 2015 to $293.0 million at 30 June 2016 driven mainly by the capital repayment of $296.5 million.

The funding ratio at 30 June 2016 was 117%, a decrease of 16% in absolute terms when compared to the funding ratio at 30 June 2015 of 133%. The funding ratio was within the preferred funding level range of between 82.5% and 117.5% as specified in the State Government’s Risk Preference Statement for VMIA.

Performance from insurance operationsPerformance from insurance operations (PFIO) is a measure of the underlying strength of VMIA’s internal operations. It is calculated by 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 net claims liabilities actuarial valuation

• the impact of the net movement in the unexpired risks liability

• legislative changes and government-directed changes.

For the 2016 financial year, the PFIO result was $307.4 million, outperforming the budget of $39.3 million, due primarily to a net claims incurred favourable variance.

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

Financial summary (continued)


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

Table 3: Key financial performance indicators

Key financial performance indicators 2016 2015 2014 2013 2012

Performance from insurance operations (PFIO)

Actual ($ million) 307.4 331.0 164.9 47.5 36.5

Budget ($ million) 39.3 52.9 9.2 (2.7) 9.8

Funding ratio 117% 133% 108% 95% 80%

Return on investments before fees 3.6% 11.7% 14.7% 15.5% 4.7%

Return on investments after fees 3.1% 11.2% 14.1% 14.9% 4.3%

Return on assets1 11.1% 11.9% 6.6% 2.2% 1.9%

Return on equity1, 2 73.1% 95.5% 467.0% N/A N/A

Salaries as percentage of gross premium written 5.8% 6.1% 6.4% 6.3% 5.8%

Gross premium written per full-time equivalent employee at end of year ($ million) 2.7 2.6 2.3 2.3 2.4

Number of employees at end of year3 144 138 154 143 129

Number of full-time equivalent staff at end of year3 138.1 130.7 145.0 134.6 121.1

Gross premium written ($ million) 377.4 346.0 337.8 309.5 288.1

1. Return on assets and return on equity are calculated based on the PFIO.2. As the average equity positions for the 2012 and 2013 financial years are negative, this ratio does not represent a meaningful performance measure.3. All figures reflect employees paid in the last full pay period of June each year. Excluded are those on leave without pay, secondees, external contractors/consultants

and temporary staff employed by employment agencies.

Financial summary (continued)




Directions of the Minister for Finance

Community Service Organisation Program

Pursuant to section 25A of the Victorian Managed Insurance Authority Act 1996, I, Robin Scott MP, direct the Victorian Managed Insurance Authority (VMIA) to provide a full range of insurance to the following entities of the Community Services Organisation Program:

1. Community Service Organisations; and2. Entities or persons engaged in the Direct

Employment Project.

This direction is effective from 1 July 2015 to 30 June 2017 (both dates inclusive), with the VMIA to determine the premiums payable, as well as any policy terms and conditions, as it sees fit. The insurance is to be provided at a commercial rate.

Dated 28 April 2015

The Hon. Robin Scott MP, Minister for Finance

Kindergarten and Adult and Community Further Education Program Pursuant to section 25A of the Victorian Managed Insurance Authority Act 1996, I, Robin Scott MP, direct the Victorian Managed Insurance Authority (VMIA) to provide a full range of insurance to the following entities:

1. Kindergartens or equivalent organisations funded and deemed eligible by the Department of Education and Training (DET); and

2. Learn Local or equivalent organisations funded and deemed eligible by the Adult, Community and Further Education Board (the Board).

This direction is effective from 1 July 2015 to 30 June 2017 (both dates inclusive), with the VMIA to determine the premiums payable by the DET and the Board, as well as any policy terms and conditions as it sees fit. The insurance is to be provided at a commercial rate.

Dated 28 April 2015


Growth Areas Infrastructure Contribution Hardship Relief BoardPursuant to section 25A of the Victorian Managed Insurance Authority Act 1996, I, Robin Scott MP, direct the Victorian Managed Insurance Authority (VMIA) to provide appropriate insurance to the Growth Areas Infrastructure Contribution Hardship Relief Board.

This direction is effective from 1 July 2015 until 30 June 2017 (both dates inclusive), with the VMIA to determine the premium payable by the Board, as well as any policy terms and conditions as it sees fit. The insurance is to be provided at a commercial rate.

Dated 28 April 2015


Victorian Bushfire Appeal Fund Advisory PanelPursuant to section 25A of the Victorian Managed Insurance Authority Act 1996, I, Robin Scott MP, direct the Victorian Managed Insurance Authority (VMIA) to provide appropriate insurance to the Victorian Bushfire Appeal Fund Advisory Panel (the Panel).

This direction is effective from 1 July 2015 until 30 June 2017 (both dates inclusive), with the VMIA to determine the premiums payable by the Panel as well as any policy terms and conditions as it sees fit. The insurance is to be provided at a commercial rate.

Dated 28 April 2015


Australian Grand Prix Corporation Pursuant to section 25A of the Victorian Managed Insurance Authority Act 1996, I, Robin Scott MP, 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 Motorcycle Grand Prix and Formula One Grand Prix.

This direction is effective from 2 September 2015 until 1 September 2017 (both dates inclusive), with the VMIA to determine the premiums payable, as well as any policy terms and conditions as it sees fit. The insurance is to be provided at a commercial rate.

Dated 28 April 2015


Royal Melbourne Showgrounds Joint VenturePursuant to section 25A of the Victorian Managed Insurance Authority Act 1996, I, Robin Scott MP, direct the Victorian Managed Insurance Authority (VMIA) to provide Directors and Officers Liability insurance to the Chairperson of the Royal Melbourne Showgrounds Joint Venture.

This direction is effective from 1 July 2015 until 30 June 2017 (both dates inclusive), with the VMIA to determine the premium payable by the Chairperson, as well as any policy terms and conditions as it sees fit. The insurance is to be provided at a commercial rate.

Dated 28 April 2015



Directions of the Minister for Finance (continued)Government Rail Insurance Program (GRIP)Pursuant to section 25A of the Victorian Managed Insurance Authority Act 1996, I, Robin Scott MP, direct the Victorian Managed Insurance Authority (VMIA) to provide appropriate insurance to

1. GRIP entities including, though not limited to, those listed in Schedule 1, but excluding Heritage and Tourist Rail Operators and Accredited Rail Operators – for public and products liability, industrial special risks and construction risks;

2. Heritage and Tourist Rail Operators and Accredited Rail Operators including, though not limited to, those listed in Schedule 2 – for public and products liabilities in excess of $10 million; and

3. GRIP entities listed in Schedule 3, in the event of a declared terrorist incident, as defined in section 6 of the Terrorism Insurance Act 2003 (Cth).

The Treasurer has provided an indemnity to the VMIA for the full costs of administering the insurance for terrorism risks provided in accordance with this direction. This indemnification is to be provided in accordance with the separate Deed of Indemnity provided by the Treasurer.

This direction is effective from 1 July 2015 until 30 June 2019 (both dates inclusive), with the VMIA to determine the premium payable by the entities for their insurance, as well as any policy terms and conditions as it sees fit. The insurance is to be provided at a commercial rate. The direction relating to GRIP issued by the then Minister on 28 May 2014 is hereby revoked.

Dated 28 April 2015


Schedule 1

Entity ACN

1 Puffing Billy Preservation Society 004 621 505

2 Metro Trains Melbourne Pty Ltd

Sunstone Resources Pty Ltd

136 429 948

164 058 002

3 KDR Victoria Pty Ltd 138 066 074

4 Australian Rail Track Corporation 081 455 754

Schedule 2

Entity ACN

Heritage and Tourist Rail Operators

1 Alexandra Timber Tramway & Museum Inc.

A0007722C

2 Ballarat Tramway Museum Incorporated A0031819K

3 Castlemaine & Maldon Railway Preservation Society

005 621 581

4 Geelong Steam Preservation Society 004 819 130

5 Melbourne Tramcar Preservation Association Inc.

A0001102T

6 Mornington Railway Preservation Society Inc.

A0001935C

7 Portland Cable Trams Inc. A0033426A

8 Red Cliffs Historical Steam Railway Inc. A0031587M

9 Seymour Railway Heritage Centre Inc. A0007496T

10 South Gippsland Tourist Railway Inc. A0028135L

11 The Central Highlands Tourist Railway 006 220 355

12 Walhalla Goldfields Railway Inc. A0026304V

13 Yarra Valley Tourist Railway Society Inc. A0007627H

14 Seven-O-Seven Operations Inc. A0006499S

15 Steamrail Victoria Inc. A0026264J

16 Diesel Electric Rail Motor Preservation Association of Victoria Inc.

A0017464R

Accredited Rail Operators

1 McLeod Rail Pty Ltd 117 452 838

Schedule 3

Entity ACN

1 Metro Trains Melbourne Pty Ltd 136 429 948

2 KDR Victoria Pty Ltd 138 066 074




Directions of the Minister for Finance (continued)Public Healthcare ProgramPursuant to section 25A of the Victorian Managed Insurance Authority Act 1996, I, Robin Scott MP, direct the Victorian Managed Insurance Authority (VMIA) to provide a full range of insurance to the following entities of the Public Healthcare Program:

1. Bush Nursing Hospitals;

2. Denominational Hospitals;

3. Privately Operated Public Hospitals;

4. Medical Research Agencies;

5. Mental Health Service Agencies;

6. Specialised Health Agencies;

7. Medical Practitioners covered by the Rural General Practitioner Program;

8. Community Health Service Agencies;

9. Community Emergency Response Teams;

10. Primary Care Partnership Agencies;

11. Post Acute Care Agencies;

12. Needle Syringe Exchange Agencies;

13. Miscellaneous Healthcare Risks;

14. The New South Wales Minister for Health (Integration of Albury and Wodonga Health Services); and

15. Former Public Healthcare Agencies that no longer operate.

This direction is effective from 1 July 2015 to 30 June 2017 (both dates inclusive), with the VMIA to determine the premiums payable by the entities of the Public Healthcare Program, as well as any policy terms and conditions as it sees fit. The insurance is to be provided at a commercial rate.

Dated 28 April 2015


Crime Stoppers VictoriaI, Robin Scott MP, being the Minister responsible for administering the Victorian Managed Insurance Authority Act 1996 (the Act), pursuant to section 25A of the Act, hereby direct the Victorian Managed Insurance Authority (VMIA) to provide appropriate insurance to the Crime Stoppers Victoria.

This direction is effective from 1 July 2015 until 30 June 2017 (both dates inclusive), with the VMIA to determine the premium payable by Crime Stoppers Victoria, as well as any policy terms and conditions as it sees fit. The insurance is to be provided at a commercial rate.

Dated 19 June 2015


Domestic Building InsurancePursuant to section 25A of the Victorian Managed Insurance Authority Act 1996, I hereby direct the Victorian Managed Insurance Authority to provide domestic building insurance to domestic builders as well as people to whom section 137B of the Building Act 1993 (Building Act) applies, where such domestic builders or persons can demonstrate the following to the Victorian Managed Insurance Authority’s satisfaction:

(a) that the domestic building insurance required is of the type specified in an applicable order as published in the Government Gazette under section 135 of the Building Act from time to time; and

(b) that they comply with such underwriting terms and conditions, including but not limited to conditions relating to premium and security, as are determined by the Victorian Managed Insurance Authority in its absolute discretion.

The Victorian Managed Insurance Authority is to determine underwriting terms and conditions, including conditions as to premium and security, and any other conditions, as are reasonably required for it to recoup the full costs for the provision of this insurance product and associated services, including the payment of claims, throughout the period for which domestic building insurance policies issued by it in accordance with this Direction remain open to be claimed upon. Premiums are to be calculated and determined in consultation with the Department of Treasury and Finance. The Victorian Managed Insurance Authority is to directly manage all claims under policies of domestic building insurance issued by it in accordance with this Direction.

The Direction is effective from 1 July 2016 (date inclusive) to 30 June 2021 (date inclusive).

Dated 3 December 2015


School Councils Insurance ProgramPursuant to section 25A of the Victorian Managed Insurance Authority Act 1996, I, Robin Scott MP, direct the Victorian Managed Insurance Authority (VMIA) to provide personal accident insurance to students of Government schools.

This direction is effective from 1 May 2016 to 30 June 2020 (both dates inclusive), with the VMIA to determine the premiums payable as well as any policy terms and conditions as it sees fit. The insurance is to be provided at a commercial rate.

Dated 21 April 2016




Directions of the Minister for Finance (continued)School Councils Insurance ProgramPursuant to section 25A of the Victorian Managed Insurance Authority Act 1996, I, Robin Scott MP, direct the Victorian Managed Insurance Authority (VMIA) to provide public liability insurance to persons and bodies during their occupancy and use of Government school facilities and equipment.


Dated 21 April 2016


School Councils Insurance ProgramPursuant to section 25A of the Victorian Managed Insurance Authority Act 1996, I, Robin Scott MP, direct the Victorian Managed Insurance Authority (VMIA) to provide insurance in respect of the property of Government school employees and volunteers used in the course of the business of the school or whilst on school grounds.


Dated 12 May 2016


Ongoing DirectionsVMIA provided insurance cover and continues to provide insurance cover under section 25A for the following entities/programs (both dates inclusive):

Cemetery Trusts 1 July 2012 – 30 June 2017

Members of the Land Tax Hardship Relief Board

20 April 2013 – 30 June 2016

Domestic Building Insurance 1 July 2013 – 30 June 2016

Construction Projects 1 July 2014 – 30 June 2019

Emergency Resources Providers Support Scheme

1 July 2014 – 30 June 2019

Heide Museum of Modern Art 1 July 2014 – 30 June 2019


Attestation of compliance with the Victorian Government Risk Management Framework Direction 4.5.5 – Risk Management Framework and Processes

Standing Direction 4.5.5 of the Minister for Finance requires agencies to attest in their Annual Report that they have complied with the mandatory requirements set out in the Victorian Government Risk Management Framework and that the Audit Committee verifies that view.

The Audit Committee has reviewed VMIA’s attestation processes and verified the following:

• VMIA has a risk management framework in place consistent with the Australian/New Zealand Risk Management Standard AS/NZS ISO 31000:2009 Risk Management - Principles and Guidelines;

• the risk management framework is reviewed annually and supports the development of a positive risk culture;

• VMIA’s risk profile has been reviewed within the past 12 months;

• risk management is incorporated into VMIA’s corporate and business planning processes;

• the risk management processes are effective in managing risk to a satisfactory level;

• responsibilities for managing each risk are defined;

• interagency risks are addressed and VMIA contributes to the management of shared risks across government, as appropriate;

• VMIA contributes to the identification and management of state-significant risks, as appropriate; and

• adequate resources are assigned to risk management.

Based on this, the Board authorised the Chairperson to provide the following attestation:

I, John Peberdy, Chairperson of the Victorian Managed Insurance Authority Board, certify that VMIA has complied with the Ministerial Standing Direction 4.5.5 – Risk Management Framework and Processes. The VMIA Audit Committee verifies this.

John PeberdyChairpersonVictorian Managed Insurance Authority30 August 2016

Risk attestation



Compliance

Occupational health and safety (OHS)VMIA is committed to the health and safety of staff and visitors. The Work Health and Safety Committee meets every two months and is represented at all organisational levels. During the year VMIA monitored and remedied the hazards identified and incidents reported.

In 2015-16, enhanced communication of work health and safety issues created a greater awareness and reporting of hazards and incidents.

Table 4: Performance against OHS management measures

2016 2015

Hazards identified 8 7

Incidents reported 7 6

WorkCover claims 1 1

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

Public administration values and employment principlesVMIA has a documented suite of detailed employment policies, including policies pertaining to recruitment, managing performance, grievance resolution, redeployment and diversity. These policies are reviewed annually to ensure they reflect current legislative requirements and workplace practices.

Workforce data Table 5: Workforce data1

2016 2015

Number of employees (headcount) 144 138

Number of employees (full-time equivalent) 138.1 130.7

1. All figures reflect employees paid in the last full pay period of June of each year. Excluded are those on leave without pay, secondees, external contractors/consultants and temporary staff employed by employment agencies.

All VMIA employees have been correctly classified in workforce data collections.

Compliance with Victorian Industry Participation Policy Act 2003The Victorian Industry Participation Policy Act 2003 (VIPP) aims to boost employment and business growth in Victoria and applies to all government procurement activities where the value exceeds $3 million in metropolitan Melbourne and state-wide projects, or $1 million in regional Victoria.

During the year VMIA did not commence or complete any contracts exceeding $3 million in metropolitan Melbourne or $1 million in regional Victoria.

Government advertising expenditureVMIA did not spend any money on government advertising campaigns during the 2015-16 financial year.

Information and communication technology expenditureVMIA’s expenditure in providing business enabling information and communication technology (ICT) services is summarised below.

Business as usual expenditure relates to ongoing activities to operate and maintain the current ICT capability. Non-business as usual expenditure relates to extending and enhancing VMIA’s current ICT capability. A further split of non-business as usual expenditure between operational and capital expenditure is also provided.

Table 6: Information and communication technology expenditure 2015-16

Business as usual

expenditure ($ excl GST)

Non- business as usual


Operational expenditure ($ excl GST)

Capital expenditure ($ excl GST)

4,461,979 522,580 522,580 -



Consultancy expenditure

Consultancy expenditure over $10,000 (excluding GST) In 2015-16, there were 15 consultancies where the total fees paid or payable to the consultants was $10,000 or greater, excluding GST. The total expenditure incurred during 2015-16 in relation to these consultancies was $962,985, excluding GST.

Table 7: Consultancy expenditure over $10,000 (excluding GST)

Consultant Purpose of consultancy

Total approved


Expenditure 2015-16

($ excl GST)

Future expenditure

($ excl GST)

Aspex Consulting Evaluation framework project 65,271 65,271 -

Bevington Group Review of VMIA structure 301,642 301,642 -

Deloitte Touche Tohmatsu

Development of a mobility strategy 30,000 30,000 -

Effective Governance Board and Board Committee evaluation 59,450 59,450 -

Erica Lane and Associates

Strategic advice in relation to service delivery improvements

274,305 110,880 -

EY Sweeney Development of a recommended survey framework 29,700 29,700 -

Finity Consulting Claims management review 103,681 103,681 -

Governance Portfolio Program business model review and development 48,750 36,562 12,188

Identify Solutions Identity and access management requirements of VMIA's IT system

19,800 19,800 -

Inhance Partners Management advice and support for corporate planning and development

502,800 84,800 -

KordaMentha Chief Executive Officer 360o review 36,000 36,000 -

Landell Consulting Probity advice 41,727 1,949 -

Mercer Policy advice 15,750 15,750 -

NoTosh Review programs for risk in practice leadership series 20,000 20,000 -

Taylor Fry External peer review of 30 June 2015 actuarial valuation 47,500 47,500 -

Consultancy expenditure under $10,000 (excluding GST)In 2015-16 there was one consultancy engaged where the total fees paid or payable to the consultant was less than $10,000, excluding GST. The total expenditure incurred during 2015-16 in relation to this consultancy was $9,036, excluding GST.


Compliance (continued)


Compliance (continued)Disclosure of major contractsDuring the 2015-16 financial year VMIA did not enter into any major contracts.

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 VMIA.

For the year ended 30 June 2016, VMIA received three applications from the general public. All requests received by VMIA were acceded to.

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

• it should be accompanied by the appropriate application fee (the fee may be waived in certain circumstances).

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

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

Requests can also be lodged online at www.foi.vic.gov.au.

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

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

Additional information on requestIn compliance with the requirements of the Standing Directions of the Minister for Finance, details in respect of the items listed below have been retained by VMIA and are available on request, subject to the provisions of the Freedom of Information Act 1982:

• declarations of pecuniary interest that have been duly completed by all relevant officers

• publications produced by VMIA about VMIA, and how these can be obtained

• changes in prices, fees, charges, rates and levies charged by VMIA

• any major external reviews carried out on VMIA

• major research and development activities undertaken by VMIA

• overseas visits undertaken including the objectives and outcomes of each visit

• assessments and measures undertaken to improve the occupational health and safety of employees

• major committees sponsored by VMIA, the purpose of each committee and the extent to which the respective purpose has been achieved

• workforce and executive officer data

• consultancies and contractors including:

(i) consultants/contractors engaged

(ii) services provided

(iii) expenditure committed to for each engagement.


http://www.foi.vic.gov.au

http://www.foi.vic.gov.au



Compliance (continued)Compliance with 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 the 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

• 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.

In 2016, VMIA undertook a self-assessment against Victorian Government Competitive Neutrality Policy September 2012. The self-assessment supported the delivery of an action contained in VMIA’s corporate plan.

The self-assessment determined that the majority of VMIA’s activities/services are not presently in scope of the policy because they do not constitute ‘a business’ for competitive neutrality purposes. This is predominantly due to the number of substantive and regulatory constraints which significantly limit VMIA’s independence in supplying the services and the price at which they are provided.

VMIA will continue to monitor its activities against the policy by undertaking regular self-assessments every 18 to 24 months or earlier should significant changes to VMIA’s business policies, government policy and/or the relevant market for an activity potentially trigger a change in the outcome of the assessment or may raise new activities for assessment.

Compliance with Protected Disclosure Act 2012The Protected Disclosure Act 2012 (the Act) encourages and assists people in making disclosure of improper conduct by public officers and public bodies. The Act provides protection to people who make disclosure in accordance with the Act and establishes a system for the matters disclosed to be investigated and rectifying action to be taken.

VMIA does not tolerate improper conduct by staff members, nor the taking of reprisals against those who come forward to disclose such conduct. It is committed to ensuring transparency and accountability in its administrative and management practices and supports making disclosure that reveals corrupt conduct, conduct involving substantial mismanagement of public resources, or conduct involving substantial risk to public health and safety or the environment.

VMIA is committed to ensuring the welfare of those who make or are cooperating in protected disclosure and will take all reasonable steps to protect people who make such disclosure from any detrimental action in reprisal for making the disclosure. It will also afford natural justice to the person who is the subject of the disclosure to the extent it is legally possible.

Reporting proceduresDisclosure of improper conduct or detrimental action by VMIA or any of its staff members and/or officers must be made directly to the Independent Broad-based Anti-corruption Commission (IBAC).

IBACLevel 1, North Tower 459 Collins StreetMelbourne VIC 3000Phone: 1300 735 135Website: www.ibac.vic.gov.auEmail: see the website above for the secure email disclosure process, which also provides for anonymous disclosure.

Further informationThe Protected Disclosure Procedures, which outline the system for reporting disclosure of improper conduct or detrimental action by VMIA or any of its staff members and/or officers, are available on VMIA’s website.

For the financial year ended 30 June 2016, there was no disclosure made by an individual to VMIA and notified to the Independent Broad-based Anti-corruption Commission under the Protected Disclosure Act 2012.

http://www.ibac.vic.gov.au


Compliance (continued)Compliance with Carers Recognition Act 2012VMIA has taken all practical measures to comply with our obligations under the Carers Recognition Act 2012 (the Act). These include considering the carer relationship principles set out in the Act when setting policies and providing services. For example, reviewing VMIA’s employment policies such as flexible working arrangements and leave provisions to ensure that these comply with the statement of principles in the Act.

Compliance with Disability Act 2006VMIA is committed to ensuring the inclusiveness of all staff members. During the year ended 30 June 2016, VMIA undertook work to improve accessibility in the kitchen areas.

Compliance with Building Act 1993VMIA does not own or control any government buildings and consequently is exempt from notifying its compliance with the building and maintenance provisions of the Building Act 1993.

Office-based environmental impactsVMIA is committed to proactively contributing to a sustainable environment and aims to minimise its office-based environmental impact through:

• adoption of ISO 14001 Environmental Management System guidelines in the development of its environmental policy

• building environmental awareness amongst staff members to reduce water, energy and paper use

• integration of sustainability principles into the design and fit-out of office space

• establishing internal procedures to maximise alternative use of redundant stationery and used office equipment

• separating office waste into organic, commingled recyclable and landfill streams

• reducing paper and printer toner use with the widespread adoption by staff of tablets, smartphones and other digital mobile devices.

Compliance with DataVic Access PolicyThe Victorian Government recognises the benefits from and encourages the availability of government data for the public good; to enable public access to government data to support research and education, promote innovation, support improvements in productivity and stimulate growth in the Victorian economy.

Supporting this intent, VMIA published data in the Victorian Government Data Directory (www.data.vic.gov.au) for Victorians to discover, access and use. The following datasets were published:

• master insurance policy wordings

• Community Service Organisation insurance policy wordings

• annual insurance questionnaire questions

• Annual Report: Progress against Annual Business Plan operational KPIs

• Annual Report: Five-year summary of financial results table

• Annual Report: Key financial performance indicators table

• Annual Report: Workforce data table

• VMIA website statistics

• Ministerial Directions under section 25A of the Victorian Managed Insurance Authority Act 1996

• Domestic Building Insurance website statistics.

VMIA will continue to publish data that is suitable for release under the DataVic Access Policy.


http://www.data.vic.gov.au


Financial Statements 30

Notes to the Financial Statements 34

Declaration by Chairperson, Accountable Officer and Chief Finance and Accounting Officer 90

Independent Auditor’s Report 91


Financial Report


Contents Page

Financial StatementsComprehensive Operating Statement 30Balance Sheet 31Statement of Changes in Equity 32Cash Flow Statement 33

Notes to the Financial StatementsNote 1 General information 34Note 2 Summary of significant accounting policies 35Note 3 Critical accounting judgements, assumptions and estimates 43Note 4 Insurance contracts – risk management policies and procedures 50Note 5 Income 52Note 6 Net claims incurred 53Note 7 Administration expenses 53Note 8 Cash and cash equivalents 54Note 9 Trade receivables 54Note 10 Non-trade receivables 54Note 11 Investments 55Note 12 Furniture, fittings, equipment and motor vehicles 56Note 13 Deferred acquisition costs 58Note 14 Reinsurance and other recovery assets 58Note 15 Trade payables 58Note 16 Non-trade payables 59Note 17 Provisions 59Note 18 Lease incentive liability 60Note 19 Net unearned premium liability 60Note 20 Unexpired risks liability 61Note 21 Claims liabilities 63Note 22 Equity 69Note 23 Reinsurance program 69Note 24 Financial instruments 70Note 25 Commitments and contingencies 82Note 26 Superannuation benefits 83Note 27 Responsible persons 84Note 28 Remuneration of executive officers and payments to contractors with significant management responsibilities 87Note 29 Reconciliation of net cash inflow from operating activities to net result 88Note 30 Reconciliation of movements in investments 89Note 31 Ex gratia expenses 89Note 32 Subsequent events 89

Declaration by Chairperson, Accountable Officer and Chief Finance and Accounting Officer 90Independent Auditor’s Report 91


Financial ReportFor the financial year ended 30 June 2016


Note

2016 $’000

2015$’000

Gross premium written 19 377,384 346,001

Increase in gross unearned premium liability (43,573) (17,383)

Gross premium earned 5(a), 19 333,811 328,618

Reinsurance premium incurred 19 (43,073) (45,459)

Net premium earned before movement in unexpired risks liability 19 290,738 283,159

Decrease in unexpired risks liability 20(b) 3,682 20,308

Net premium earned 294,420 303,467

Gross claims incurred 6, 21(c) (222,949) (81,525)

Reinsurance and other recoveries 5(b), 6, 21(c) 20,628 (8,391)

Unallocated claims expenses 6 (6,882) (7,257)

Net claims incurred 6 (209,203) (97,173)

Gross commission paid (20,615) (19,547)

Reinsurance commission incurred (1,013) (1,329)

Increase in deferred acquisition costs 13, 20(a) 5,853 6,117

Commission incurred (15,775) (14,759)

Other income 5(d) 2,099 2,223

Administration expenses 7 (30,335) (28,281)

Underwriting result 41,206 165,477

Investment income 5(c) 80,530 244,123

Investment management expenses (7,827) (6,693)

Net investment income 72,703 237,430

Net result 113,909 402,907

Comprehensive result 113,909 402,907

VMIA has no other comprehensive income to report for the year ended 30 June 2016 (2015: $Nil).

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

Financial Statements

Comprehensive Operating StatementFor the financial year ended 30 June 2016


Balance SheetAs at 30 June 2016

Note

2016$’000

2015$’000

ASSETSFinancial assets

Cash and cash equivalents 8 7,788 20,123

Trade receivables 9 666 4,647

Non-trade receivables 10 53 572

Investments 11 2,208,124 2,405,466

Total financial assets 2,216,631 2,430,808

Non-financial assets

Prepaid expenses 735 920

Trade receivables 9 355,194 326,841

Non-trade receivables 10 1,016 572

Furniture, fittings, equipment and motor vehicles 12 2,977 3,874

Deferred acquisition costs 13, 20(a) 28,005 22,152

Unearned premium 19 10,241 24,551

Claims outstanding and incurred but not reported 14, 21(c) 39,220 52,103

Reinsurance and other assets 49,461 76,654

Total non-financial assets 437,388 431,013

Total assets 2,654,019 2,861,821

LIABILITIES

Trade payables 15 17,715 34,494

Non-trade payables 16 85,883 95,519

Derivative liabilities 11 13,751 13,178

Provisions 17 3,869 3,794

Lease incentive liability 18 783 1,052

Unearned premium 19 448,190 404,617

Unexpired risks 20(b) 62,695 66,377

Claims outstanding and incurred but not reported 21(a), 21(c) 1,728,116 1,694,682

Gross insurance liabilities 2,239,001 2,165,676

Total liabilities 2,361,002 2,313,713

Net assets 293,017 548,108

EQUITY

Contributed capital 22 13,871 162,371

Accumulated surplus 22 279,146 385,737

Total equity 22 293,017 548,108

Commitments 25(c), 25(d) 245,426 133,896

Contingent assets and contingent liabilities 25(e) - -

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



Note

Contributed capital $’000

Accumulated (deficit)/surplus

$’000

Total

$’000

Balance at 30 June 2014 162,371 (17,170) 145,201

Comprehensive result for the year - 402,907 402,907

Balance at 30 June 2015 22 162,371 385,737 548,108

Comprehensive result for the year - 113,909 113,909

Conversion of accumulated surplus into contributed capital 22 148,000 (148,000) -

Repayment of contributed capital 22 (296,500) - (296,500)

Dividend paid - (72,500) (72,500)

Balance at 30 June 2016 22 13,871 279,146 293,017

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 2016



Cash Flow StatementFor the financial year ended 30 June 2016

Note

2016$’000

2015$’000

Cash flows from operating activities

Insurance premium received 418,288 416,144

Other income 2,309 1,413

Reinsurance premium paid (47,020) (41,733)

Gross claims paid (220,324) (376,218)

Reinsurance and other recoveries received 39,292 194,305

Reimbursement of claims paid on behalf of others 21,921 17,203

Gross commission paid (22,676) (21,502)

Payments to employees and suppliers for services and goods (44,075) (42,203)

Dividends, distributions and other investment income received 5(c) 92,781 71,391

Interest received 5(c) 15,086 25,250

Goods and Services Taxation paid (24,888) (23,630)

Stamp Duty paid (30,679) (30,441)

Net cash inflow from operating activities 29 200,015 189,979

Cash flows from investing activities

Acquisition of furniture, fittings, equipment and motor vehicles 12 (340) (396)

Proceeds on disposal of furniture, fittings, equipment and motor vehicles 12 230 253

Acquisition of investments 30 (1,851,116) (3,717,430)

Proceeds on disposal of investments 30 2,007,876 3,525,064

Net cash inflow/(outflow) from investing activities 156,650 (192,509)

Cash flows from financing activities

Repayment of contributed capital 22 (296,500) -

Dividend paid (72,500) -

Cash outflow from financing activities (369,000) -

Decrease in cash and cash equivalents (12,335) (2,530)

Cash and cash equivalents at beginning of year 20,123 22,653

Cash and cash equivalents at end of year 8 7,788 20,123

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



1. General information(a) Reporting entity The financial report covers the Victorian Managed Insurance Authority (VMIA) as an individual reporting entity. VMIA is a Public Financial Corporation, established on 1 October 1996 by the Victorian Managed Insurance Authority Act 1996 to provide insourced risk management and multi-line insurance services to its clients across the State of Victoria. The Order in Council gazetted on 14 May 2015 declared VMIA as a reorganising body under section 7 of the State Owned Enterprises Act 1992.

VMIA’s principal address is Level 10, 161 Collins Street, Melbourne, Victoria, 3000.

A description of the nature of VMIA’s operations and its principal activities is included in the VMIA 2016 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 the prior year. 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) Comprehensive Operating Statement, Note 6 Net Claims Incurred and Note 7 Administration Expenses – provide separate disclosure of the reallocation of unallocated claims expenses from administration expenses to net claims incurred.

(ii) Cash Flow Statement, Note 5(c) Investment Income, Note 29 Reconciliation of Net Cash Inflow from Operating Activities to Net Result and Note 30 Reconciliation of Movement in Investments – gains and losses pertaining to equity swaps have been reclassified from interest to realised gains and losses. Further details are provided in Note 1(d) below.

(iii) Note 27(c) Other Transactions of Responsible Persons and their Related Entities – all income and expense transactions are disclosed net of Stamp Duty and Goods and Services Taxation to align with the disclosure in the Comprehensive Operating Statement.

(d) Correction of prior period misstatement In light of updated information provided by the custodian VMIA has determined that equity swap income of $8.230 million for the year ended 30 June 2015 was incorrectly accounted for as interest income as opposed to realised gains on disposal of investments. This misstatement has been corrected in the Cash Flow Statement line items Interest Received and Proceeds on Disposal of Investments resulting in Net Cash Inflow from Operating Activities decreasing from $198.209 million to $189.979 million and Net Cash Outflow from Investing Activities decreasing from $200.739 million to $192.509 million. Note 5(c) Investment Income, Note 29 Reconciliation of Net Cash Inflow from Operating Activities to Net Result and Note 30 Reconciliation of Movement in Investments have been updated accordingly.

Notes to the Financial StatementsFor the financial year ended 30 June 2016



2. Summary of significant accounting policies(a) Statement of compliance The financial report is a general purpose financial report prepared on an accrual basis in accordance with the Financial Management Act 1994, applicable Australian Accounting Standards, in particular 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 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 2016.

(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. Consequently, where appropriate, VMIA applies those paragraphs in Australian Accounting Standards applicable to not-for-profit entities.

(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 2016 and the comparative information presented for the year ended 30 June 2015.

The functional currency of VMIA is the Australian Dollar.

(d) Changes in accounting policies The following revised Australian Accounting Standard has been adopted during the current financial year with its financial impact detailed below.

• AASB 2015-7 Amendments to Australian Accounting Standards – Fair Value Disclosures for Not-for-Profit Public Sector Entities which is applicable for reporting periods beginning on or after 1 July 2016. This amendment relieves not-for-profit public sector entities from making certain specified disclosure about the fair value measurement of assets within the scope of AASB 116 Property, Plant and Equipment. VMIA has early adopted this standard during the current financial year. As a result, Note 12 no longer discloses the financial ranges of the significant unobservable inputs relevant to computer hardware, furniture, leasehold improvements, motor vehicles and office equipment.

(e) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that may be applicable to VMIA but are not mandatory for the year ended 30 June 2016. VMIA has not adopted 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 2018. 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 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) which is applicable for reporting periods beginning on or after 1 January 2018. This amendment retains the classification of financial liabilities and the ability to use the fair value option, and determines the basis of accounting for any fair value changes. Details of the impact are still being assessed.

• AASB 15 Revenue from Contracts with Customers which is applicable for reporting periods beginning on or after 1 January 2018. This standard requires entities to recognise revenue when the entity satisfies a performance obligation by transferring a promised good or service to a customer. Details of the impact are still being assessed.

• AASB 16 Leases which is applicable for reporting periods beginning on or after 1 January 2019. This standard requires the recognition of most operating leases on the Balance Sheet. Details of the impact are still being assessed.



2. Summary of significant accounting policies (continued)

(e) New accounting standards and interpretations (continued)• AASB 2015-6 Amendments to Australian Accounting Standards – Extending Related Party Disclosures to

Not-for-Profit Public Sector Entities which is applicable for reporting periods beginning on or after 1 July 2016. This amendment extends the scope of AASB 124 Related Party Disclosures to include not-for-profit public sector entities and will result in extended disclosure on VMIA’s key management personnel and related party transactions.

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 a minimal impact on VMIA’s financial report and thus have not been specifically identified above.

(f) Gross premium earned and gross unearned premium liability 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.

Unearned premium represents the proportion of premium written that relates to unexpired terms of policies in force at the balance sheet date, generally calculated on a time proportionate basis.

(g) Reinsurance premium incurred and ceded unearned premium asset 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 a ceded unearned premium asset at the balance sheet date.

(h) Unexpired risks liability The adequacy of the net 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 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(i)], 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.

(i) Gross claims incurred and gross claims liabilities Gross claims incurred comprise claims and related expenses paid during the financial year and changes in the gross claims outstanding and gross claims incurred but not reported liabilities and related expenses, together with any other adjustments to claims for prior years.

The claims liabilities, which are actuarially assessed, comprise: (i) claims reported but not yet paid; (ii) claims incurred but not reported and claims incurred but not enough reported; (iii) the anticipated claims handling expenses of settling those claims and (iv) a risk margin.

Claims handling expenses include expenses that can be directly associated with individual claims, such as legal and other professional fees, and expenses that can only be indirectly associated with individual claims, such as claims administration expenses.




(i) Gross claims incurred and gross claims liabilities (continued) Indirect claims handling expenses incurred during the financial year include a portion of the indirect claims handling expenses to be paid in the future, being that portion which relates to handling claims arising during the current and prior reporting periods. The gross claims liabilities include these unpaid indirect claims handling expenses.

Indirect claims handling expenses included in administration expenses are referred to as unallocated claims expenses and are reallocated from administration expenses to net claims incurred.

The risk margin is applied to the net central estimate of the claims liabilities to achieve a 75% (2015: 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% (2015: 23%) allowance for diversification between insurance lines of business. The risk margins utilised also take into account the effect of the stop loss reinsurance protection pertaining to the medical indemnity claims 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 21.

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

(j) Reinsurance and other recoveriesReinsurance and other recoveries received or receivable in respect of gross claims paid and movements in reinsurance and other recovery assets in respect of claims reported but not yet paid, claims incurred but not reported and claims incurred but not enough reported are recognised in the Comprehensive Operating Statement in the year they occur.

Reinsurance and other recovery assets are actuarially assessed in a manner similar to the assessment of gross claims liabilities and are measured as the present value of the expected future receipts, calculated on the same basis as the gross claims liabilities [refer to Note 2(i)].

(k) Gross deferred acquisition costs Acquisition costs, which represent gross commission paid in respect of general insurance contracts, are deferred and recognised as assets where they can be reliably measured and where it is probable that they will give rise to premium earned that will be recognised in the Comprehensive Operating Statement in subsequent reporting periods.

Deferred acquisition costs are amortised systematically in accordance with the expected pattern of the incidence of risk under the general insurance contracts to which they relate. This pattern of amortisation corresponds to the earning pattern of the corresponding premium written.

(l) Other income Other income includes rendering of services to VMIA’s clients. Other income is recognised in the Comprehensive Operating Statement on an accrual basis.

(m) Administration expenses Administration expenses represent the day-to-day costs in managing VMIA and are recognised as they are incurred.




(n) Net investment income Dividend income is recognised when VMIA has the right to receive payment. Interest income and investment management expenses are 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.

(o) 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 the Comprehensive Operating Statement.

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

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

Rent free periods and other lease incentives offered by the lessor to 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.

(q) TaxationVMIA is exempt from Federal income taxation under section 24AM of the Income Tax Assessment Act 1936. 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 Statement of Cash Flows.

(r) DividendsIn accordance with section 13 of the State Owned Enterprises Act 1992, VMIA is required to pay to the State a dividend as determined by the Treasurer. An obligation to pay a dividend only arises after a formal determination is made by the Treasurer after consulting with the Minister for Finance and VMIA’s Board of Directors.

(s) 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.




(t) ImpairmentThe carrying amounts of VMIA’s assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If there is any indication that an asset may be impaired, its recoverable amount is estimated. The recoverable amount is the higher of its net selling price and its value in use.

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

(u) 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.

(v) Offsetting financial instruments VMIA offsets financial assets and financial 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 financial liability is the same and the financial asset and financial liability are denominated in the same currency.

(w) Cash and cash equivalents Cash and cash equivalents comprise cash on hand, cash at bank and cash in transit which are held for the purpose of meeting short term cash commitments rather than for investment purposes.

(x) ReceivablesTrade 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 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. Bad debts are written off when identified.

Receivables comprise contractual receivables, for example, debtors in relation to goods and services and accrued investment income, and statutory receivables, for example, amounts owing from the Victorian Government and GST input taxation credits recoverable.

Contractual receivables are classified as financial instruments and categorised as receivables [refer to Note 2(z)]. Statutory receivables are recognised and measured similarly to contractual receivables, except in relation to impairment, but are not classified as financial instruments because they do not arise from a contract.




(y) Furniture, fittings, equipment and motor vehicles

Cost, valuation and depreciationFurniture, 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.

Refer to Note 12 for details of inputs and valuation techniques used in determining the fair values of furniture, fittings, equipment and motor vehicles.

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

Useful life

Asset 2016 2015

Computer hardware 4 years 4 years

Furniture 10 years 10 yearsLeasehold improvements Term of lease – 4-7 years Term of lease – 5-7 years

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.

Profits and losses on disposal of furniture, fittings, equipment and motor vehicles are calculated as being the difference between the carrying value and net sale proceeds on the dates of disposal and are recognised in the Comprehensive Operating Statement.

Repairs and maintenance are recognised in the Comprehensive Operating Statement when the expenditure is incurred.

ImpairmentAssets 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 an expense in the Comprehensive Operating Statement.

(z) Assets backing insurance liabilitiesVMIA has determined that all assets, except for prepaid expenses and 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 fair value in the Balance Sheet with any subsequent changes in fair value 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, cash in transit and short term money market funds are carried at the face value of the amounts deposited or drawn. The carrying amounts of cash assets represent their fair values.

• Receivables are recognised and measured at fair value being the undisputed recoverable amounts between counterparties.

• 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.




(z) Assets backing insurance liabilities (continued)• 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 financial liabilities. They are initially recognised at fair value on the date on which the 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.

• 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(j)]. The details of the inflation and discount 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 VMIA commits to buy or sell the asset.

Investments are derecognised when the rights to receive future cash flows from the assets have expired, or have been transferred, and VMIA has transferred substantially all the risks and rewards of ownership.

Investments that are due to mature, expire or be realised within 12 months of the balance sheet date are classified as current investments. While this classification policy may result in a reported working capital deficit, VMIA holds high quality liquid assets in its investment portfolio which are readily convertible to cash assets.

(aa) Financial liabilities Financial liabilities at fair value through profit or loss are initially measured at fair value and attributable transaction costs are expensed as incurred. Subsequently any changes in fair value are recognised in the Comprehensive Operating Statement.

(bb) PayablesPayables represent liabilities for goods and services provided to VMIA that are unpaid at the end of the financial year. Payables are recognised and measured 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.

Payables comprise contractual payables, for example, accounts payable, and statutory payables comprise GST and Stamp Duty payables. Accounts payable represent liabilities for goods and services provided to VMIA prior to the end of the financial year that are unpaid.

Contractual payables are classified as financial instruments and categorised as financial liabilities at fair value through profit or loss [refer to Note 2(aa)]. Statutory payables are recognised and measured similarly to contractual payables, but are not classified as financial instruments and are not included in the category of financial liabilities at fair value through profit or loss, because they do not arise from a contract.




(cc) ProvisionsProvisions are recognised when VMIA has a present obligation, the future sacrifice of economic benefits is probable and the amount of the provision can be measured reliably.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows, using a discount rate that reflects the time value of money and risks specific to the provision.

When some or all of the economic benefits required to settle a provision are expected to be received from a third party, the receivable is recognised as an asset if it is virtually certain that recovery will be received and the amount of the receivable can be measured reliably.

(dd) Employee benefitsProvision is made for benefits accruing to employees in respect of wages and salaries, annual leave and long service leave for services rendered to the balance sheet date when it is probable that settlement will be required and the benefits are capable of being measured reliably.

Liabilities for wages and salaries and annual leave are recognised as current liabilities because VMIA does not have an unconditional right to defer settlement of these liabilities. The provision for annual leave is measured at the undiscounted value if VMIA expects to wholly settle such within 12 months and at the present value if VMIA does not expect to wholly settle such within 12 months.

Entitlements to long service leave vest after seven years of continuous service. The provision for unconditional long service leave is recognised as a current liability even where VMIA does not expect to settle the liability within 12 months because VMIA does not have the unconditional right to defer the settlement of the entitlement should an employee take leave within 12 months. The provision for unconditional long service leave is measured at the undiscounted value if VMIA expects to wholly settle such within 12 months and at the present value if VMIA does not expect to wholly settle such within 12 months.

The provision for conditional long service leave pertaining to the non-vested benefits is recognised as a non-current liability because VMIA has an unconditional right to defer the settlement of the entitlement until the employee has completed the requisite years of service. The provision for conditional long service leave is measured at present value.

Any gain or loss following the revaluation of the present value of the provision for long service leave is recognised in the Comprehensive Operating Statement.

VMIA recognises termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits falling due more than 12 months after the balance sheet date are discounted to present value.

Liabilities for on-costs such as payroll taxation, superannuation and workers’ compensation are recognised separately from the liabilities for wages and salaries, annual leave and long service leave. Contributions to complying superannuation funds are expensed when incurred.

(ee) EquityAdditions to net assets which have been designated as contributions by owners are recognised as contributed capital in accordance with FRD 119A Transfers through Contributed Capital.

(ff) Commitments and contingenciesCommitments 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 contingent liabilities are presented inclusive of GST.



3. Critical accounting judgements, assumptions and estimatesVMIA 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 deemed reasonable.

Revisions to accounting estimates are recognised in the period in which the estimate is revised and also in future periods that are affected by the revision.

Measurement of fair valuesA number of VMIA’s accounting policies and disclosure require the measurement of fair values for both financial and non-financial assets and liabilities in accordance with the requirements of AASB 13 Fair Value Measurement and the relevant Financial Reporting Directions.

When measuring the fair value of an asset or liability, VMIA uses observable market data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:

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

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

• 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).

If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the fair value measurement as a whole.

In addition, VMIA determines whether transfers have occurred between the different levels in the fair value hierarchy by reviewing the categorisation, based on the lowest level input that is significant to the fair value measurement as a whole, at the end of each financial year.

Note 24 sets out VMIA’s financial instruments that are subject to valuation techniques that give rise to estimation uncertainty.

Descriptions of the lines of business and the actuarial process for determining claims liabilitiesVMIA’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.

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

(i) Domestic Building Insurance 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 This line of business covers pre 1985 workers’ compensation and public liability claims against the former State Electricity Commission of Victoria 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.



3. Critical accounting judgements, assumptions and estimates (continued)

Descriptions of the lines of business and the actuarial process for determining claims liabilities (continued)

(iii) Liability, Property and OtherThese lines of business provide a range of general insurance to:

• Government Departments; • Participating bodies; and • 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 VMIA’s independent actuary for the incurred but not reported and incurred but not enough reported components.

(iv) Medical IndemnityThe Treasurer, on behalf of the State of Victoria, has provided stop loss reinsurance protection for policy years incepting on or after 1 July 2003 that limits VMIA’s liability for medical indemnity claims incurred in any one policy year to a maximum of 120% (2015: 120%) of the actuarially estimated undiscounted gross claims incurred for that policy 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 $850,000 at 30 June 2016, up from $815,000 at 30 June 2015 in line with wage and superimposed inflation.




Descriptions of the lines of business and the actuarial process for determining claims liabilities (continued)The following table summarises the main assumptions used by the independent actuary in estimating the net claims liabilities.

Actuarial assumptions

Domestic Building

Insurance

Dust Diseases and Workers'

Compensation LiabilityMedical

Indemnity Property Other

2016

Inflation rate 3.0% 3.4% 3.0% 3.0% 3.0% 3.0%

Superimposed inflation rate - 2.0% - 3.0% - -

Discount rate 1.8% 2.6% 1.8% 1.8% 1.8% 1.8%

Weighted average term to settlement(years) 3.9 12.1 4.1 4.3 1.1 2.5

Large claim frequency - - - 1.5% - -

Claim frequency per total certificates 1.6% - - - - -

Number of incurred but not reported (IBNR) claims - 913 - - - -

Claims handling expense (CHE) rate* 6.0% 7.0% 7.1% 3.0% 6.3% 7.5%Risk margin 23.5% 28.5% 31.7% 20.0% 17.5% 29.4%

2015

Inflation rate 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%

Superimposed inflation rate - 2.0% - 3.5% - -

Discount rate 2.5% 3.7% 2.5% 2.8% 2.5% 2.5%

Weighted average term to settlement(years) 4.2 11.7 3.8 4.8 0.9 3.3

Large claim frequency - - - 1.5% - -

Claim frequency per total certificates 1.5% - - - - -Number of incurred but not reported (IBNR) claims - 985 - - - -

Claims handling expense (CHE) rate* 7.0% 8.0% 6.7% 3.0% 5.3% 8.0%Risk margin 24.1% 29.3% 32.5% 21.1% 18.0% 30.7%

(*) Liability, Property and Other CHE rate for working claims = 8% and Property Catastrophe claims = 0.8%.

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




Process used to determine assumptions

(i) Dust Diseases and Workers’ CompensationThe 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 VMIA.

(ii) Medical IndemnityThe 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.

(iii) All VMIA lines of business• 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 superimposed inflation rates are set with reference to the superimposed inflation indicators present in the portfolio data and industry trends.

• 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 weighted average 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 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 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 for the current year

Variable

Sensitivity

%

Impact net of recoveries

$’000

Domestic Building Insurance

Inflation rate (3.0% p.a.) +1.0 3,542

-1.0 (3,329)

Discount rate (1.8% p.a.) +1.0 (3,329)

-1.0 3,542

Claim frequency (1.6% of total certificates) +0.1 5,996

-0.1 (5,996)

Average claim size ($40,400 per claim as at 30 June 2016) +10.0 9,594

-10.0 (9,594)

Claims handling expense rate (6.0% of claim payments) +1.0 905

-1.0 (905)

Risk margin (23.5% p.a.) +1.0 777

-1.0 (777)

Dust Diseases and Workers' Compensation


-1.0 (35,121)

Superimposed inflation rate (2.0% p.a.) +1.0 36,607

-1.0 (30,682)

Discount rate (2.6% p.a.) +1.0 (35,741)

-1.0 43,527

Number of IBNR claims (913 claims) +10.0 29,996

-10.0 (29,996)

Average claim size ($161,000 per claim as at 30 June 2016) +10.0 29,996

-10.0 (29,996)

Claims handling expense rate (7.0% of claim payments) +1.0 2,973

-1.0 (2,973)

Risk margin (28.5% p.a.) +1.0 2,475

-1.0 (2,475)




Sensitivity analysis – insurance contracts (continued)

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

Variable

Sensitivity

%


$’000

Liability


-1.0 (3,378)

Discount rate (1.8% p.a.) +1.0 (3,428)

-1.0 3,670

Ultimate claims ratio (assumed ultimate claims ratio for Liability is 68% for the latest +20.0 8,002

policy year) -20.0 (8,001)


-1.0 (1,106)

Risk margin (31.7% p.a.) +1.0 658

-1.0 (658)

Medical Indemnity


-1.0 (43,582)

Superimposed inflation rate (3.0% p.a.) +1.0 45,913

-1.0 (43,582)

Discount rate (1.8% p.a.) +1.0 (45,006)

-1.0 48,453

Non-large claim costs for the latest policy year +10.0 10,447

($39,000 per 1,000 separations) -10.0 (10,447)

Claim frequency – large claims for the latest policy year +0.2 13,885

(1.5% per 1,000 separations) -0.2 (13,885)

Average claim size for large claims +5.0 23,930

($2.5 million per claim as at 30 June 2016) -5.0 (23,930)


-1.0 (10,806)

Risk margin (20.0% p.a.) +1.0 9,228

-1.0 (9,228)





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

Variable

Sensitivity

%


$’000

Property

Inflation rate (3.0% p.a.) +1.0 285

-1.0 (283)

Discount rate (1.8% p.a.) +1.0 (343)

-1.0 353


-1.0 (348)

Risk margin (17.5% p.a.) +1.0 266

-1.0 (266)

Other


-1.0 (1,229)

Discount rate (1.8% p.a.) +1.0 (1,233)

-1.0 1,302

Ultimate claims ratio for long tail classes (assumed ultimate claims ratio for Professional +20.0 1,240

Indemnity and Directors and Officers is 125% for the latest policy year) -20.0 (1,240)


-1.0 (496)

Risk margin (29.4% p.a.) +1.0 382

-1.0 (382)



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 ultimate net claims incurred divided by gross ultimate premium.

Claims handling expense (CHE) rate

Claims liabilities include the professional and administration 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% (2015: 75%) probability of sufficiency. An increase in the risk margin would increase net claims incurred.

4. Insurance contracts – risk management policies and proceduresThe financial condition and operation of 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. 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 risksVMIA’s purpose is to minimise the impact on the State and its clients of the exposure to loss from adverse events through the provision of risk management and insurance services. 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. VMIA maintains Prudential Insurance Policies that encompass all aspects of VMIA’s operations including the reinsurance risk retentions and limits. These policies set out VMIA’s processes and controls in respect of the management of both financial and non-financial insurance risks likely to be faced by 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 VMIA is exposed.

• Actuarial models that use claims information derived from the claims experience of VMIA with consideration of industry experience.





4. Insurance contracts – risk management policies and procedures (continued)

(a) Objectives in managing risks arising from insurance contracts and policies mitigating these risks (continued)• 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 23 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 VMIA’s Reinsurance Management Strategy are accepted as participants in VMIA’s reinsurance program.

• The investment Strategic Asset Allocation, as determined by the Victorian Funds Management Corporation (VFMC), to meet 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 businessInsurance contracts for Domestic Building InsuranceInsurance contracts commence on the project contract’s start date and run for six years after the completion date of the project. The terms and conditions of these insurance contracts are reviewed on an ongoing basis.

Insurance contracts for Dust Diseases and Workers’ CompensationThe Dust Diseases and Workers’ Compensation portfolio is in run-off. The last Dust Diseases and Workers’ Compensation insurance contract expired on 31 January 1995.

Insurance contracts for Liability, Medical Indemnity, Property and OtherInsurance contracts typically incept at 4.00pm 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 riskThe portfolio contains some diversity, but is geographically concentrated in Victoria, and as such is exposed to the potentially material catastrophes of the State, for example, 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 catastrophe excess of loss reinsurance program provides coverage in excess of the retention level of $50 million (2015: $50 million). The appropriateness of the retention levels is reviewed by the Board of Directors on an annual basis.

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

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

(e) Credit riskThe 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. Income

Note2016$’000

2015 $’000

(a) Gross premium earned

Domestic Building Insurance 56,296 49,712

Liability 35,264 37,205

Medical Indemnity 157,563 152,530

Property 47,263 50,994

Other 37,425 38,177

Total gross premium earned 333,811 328,618

(b) Reinsurance and other recoveries

Domestic Building Insurance 72 12

Dust Diseases and Workers' Compensation - 8

Liability 3,113 (35,013)

Medical Indemnity 3,797 489

Property 387 11,482

Other 13,259 14,631

Total reinsurance and other recoveries 6 20,628 (8,391)

(c) Investment income

Dividends and distributions 92,493 70,061

Interest 15,086 25,250

Other investment income 288 1,330

Fair value movements through income:

Realised (losses)/gains (12,860) 71,123

Unrealised (losses)/gains 11 (14,477) 76,359

Total investment income 80,530 244,123

(d) Other income

Management and administration fees 2,099 2,223

Total income 437,068 566,573



6. Net claims incurred2016 2015

Currentyear

$’000

Prioryears$’000

Total$’000

Currentyear

$’000

Prioryears$’000

Total$’000

Gross claims incurred

Undiscounted 357,754 (242,379) 115,375 370,344 (418,249) (47,905)

Discount movement (31,507) 139,081 107,574 (50,295) 179,725 129,430

Total gross claims i ncurred 326,247 (103,298) 222,949 320,049 (238,524) 81,525

Reinsurance and other recoveries

Undiscounted (9,539) (12,811) (22,350) (13,123) 37,523 24,400

Discount movement 584 1,138 1,722 572 (16,581) (16,009)

Total reinsurance and other recoveries (8,955) (11,673) (20,628) (12,551) 20,942 8,391

Unallocated claims expenses 6,882 - 6,882 7,257 - 7,257

Total net claims i ncurred 324,174 (114,971) 209,203 314,755 (217,582) 97,173

The total net claims incurred for the 2016 financial year includes claim payments and actuarial adjustments for claims incurred prior to 2016 and claims incurred for the most recent policy year.

7. Administration expenses2016 $’000

2015 $’000

Auditor's remuneration 132 129

Depreciation of furniture, fittings, equipment and motor vehicles 1,008 1,034

Funding for clients' risk management projects 2,308 851

Interest expense - 1

(Profit)/loss on disposal of furniture, fittings, equipment and motor vehicles (1) 3

Operating lease expenditure 1,794 1,673

Professional services 3,096 3,360

Post employment benefits – defined contribution plans 2,070 2,149

Post employment benefits – defined benefit plan 45 88

Salaries, wages and long service leave 21,932 21,186

Suppliers and other services

Information services 2,942 2,991

Strategic risk expenses 776 914

Other 1,115 4,833 1,159 5,064

Total administration expenses 37,217 35,538

Less: unallocated claims expenses (6,882) (7,257)

Net administration expenses 30,335 28,281

The remuneration paid or payable to the Victorian Auditor-General’s Office for auditing VMIA’s financial report was $132,200 (2015: $129,000). No remuneration was paid to the Victorian Auditor-General’s Office for any other services.



8. Cash and cash equivalents2016$’000

2015$’000

Current

Cash on hand 1 1

Cash at bank 7,787 20,122

Total cash and cash equivalents 7,788 20,123

9. Trade receivablesCurrent

Reinsurance receivables – financial (contractual) 666 4,647

Insurance receivables – non-financial (statutory) 355,194 326,841

Total trade receivables 355,860 331,488

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 2016 (2015: $3.795 million). Refer to Note 24 for the nature and extent of risks arising from contractual trade receivables.

Statutory receivables mainly comprise insurance premium owing by various Victorian Government Departments and agencies. The fair value measurement for these receivables has been categorised as Level 2. No valuation techniques were used in the fair value measurement. The inputs include the undisputed recoverable amounts between counterparties.

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. $1.103 million of insurance receivables were past due at 30 June 2016 (2015: $0.556 million).

No provision for doubtful debts has been raised at 30 June 2016 (2015: Nil) as there is no risk of non-recovery of trade receivables.

10. Non-trade receivablesCurrent

Non-trade receivables – financial (contractual) 53 572

Goods and Services Taxation recoverable – non-financial (statutory) 1,016 572

Total non-trade receivables 1,069 1,144

Refer to Note 24 for the nature and extent of risks arising from contractual non-trade receivables.

The fair value measurement for statutory non-financial receivables has been categorised as Level 2. No valuation techniques were used in the fair value measurement. The inputs include the undisputed recoverable amounts between counterparties.

The usual credit terms for non-trade receivables is 30 days. No interest is charged on non-trade receivable invoices not paid within the credit terms. No non-trade receivables were past due at 30 June 2016 (2015: Nil).

No provision for doubtful debts has been raised at 30 June 2016 (2015: Nil) as there is no risk of non-recovery of non-trade receivables.



11. Investments

Opening balance

$’000Acquisitions

$’000

Sales/ redemptions

$’000

Unrealised fair value

(loss)/gain through income

$’000

Closing balance

$’000

Fair value at 30 June 2016

Australian equities 260,213 148,904 (164,617) (6,781) 237,719

Diversified fixed interest 333,814 63,611 (95,583) 6,511 308,353

Inflation linked bonds 288,539 49,034 (73,618) 5,522 269,477

Infrastructure 84,256 36,458 (22,012) 8,892 107,594

International equities 741,389 503,349 (610,789) (41,264) 592,685

Non-traditional strategies 208,999 66,788 (60,526) 902 216,163

Private equity 37,182 12,584 (15,968) 2,785 36,583

Property 196,012 25,013 (36,886) 9,011 193,150

Short term money market funds 241,884 931,023 (940,203) (55) 232,649

Total fair value at 30 June 2016 2,392,288 1,836,764 (2,020,202) (14,477) 2,194,373

Fair value at 30 June 2015

Australian equities 221,713 566,023 (528,555) 1,032 260,213

Diversified fixed interest 268,688 157,665 (96,019) 3,480 333,814

Inflation linked bonds 262,122 77,314 (41,177) (9,720) 288,539

Infrastructure 61,586 36,062 (18,783) 5,391 84,256

International equities 531,645 1,923,119 (1,752,563) 39,188 741,389

Non-traditional strategies 163,406 29,924 (21,060) 36,729 208,999

Private equity 53,286 93,309 (103,190) (6,223) 37,182

Property 140,229 52,691 (3,268) 6,360 196,012

Short term money market funds 329,745 799,576 (887,559) 122 241,884

Total fair value at 30 June 2015 2,032,420 3,735,683 (3,452,174) 76,359 2,392,288

Note2016$’000

2015$’000

Investments

Current 245,929 234,804

Non-current 1,962,195 2,170,662

Total investments at fair value 2,208,124 2,405,466

Derivative liabilities

Current (13,355) (13,100)

Non-current (396) (78)

Total derivative liabilities at fair value 24(d) (13,751) (13,178)

Total fair value 2,194,373 2,392,288

There was a significant change in the structure of the investments held by VFMC during the 2015 financial year. Investments in Australian and international equities and inflation linked bonds were consolidated into VFMC trusts.

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



11. Investments (continued)

Investments are reported at fair value in accordance with the details contained in Note 2(z). Refer to Note 24 for the nature and extent of risks arising from investments.

Acquisitions does not agree to acquisitions of investments in Note 30 as the latter Note does not include the decrease pertaining to outstanding settlements of $14.352 million during the current financial year (2015: $18.253 million increase).

Sales/redemptions does not agree to proceeds on disposal of investments in Note 30 as such does not include realised losses on disposal of investments of $12.860 million (2015: $71.123 million gain) and realised gains paid as interest to clients of $0.534 million (2015: $1.767 million).

12. Furniture, fittings, equipment and motor vehiclesComputer hardware

$’000Furniture

$’000

Leasehold improvements

$’000

Motor vehicles

$’000

Office equipment

$’000 Total$’000

Fair value at 30 June 2014 - 690 2,724 1,163 191 4,768

Cost 76 951 3,676 1,573 365 6,641

Accumulated depreciation (76) (261) (952) (410) (174) (1,873)

Additions - 15 33 348 - 396

Disposals - - - (256) - (256)

Depreciation expense - (138) (556) (301) (39) (1,034)

Fair value at 30 June 2015 - 567 2,201 954 152 3,874

Cost 76 965 3,710 1,454 360 6,565

Accumulated depreciation (76) (398) (1,509) (500) (208) (2,691)

Additions - 18 18 295 9 340

Disposals - (4) - (225) - (229)

Depreciation expense - (141) (566) (262) (39) (1,008)

Fair value at 30 June 2016 - 440 1,653 762 122 2,977

Cost 76 977 3,727 1,309 364 6,453

Accumulated depreciation (76) (537) (2,074) (547) (242) (3,476)

2015

Proceeds on disposal - - - 253 - 253

Loss on disposal - - - (3) - (3)

2016

Proceeds on disposal - 1 - 229 - 230

(Loss)/profit on disposal - (3) - 4 - 1

The fair value measurement for furniture, fittings, equipment and motor vehicles has been categorised as Level 3 (2015: Level 3). All items in the table above are valued using the depreciated replacement cost method and the table shows a reconciliation of the opening balances to the closing balances for the Level 3 fair values.

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



12. Furniture, fittings, equipment and motor vehicles (continued)

Description of significant unobservable inputs to Level 3 valuations:

Asset Valuation technique

Significant unobservable inputs

Computer hardware Depreciated replacement cost Cost per unit (i)

Useful life (ii)

Furniture Depreciated replacement cost Cost per unit (i)

Useful life (ii)

Leasehold improvements Depreciated replacement cost Cost per unit (i)

Useful life (ii)

Motor vehicles Depreciated replacement cost Cost per unit (i)

Useful life (ii)

Office equipment Depreciated replacement cost Cost per unit (i)

Useful life (ii)

(i) Sensitivity of fair value measurement to changes in significant unobservable inputs – a significant increase/(decrease) in the cost per unit would result in a significantly higher/(lower) fair value.

(ii) Sensitivity of fair value measurement to changes in significant unobservable inputs – a significant increase/(decrease) in the estimated useful life would result in a significantly higher/(lower) valuation.

The significant unobservable inputs have remained unchanged from the 2015 financial year.

Furniture, fittings, equipment and motor vehicles are classified into the Public Administration purpose group in accordance with FRD 103F Non-Financial Physical Assets. The fair value assessment is performed annually and no movements in fair values have been identified for the financial year ended 30 June 2016 (2015: Nil). A full revaluation will be completed during the 2017 financial year.



13. Deferred acquisition costs

Note2016$’000

2015$’000

Deferred acquisition costs at beginning of year 22,152 16,035

Acquisition costs deferred 20,615 19,547

Amortisation charged to income (17,082) (16,383)

Decrease in write down due to premium deficiency 2,320 2,953

Increase in deferred acquisition costs credited to income 20(a) 5,853 6,117

Deferred acquisition costs at end of year 20(a) 28,005 22,152

14. Reinsurance and other recovery assetsReinsurance recoveries in respect of claims liabilities (undiscounted) 28,986 33,727

Other recoveries in respect of claims liabilities (undiscounted) 12,678 22,246

Discount to present value (2,444) (3,870)

Total reinsurance and other recovery assets 21(c) 39,220 52,103

Current 10,122 20,967

Non-current 29,098 31,136

Total reinsurance and other recovery assets 39,220 52,103

Refer to Note 21(c) for a reconciliation of the movement in reinsurance and other recovery assets.

15. Trade payablesCurrent

Trade payables – financial (contractual) (i) 4,667 20,948

Deposits held to meet future claim payments – financial (contractual) (ii) 13,048 13,546

Total trade payables 17,715 34,494

(i) Certain of VMIA’s reinsurance policies incepted at 4.00pm on 30 June 2015 and accordingly such ceded premium written was raised as a financial liability at 30 June 2015.

(ii) Deposits held to fund client deductibles where VMIA provides a claims management service to clients in respect of such deductibles.

The average credit terms for trade payables is 30 days (2015: 30 days). No interest is usually charged on invoices not paid within the credit terms.

Refer to Note 24 for the nature and extent of risks arising from contractual trade payables.



16. Non-trade payables2016$’000

2015$’000

Current

Accruals and other payables – financial (contractual) 5,965 4,650

Outstanding investment settlements – financial (contractual) 18,680 33,032

Goods and Services Taxation – non-financial (statutory) 29,840 27,860

Stamp Duty – non-financial (statutory) 31,398 29,977

Total non-trade payables 85,883 95,519

The fair value measurement for statutory non-trade payables has been categorised as Level 2. No valuation techniques were used in the fair value measurement. The inputs include the undisputed amounts between counterparties.

Refer to Note 24 for the nature and extent of risks arising from contractual non-trade payables.

17. ProvisionsUnconditional

annual leave$’000

Conditional long service

leave$’000

Unconditional long service

leave$’000

Other employee

benefits $’000

Leasehold restoration

$’000 Total$’000

Balance at 30 June 2014 1,019 563 1,111 - 440 3,133

Charged to income 129 (7) 499 184 - 805

Provision utilised during the year (85) - (59) - - (144)

Balance at 30 June 2015 1,063 556 1,551 184 440 3,794

Charged to income 156 68 460 (2) - 682

Provision utilised during the year (144) - (281) (182) - (607)

Balance at 30 June 2016 1,075 624 1,730 - 440 3,869

2016

Current 1,075 - 1,730 - - 2,805

Non-current - 624 - - 440 1,064

Total provisions at 30 June 2016 1,075 624 1,730 - 440 3,869

2015

Current 1,063 - 1,551 184 - 2,798

Non-current - 556 - - 440 996

Total provisions at 30 June 2015 1,063 556 1,551 184 440 3,794

Employee benefits consist of annual leave and long service leave accrued by employees and termination benefits payable to employees. The provisions for annual leave and long service leave include payroll taxation, superannuation and workers’ compensation on-costs of $0.471 million at 30 June 2016 (2015: $0.420 million) and are measured at present value. The provision for annual leave will not be wholly settled within 12 months. Liabilities for on-costs such as payroll taxation, superannuation and workers’ compensation are recognised separately as non-trade payables.

VMIA is required to restore the leased premises to its original condition at the end of the lease term. A provision has been recognised for the present value of the estimated expenditure required to remove any leasehold improvements. These costs have been capitalised as part of the cost of leasehold improvements and are amortised over the shorter of the term of the lease or the useful life of the assets.



18. Lease incentive liability2016$’000

2015 $’000

Current 269 269

Non-current 514 783

Total lease incentive liability 783 1,052

During 2012 VMIA negotiated a lease incentive benefit, equivalent to 20 months of rent, in relation to the 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.

19. Net unearned premium liability Gross$'000

Reinsurance$'000

Net$'000

Unearned premium liability/(asset) at 30 June 2014 387,234 (28,278) 358,956

Premium written 346,001 (41,732) 304,269

Premium (earned)/incurred (328,618) 45,459 (283,159)


Premium written 377,384 (28,763) 348,621

Premium (earned)/incurred (333,811) 43,073 (290,738)


2016

Current 351,138 (7,776) 343,362

Non-current 97,052 (2,465) 94,587


2015

Current 325,285 (24,485) 300,800

Non-current 79,332 (66) 79,266


The majority of VMIA’s insurance policies with its clients incept at 4.00pm on 30 June each year and accordingly the majority of such gross premium written is unearned at 30 June each year.

During the year the net unearned premium liability was assessed by the independent actuary as being deficient. Refer to Note 20 for details of the amounts recognised in respect of this deficiency.



20. Unexpired risks liabilityThe Liability Adequacy Test (LAT) [refer to Note 2(h)] was undertaken by the independent actuary for all applicable insurance underwritten by VMIA. VMIA’s independent actuary has compared the net unearned premium liability at 30 June 2016 to the present value of expected future cash flows, discounted at the risk free rate of 1.8% p.a. at 30 June 2016 (2015: between 2.5% p.a. and 2.8% 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 2016;

(ii) Allowance for expenses to administer the policies after the renewal date;

(iii) A risk margin to provide a 75% (2015: 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 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 $14.6 million (2015: $16.9 million) premium deficiency for the Domestic Building Insurance portfolio, $61.3 million (2015: $62.6 million) for the Medical Indemnity portfolio, $1.4 million (2015: nil) for the Property portfolio and nil (2015: $3.7 million) for the Other portfolio. In recognising the premium deficiency pertaining to the Medical Indemnity, Property and Other portfolios, an unexpired risks liability of $62.7 million (2015: $66.4 million) is recognised in the Balance Sheet. The premium deficiency pertaining to the Domestic Building Insurance portfolio has been written off against gross deferred acquisition costs.

Refer to Note 3 for the actuarial assumptions pertaining to discount rates and risk margins for each line of business and Note 2(i) for details pertaining to the risk margin including the allowance for diversification between insurance lines of business.



20. Unexpired risks liability (continued)

(a) Calculation of premium deficiencies

Domestic Building

Insurance$’000

Liability$’000

Medical Indemnity

$’000Property

$’000Other$’000

2016

Net unearned premium liability 146,539 22,488 170,093 32,984 29,996

Net present value of future policy costs (95,978) (16,766) (193,257) (29,333) (22,140)

Risk margin (22,556) (5,150) (38,159) (5,023) (6,511)

Gross deferred acquisition costs recognised (42,614) - - - -

Gross premium (deficiency)/surplus (14,609) 572 (61,323) (1,372) 1,345

Gross premium deficiency (14,609) - (61,323) (1,372) -

Deferred acquisition costs written down 14,609 - - - -

Net premium deficiency - - (61,323) (1,372) -Deferred acquisition costs recognised in Balance Sheet (i) 28,005 - - - -

2015

Net unearned premium liability 126,200 25,287 157,448 34,690 15,788

Net present value of future policy costs (83,823) (18,754) (182,198) (28,460) (15,062)

Risk margin (20,225) (5,927) (37,888) (4,998) (4,465)

Gross deferred acquisition costs recognised (39,081) - - - -

Gross premium (deficiency)/surplus (16,929) 606 (62,638) 1,232 (3,739)

Gross premium deficiency (16,929) - (62,638) - (3,739)

Gross deferred acquisition costs written down 16,929 - - - -

Net premium deficiency - - (62,638) - (3,739)Deferred acquisition costs recognised in Balance Sheet (i) 22,152 - - - -

(i) The increase in deferred acquisition costs recognised in the Comprehensive Operating Statement during the financial year amounted to $5.853 million (2015: $6.117 million).

(b) Unexpired risks liability

2016$’000

2015$’000

Current

Unexpired risks liability at beginning of year 66,377 86,685

Decrease in unexpired risks liability credited to income (3,682) (20,308)

Unexpired risks liability at end of year (i) 62,695 66,377

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



21. Claims liabilities(a) Gross claims liabilities

2016$’000

2015$’000

Undiscounted central estimate 1,544,341 1,620,523

Discount to present value (185,047) (295,823)

Discounted value of central estimate 1,359,294 1,324,700

Claims handling expenses 58,513 58,979

Risk margin 310,309 311,003

Total gross claims liabilities 1,728,116 1,694,682

Current 229,604 232,642

Non-current 1,498,512 1,462,040

Total gross claims liabilities 1,728,116 1,694,682

(b) Risk marginThe objective of the risk margin is to achieve a 75% (2015: 75%) probability that the claims liabilities will be sufficient. Refer to Note 3 for the actuarial assumptions pertaining to risk margins for each line of business and Note 2(i) for details pertaining to the risk margin including the allowance for diversification between insurance lines of business.

(c) Reconciliation of movement in discounted claims liabilities

Gross$’000

Reinsurance and other recoveries

$’000Net

$’000

Claims liabilities at 30 June 2014 1,959,713 (248,736) 1,710,977

Effect of changes in economic assumptions 37,241 (1,404) 35,837

Effect of changes in other assumptions (320,522) 27,470 (293,052)

Effect of claims moving one year closer to settlement 44,757 (5,124) 39,633

Claims incurred for most recent policy year 320,049 (12,551) 307,498

Claims incurred charged to income 81,525 8,391 89,916

Net claim payments during the year (346,556) 188,242 (158,314)


Effect of changes in economic assumptions 68,279 (455) 67,824

Effect of changes in other assumptions (202,941) (10,363) (213,304)

Effect of claims moving one year closer to settlement 31,364 (855) 30,509

Claims incurred for most recent policy year 326,247 (8,955) 317,292

Claims incurred charged/(credited) to income 222,949 (20,628) 202,321

Net claim payments during the year (189,515) 33,511 (156,004)


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



21. Claims liabilities (continued)

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

Domestic Building Insurance2010$’000

2011$’000

2012$’000

2013$’000

2014$’000

2015$’000

2016$’000

Total$’000

Original estimate of ultimate net claims incurred at end of policy year 1,608 31,679 28,783 33,730 41,282 45,577 52,563

One year later 1,608 31,323 34,447 35,473 36,167 39,879

Two years later 1,609 36,046 37,103 37,266 35,247

Three years later 1,728 40,612 36,635 35,545

Four years later 1,767 44,142 38,341

Five years later 2,160 49,313

Six years later 2,224

Current estimate of ultimate net claims incurred 2,224 49,313 38,341 35,545 35,247 39,879 52,563 253,112

Cumulative payments (1,404) (29,338) (19,136) (14,662) (8,687) (3,592) (693) (77,512)

Net claims liabilities – undiscounted 820 19,975 19,205 20,883 26,560 36,287 51,870 175,600

Unearned liabilities (97,464)

Total net claims liabilities – undiscounted 78,136

Discount to present value (4,850)

Claims handling expenses 4,397

Risk margin 18,257

Net claims liabilities at 30 June 2016 95,940

Dust Diseases and Workers’ CompensationTotal

$’000

Seven years previous 685,230

Six years previous 703,439

Five years previous 688,654

Four years previous 682,802

Three years previous 648,608

Two years previous 620,617

One year previous 565,876

Current estimate of ultimate net claims incurred 533,804

Cumulative payments (since 30 June 1999) (204,199)

Net claims liabilities – undiscounted 329,605



Risk margin 70,641





(d) Net claims development tables (continued)

Liability2007$’000

2008$’000

2009$’000

2010$’000

2011$’000

2012$’000

2013$’000

2014$’000

2015$’000

2016$’000

Total$’000


One year later 22,401 8,524 11,411 12,042 15,888 17,473 18,494

Two years later 5,963 22,253 9,148 10,929 11,345 11,497 18,052

Three years later 7,339 3,324 21,361 5,830 8,549 4,866 9,068

Four years later 7,126 3,033 19,076 4,019 6,023 3,819

Five years later 6,122 2,601 19,616 3,767 5,862

Six years later 6,234 1,913 19,094 3,443

Seven years later 6,105 1,695 19,510

Eight years later 5,754 1,418

Nine years later 5,513

Current estimate of ultimate net claims incurred 5,513 1,418 19,510 3,443 5,862 3,819 9,068 18,052 18,494 24,543 109,722

Cumulative payments (5,424) (1,445) (19,255) (3,260) (3,720) (1,779) (1,586) (3,003) (3,306) (2,758) (45,536)

Net claims liabilities – undiscounted 89 (27) 255 183 2,142 2,040 7,482 15,049 15,188 21,785 64,186

2006 and prior years 171




Risk margin 20,847




Medical Indemnity2007$’000

2008$’000

2009$’000

2010$’000

2011$’000

2012$’000

2013$’000

2014$’000

2015$’000

2016$’000

Total$’000

Original estimate of ultimate net claims incurred at end of policy year 126,340 103,208 125,003 148,717 186,932 197,860 200,994 211,101 194,564 194,232

One year later 118,865 98,283 122,674 148,175 182,807 170,682 192,272 177,767 178,022

Two years later 112,915 123,112 130,463 144,714 166,419 163,285 167,130 165,566


Four years later 122,865 133,844 134,301 120,452 140,505 112,781

Five years later 107,421 129,468 128,339 112,333 124,256

Six years later 109,593 120,191 110,481 103,925




Current estimate of ultimate net claims incurred 79,633 94,158 93,137 103,925 124,256 112,781 149,957 165,566 178,022 194,232 1,295,667

Cumulative payments (76,103) (68,525) (66,522) (46,036) (53,157) (19,552) (16,266) (1,358) (2,023) (215) (349,757)

Net claims liabilities – undiscounted 3,530 25,633 26,615 57,889 71,099 93,229 133,691 164,208 175,999 194,017 945,910

2006 and prior years 22,668




Risk margin 184,654

Net claims liabilities at 30 June 2016 1,107,490





Property2007$’000

2008$’000

2009$’000

2010$’000

2011$’000

2012$’000

2013$’000

2014$’000

2015$’000

2016$’000

Total$’000


One year later 39,408 14,099 145,466 45,686 9,820 13,105 27,180

Two years later 5,340 28,938 13,125 140,569 43,829 4,913 14,151


Four years later 36,140 4,715 24,278 12,042 117,495 30,386

Five years later 36,165 3,849 23,072 12,144 118,683

Six years later 35,942 3,849 15,885 12,042






Net claims liabilities – undiscounted - - (514) - 2,671 225 140 4,148 10,949 7,569 25,188



Discount to present value (495)


Risk margin 4,663






Other2007$’000

2008$’000

2009$’000

2010$’000

2011$’000

2012$’000

2013$’000

2014$’000

2015$’000

2016$’000

Total$’000


One year later 20,508 6,958 18,732 15,117 9,583 9,762 9,937

Two years later 4,503 36,333 5,554 18,920 14,324 8,538 9,800


Four years later 5,590 6,396 45,296 5,338 17,953 12,474

Five years later 5,298 5,199 26,192 4,740 17,077

Six years later 6,278 5,360 21,348 4,317






Net claims liabilities – undiscounted 167 90 973 940 1,968 4,380 2,333 5,171 6,103 14,540 36,665





Risk margin 11,247






22. Equity2016$’000

2015$’000

Contributed capital 13,871 162,371

Accumulated surplus 279,146 385,737

Total equity 293,017 548,108

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

Capital managementThe State Government’s Risk Preference Statement for VMIA provides for a funding level range of between 82.5% and 117.5% (2015: between 82.5% and 117.5%). At 30 June 2016 VMIA’s Funding Ratio of 117% was within this preferred funding level range (2015: 133% outside preferred range). It is expected that from time to time VMIA’s Funding Ratio will be outside the preferred range and being outside the preferred range at a particular point in time is not in itself a significant event.

The Order in Council gazetted on 14 May 2015 declaring VMIA as a reorganising body under section 7 of the State Owned Enterprises Act 1992 gives the Treasurer the power to direct VMIA to pay dividends and/or repay capital to the State after consulting with the Minister for Finance and VMIA’s Board of Directors.

Repayment of contributed capitalIn accordance with section 11(1)(d) of the State Owned Enterprises Act 1992 an amount of $148 million of accumulated surplus was converted into contributed capital as directed by the Treasurer after consulting with VMIA’s Board of Directors. In accordance with section 12 of the State Owned Enterprises Act 1992 VMIA repaid contributed capital of $296.5 million to the State on 24 June 2016 as directed by the Treasurer after consulting with the Minister for Finance and VMIA’s Board of Directors.

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

• Industrial Special Risks – $3.3 billion (2015: $3 billion) in excess of the State $50 million (2015: $50 million) retention, any one event, including the Government Rail Insurance Program Industrial Special Risks.

• Public and Product Liability – $950 million (2015: $800 million) in excess of the State $50 million (2015: $50 million) retention, any one occurrence, and in the annual aggregate separately for Product Liability and Bushfire Liability.

• Principal Controlled Construction Risks – Material Damage – $97.5 million (2015: $97.5 million) for property damage in excess of the State $2.5 million (2015: $2.5 million) retention, any one contract.

• Principal Controlled Construction Risks – Public Liability – $295 million (2015: $295 million) in excess of the State $5 million (2015: $5 million) retention, any one occurrence.

• Government Rail Insurance Program – Public and Product Liability – $500 million (2015: $500 million) in excess of the State $100,000 (2015: $100,000) retention, any one occurrence.

• Terrorism – $990 million (2015: Nil) in excess of the State $10 million (2015: Nil) retention, any one event and in the annual aggregate for Property, with a further sub-limit of $450 million (2015: Nil), any one event and in the annual aggregate for Public Liability.

In addition, to protect against the potential for a series of insured losses incurred in any one year under VMIA’s Industrial Special Risks and Public and Product Liability policies, VMIA has purchased Aggregate Stop Loss reinsurance of $60 million in the aggregate subject to VMIA retaining the first $20 million of each loss as well as the first $30 million of losses in the aggregate. In 2015 VMIA purchased Aggregate Stop Loss reinsurance of $100 million in excess of an aggregate of $150 million of insured losses incurred in any one year under VMIA’s Industrial Special Risks, Principal Controlled Construction Risks and Public and Products Liability policies, on a proportional basis of 90%.



24. Financial instrumentsVMIA’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. VMIA’s investment activity is undertaken pursuant to the Victorian Managed Insurance Authority Act 1996, the Borrowing and Investment Powers Act 1987, the Prudential Standard: VFMC and the Centralised Investment Model and Orders in Council dated 1 February 2009 and 23 June 2015 respectively.

The Orders in Council define the responsibilities of VMIA and VFMC. 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 Minister for Finance. 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 VFMC is documented in a detailed Investment Risk Management Plan (IRMP) which is approved by the Treasurer.

Every six months VFMC’s 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. VFMC reports on investment performance including comparisons to market benchmarks on a monthly basis. VMIA’s Capital Committee and management regularly review and monitor VFMC’s investment performance over varying time horizons. VMIA’s 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 VFMC.

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

The investment portfolio is summarised in Note 11.

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

VFMC restricts the managers of VMIA’s direct investment portfolio and of the trusts in which 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.

At 30 June 2016, VMIA had exposure to Australian Fixed Interest futures, Australian Share Price Index futures, International Equity futures, swaps and forward currency contracts. These exposures are valued at fair value as determined by their market value at the balance sheet date.



24. Financial instruments (continued)

(a) Classification of financial instruments

NoteLevel 1

$’000Level 2

$’000Level 3

$’000Total

$’000

2016

Financial assets and financial liabilities

Cash and cash equivalents 8 7,788 - - 7,788

Trade receivables 9 - 666 - 666

Non-trade receivables 10 - 53 - 53

Investments and derivative liabilities

Australian equities 11 (41) 237,760 - 237,719

Diversified fixed interest 11 1,116 270,843 36,394 308,353

Inflation linked bonds 11 - 269,477 - 269,477

Infrastructure 11 - 348 107,246 107,594

International equities 11 - 592,685 - 592,685

Non-traditional strategies 11 - 41,320 174,843 216,163

Private equity 11 - 23,041 13,542 36,583

Property 11 - 19,188 173,962 193,150

Short term money market funds 11 215,556 17,093 - 232,649

Trade payables 15 - (17,715) - (17,715)

Non-trade payables 16 (18,680) (5,965) - (24,645)

Total financial assets and financial liabilities 205,739 1,448,794 505,987 2,160,520




(a) Classification of financial instruments (continued)

NoteLevel 1

$’000Level 2

$’000Level 3

$’000Total

$’000

2015

Financial assets and financial liabilities

Cash and cash equivalents 8 20,123 - - 20,123

Trade receivables 9 - 4,647 - 4,647

Non-trade receivables 10 - 572 - 572

Investments and derivative liabilities

Australian equities 11 667 259,539 7 260,213

Diversified fixed interest 11 1,180 295,903 36,731 333,814

Inflation linked bonds 11 - 288,539 - 288,539

Infrastructure 11 - 5,077 79,179 84,256

International equities 11 (128) 741,517 - 741,389

Non-traditional strategies 11 - 35,815 173,184 208,999

Private equity 11 - 27,140 10,042 37,182

Property 11 - 17,565 178,447 196,012

Short term money market funds 11 219,252 22,632 - 241,884

Trade payables 15 - (34,494) - (34,494)

Non-trade payables 16 (33,032) (4,650) - (37,682)

Total financial assets and financial liabilities 208,062 1,659,802 477,590 2,345,454

VMIA holds units in various investment trusts classified as either Level 2 or Level 3 financial instruments. These investment trusts may invest in assets or liabilities that would ordinarily be classified as Level 1 financial instruments if VMIA directly invested in these assets or liabilities. Refer to Note 3 for information on the classification of financial instruments and the fair value hierarchy.

2016$’000

2015$’000

Level 3 fair value hierarchy reconciliation of investments

Balance at beginning of year 477,590 380,368

Acquisitions 90,752 114,481

Disposals (72,789) (21,983)

Return of capital (14,874) (33,289)

Gains/(losses) on disposal credited/(charged) to income 3,102 (6,865)

Gains on changes in fair value 22,206 44,878

Balance at end of year 505,987 477,590





Transfers between fair value hierarchy categoriesVMIA recognises transfers between the different levels of the fair value hierarchy at the end of the financial year during which the change has occurred.

Transfers from Level 2 to Level 3During the current financial year there were no (2015: Nil) transfers from Level 2 to Level 3 based on management’s annual reassessment of the significance of unobservable valuation inputs that had been used to derive the fair value of those investments.

Investments subject to estimation uncertaintyThere are no Level 2 investments at 30 June 2016 (2015: Nil) subject to estimation uncertainty.

The investments managed by VFMC on behalf of 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 uncertainty, 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 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 VMIA is not privy to the detailed inputs and assumptions used to value the underlying investment assets and hence VMIA is not in a position to provide the sensitivity analysis pertaining to the fair value measurement due to changes in unobservable inputs.

2016$’000

2015$’000

Level 3 investment classes subject to estimation uncertainty

Australian equities - 7

Diversified fixed interest 36,394 36,731

Infrastructure 107,246 79,179

Non-traditional strategies 174,843 173,184

Private equity 13,542 10,042

Property 173,962 178,447

Balance at end of year 505,987 477,590





Investments subject to estimation uncertainty (continued)

(i) Australian equitiesAustralian equities at 30 June 2015 comprised equity investments that were on a trading halt or did not have recent trading activity.

The valuations of Australian equities are based on the last trading price of the securities.

(ii) Diversified fixed interestDiversified 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 fund 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.

(iii) InfrastructureInfrastructure 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, risk premium, asset utilisation rates, 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).

(iv) Non-traditional strategiesInsurance investmentsInsurance 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 16.2% p.a. (2015: 16.4% p.a.), life expectancy estimates obtained from qualified providers and expected premium payments based on the back solving premiums optimisation method.

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 fund manager. Depending on the investment, the methodologies applied include discounted cash flow, amortised cost, direct comparison and other market accepted methodologies. The fund 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.





Investments subject to estimation uncertainty (continued)

(v) 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.

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

Short sales made by VMIA involve certain risks and special considerations. Possible losses from short sales differ from losses that could be incurred from a purchase of a security as losses from short sales may be unlimited, whereas losses from purchases cannot exceed the total amount invested.

The listed equity sensitivity analysis below has been determined for the directly held Australian and international equities which are listed on the Australian Stock Exchange and international bourses, and effective exposure to futures, both domestic and international. Australian and international equities that are held through trusts are included in the analysis of unlisted investment prices. The following details VMIA’s sensitivity to a 15% (2015: 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 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 VMIA management to monitor equity price risk.

2016$’000

2015$’000

Impact on comprehensive result and equity from a movement in equity prices

Listed investment prices

Decrease of 15% (1,767) (3,493)

Increase of 15% 1,767 3,493

Unlisted investment prices

Decrease of 15% (265,950) (294,991)

Increase of 15% 265,950 294,991




(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. VMIA is exposed to foreign exchange rate risk through its investments which are denominated in foreign currencies.

VFMC limits foreign exchange risk through the use of forward currency contracts where it agrees to sell specified amounts of foreign currencies in the future at predetermined exchange rates. The proportion of foreign exchange risk which is hedged is reviewed regularly to ensure that the net exposure is maintained at a level which is consistent with VMIA’s overall Investment Objective. VFMC’s policy, contained in its Investment Risk Management Plan approved by the Treasurer, is to adopt a neutral hedged position of 50% (2015: 50%) of international equities exposure and 100% (2015: 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 VMIA’s direct investment and not on a look-through basis for investments held indirectly through unit trusts. Consequently, the disclosure of currency risk may not represent the true currency risk profile of VMIA where the unit trust has significant investments which have exposure to the currency markets.

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

Investments in foreign currency

$’000

Forward currency contract cover

$’000Net exposure

$’000

2016

British Pound 4,568 (34,638) (30,070)

Euro 12,084 (85,497) (73,413)

Japanese Yen 39,873 (73,818) (33,945)

US Dollar 802,296 (864,061) (61,765)

Other 12,960 (51,245) (38,285)

Total 871,781 (1,109,259) (237,478)

2015

British Pound 6,226 (37,179) (30,953)

Euro 8,525 (69,370) (60,845)

Japanese Yen 21,796 (56,172) (34,376)

US Dollar 526,174 (660,330) (134,156)

Other 44,023 (91,424) (47,401)

Total 606,744 (914,475) (307,731)





(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 a 10% (2015: 10%) increase and decrease in the Australian Dollar against the relevant foreign currencies and assumes that the change takes place at the beginning of the financial year and remains constant to the balance sheet date.

2016$’000

2015$’000

Impact on comprehensive result and equity from a movement in foreign exchange rates

Increase of 10% 21,590 28,033

Decrease of 10% (26,385) (34,203)

(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. Refer to Note 2 for accounting policies used to measure and report the assets and liabilities of VMIA. Where the applicable fair value is determined by discounting future cash flows, movements in interest rates will result in a reported unrealised gain or loss in the Comprehensive Operating Statement. 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.

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 VMIA’s insurance liabilities. As interest rates move, to the extent these assets and liabilities can be matched, increases or decreases in claims incurred arising from the remeasurement of the claims liabilities will be offset by increases or decreases in the fair value of interest bearing investments.

VFMC uses derivatives to manage the interest rate risk on interest rate sensitive assets. Interest rate swap contracts and forward rate agreements are used to either change the interest rate risk between fixed and floating rates of interest or between different floating rates of interest.





(iii) Interest rate risk (continued)A summary of VMIA’s exposure to interest rate risk on financial instruments follows:

Fixed interest rate period to maturity

NoteVariable rate

$’000Under 1 year

$’0001-5 years

$’000Over 5 years

$’000Total

$’000

2016

Financial assets

Cash and cash equivalents 8 7,787 - - - 7,787

Debt securities 16,910 13,759 80,420 58,093 169,182

Short term money market funds 40,516 175,040 - - 215,556

Interest rate derivatives 34,724 - - - 34,724

Financial assets exposed to interest rate risk 99,937 188,799 80,420 58,093 427,249

Financial liabilities

Trade payables 15 13,048 - - - 13,048


Financial liabilities exposed to interest rate risk 18,658 - - - 18,658

Net exposure 81,279 188,799 80,420 58,093 408,591

2015

Financial assets

Cash and cash equivalents 8 20,122 - - - 20,122

Debt securities 31,910 11,978 76,070 76,046 196,004

Short term money market funds 24,653 194,600 - - 219,253


Financial assets exposed to interest rate risk 95,600 206,578 76,070 76,046 454,294


Trade payables 15 13,546 - - - 13,546


Financial liabilities exposed to interest rate risk 17,138 - - - 17,138

Net exposure 78,462 206,578 76,070 76,046 437,156





(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 sensitivity analysis assumes that the change takes place at the beginning of the financial year and remains constant to the balance sheet date. A 1.0% (2015: 1.0%) 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 VMIA’s exposure to interest rates on its variable rate investments and payables, and the fair value movement on its fixed rate investments.

2016$’000

2015$’000

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

Increase of 1.0% (9,325) (10,017)

Decrease of 1.0% 9,336 10,030

(c) Credit riskCredit risk arises from the potential default of an issuer or counterparty on their contractual obligations resulting in a financial loss to VMIA. Financial assets of 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 VMIA is therefore the carrying amount and is detailed in Note 24(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 at 30 June 2016 (2015: Nil) are past their due date, are impaired, or have been renegotiated [also refer to Note 4(e)].

VFMC manages counterparty credit risk by conducting due diligences on counterparties and will only deal with counterparties of high quality and with substantial balance sheets. Agreements also contain provisions for the agreement to be reviewed or rescinded upon the occurrence of specified events relating to counterparty credit and liquidity.

VFMC’s assessment processes also ensure that well defined documentation underpins each transaction, clear rules exist for completing single transactions with a particular counterparty and that appropriate credit limits exist to accommodate the transaction. Exposure is measured on a multi-tiered basis according to the individual transaction, counterparty total and credit rating total and is monitored by personnel separated from the dealing function. When conducting over the counter derivative transactions, bilateral legal contracts must be signed with the counterparty prior to execution of the transaction.

The establishment of appropriate policies and multi-tiered limits ensures that VMIA maintains a diversified portfolio without any significant concentration of credit risk on an industry, regional or foreign country basis.

The credit risk of the investment portfolio is managed by VFMC and its appointed fund managers under instructions from VFMC. The appointed fund managers, through VFMC, manage credit risk by diversifying the exposure amongst counterparties. VMIA does not have any significant concentration of investment credit risk on an industry, regional or foreign country basis.




(c) Credit risk (continued)

Financial assets are held with counterparties with the following Standard & Poor’s credit ratings:

NoteAAA

$’000AA+/AA-

$’000A+/A- $’000

BBB+/BBB- $’000

Not rated $’000

Total $’000

2016

Cash and cash equivalents (i) 8 - 7,787 - - - 7,787

Trade receivables (ii) 9 - 666 - - - 666

Non-trade receivables 10 - - - - 53 53

Debt securities 97,229 32,051 21,078 7,201 11,623 169,182

Total 97,229 40,504 21,078 7,201 11,676 177,688

2015

Cash and cash equivalents (i) 8 - 20,122 - - - 20,122

Trade receivables (ii) 9 - 866 3,781 - - 4,647

Non-trade receivables 10 - - - - 572 572

Debt securities 109,700 33,763 26,702 8,547 17,292 196,004

Total 109,700 54,751 30,483 8,547 17,864 221,345

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

(ii) Statutory receivables mainly comprise insurance premium owing by various Victorian Government agencies and have been excluded in the above analysis as the credit risk is minimal.

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 VMIA will encounter difficulty in meeting its financial obligations as they fall due.

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 VMIA’s operating requirements. VMIA is cash flow positive with insurance premium, investment income and other income receipts exceeding claim payments, reinsurance premium, commission and administration expense payments.

VMIA may, from time to time, invest in derivative contracts traded over the counter, which are not traded in an organised market and may be illiquid. As a result, VMIA may not be able to liquidate its investments quickly in these instruments at an amount close to their fair value to meet its liquidity requirements or to respond to specific events such as a deterioration in the creditworthiness of any particular issuer.

The following table summarises the maturity profile of the derivatives which form part of VMIA’s financial liabilities. The table is based on the undiscounted cash flows of the financial liabilities and on the earliest date on which VMIA can be required to pay.




(d) Liquidity risk (continued)

Under 1 year$’000

1-5 years$’000

Over 5 years$’000

Total$’000

2016


Financial derivatives 13,355 396 - 13,751

2015


Financial derivatives 13,100 63 15 13,178

VMIA’s trade payables disclosed in Note 15 include certain interest bearing balances being funds, advanced to VMIA, to fund the payment of claims VMIA manages on behalf of its clients. There is no contractual maturity date for these trade payables of $13.048 million (2015: $13.546 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 clients 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 (2015: 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.

(e) Offsetting financial assets and financial liabilitiesThe following table discloses financial assets and financial liabilities which have been offset in the Balance Sheet in accordance with AASB 132 Financial Instruments: Presentation and those which have not been offset in the Balance Sheet at financial year end.

The net positions of financial assets and financial liabilities which meet the criteria for offsetting in the normal course of business are disclosed in the Balance Sheet at financial year end and are disclosed in the first column of the table below.

The second column represents the related amounts that do not meet the criteria for offsetting in the normal course of business, but can be offset under certain circumstances, such as default or when the right to offset is conditional upon the default of the counterparty. The last column discloses the net impact on the Balance Sheet if all existing rights of offset were exercised.

Net amount disclosed in

Balance Sheet$’000

Related amount not offset in

Balance Sheet$’000

Net amount$’000

2016

Derivative assets 50,381 (10,843) 39,538

Derivative liabilities (13,751) 10,843 (2,908)

2015

Derivative assets 22,863 (5,506) 17,357

Derivative liabilities (13,178) 5,506 (7,672)



25. Commitments and contingencies(a) Statutory guaranteeThe due satisfaction of amounts payable by VMIA as a result of, or in connection with, liabilities of VMIA is guaranteed by the Government of Victoria. VMIA’s financial objective is to operate essentially as a stand alone entity. To this end 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 VMIA will call on the statutory guarantee other than in exceptional circumstances.

(b) Guarantee feePursuant to section 27 of the Victorian Managed Insurance Authority Act 1996, the Government of Victoria has guaranteed amounts payable by VMIA as a result of, or in connection with, liabilities of VMIA. In accordance with section 27(3) of the Victorian Managed Insurance Authority Act 1996 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 VMIA. VMIA has not received any Treasurer’s determination in relation to the payment of a guarantee fee for the financial year ended 30 June 2016 (2015: Nil).

(c) Capital commitmentsVMIA has uncalled capital commitments in respect of investments totalling $238.902 million as at 30 June 2016 (2015: $125.556 million).

(d) Operating lease commitmentsCommitments in relation to operating leases contracted for at 30 June but not recognised as liabilities are:

2016$’000

2015 $’000

Not later than one year 2,323 2,235

Later than one year but not later than five years 4,201 6,105

Total operating lease commitments 6,524 8,340

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

(e) ContingenciesVMIA has no known contingent assets or contingent liabilities (2015: Nil).



26. Superannuation benefitsEmployees of VMIA are entitled to receive superannuation benefits and 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. 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. 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 amounts expensed in relation to the employee superannuation funds are as follows:

2016 $’000

2015$’000

Defined benefit fund:

ESSSuper 45 88

Defined contribution funds:

AMP Superannuation Savings Trust 80 91

AustralianSuper 163 232

CARE Super 96 96

First State Superannuation Scheme 86 72

VicSuper 876 929

Other 769 729

Total 2,115 2,237

There were no superannuation contributions outstanding at 30 June 2016 (2015: $0.068 million).



27. 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: The Hon. R. Scott MP.

Governing Board: J. Peberdy (Chairperson), C. Christian (appointed 23 February 2016), I. Gaudion (until 16 October 2015), T. Hemming (appointed 20 October 2015), D. Kearsley, J. McNeil, T. Ryan, M. Valena and R. Worthington.

Accountable Officer: P. O’Connor (Chief Executive Officer until 7 February 2016),J. Brennan (Acting Chief Executive Officer from 8 February 2016 to 29 May 2016),E. Karagiannis (Acting Chief Executive Officer from 30 May 2016 to 17 June 2016),J. Brennan (Acting Chief Executive Officer from 18 June 2016 to 30 June 2016).

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

2016 2015

Directors

$0 – $9,999 - 1

$10,000 – $19,999 2 1

$20,000 – $29,999 1 -

$30,000 – $39,999 - 6

$40,000 – $49,999 5 -

$80,000 – $89,999 1 1

Accountable Officers

$50,000 – $59,999 - 1

$160,000 – $169,999 1 -

$230,000 – $239,999 1 -

$360,000 – $369,999 - 1

The Directors’ remuneration shown in the above table is as determined by the Minister for Finance.

The Hon. R. Scott MP did not receive any remuneration from VMIA. Remuneration details pertaining to the Minister for Finance are reported in the financial report of the Department of Premier and Cabinet. For information pertaining to related party transactions of the Minister for Finance, the register of members’ interests is publicly available from www.parliament.vic.gov.au/publications/register-of-interests.

The remuneration, including the superannuation guarantee contribution, received or receivable by responsible persons from VMIA amounted to $748,672 (2015: $767,907).

http://www.parliament.vic.gov.au/publications/register-of-interests



27. Responsible persons (continued)

(c) Other transactions of responsible persons and their related entitiesDuring the current 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 VMIA and that responsible person or firm or company of which that responsible person is a member or has a substantial interest (2015: Nil).

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. All income and expense transactions exclude Stamp Duty and Goods and Services Taxation.

Mr Peberdy was a Director and Acting Chairperson of the Country Fire Authority until 17 June 2016. VMIA provides insurance to the Country Fire Authority on normal commercial terms and conditions. VMIA also funds a risk prevention initiative aimed at reducing motor vehicle accidents and improving driver safety.

2016$

2015$

Country Fire Authority

Gross premium written 3,926,738 3,907,197

Gross claims paid 4,346,464 54,071,802

Risk management program expenses 68,091 30,521

Ms Christian is a Director of the State Library of Victoria. VMIA provides insurance to the State Library of Victoria on normal commercial terms and conditions. VMIA also hires venues from the State Library of Victoria on normal commercial terms and conditions.

State Library of Victoria

Gross premium written 577,943 623,989

Gross claims paid - 24,081

Administration expenses 8,465 -

Mr Gaudion is the Chairperson of the Audit Committee for Docklands Studios Melbourne Pty Ltd. VMIA provides Directors and Officers Liability insurance to Docklands Studios Melbourne Pty Ltd on normal commercial terms and conditions.

Docklands Studios Melbourne Pty Ltd


Mr Hemming is an employee of Court Services Victoria. VMIA provides insurance to Court Services Victoria on normal commercial terms and conditions. VMIA also funds a risk prevention initiative pertaining to the reporting of hospital deaths to the State Coroner.

Court Services Victoria


Gross claims paid 3,054,470 759

Risk management program expenses 100,000 -



27. Responsible persons (continued)

(c) Other transactions of responsible persons and their related entities (continued)Professor McNeil is a Director of Austin Health and a sessional employee of Alfred Health. VMIA provides insurance to these two entities on normal commercial terms and conditions. VMIA also funds Medical Indemnity Strategy projects to improve clinical outcomes at Austin Health and Alfred Health.

Professor McNeil is called upon by the Government from time to time to undertake health investigations involving clients of VMIA, including the Country Fire Authority and the Hazelwood coal mine fire, that potentially could lead to claim notifications.

2016$

2015$

Austin Health



Risk management program expenses 110,148 111,043

Alfred Health



Risk management program expenses 7,260 -

Ms Ryan is a Director of VicForests and the Metropolitan Fire and Emergency Services Board. VMIA provides insurance to these two entities on normal commercial terms and conditions.

Ms Ryan is a Director of Good Shepherd Australia and New Zealand. VMIA provides insurance to Good Shepherd Australia and New Zealand under the Community Services Organisation Program. VMIA did not collect any premium from or pay any claims to Good Shepherd Australia and New Zealand.

Ms Ryan was the Chairperson of the Advisory Board, Office of Correctional Services Review, appointed by the Department of Justice and Regulation, until 14 January 2016. VMIA provides insurance to the Department of Justice and Regulation on normal commercial terms and conditions. VMIA contributed funding towards the Department of Justice and Regulation risk awards.

VicForests


Gross claims paid - 216,294

Metropolitan Fire and Emergency Services Board


Gross claims paid 171,131 107,659

Department of Justice and Regulation


Gross claims paid 5,538,629 28,586

Risk management program expenses 145 -



28. Remuneration of executive officers and payments to contractors with significant management responsibilities (a) Remuneration of executive officersThe number of officers with executive responsibility, other than the Chief Executive Officer [refer to Note 27(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 (AEE) is based on working 38 ordinary hours per week during the financial year. The AEE provides a measure of full time equivalent executive officers during the financial year.

Income bandTotal remuneration Base remuneration

2016 2015 2016 2015

$0 – $99,999 1 1 1 2

$150,000 – $159,999 - - - 1

$170,000 – $179,999 - 1 - 1

$190,000 – $199,999 - 1 - -

$200,000 – $209,999 - - - 1

$220,000 – $229,999 - 1 1 1

$240,000 – $249,999 - - 1 -

$250,000 – $259,999 1 1 1 2

$260,000 – $269,999 - 1 - 1

$270,000 – $279,999 1 - 1 1

$280,000 – $289,999 1 2 1 -

$300,000 – $309,999 - 1 2 -

$310,000 – $319,999 1 1 - -

$320,000 – $329,999 1 - - -

$330,000 – $339,999 1 - - -

$340,000 – $349,999 1 - - -Total number 8 10 8 10Total annualised employee equivalent (AEE) 7.1 8.2 7.1 8.2Total amount ($) 2,218,471 2,340,583 1,971,723 1,925,156

During the current financial year there were eight (2015: 10) executive officers employed at VMIA. In 2016 one executive officer acted in the Accountable Officer role for part of the financial year. In 2015 one executive officer ceased employment during the financial year and one officer acted in an executive officer role for part of the financial year. As a result, the remuneration of one executive officer was less than the $100,000 reportable threshold (2015: two).



28. Remuneration of executive officers and payments to contractors with significant management responsibilities (continued)

(b) Payments to contract personnelDuring the current financial year VMIA engaged two contractors with significant management responsibilities undertaking the role of Acting General Manager, People and Change (2015: one). The total amount paid or payable to the contractors by VMIA is disclosed in the table below.

Expense band 2016 2015

$60,000 – $69,999 1 -

$70,000 – $79,999 1 1

Total number 2 1

Total expenses, excluding GST ($) 139,800 72,600

29. Reconciliation of net cash inflow from operating activities to net result

Note2016$’000

2015$’000

Net result 113,909 402,907

(Profit)/loss on disposal of furniture, fittings, equipment and motor vehicles 7, 12 (1) 3

Depreciation of furniture, fittings, equipment and motor vehicles 7, 12 1,008 1,034

Realised loss/(gain) on disposal of investments 5(c), 11 12,860 (71,123)

Unrealised loss/(gain) on investments 5(c), 11 14,477 (76,359)

Interest paid to clients 11 (534) (1,767)

Change in fair value of investments as a result of outstanding settlements 11 14,352 (18,253)

Changes in operating assets and liabilities:

(Increase)/decrease in trade receivables (24,372) 6,890

Decrease in non-trade receivables 75 11

Decrease/(increase) in prepaid expenses 185 (300)

Increase in deferred acquisition costs 13, 20(a) (5,853) (6,117)

Decrease in reinsurance and other assets 27,193 200,360

(Decrease)/increase in trade payables (16,779) 252

(Decrease)/increase in non-trade payables (9,636) 20,005

Increase in provisions 75 661

Decrease in lease incentive liability (269) (269)

Increase/(decrease) in gross insurance liabilities 73,325 (267,956)

Net cash inflow from operating activities 200,015 189,979



30. Reconciliation of movements in investments2016$’000

2015$’000

Movement in investments (197,915) 359,868

Decrease/(increase) in fair value of investments 41,155 (167,502)

Movement in investments arising from cash flows (156,760) 192,366

Comprising:Acquisition of investments 1,851,116 3,717,430Proceeds on disposal of investments (2,007,876) (3,525,064)

(156,760) 192,366

The decrease in the fair value of investments of $41.155 million (2015: $167.502 million increase) comprises realised and unrealised losses on investments and interest paid to clients of $26.803 million (2015: $149.249 million gain) and the decrease in outstanding settlements pertaining to investments of $14.352 million (2015: $18.253 million increase).

31. Ex gratia expensesNo ex gratia expenses were incurred during the current financial year (2015: $9,862).

Ex gratia expenses are presented in suppliers and other services in Note 7.

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



Financial ReportFor the financial year ended 30 June 2016

Declaration by Chairperson, Accountable Officer and Chief Finance and Accounting OfficerWe 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 2016 and the financial position of the Victorian Managed Insurance Authority at 30 June 2016.

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 2016.

John Peberdy Chairperson

Colin Radford Victor Martindale Chief Executive Officer Chief Financial Officer (Accountable Officer) (Chief Finance and Accounting Officer)

MELBOURNE30 August 2016


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

Page

Charter and purpose

FRD 22G Manner of establishment and the relevant Minister 7

FRD 22G Purpose, functions, powers and duties 7

FRD 22G Nature and range of services provided 7

FRD 22G Initiatives and key achievements 11-12

Management and structure

FRD 22G Organisational structure 8-10

Financial and other information

FRD 8C Performance against output performance measures 13

FRD 10A Disclosure index 93-94

FRD 12B Disclosure of major contracts 24

FRD 22G Employment and conduct principles 22

FRD 22G, FRD29A Workforce data 22

FRD 22G Application and operation of Freedom of Information Act 1982 24

FRD 22G Application and operation of Protected Disclosure Act 2012 25

FRD 22G Application and operation of Carers Recognition Act 2012 26

FRD 22G Compliance with building and maintenance provisions of Building Act 1993 26

FRD 22G Compliance with National Competition Policy 25

FRD 22G Summary of financial results 14-16

FRD 22G Financial performance 14

FRD 22G Significant changes in financial position 15

FRD 22G Subsequent events 15, 89

FRD 22G Details of consultancy expenditure over $10,000 23

FRD 22G Details of consultancy expenditure under $10,000 23

FRD 22G Government advertising expenditure 22

FRD 22G Occupational health and safety 22

FRD 22G Statement of availability of other information 24

FRD 24C Reporting of office-based environmental impacts 26

FRD 25B Victorian Industry Participation Policy disclosure 22

SD 4.2.(j) Sign off requirements 2-3

SD 4.5.5 Risk management compliance attestation 21

Financial Statements required under Part 7 of Financial Management Act 1994

SD 4.2(b) Comprehensive Operating Statement 30

SD 4.2(b) Balance Sheet 31

SD 4.2(a) Statement of Changes in Equity 32

SD 4.2(b) Cash Flow Statement 33

Disclosure index


Disclosure index (continued)Page

Other requirements under Standing Direction 4.2

SD 4.2(c) Statement of compliance with Australian Accounting Standards and other authoritative pronouncements 35

SD 4.2(b) Notes to the Financial Statements 34-89

SD 4.2(c) Compliance with Ministerial Directions 90

SD 4.2(c) Declaration by Chairperson, Accountable Officer and Chief Finance and Accounting Officer 90

SD 4.2(d) Rounding of amounts 34

Other disclosure required by FRDs in Financial Statements and Notes to the Financial Statements

FRD 11A Disclosure of Ex Gratia Expenses 89

FRD 17B Wage Inflation and Discount Rates for Employee Benefits 42, 59

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

84-88

FRD 103F Non-Financial Physical Assets 40, 56-57

FRD 104 Foreign Currency 35, 38

FRD 106 Impairment of Assets 40

FRD 110 Cash Flow Statement 33

FRD 112D Defined Benefit Superannuation Obligations 83

FRD 116 Financial Instruments – Public Finance Corporations 40-41, 70-81

FRD 119A Transfers through Contributed Capital 31-33, 42, 69

FRD 120J Accounting and Reporting Pronouncements Applicable to the 2015-16 Reporting Period 35-36

Legislation

Audit Act 1994 91

Borrowing and Investment Powers Act 1987 70

Building Act 1993 19, 26

Carers Recognition Act 2012 26

Constitution Act 1975 92

Disability Act 2006 26

Financial Management Act 1994 i, 3, 34, 35, 84, 90, 91, 92

Freedom of Information Act 1982 24

Income Tax Assessment Act 1936 38

Protected Disclosure Act 2012 25

State Owned Enterprises Act 1992 9, 34, 38, 69

Terrorism Insurance Act 2003 18

Victorian Industry Participation Policy Act 2003 22

Victorian Managed Insurance Authority Act 1996 7, 9, 17, 18, 19, 20, 26, 34, 69, 70, 82


Victorian Managed Insurance AuthorityLevel 10 South, 161 Collins Street Melbourne VIC 3000

Phone: 03 9270 6900 Fax: 03 9270 6949 E-mail: [email protected] Website: www.vmia.vic.gov.au

Responsible MinisterThe Hon. Robin Scott MP Minister for Finance

Board of DirectorsJohn Peberdy, Chairperson Therese Ryan, Deputy ChairpersonChristine ChristianToby HemmingDoug KearsleyJohn McNeilMark ValenaRobyn Worthington

Chief Executive OfficerJohn Brennan (Acting)

Investment Funds ManagerVictorian Funds Management Corporation Level 13, 101 Collins Street Melbourne VIC 3000

BankWestpac Banking Corporation Level 7, 150 Collins Street Melbourne VIC 3000

External AuditorVictorian Auditor-General’s Office Level 24, 35 Collins Street Melbourne VIC 3000

Internal AuditorPricewaterhouseCoopersFreshwater Place2 Southbank Boulevard Southbank VIC 3006

ActuaryFinity Consulting Pty Limited Level 3, 30 Collins Street Melbourne VIC 3000

Corporate informationAs at 30 June 2016

mailto:contact%40vmia.vic.gov.au?subject=

http://www.vmia.vic.gov.au

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Ph 03 9270 6900

Level 10 South, 161 Collins Street

Melbourne VIC 3000

www.vmia.vic.gov.au

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