Independent Auditor’s report

To the Minister for Veterans’ Affairs

Opinion

In my opinion, the financial statements of the Defence Service Homes Insurance Scheme (‘the Entity’) for the year ended 30 June 2019:

(a) are in all material respects based on, and in agreement with, proper accounts and records;

(b) comply with Australian Accounting Standards – Reduced Disclosure Requirements and the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015; and

(c) present fairly the financial position of the Entity as at 30 June 2019 and its financial performance and cash flows for the year then ended.

The financial statements of the Entity, which I have audited, comprise the following statements as at 30 June 2019 and for the year then ended:

• Statement by the Secretary and General Manager;
• Statement of Comprehensive Income;
• Statement of Financial Position;
• Statement of Changes in Equity;
• Cash Flow Statement; and
• Notes to and forming part of the Financial Statements, comprising a Summary of Significant Accounting Policies and other explanatory information.

Basis for opinion

I conducted my audit in accordance with the Australian National Audit Office Auditing Standards, which incorporate the Australian Auditing Standards. My responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of my report. I am independent of the Entity in accordance with the relevant ethical requirements for financial statement audits conducted by the Auditor‐General and his delegates. These include the relevant independence requirements of the Accounting Professional and Ethical Standards Board’ APES 110 Code of Ethics for Professional Accountants (the Code) to the extent that they are not in conflict with the Auditor‐General Act 1997. I have also fulfilled my other responsibilities in accordance with the Code. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.

Accountable Authority’s responsibility for the financial statements

As the Accountable Authority of the Entity, the Secretary of the Department of Veterans’ Affairs is responsible under the Defence Service Homes Act 1918 for the preparation and fair presentation of annual financial statements that comply with the form approved by the Finance Minister, being the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 which incorporates Australian Accounting Standards – Reduced Disclosure Requirements. The Secretary is also responsible for keeping proper accounts and records and for such internal control as the Secretary determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Secretary is responsible for assessing the ability of the Entity to continue as a going concern, taking into account whether the Entity’s operations will cease as a result of an administrative restructure or for any other reason. The Secretary is also responsible for disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the assessment indicates that it is not appropriate.

Auditor’s responsibilities for the audit of the financial statements

My objective is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian National Audit Office Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

As part of an audit in accordance with the Australian National Audit Office Auditing Standards, I exercise professional judgement and maintain professional scepticism throughout the audit. I also:

• identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;
• obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity’s internal control;
• evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Accountable Authority;
• conclude on the appropriateness of the Accountable Authority’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity’s ability to continue as a going concern. If I conclude that a material uncertainty exists, I am required to draw attention in my auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify my opinion. My conclusions are based on the audit evidence obtained up to the date of my auditor’s report. However, future events or conditions may cause the Entity to cease to continue as a going concern; and
• evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

I communicate with the Accountable Authority regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that I identify during my audit.

Signed by:

Australian National Audit Office
Peter Kerr
Executive Director
Delegate of the Auditor‐General
Canberra
10 September 2019

Statement by the Secretary and General Manager

The accompanying financial statements of the Defence Service Homes Insurance Scheme for the year ended 30 June 2019 have been prepared in accordance with section 50B of the Defence Service Homes Act 1918 which requires the financial statements to be prepared in such form as determined by the Minister for Finance. The Minister for Finance has approved the form of the financial statements as specified in the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015.

In our opinion, the attached financial statements for the year ended 30 June 2019 comply with Australian Accounting Standards – Reduced Disclosure Requirements and the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015, and are in all material respects based on, and in agreement with, proper accounts and records.

In our opinion, at the date of this statement, there are reasonable grounds to believe that Defence Service Homes Insurance Scheme will be able to pay its debts as and when they fall due.

Signed by:

Liz Cosson AM CSC

Secretary, Department of Veterans’ Affairs

September 2019

Karen Pickering

General Manager, Defence Service Homes Insurance Scheme

September 2019

Statement of Comprehensive Income

for the period ended 30 June 2019

Statement of Financial Position

as at 30 June 2019

Statement of Changes in Equity

for the period ended 30 June 2019

Cash Flow Statement

for the period ended 30 June 2019

Notes to and forming part of the Financial Statements

Overview

Objectives of Defence Service Homes Insurance Scheme

The Defence Service Homes Insurance Scheme (the Scheme) forms part of the operations of the Client Engagement and Support Services Division of the Department of Veterans' Affairs (the Department). The objective of the Scheme is to provide domestic building insurance in accordance with the Defence Service Homes Act 1918 and Regulations.

The Scheme operates under the control of the Secretary of the Department of Veterans' Affairs.

The continued existence of the Scheme in its present form is dependent on Government policy.

Basis of Preparation of the Financial Statements

The financial statements are required by Section 50B of the Defence Service Homes Act 1918. The financial statements are general purpose financial statements.

The statements have been prepared in accordance with:

• Public Governance, Performance and Accountability (Financial Reporting) Rule 2015; and
• Australian Accounting Standards and Interpretations – Reduced Disclosure Requirements issued by the Australian Accounting Standards Board (AASB) that apply for the reporting period.

The financial statements have been prepared on an accrual basis and in accordance with the historical cost convention, except for certain assets at fair value. Except where stated, no allowance is made for the effect of changing prices on the results or the financial position.

The financial statements are presented in Australian dollars and values are rounded to the nearest thousand dollars unless otherwise specified.

Unless an alternative treatment is specifically required by an accounting standard or the PGPA Rule, assets and liabilities are recognised in the statement of financial position when and only when it is probable that future economic benefits will flow to the Scheme or a future sacrifice of economic benefits will be required and the amounts of the assets or liabilities can be reliably measured. However, assets and liabilities arising under agreements equally proportionately unperformed are not recognised unless required by an accounting standard.

Unless alternative treatment is specifically required by an accounting standard, revenues and expenses are recognised in the statement of comprehensive income, when and only when the flow, consumption or loss of economic benefits has occurred and can be reliably measured.

Significant Accounting Judgements and Estimates

In the process of applying the accounting policies listed in this note, the Scheme has made the following judgements that have the most significant impact on the amounts recorded in the financial statements:

• The value of outstanding claims and estimated future claims on unexpired premiums has been estimated by an independent actuary. The actuary has used the methods and assumptions detailed in note 3.1B.

No accounting assumptions or estimates have been identified that have a significant risk of causing a material adjustment to carrying amounts of assets and liabilities within the next accounting period.

New Australian Accounting Standards

All new accounting standards, revised standards, amending standards and/or interpretations that were issued prior to the signing of the statements by the Secretary and General Manager, and are applicable to the current reporting period did not have a material effect on the Scheme’s financial statements.

The following new standards were issued by the Australian Accounting Standards Board prior to the signing of the statement by the Secretary and General Manager which are expected to have a material impact on the entity’s financial statements for future reporting periods, the impact of this standard has not yet been quantified.

Taxation

The Defence Service Homes Insurance Scheme is exempt from all forms of taxation except fringe benefits tax and the goods and services tax (GST).

Revenues, expenses, liabilities and assets are recognised net of GST:

• except where the amount of GST incurred is not recoverable from the Australian Taxation Office; and
• except for receivables and payables.

Events After the Reporting Period

There were no events occurring after balance date that had a material impact on the financial statements.

Deferred Acquisition Costs

A portion of acquisition costs relating to unearned premium revenue can be deferred in recognition that it represents future benefits to the Scheme. Deferred acquisition assets must have a probability of future economic benefit and be able to be reliably measured. The Scheme does not have the data or reporting to reliably measure the value of this asset, therefore it does not take up a deferred acquisition asset.

The Scheme has chosen not to recognise deferred acquisition costs or assets due to the complexity involved and the amounts being immaterial.

1. Financial Performance

This section analyses the financial performance of DSHIS for the year ended 2019.

1.1. Expenses

Accounting Policy

Salary, Wages and Superannuation

The Scheme’s salaries, wages, superannuation, long service leave and annual leave are paid by the Department, and the Scheme repays the Department for these expenses as a supplier on 30 day terms. These expenses paid to the Department are recorded as wages, salaries, superannuation and leave in order to represent the nature of the expenses to the scheme. Any salaries, wages, superannuation, long service leave and annual leave unpaid as at 30 June 2019 are recorded as unpaid supplier expenses.

All long service and annual leave liabilities are recorded by the Department of Veterans’ Affairs.

Staff are members of the Commonwealth Superannuation Scheme (CSS), the Public Sector Superannuation Scheme (PSS), the PSS accumulation plan (PSSap) or a superannuation scheme of their choice.

The CSS and PSS are defined benefit schemes for the Australian Government. The PSSap is a defined contribution scheme.

The liability for defined benefits is recognised in the financial statements of the Australian Government and is settled by the Australian Government in due course. The liability is reported by the Department of Finance as an administered item.

The Department makes employer contributions to the Australian Government at rates determined by an actuary to be sufficient to meet the cost to the Government of the superannuation entitlements of the Scheme’s employees.

1.2. Own-Source Income and Gains

Accounting Policy

Commissions received revenue is recognised when it becomes due to the Scheme.

Accounting Policy

Resources received free of charge are recognised as gains when, and only when, a fair value can be reliably determined and the services would have been purchased if they had not been donated. Use of those resources is recognised as an expense.

Resources received free of charge are recorded as either revenue or gains depending on their nature.

Contributions of assets at no cost of acquisition or for nominal consideration are recognised as gains at their fair value when the asset qualifies for recognition, unless received from another Government agency or authority as a consequence of a restructuring of administrative arrangements.

Accounting Policy

Amounts appropriated are recognised as revenue when the Scheme gains control of the appropriation. The Scheme receives appropriation revenue for interest equivalency payments.

2. Financial Position.

This section analyses the DSHIS’s assets used to generate financial performance and the operating liabilities incurred as a result. Employee related information is disclosed in the People and Relationships section.

2.1. Financial Assets

2.2. Non-Financial Assets

Accounting Policy

The Scheme’s intangibles comprise internally developed software for internal use. These assets are carried at cost less accumulated amortisation and accumulated impairment losses except for purchases costing less than $2,000, which are expensed in the year of acquisition (other than where they form part of a group of similar items which are significant in total).

Software is amortised on a straight-line basis over its anticipated useful life. The useful life of the Scheme’s software is 10 years (2017-18: 10 years).

Impairment

All intangible assets were assessed for impairment at 30 June 2019. Where indications of impairment exist, the asset’s recoverable amount is estimated and an impairment adjustment made if the asset’s recoverable amount is less than its carrying amount.

The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. Value in use is the present value of the future cash flows expected to be derived from the asset. Where the future economic benefit of an asset is not primarily dependent on the asset’s ability to generate future cash flows, and the asset would be replaced if the Scheme were deprived of the asset, its value in use is taken to be its depreciated replacement cost.

No indicators of impairment were found for intangible assets at fair value or intangibles at cost.

2.3. Payables

3. Insurance Underwriting Activities

This section describes DSHIS’s insurance underwriting activities.

3.1 Insurance Underwriting Activities

Accounting Policy

Reinsurance Receivables

Reinsurance receivables are recorded at discounted estimated value on paid claims and incurred claims not yet paid and recognised as a reduction in the claims expense.

Accounting Policy

Premium Revenue:

Premium revenue comprises amounts charged to policyholders, excluding amounts collected on behalf of third parties, principally GST in full. The earned portion of premiums received and receivable, including unclosed business, in recognised as revenue. Premium revenue is recognised as earned from the date of attachment of risk.

The pattern of recognition over the policy or indemnity periods is based on time which is considered to closely approximate the pattern of risks underwritten.

Accounting Policy

Liability Adequacy Test and Unexpired Risk Liability

AASB 1023 General Insurance Contracts requires the application of a liability adequacy test upon unearned premiums. Where this test indicates that the Scheme’s unearned premiums are insufficient to cover the expected future claims under the policies associated with those premiums, the difference is recognised in the Statement of Comprehensive Income as an Unexpired Risk Liability. The result of this test indicates that the Scheme’s unearned premiums are sufficient to cover expected future claims on unexpired policies at 30 June 2019 and as such, the Scheme has recognised no movement (2018: nil) and an unexpired risk liability of nil (2018: nil). The probability of adequacy applied in the test is different to the probability of adequacy adopted in determining the outstanding claims liability. No specific guidance exists for the risk margin to be used in determining the adequacy of premium liabilities. The use of the 75% basis as a regulatory benchmark in Australia, is consistent with market practices.

The Scheme has not taken into account the income from invested retained surpluses or agency commissions which are used to subsidise costs associated with the building insurance policies.

The Scheme’s unadjusted unearned premium liability as at 30 June 2019 was $22,187,000 (2018: $21,475,000) and future cash flows relating to future claims under the risk associated with those premiums as advised by the Scheme’s independent actuaries was $20,792,000 (2018: $18,134,000).

Outstanding Claims

The provision for outstanding claims has been determined on a case by case approach in respect of all claims reported. The liability for outstanding claims includes claims incurred but not yet paid, incurred but not reported (IBNRs), and incurred but not enough reported (IBNERs). The provision includes the expected administration costs of settling those claims. A report on the adequacy of the provision was prepared by independent actuaries (PricewaterhouseCoopers) as at 30 June 2019. The methods used to assess the outstanding liability were Projected Case Estimates (PCE) and Payment Per Claims Incurred (PPCI). This methodology meets Actuarial Standard PS 300 Valuation of General Insurance Claims.

Actuarial Methods

The methodology for the estimation of the net outstanding claims provision as at 30 June 2019 consists of:

• Predicting future claim payment cash flows in respect of claims incurred prior to 30 June 2019. Separate predictions by claim type (Liability, Catastrophe and Other) are made in respect of each combination of accident quarter and financial quarter of payment. The future cash flow predictions are derived from several actuarial models of the various claim processes. That is, actuarial models are constructed for numbers of claims reported, average payments per claim incurred, development of case estimates and payments as a proportion of case estimates. The results of the models are blended based on their individual characteristics to produce a single estimate of the outstanding claims.

• Initially all estimates are made in 30 June 2019 dollars, but subsequently are increased to allow for inflation from that date to the date of payment.

• Liability for outstanding claims is estimated by:
  • discounting these inflated claim payments to allow for investment return at risk free rates;
  • adjusting for the effect of GST; and
  • adding an allowance to provide for associated claims administration expenses.
• Gross and net liabilities are derived by making adjustments for both third party recoveries and reinsurance recoveries.
• The estimate of liability is increased by a prudential margin.

Actuarial Assumptions

The following assumptions have been made in determining the net outstanding claims provision as at 30 June 2019:

• Inflation rates: 2.25% for 2018-19;
• Discount rates: 0.97% for 2018-19;
• Claims administration expenses (CAE): 5% of gross outstanding claims liability;
• Superimposed inflation: approximately 6.1% p.a. in the actuarial model with explicit superimposed inflation assumptions;
• Prudential margin: 12% of net central estimate (including CAE) of outstanding claims liability for 75% probability of sufficiency;
• Number of claims for the 2018-19 accident year: approximately 7,891; and
• Average claim size (in actual values) for the 2018-19 accident year (net of all recoveries): approximately $5,877.

The following assumptions have been made in determining the net outstanding claims provision as at 30 June 2018:

• Inflation rates: 2.79% for 2017-18;
• Discount rates: 1.57% for 2017-18;
• Claims administration expenses (CAE): 5% of gross outstanding claims liability;
• Superimposed inflation: approximately 7.2% p.a. in the actuarial model with explicit superimposed inflation assumptions;
• Prudential margin: 12% of net central estimate (including CAE) of outstanding claims liability for 75% probability of sufficiency;
• Number of claims for the 2017-18 accident year: approximately 7,005; and
• Average claim size (in actual values) for the 2017-18 accident year (net of all recoveries): approximately $3,678.

Process for Determining Assumptions

The process for determining each of the assumptions is as follows:

• Inflation rates: are taken as an average of CPI (housing) and AWE inflation expectations which are based on internal and external forecasts of future rates;
• Discount rates: derived from a yield curve fitted to the actual yields on Commonwealth Government bonds as at 30 June 2019;
• Claims administration expenses: assumed based on industry experience;
• Superimposed inflation: derived from actuarial models based on the long term average of past experience for all non‑catastrophe claims;
• Prudential margin: selected based on analysis of estimated historical variability within the portfolio;
• Number of claims in 2018-19 accident year: derived from actuarial models of past claim reporting patterns;
• Average claim size (in actual values) for 2018-19 accident year: derived as an outcome of all the actuarial models blended to form adopted estimates of outstanding claims and hence total ultimate claim costs and average claim sizes.

Insurance Risk Management

Insurance risk management policies and practices are disclosed at Note 6.3 – Risk management.

Process for Determining Risk Margin

The risk margin required for a 75% level of sufficiency has been estimated using various statistical modelling techniques applied to the claim data. An actuarial model (the “chain ladder”) has been fitted to 10,000 simulated claim data sets to determine 10,000 estimates of the outstanding claims and hence an approximate distribution of those amounts. The analysis is on the basis prescribed by Australian Prudential Regulation Authority (APRA) in that it ignores asset risk but takes into account liability risk, including inflation risk.

Accounting Policy

Unearned Revenue

Unearned premiums represents the estimated proportion of premiums written in the current year relating to cover provided in the subsequent year. The Scheme's system allows for the unearned proportion to be calculated for each individual policy in accordance with AASB 1023 General Insurance Contracts.

Revenue in Advance

Revenue in advance is recognised where the revenue has been received prior to the period in which the revenue relates. The Scheme recognises revenue in advance at nominal value.

Accounting Policy

Gross incurred:

Gross incurred (claims expense) represents all claims paid during the reporting period and the movement in open claims recognised through the outstanding claims liability. The gross incurred is adjusted for claims development based on actuarial modelling (see note 3.1C) to take in to account incurred but not reported (IBNRs), and incurred but not enough reported (IBNERs).

4. Funding

This section identifies DSHIS’s funding structure.

4.1. Appropriations

4.2. Special Accounts

Appropriation: Public Governance, Performance and Accountability Act 2013, s80

Establishing Instrument: Defence Service Homes Act 1918, s40

Purpose: To make all payments by the Commonwealth in connection with its activities as insurer under Defence Service Homes Act 1918, s40.

5. People and Relationships

5.1. Related Party Disclosures

Related party relationships:

DSHIS is an Australian Government controlled entity. Related parties to DSHIS are Key Management Personnel, who are the General Manager DSHIS and Secretary of Department of Veterans’ Affairs.

Transactions with related parties:

Given the breadth of Government activities, related parties may transact with the government sector in the same capacity as ordinary citizens.

Giving consideration to relationships with related entities, and transactions entered into during the reporting period by DSHIS, it has been determined that there are no related party transactions to be separately disclosed.

6. Managing Uncertainties

This section analyses how DSHIS manages financial risks within its operating environment.

6.1. Contingent Assets and Liabilities

Quantifiable Contingencies

The Scheme had no quantifiable contingencies as at 30 June 2019 (nil at 30 June 2018).

Unquantifiable Contingencies

The Scheme had no unquantifiable contingencies as at 30 June 2019 (nil at 30 June 2018).

6.2. Financial Instruments

Accounting Policy

Financial Instruments

Financial assets

With the implementation of AASB 9 Financial Instruments for the first time in 2019, the entity classifies its financial assets as financial assets measured at amortised cost.

The classification depends on both the entity's business model for managing the financial assets and contractual cash flow characteristics at the time of initial recognition. Financial assets are recognised when the entity becomes a party to the contract and, as a consequence, has a legal right to receive or a legal obligation to pay cash and derecognised when the contractual rights to the cash flows from the financial asset expire or are transferred upon trade date.

Comparatives have not been restated on initial application.

Financial Assets at Amortised Cost

Financial assets included in this category need to meet two criteria:

1. the financial asset is held in order to collect the contractual cash flows; and

2. the cash flows are solely payments of principal and interest (SPPI) on the principal outstanding amount.

Amortised cost is determined using the effective interest method.

Effective Interest Method

Income is recognised on an effective interest rate basis for financial assets that are recognised at amortised cost.

Impairment of Financial Assets

Financial assets are assessed for impairment at the end of each reporting period based on Expected Credit Losses, using the general approach which measures the loss allowance based on an amount equal to lifetime expected credit losses where risk has significantly increased, or an amount equal to 12-month expected credit losses if risk has not increased.

The simplified approach for trade, contract and lease receivables is used. This approach always measures the loss allowance as the amount equal to the lifetime expected credit losses.

A write-off constitutes a derecognition event where the write-off directly reduces the gross carrying amount of the financial asset.

Financial Liabilities

Financial liabilities are measured at amortised cost.

Financial liabilities are recognised and derecognised upon ‘trade date’.

Financial Liabilities at Amortised Cost

Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. These liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective interest basis.

Supplier and other payables are recognised at amortised cost. Liabilities are recognised to the extent that the goods or services have been received (and irrespective of having been invoiced).

All payables are expected to be settled within 12 months except where indicated.

Note 6.2C: Net gains or losses on financial liabilities

There was no income or expense from financial liabilities (2018: nil).

Note 6.2D: Financial assets reclassified

During the year there has been no financial assets that have been reclassified.

6.3. Risk Management

Insurance risk

The risks inherent in any single insurance contract are the possibility of the insured event occurring and the uncertainty of the amount of the resulting claim. By the very nature of an insurance contract, these risks are random and unpredictable. In relation to the pricing of individual insurance contracts and the determination of the level of the outstanding claims provision in relation to a portfolio of insurance contracts, the principal risk is that the ultimate claims payments will exceed the carrying amount of the provision established.

Notes: (a) Net provision, including prudential margin.

Equivalent net provision derived by:

(b) adding/subtracting 1% p.a. to each future assumed inflation rate.

(c) adding/subtracting 1% p.a. to each future assumed discount rate.

(d) adding/subtracting 1% to superimposed inflation assumption.

(e) increasing/reducing IBNR claims in each of the PPCI models by 10%.

Underwriting risks

Selection and pricing of risks

Risks insured are limited to dwelling houses owned by persons eligible under the Defence Service Homes Act 1918. Insurance policies are written in accordance with local management practices and regulations within each jurisdiction taking into account the Scheme’s underwriting standards.

Pricing of risks is controlled by use of in-house pricing models relevant to market in which the Scheme operates. Experienced underwriters and actuaries maintain historical pricing and claims analysis and this is combined with a knowledge of current developments in the market.

Concentration risk

The Scheme manages exposure to concentration risk by issuing polices across all Australian locations. Reinsurance is purchased to reduce potential exposure to catastrophe losses.

Claims management and claims provisioning risk

The Scheme’s approach to determining the outstanding claims provision and the related sensitivities are set out in note 3.1B.

The Scheme seeks to ensure the adequacy of its outstanding claims provision by reference to the following controls:

• Experienced claims managers work with underwriters on coverage issues and operate within the levels of delegation issued to them in respect of the settlement of claims.
• Processes exist to ensure that all claims advices are captured and updated on a timely basis and with a realistic assessment of the ultimate claims cost.
• The aggregate outstanding claims provision for the Scheme is reviewed by an external actuary annually.

Despite the rigour involved in the establishment and review of the outstanding claims provision, the provision is subject to significant uncertainty for the reasons set out in note 3.1B.

Reinsurance counterparty risk

The Scheme reinsures a portion of risks underwritten to control exposure to insurance losses, reduce volatility and protect capital. The Scheme’s strategy in respect of the selection, approval and monitoring of reinsurance arrangements is addressed by the following protocols:

• Treaty or facultative reinsurance is placed in accordance with the requirements of the Scheme’s reinsurance management strategy.
• Reinsurance arrangements are regularly reassessed to determine their effectiveness based on current exposures, historical losses and potential future losses.
• Exposure to reinsurance counterparties and the credit quality of those counterparties is actively monitored.

Strict controls are maintained over reinsurance counterparty exposures. Reinsurance is placed with counterparties that have a Standard & Poor’s credit rating of A- or above. Credit risk exposures are calculated regularly and compared with authorised credit limits, and the arrangements discontinued from the day the counterparty’s Credit rating falls below A-. The Scheme currently has no receivables with reinsurance counterparties below A-.

Accounting Policy

Reinsurance Arrangements

The Scheme purchases reinsurance each year for dwelling per risk, catastrophe risk and legal liability risk. Premium ceded to reinsurers is recognised as an expense and is measured at nominal value in accordance with the pattern of reinsurance service received.

7. Other Information

This section provides other disclosures relevant to DSHIS’s financial information environment for the year.

7.1. Aggregate Assets and Liabilities

7.2. Explanations of Major Budget Variances

The following tables provide a comparison between the 2018–19 Portfolio Budget Statements (PBS) budget and the final financial outcome in the 2018-19 financial statements. The Budget is not audited.

Variances are considered to be ‘major’ based on the following criteria:

• the variance between budget and actual is greater than 10%; and
• the variance between budget and actual is greater than 2% of the relevant category (Income, Expenses and Equity totals); or
• an item below this threshold but is considered important for the reader’s understanding or is relevant to an assessment of the discharge of accountability and to an analysis of performance of an entity.