MOTOR ACCIDENT COMMISSION
FUNCTIONAL RESPONSIBILITY AND STRUCTURE
Establishment
The Motor Accident Commission (the Commission) is a statutory authority established pursuant to the Motor Accident Commission Act 1992.
Functions
The functions of the Commission are as follows:
· To provide policies of compulsory third party insurance under Part 4 of the Motor Vehicles Act 1959, and to be the sole approved insurer under that Part until such time as the Minister responsible for the administration of that Act forms the view that it would be in the best interests of the State to invite and approve other persons or bodies of persons to be insurers under that Part.
· To maintain the Compulsory Third Party Fund.
· To perform the functions of the nominal defendant while the Commission holds that office under Part4 of the Motor Vehicles Act 1959.
· To provide financial or other support for and promote programs designed to reduce the incidence or impact of road accidents and road accident injuries.
· To carry on any other residual insurance business arising from its earlier operations as the State Government Insurance Commission (but only in order to wind up that business).
· To perform any functions of a kind prescribed by regulation.
· To perform any functions that are necessary or convenient for or incidental to the performance of functions referred to above.
The principal objectives of the Commission in providing compulsory third party insurance are to:
· achieve and maintain a sufficient level of solvency in the Compulsory Third Party Fund;
· minimise premium charges having regard to the Commission’s objective of achieving and maintaining a sufficient level of solvency in the Fund;
· deal with claims for compensation in accordance with law as expeditiously as possible.
Pursuant to section 18 of the Motor Accident Commission Act 1992, the Minister must prepare, in consultation with the Commission, a Charter, which may limit the functions or powers of the Commission.
The Commission’s Charter specifies that the Commission is empowered to undertake the following classes of insurance:
· Compulsory third party (CTP) insurance (in accordance with the Motor Vehicles Act 1959).
· Mortgage insurance, credit enhancements, and guarantees insurance.
· Financial risk insurance.
The latter two classes of insurance are in ‘run-off’ mode.
Structure
The structure of the Commission is illustrated in the following organisation chart.
With the exception of the CTP insurance business, no new policies were underwritten by the Commission for all other insurance activities. These activities are in ‘run-off’ mode and will cease once the Commission’s obligations under the existing policies have expired or have been settled.
The administration and management of the CTP claims insurance business for 2002-03 was contracted to SGIC General Insurance Limited. Investments are managed by a number of external fund managers with the exception of the property portfolio which is managed ‘in-house’.
Changes to Functions and Structure
Until 30June2003, the Commission was responsible for the management and finalisation of the ‘Old Act, Workers Compensation Fund’, which was transferred to the Commission in accordance with the SGIC (Sale) Act 1995.This Fund relates to unresolved claims from workers compensation policies issued under subsection 118(g) of the Workers Compensation Act 1971 (now repealed). From 1 July 2003 responsibility for the management of this Fund rests with the South Australian Asset Management Corporation.
Amendments to Legislation
On 29 August 2002 Parliament passed a number of amendments to the Motor Accident Commission Act 1992.These amendments were a result of the scoping review and National Competition Policy review of the Commission’s operations and give effect to the decision that the Commission should not be privatised and should remain the sole provider of CTP insurance in South Australia. Key aspects of the legislative changes include:
· the introduction of a requirement for the Commission to seek to achieve and maintain sufficient solvency;
· a provision allowing CTP compensation to be paid by way of lifetime periodic payments (to facilitate the payment of ‘structured settlements’) instead of as a lump sum; and
· the removal of the Commission from the state tax equivalent regime.
AUDIT MANDATE AND COVERAGE
Audit Authority
Audit of Financial Statements
Subsection 28(3) of the Motor Accident Commission Act 1992 provides for the Auditor-General to audit the accounts and financial statements of the Commission in respect of each financial year.
Assessment of Controls
Subsection 36(1)(a)(iii) of the Public Finance and Audit Act 1987 provides for the Auditor-General to assess the controls exercised by the Commission in relation to the receipt, expenditure and investment of money, the acquisition and disposal of property and the incurring of liabilities.
Scope of Audit
The audit program covered major financial systems and was directed primarily to obtaining sufficient evidence to enable an audit opinion to be formed with respect to the financial statements and internal controls. Further, with respect to the assessment of controls, the audit considered whether they were consistent with the prescribed elements of the Financial Management Framework as required by Treasurer’s Instruction 2 ‘Financial Management Policies’.
During 2002-03, specific areas of audit attention included:
· investment assets
· investment income
· claims payable
· premiums
· management agreements (CTP) including transition to new CTP managers
· actuarial assessments
· provisions for outstanding claims
· accounts payable
· receivables
· reinsurance and other recoveries.
Audit Communications to Management
The audit of the Commission proved to be satisfactory. No significant issues arose during the audit and other matters arising were satisfactorily resolved with management.
AUDIT FINDINGS AND COMMENTS
Audit Opinions
Audit of Financial Statements
In my opinion, the financial report of the Motor Accident Commission is in accordance with:
(a) the Corporations Act 2001, including:
(i) giving a true and fair view of the Motor Accident Commission’s and consolidated entity’s financial position as at 30 June 2003 and their performance for the year ended on that date; and
(ii) complying with Accounting Standards in Australia and the Corporations Regulations 2001; and
(b) other mandatory professional reporting requirements in Australia.
Emphasis of Matter
Without qualification to the opinion expressed above, attention is drawn to the following matter. As indicated in Note 27 to the financial statements, the Motor Accident Commission has as one of its principal objectives, the objective of achieving and maintaining a Sufficient Level of Solvency in the Compulsory Third Party Fund as determined by a set formula. The Statement of Financial Position for the Compulsory Third Party Fund as at 30 June 2003 discloses net assets of $4.2 million, or 2.6 percent of the target level of sufficient solvency as calculated by the formula. The accounts for the Motor Accident Commission are prepared on a going concern basis after consideration of the following issues:
· The Fund reports positive net assets as at 30 June 2003.
· The Fund’s investment strategy ensures adequate liquidity to meet liabilities as and when they fall due.
· The Motor Accident Commission has developed a strategy to work towards the achievement of a Sufficient Level of Solvency over a five year time period.
· The Motor Accident Commission is supported by a Government guarantee pursuant to subsection 21(1) of the Motor Accident Commission Act 1992.
Assessment of Controls
Audit formed the opinion that the controls exercised by the Motor Accident Commission in relation to the receipt, expenditure and investment of money, the acquisition and disposal of property and the incurring of liabilities is sufficient to provide reasonable assurance that the financial transactions of the Motor Accident Commission have been conducted properly and in accordance with law.
INTERPRETATION AND ANALYSIS OF FINANCIAL STATEMENTS
Highlights of Consolidated Financial Statements
2003 / 2002 / Percentage$’million / $’million / Change
UNDERWRITING RESULT
Net premium revenue / 305 / 267 / 14
Net claims / (314) / (281) / 12
Other underwriting expenses / (59) / (53) / 11
Underwriting Loss / (68) / (67) / 1
INVESTMENT RESULT
Net investment revenue / 66 / 61 / 8
Investment market value movements / (33) / (46) / (28)
Profit on Investment Activities / 33 / 15 / 120
Net Loss / (35) / (56) / (37)
Net Cash Flows from Operations / (30) / 30 / -
ASSETS
Current assets / 448 / 325 / 38
Non-current assets / 859 / 949 / (9)
Total Assets / 1 307 / 1 274 / 3
LIABILITIES
Current liabilities / 432 / 421 / 3
Non-current liabilities / 865 / 807 / 7
Total Liabilities / 1 297 / 1 228 / 6
EQUITY / 10 / 46 / (78)
The Commission’s financial performance is significantly influenced by two inter-related aspects of its business as outlined below:
· Underwriting result — Underwriting operations are influenced by premium income, the number of claims and the estimated costs of settling those claims. The underwriting result is determined as premium revenue less claims expense (after the cost and recoveries associated with reinsuring a portion of the insurance portfolio’s risk with third parties) and other underwriting costs.
· Investment result — Investment operations is an integral part of any insurance business as the estimated return on invested funds is a significant component of the pricing strategy employed by the business. Australian Accounting Standards Board AASB 1023 ‘Financial Reporting of General Insurance Activities’ requires that ‘market value accounting’ be adopted in the accounting for and valuation of investments. This means that the investment result includes not only interest and related income received, but also changes in the market values of investments held at balance date. Changes in the market values of investments can be subject to wide fluctuations and it is important to emphasise that gains or losses recognised in the Commission’s financial statements as a result of market fluctuations are unrealised. That is, until such time as the investments are sold, no gain or loss is actually received or incurred by the Commission.
Statement of Financial Performance
Underwriting Result
Net premium revenue increased in 2003 by $38 million or 14 percent which is in line with the 15.5 percent increase in premiums approved by the Treasurer effective from 1 July 2002.Net premium revenue has increased steadily since 2001.Net claims and underwriting expenses have increased steadily over the same period and the underwriting loss increased from $59 million in 2000 to $69 million in 2001 where it has remained relatively stable for the three years to June 2003.
An analysis of the underwriting result for the Commission for the four years to 2003 is presented in the following chart.
Investment Result
The investment result has fluctuated considerably over the last four years primarily as a result of the variation in market value movements. Net investment revenue has remained relatively stable with a $5 million increase in 2003.The market value of investments decreased by $46 million and $33 million for the 2002 and 2003 years respectively which is reflective of the world wide downturn in investment markets over this period. As a result of this negative movement in investment values the overall investment result has declined from $92 million in 2000 to $33 million in 2003.
An analysis of the investment result for the Commission for the four years to 2003 is shown in the following chart.
Operating Result
The Commission has incurred an operating loss for the last two years after posting small profits for the preceding two years. The turnaround in operating result is due mainly to the effects of the negative movement in the market value of investments together with an increased cost of net claims.
The following chart shows the correlation between the operating result and the movement in the market value of investments over the four years to 2003 and highlights the recent significance of market value movements notwithstanding other factors that influence costs and revenues of the Commission.
Statement of Financial Position
Investments
The total value of investment assets has increased by $124 million over the four years to 2003 with investments totalling $1.3 billion as at 30 June 2003.The portfolio mix has seen a shift away from fixed interest investment since 2001 with an increase in equity and property investments. As at 30 June 2003 fixed interest investments accounted for 61 percent, equity 30 percent and property 9 percent of the investment portfolio.
For the four years to 2003 a structural analysis of investment assets is shown in the following chart.
Outstanding Claims
The primary liability of the Commission is for outstanding claims. The liability covers claims reported but not yet paid, incurred but not reported, the anticipated direct and indirect costs of settling those claims and estimated reinsurance and other insurance costs.
Calculation of the liability is an estimation process and a range of factors, including economic assumptions, affect the calculation. There is therefore a need for professional actuaries to undertake the calculation and for detailed disclosure of a range of the assumptions made in the calculation to be included in the notes to the financial statements.
The liability calculation is reviewed by independent actuaries for the Commission. Detail of the calculation is provided in Notes 1(g) and 15 to the financial statements.
The following chart sets out details of the liability for the four years to 2003.The value of outstanding claims has been increasing over the period.
The ratio of investments to outstanding claims liability is shown in the following chart. The downward trend of the ratio highlights the increase in outstanding claims liability while investment assets have remained relatively stable over the period.
Solvency Level
One of the amendments to the Motor Accident Commission Act 1992 proclaimed during the year requires the Commission to seek to achieve and maintain a sufficient level of solvency for the CTP fund in accordance with a formula determined by the Treasurer.