MIPS Annual Report 2009/10 by Medical Indemnity Protection Society

MIPS Annual Report 2010 1

annual report 2009-2010 Medical Indemnity Protection Society Ltd and its subsidiaries

Medical Indemnity Protection Society Ltd (MIPS) has been protecting, supporting and safeguarding the interests and professional character of its members since 1988. MIPS provides a range of membership benefits including medico-legal advice to over 30,000 members 24/7. Qualified, experienced health professionals are involved in all areas of the group’s operations.

This financial report covers Medical Indemnity Protection Society Ltd as an individual entity and the group consisting of Medical Indemnity Protection Society Ltd and its subsidiaries (Group). Medical Indemnity Protection Society Ltd is a company limited by guarantee and shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Level 3, 15-31 Pelham Street Carlton VIC 3053 Australia. A description of the nature of the Group’s operations and its principal activities are contained in the directors’ report on pages 8-11. The financial report has been authorised for issue by the directors on 13 October 2010. MIPS has the power to amend and reissue the financial report.

MIPS Annual Report 2010 1

contents MIPS Board

MIPS chairman’s report

MIPS Insurance chairman’s report

MIPS managing director’s report

Organisation structure

Management of MIPS

Member benefits

Assistance with claims

Risk management activity

financial report Directors’ report

Auditor’s independence declaration

Statements of comprehensive income

Statement of financial position

Statements of changes in equity

Statement of cash flows

Notes to the financial statements

Directors’ declaration

Independent audit report

2 Board of Directors

board of directors

Medical Indemnity Protection Society Ltd board. The board of MIPS is made up of a broad spread of medical, and non-medical members, each of whom brings their unique expertise to the organisation, and contributes to the ongoing direction of the business.

William Turner

Bob Dickens

Anthony Fraser

MBBS, LLB, FRCS, FRACS, FACLM, FAICD

MBBS FRACS FAOrthA

B.Juris, LLB

Bob Dickens graduated in Medicine from Melbourne University in 1962, and then graduated as a Fellow in General Surgery from the Royal Australian College of Surgeons in 1967. He then undertook specialist training in orthopaedics in the UK and USA, and returned to Australia in 1972. He was appointed to the consultant staff of the Royal Childrenâ&#x20AC;&#x2122;s Hospital and the Royal Melbourne Hospital, ultimately becoming Head of the Orthopaedic Department. In 1976, he became involved in the medical indemnity industry when he was appointed to the council of The Medical Defence Association of Victoria. He was appointed President and Chief Executive in 1990, and retired in 2000. Initially involved in MIPS in the claims area, he was subsequently appointed to the board of MIPS in 2002.

Tony Fraser was admitted to practice as a solicitor in 1973. After spending three years in private practice, he joined a life insurer / funds manager, initially as Legal Counsel. Over the next 20 years he was involved in senior management positions, including five years as Managing Director of the financial planning subsidiary of the parent company. In 1998 he returned to private practice, and since then has acted as principal of his own law firm.

Chairman

William Turner holds the position of Chairman of MIPS and Deputy Chairman of MIPS Insurance, having previously been a Director of Professional Insurance Australia. Based in Hobart, he has been a successful orthopaedic surgeon for over 28 years, and has a degree in Law which provides a strong medico-legal background. He is also the current President of The Medical Protection Society of Tasmania Inc., and a Director of the Winston Churchill Memorial Trust. Former positions he has held include Chairman of the Medical Advisory Board at Hobart Private Hospital, and Director of Rehab Tasmania.

MIPS Annual Report 2010 3

Kerry Roxburgh B.Com, MBA, MESAA Kerry Roxburgh is a Director of a number of companies, including two listed public companies. He is Chairman of the Charter Hall Group and a non-executive Director of Ramsay Health Care. He is Chairman of Tasman Cargo Airlines and of Money S and he is the Deputy Chairman of the Lawcover Group. He is also a member of the AON Risk Services Board of Advice. He was one of the founders of online stockbroker, E*Trade Australia where for three years he was the Chief Executive prior to becoming Chairman, a position he held from 2000-2007 when it was acquired by the ANZ Bank. Prior to E*Trade, Kerry spent 10 years as an Executive Director of the Hong Kong Bank of Australia Group including five years as Managing Director of that bankâ&#x20AC;&#x2122;s corporate finance subsidiary. Kerry qualified as a Chartered Accountant in 1969 and has experience in the financial management of the insurance, healthcare, technology, property and resource sectors.

Assoc. Prof. Charles Steadman MBBS, MD, FRACP, FAICD Charles Steadman graduated in medicine from the University of Queensland in1980. After service as a rural medical practitioner he trained in internal medicine and gastroenterology at the Princess Alexandra Hospital in Brisbane and then was a Fulbright scholar at the Mayo Clinic in the USA. He returned to Australia as Director of Gastroenterology and Hepatology at Princess Alexandra Hospital and later entered private specialist practice in Brisbane. He is a Fellow of the Australian Institute of Company Directors, Associate Professor of Medicine with the University of Queensland and a Director of Queensland Doctors Mutual Pty Ltd and Queensland Gastroenterology Pty Ltd. He is also a national examiner of the Royal Australasian College of Physicians and has served overseas as an ADF medical officer.

Dr. Bruce Taylor

Dr. Troy Browning

MDSc, LDS, FRACDS, FADI, FICD, FPFA

MBBS, MBA, Grad Dip Ins, ANZIIF (Fellow), CIP, AFAIM

Bruce Taylor graduated BDSc from the University of Melbourne in 1973, and entered private practice for six years. Since gaining his MDSc in 1981, he practised as a specialist Orthodontist in private practice in Melbourne. His association with the University continues as a part-time senior Lecturer and Consultant. A past president and life member of the Australian Dental Association (VIC), Bruce was a Director of the Australian Dental Council for ten years and is Chairman of the Policy Advisory Committee of the Professional Provident Fund. Based in Melbourne, he is a Director of Victorian Medical Insurance Agency Ltd, MIPS Insurance and the Australian Dental Research Foundation Ltd.

Troy Browning graduated with a Bachelor of Medicine and Surgery from Sydney University in 1984 and went on to private practice in the northern suburbs of Sydney. His involvement in the medical indemnity industry began in 1995 when he was appointed as a Medico-legal Advisor and Claims Manager in the Australian operations of The MDU (Medical Defence Union) UK. In 1997 he joined a Melbourne-based professional services group providing expertise and back-office support to a number of medical defence organisations and their shared insurer. As General Manager of that organisation, he helped establish the Queensland Doctorsâ&#x20AC;&#x2122; Mutual and MIPS Insurance, and was a Director of the inaugural Board of Health Professionals Insurance Australia, later renamed MIPS Insurance. Dr. Browning was appointed as MIPS Group CEO in 2005. In 2010 Dr. Browning was appointed as Managing Director of MIPS, whilst continuing his role as MIPS Insurance CEO.

4 MIPS Chairman’s Report

mips chairman’s report The MIPS group has once again enjoyed a successful year with a significant increase in members’ surplus and also in net members’ assets.

The details of the financial results can be best obtained by reading the reports of the Chairman of MIPS Insurance and the Managing Director of MIPS. These reports outline the reasons for the improvement in the consolidated results over the 2009-2010 year. The financial results of MIPS reflect the clinical risk profile of our members. That clinical risk profile is significantly lower than average for the sector and means lower than average income per member, albeit from 30,000 plus members!

philosophy MIPS aims to be the pre-eminent ‘doctors for doctors’ medical defence organisation in Australia. MIPS objective under its constitution is to promote honourable and discourage irregular practice. Its obligations are to its current members – MIPS does not expose members’ assets to the risk of claims of non-members. MIPS provides members with a number of standard benefits including access to medical indemnity insurance cover underwritten by our wholly owned APRA regulated subsidiary MIPS Insurance. MIPS, however, believes a holistic approach to the provision of protection and support to our members requires more than a policy of insurance and accordingly we provide other benefits including 24 hour medicolegal assistance from well qualified clinicians, access to an extensive range of risk management resources and representation and advocacy on behalf of MIPS members.

With respect to the latter, the Managing Director is involved with a number of projects including the National E Health Transitional Authority (NeHTA), The Open Disclosure Advisory Group, Beyond Blue initiative for medical practitioners and several Insurance Council working parties including the medical indemnity working group. In addition, during the year MIPS again made a number of submissions on behalf of members, the two most important in respect of current issues being: • in response to the exposure draft to the recently implemented Health Practitioner Regulation National Law 2009. In its submission MIPS expressed a number of concerns particularly in relation to mandatory reporting and procedural fairness. • to the productivity commission in relation to a national disability and long term care scheme. Any such scheme has the potential to have a significant impact, either positive or negative, on medical indemnity costs.

MIPS Annual Report 2010 5

the board The board remained stable for the financial year ending June 2010. There are however some significant changes planned for the near future. Mr Bob Dickensâ&#x20AC;&#x2122; term as a Director expires at the end of December 2010 and he has indicated an intention to retire and not be available for reappointment. Mr Dickens has been involved in the medical indemnity industry since joining the Council of the Medical Defence Association of Victoria in 1976. He subsequently became President and Chief Executive of that organisation in 1990 ultimately retiring from MDAV in 2000. He joined MIPS initially being involved in claims and was appointed to the Board in 2002. He has provided unwavering support to MIPS and the contribution that he has made over the years has been very much appreciated by other Directors and hopefully (if not always obviously) by the membership. He will remain at MIPS concentrating on providing advice and support in the claims division. Dr Troy Browning, until recently the CEO of the MIPS Group, was appointed to the board of MIPS in September of 2010 and is now Managing Director. This appointment has been made in view of his significant contribution to the development of MIPS over his period as CEO and will provide him with further opportunities to influence MIPSâ&#x20AC;&#x2122; development in the future.

MIPS is presently seeking to appoint two further Directors to the board, at least one of whom must be a medical practitioner. It is expected that these appointments will improve the diversity of the board. I expect these new appointments to bring some fresh ideas to the board and to challenge some of the beliefs currently held by remaining board members. It is to be hoped that such developments will stimulate further innovation enabling us to provide even better service to members. It remains to me to express my thanks to my fellow Directors and Dr Browning, for their support and invaluable assistance over the last year. My thanks also go to Mr Barry Gilbert, Chairman of MIPS Insurance together with the other Directors of MIPS Insurance for ably guiding the company through what have been difficult times associated with the recent global financial upheavals. My thanks also go to the Heads of the Divisions of MIPS and to all the other staff who work so assiduously to provide members with the services they require.

R W L Turner Chairman

6 MIPS Insurance Chairman’s Report

mips insurance chairman’s report Economic and investment conditions were more favourable in the financial year to June 2010 than in the previous financial year and MIPS Insurance once again achieved very satisfactory financial results.

Profit for MIPS Insurance for the year was $7 million compared with $2.8 million in 2009. Capital adequacy improved from a multiple of 2.94 last year to 3.15; well ahead of the APRA minimum requirement of 1.5 for medical indemnity insurers and 1.2 for general insurers. The board has considered it prudent to hold high levels of solvency during the early years of MIPS Insurance’s development, to withstand any unforeseen financial shocks that could arise (for example) from volatility in the value of the claims portfolio which might arise from a small number of potentially high value claims.

MIPS Insurance has also exercised due care and diligence to ensure the security of capital and reinsurance assets held to meet the claims of MIPS members. As MIPS Insurance matures, the strategy for future years is for the capital ratio to be comfortably (but not excessively) greater than required by APRA. The underwriting result at $5 million, which is materially influenced by the assumptions used by the Actuary in calculating future claims liabilities, was $4.2 million higher than the previous year’s $0.8 million. The previous year’s result had been adversely affected compared with the year prior by the reduction in the claims discount rate actuarial assumption. The discount rate applied for the 2009-10 is 4.6% compared with 4.9% for the 2008-09 year and 6.8% for the 2007-08 year.

MIPS Annual Report 2010 7

The other major contributor to the improved result this year was investment gains of $1 million, compared with investment losses in 2008-09 of $3 million. Including gains and losses on investments, MIPSi has had a profitable investment return throughout the global financial crisis. The investment result for the year was $9.4 million compared with $5.3 million for the 2008-09 year. Total liabilities (predominately outstanding claims liabilities) increased by $12.5 million in the year, with an offsetting increase in total assets of $19.5 million reflecting total equity increasing by $7 million to $77.8 million. MIPS Insurance has a reassuring combination of a strong balance sheet and particularly strong panel of reinsurers, giving its insured members excellent security against future claims. This, together with disciplined risk acceptance and pricing practices, claims handling and support of a very high professional standard, provides MIPS members the high quality insurance cover required to meet their needs.

All members of the MIPS Insurance Board, the Group Audit, Risk and Compliance Committee, and the management team and staff led by Dr. Troy Browning, are to be congratulated for another successful year.

Barry S Gilbert Chairman

8 MIPS Managing Director’s Report

mips managing director’s report I am pleased to report that the results for the MIPS Group to 30 June 2010 show: • $21.2

million increase in members’ surplus

•

9% increase 1 in members’ net assets 3% increase 1 in total members’ assets.

MIPS members’ total assets as at 30 June 2010 increased to $280.7 million with net assets of $133.1 million. MIPS Insurance’s solvency level increased from 30 June 2009 and remains well in excess of that required by the Australian prudential regulation authority (APRA). Of additional comfort to members is that when MIPS Insurance’s parent (MIPS) is assessed on a similar basis, it shows an even higher level of solvency than its subsidiary.

financial results The 2009-2010 results bettered MIPS expectations due to a range of factors, the most significant of which were: • Higher total income than anticipated. Total income received during the year was higher than predicted mainly reflecting continued new member growth during the year • Increased Reinsurance costs reflecting MIPS desire to ensure members’ surplus is protected from adverse claims experience through further strengthening of reinsurance protection • Claims experience was better than anticipated. The total value of claim and potential claim matters reported during the year was less than the actuarial projection

• Better than predicted claims development in prior years. This reflects the slow release of reserves as claims from earlier years are finalised • Improved investment result compared with prior year. Investment income was significantly higher than in the prior year, primarily as a result of the improvement in value of equity investments. The groups conservative investment management approach has seen a positive investment result throughout the global financial crisis • Sale of MIPS interest in Professional Insurance Australia Pty Ltd • Further reductions in non-indemnity operating expenses. A 5% decrease from 2008-2009 administration and other operating expenses was achieved – bettering budget saving targets and timeframe • Modest reinsurance recoveries. The MIPS Group has maintained a relatively modest exposure to reinsurance recovery assets (less than $4 million). The MIPS Group further protects members’ by limiting reinsurance exposure by utilising several APRA regulated global reinsurers on its programs.

MIPS Annual Report 2010 9

MIPS continues to take a prudent approach to minimise exposure to the potential volatility from low number but high value medical indemnity claims. For that reason the MIPS Group again reserved for medical indemnity liabilities at a higher level of sufficiency than the minimum required under APRA prudential standards. The consideration of the appropriate level of sufficiency to adopt is considered each year in light of organisational maturity.

growth

Under MIPS constitution “no part of the company’s income or property may be paid or transferred directly or indirectly by way of dividend bonus or otherwise to members or shareholders…”. All annual members’ surplus are added to members’ total assets. Additional members’ net assets not only add to members security by further strengthening MIPS, but also help to reduce the year to year volatility and the amount members are charged from that which must otherwise occur. That is because the groups net asset/ solvency position is considered every year as part of the process of setting membership fees.

Continued improvements in staff training and refinements of MIPS systems and operations have further improved member service delivery and efficiency. MIPS staff have worked hard during the year to enhance member benefits and services while at the same time achieving significant administration cost reductions and bettering budgeted reduction targets, across a range of cost types.

During the 2009-2010 financial year MIPS non-student medical member numbers increased by approximately 4% over the prior year and overall MIPS experienced an increase in total membership (including students) of approximately 4.5%, bringing total membership numbers as at 30 June 2010 to just over 31,000.

operational matters

10 MIPS Managing Director’s Report

mips managing director’s report Total staff numbers also reduced during the year. Noting MIPS growth in members and increased level of service and services offered to members – that is objective confirmation of increased operational efficiency. MIPS also created a separate marketing and communications division during the year to permit increased specialisation and focus.

investment management During the year the MIPS Group undertook a review of investment manager services. A number of highly regarded firms participated in an extensive, rigorous and objective process that ultimately saw the reappointment of the incumbent manager. The appointed investment manager works within a tightly defined and monitored investment mandate. The MIPS Group Investment Committee provides additional oversight of financial matters and provides appropriate recommendations to the MIPS Group Boards for consideration.

data provision

risk management initiatives

During the year MIPS provided data to federal and state governments and others under various legislation and other instruments.

MIPS again increased its investment in members risk management resources over prior years. As a result;

MIPS is required to provide data to:

• 992 Members registered for MIPS risk management workshops

• Apra - MIPSi claims and policy data and ’mutual’ data

• 679 Members viewed one of MIPS on-line risk modules

• Dept. of Health and Ageing/Medicare – Premium Support Scheme, Run-off Cover Scheme, High Cost Claims Scheme, Policy, Risk Management and other data

• 56 Members attended a MIPS medico-legal presentation and

• NSW Department of Health–Policy/ claims/premium relativity/ workforce data

claims performance

• ACT – Claims and Policy data • MINC – Claims data for public/private medical indemnity claims analysis.

MIPS also provided 40 risk management presentations.

During the year MIPS claims division received approximately 3,700 new contacts from members - most (approximately 82%) relating to advisory matters or incidents deemed not likely to give rise to a claim. MIPS continues to provide members with 24/7 access to frontline medicolegal advisors who are all experienced medical and dental practitioners from a wide range of dental and medical craft groups. Those practitioners also act as claims handlers to ensure that there is efficient interaction of members, experts and legal advisors regarding clinical issues which also helps reduce the adverse impact on members’ time.

MIPS Annual Report 2010 11

MIPS does not employ in-house lawyers. MIPS believes a combination of experienced clinician claims handlers and independent external lawyers expert in the subject and jurisdiction of a matter, is the ideal combination for obtaining the best outcomes for members. MIPS accounts again show that in general terms claims results continue to be better than actuarial projections. That pattern reflects continuing endeavours in the areas of member selection, clinical risk management and efficient and effective claims management. The activities of MIPS triage committee, ably assisted by MIPS clinician file handlers, and the claims senior management group are all designed to achieve the best possible outcome for the membership. Those committees all operate within the framework of the claims division.

potential challenges APRA is nearing finalisation of its life and general insurance capital project. The outcomes of that project have the potential to adversely affect medical indemnity costs. MIPS has made comment through its membership of the insurance council to help ensure the best long-term outcomes for MIPS current and future members are achieved.

future direction MIPS obligations are to current members and MIPS continues to strive to ensure that the right balance is achieved between providing additional or improved services that members need and the cost of delivery of those services to members. The 30 June 2010 MIPS Group results have added materially to the security that MIPS provides its members.

Dr Troy Browning Managing Director

12 Organisatonal Structure

organisatonal structure The key governance structures within the MIPS group are: •

MIPS board

•

IPS Insurance M board

•

IPS Group M audit, risk and compliance committee

•

IPS Group M investment committee.

The MIPS Group reflects significant depth and breadth of Director experience. This includes medical, dental, legal, accounting, insurance and other financial sector and corporate governance, executive and Board expertise and experience. The MIPS and MIPS Insurance Boards are supported by the group audit risk and compliance committee (GARCC), whose aim is to help reduce risk to the group through identification, mitigation and oversight of risk. The GARCC consists of highly skilled and experienced independent non executive Directors from both boards, and monitors compliance with group policies and with prudential statutory and other requirements.

Risks are reviewed by management on an inherent and residual basis, and risk controls are rated according to management’s assessment of their effectiveness. The MIPS track record continues to be one of growth and constant improvement in the range and delivery of services to members. Through its corporate governance and management structures, MIPS ensures that it matches members’ trust with the certainty, strength and integrity that they expect of their organization.

Members’ interests are protected through a sound corporate governance structure, which comprises risk management and compliance management frameworks. These governance structures ensure that the business adequately addresses its compliance related risks and meets appropriate regulatory and statutory obligations and standards.

Norman Newbon FAICD Chairman, GARCC

MIPS Annual Report 2010 13

MIPS Group governance and management

MIPS Group

MIPS Insurance Board

MIPS Board

GIC

Information & Projects

Corporate Administration & Compliance

GARCC

MD/CEO

Marketing & Communications

Claims

Finance & Risk Management

Internal Audit

Member Services

14 Management of MIPS

management of mips In order to safeguard the organisation and to provide assurance of our compliance with the large number and wide range of regulatory and legal requirements, MIPS has a number of internal committees which oversee its daily operations and ensure transparency and efficiency.

group audit, risk and compliance committee The group audit, risk and compliance committee’s (GARCC) primary responsibility is reviewing and monitoring the MIPS Groups risk management strategy and enterprise risk management process. The GARCC is made up of independent Directors, and is responsible, through management, for monitoring compliance with the Boards’ policies, as well as prudential and statutory requirements. The GARCC reports to the Boards on the progress of the internal audit programme, the risk management system and adherence to the compliance plan each quarter, or more frequently as required. The GARCC met six times throughout the year and in carrying out its duties, monitored, reviewed and approved processes used to: • Identify higher risk areas within the group’s operations and verify the integrity, relevance and effectiveness of the management of those risks, including the risks associated with: – Investment – financial systems – risk management systems – legal obligations

• Ensure the integrity of all financial and management information upon which the Boards rely • Maintain an effective and efficient control and risk management environment • Ensure the group meets the requirements of the appointed auditor’s programme and undertake appropriate actions in response to the appointed auditor’s report • Ensure the group complies with the relevant regulatory requirements. The GARCC also has responsibilities to • Make an appointment recommendation for an appointed auditor, and undertake an annual review of the appointed auditor’s engagement, including an evaluation of the appointed auditor’s independence • Make an appointment recommendation for an appointed actuary, and undertake an annual review of the appointed actuary’s engagement, including an evaluation of the appointed actuary’s independence • Make an appointment recommendation for an lnternal auditor and undertake an annual review of the lnternal auditor’s work, including an evaluation of independence. The members of the GARCC are detailed in the Director’s report.

MIPS Annual Report 2010 15

16 Management of MIPS

internal audit

group investment committee

During the year, the group brought the internal audit function in house. The MIPS Group internal auditor utilises the services of external providers of internal audit services as and when required. Internal audit provides independent and objective assurance and consulting services designed to add value and improve the efficiency and effectiveness of the MIPS Group’s operations. Internal audit applies a systematic, disciplined approach to evaluate and improve the effectiveness of MIPS risk management, controls and governance processes.

The Group Investment Committee (GIC) is responsible for reviewing, guiding and recommending to the respective Boards in regard to investment matters. The GIC is a Board and management committee and will comprise a minimum of two Directors, the Managing Director and CEO and Chief Financial Officer (CFO).

The objective of internal audit is to determine that the enterprise risk management framework, control and corporate governance processes, as designed and represented by management, are adequate and functioning to provide assurance that: • Risks are appropriately identified and managed • Interaction with the various governance groups occurs as needed • Significant financial, managerial and operating information is accurate, reliable and timely • Employees’ actions are in compliance with policies, standards, procedures, and applicable laws and regulations • Resources are acquired economically, used efficiently and adequately protected • Programmes, plans and objectives are achieved • Quality and continuous improvement are fostered in the group’s control process • Significant legislative or regulatory issues impacting the group are recognised and addressed appropriately.

The day to day maintenance of the investment portfolio is undertaken by the CFO and the finance division in conjunction with the MIPS Group appointed investment manager. The members of the GIC are detailed in the Director’s Report. The committee met formally three times during the year however matters were routinely and regularly communicated and discussed using electronic means. In carrying out its duties the GIC:

• Recommends to the Boards the appointment or termination of external investment managers • Meets formally with the external investment manager • Reviews the effectiveness of the investment risk management procedures • Considers whether there should be any variations to the approved asset allocation ranges • Considers what systems have been formulated by the group to monitor compliance with legislative, regulatory and internal investment policies • Considers what measures are being taken by the group to ensure assets are managed in accordance with investment mandates and benchmarks approved by the Boards

• Reviews and recommends to the Boards any changes to the investment objectives, policies and strategic asset allocation ranges and benchmarks

• Considers what internal and external audit checks were made on the investment policies and procedures of the group and their findings over the past 12 months.

• Reviews and recommends to the Boards any additional investment sectors or types of securities

membership assessment, acceptance and advisory committee

• Reviews the appropriateness of the mandate of the external investment manager

The MIPS Group membership assessment, acceptance and advisory committee (‘membership committee’) considers membership matters within the authority delegated by the MIPS Board and the terms of MIPS constitution.

• Reviews the past 12 months’ performance of both internal and external investment management process against relevant benchmarks • Reviews and considers the tactical asset allocation and recommend to the Boards any changes

The membership committee consists of the MIPS Director of Claims, MIPS Chairman / MIPSi Deputy Chairman, MIPS Managing Director/MIPSi CEO, MIPS Head of Member Services, MIPS Head of Claims and MIPS Clinical Risk Manager. Other attendees may include MIPS member services officers and may also include other MIPS Directors and invited attendees who may be required to provide the membership committee with technical assistance.

MIPS Annual Report 2010 17

Acceptance into membership can only be considered in accordance with MIPS constitution. Only MIPS members have access to membership benefits including cover under MIPS members’ master or group insurance policies. The membership committee operates on a continuous ‘as required’ daily basis. Frequency is however determined by the nature and type of applications. A formal meeting of the full membership committee is usually held each week. The membership committee reviews exceptional or complex matters at its formal weekly meetings. Matters for consideration may also include new membership categories or membership benefit considerations. Other matters such as applications by members to vary their retroactive date and membership category queries are also referred by member services officers for consideration by the membership committee. Each year member services and claims divisions co-ordinate data provision prior to renewal through the MIPS membership committee to review the claims and incidents notifications for all members. Members identified by that process who display abnormal practice profiles

may be counselled and/or advised of changes to their membership terms and conditions and/or have practice restrictions imposed or be advised that application for membership renewal will not be accepted.

responsible managers committee The MIPS Group holds two Australian Financial Service Licences (AFSL). As licensees, MIPS must maintain the organisational competence to provide the financial services covered by these licenses. That organisational competence is provided by responsible managers, who represent the company to ensure that the company meets these obligations.

The purpose of the responsible manager committee meetings is to ensure that MIPS is meeting its obligations as an AFSL holder (including its organisational competency obligations) on an ongoing basis. Any matters identified at meetings of the responsible managers committee which may have a material impact on MIPS being able to maintain its organisational competence or any other material matter will be reported to the group audit risk and compliance committee. Some of the standing items of the responsible managers committee meetings include: • Ongoing compliance and certification of AFSL obligations including monitoring and supervision activities

Responsible managers:

• Monitoring, review and management of complaints

• Are directly responsible for significant day to day decisions about the ongoing provision of financial services

• Initial and ongoing education of all staff in relation to AFSL matters.

• Have the appropriate knowledge and skills for all MIPS financial services and products, and • Individually meet one of the five options for demonstrating appropriate knowledge and skills. Responsible managers committee meetings take place monthly to ensure AFSL compliance is maintained within the business and that MIPS will continue to maintain compliance with its AFSL (corporations act) obligations. MIPS three responsible managers are the Managing Director, the Head of Information and Projects and the Clinical Risk Manager.

Over the 2009/2010 financial year the responsible managers committee: • Implemented a sophisticated complaint reporting and monitoring policy and system ensuring that such issues were dealt with promptly and effectively and in accordance with the new requirements of ASIC • Continued the extensive ongoing AFSL education program for all staff • Noted there were no breaches of MIPS AFSL obligations • Dealt with changes to ASIC dispute resolution schemes including new terms of reference for the financial ombudsman service.

18 Member Benefits

member benefits As a member organisation, MIPS is committed to efficiently providing a range of benefits to members to meet their needs in accordance with MIPS constitution.

The extent of access to MIPS comprehensive and flexible membership benefits is determined by the membership category selected by a member.

MIPS continues to expand the benefits it provides members in anticipation and/or response to developing needs while keeping associated paperwork to a necessary minimum.

The table below sets out the benefits of membership. MIPS Protections MIPS Members’ Medical Indemnity Insurance Policy* MIPS Members’ Medical Indemnity Insurance Student Member Policy MIPS Members’ Practice Entity Policy* MIPS Members’ Group Personal Accident Policy* Medico-legal advice (24/7 advice helpline) Risk Management Workshops & Advice Medico-legal seminars and training Online Risk Management Modules MIPS Review and MIPS Student Review *These membership benefits do not apply to Student Membership categories.

MIPS Annual Report 2010 19

20 Assistance with Claims

assistance with claims The claims division of MIPS provides advice and claims management support and services to members.

The claims division of MIPS provides advice and claims management support and services to members. MIPS is different in that all its medicolegal advisers and file managers are experienced, senior medical or dental practitioners. These medico-legal advisors all have substantial experience in clinical practice and can therefore use their professional expertise and experience to better assist members. MIPS’ 16 medico-legal advisers/file managers have specific backgrounds in the disciplines of general practice, obstetrics/gynaecology, anaesthetics, orthopaedic surgery, general surgery, internal medicine, pain management, general dentistry, endodontics and prosthodontics. The majority of contacts from members to the claims division each year relate to advisory matters or incidents involving patients that are thought unlikely to lead to a claim. Divisional time however, remains evenly split between providing advice to members and dealing with all aspects of managing incident notifications. Advisory services deal with most aspects of the health practitioner member/patient relationship. Some recent examples of relatively straightforward matters include advice on how to manage a subpoena for evidence or notes, how to disengage from a patient, and how to deal with a worker’s compensation or other insurer’s request for records.

There has been a large growth in the number of practitioners seeking advice in relation to their obligations to furnish records and information under the family law court, and also in other jurisdictions. These are often complex matters involving potential conflict of interest, particularly where the practitioner has been involved in treatment of more than one party to the action. There has also been a significant increase in systematic Medicare Australia audits of practices and practitioners, in some cases involving significant repercussions and ramifications to members. One of the unique elements of MIPS member benefits is assistance for non medical indemnity matters relating to professional activities that are otherwise not covered under any insurance policy. Some examples where discretion has been exercised have been: • Impairment assessments by registration bodies, when not related to health care incidents • Allegations made by practice staff (eg bullying, harassment etc) • Investigations relating to clinical competencies, and • General registration issues, with particular regard to visas, work permits, recognition of qualifications and other issues inherently faced by international medical graduates.

MIPS Annual Report 2010 21

22 Assistance with Claims

Members can sometimes be involved in sensitive and complex clinical issues, which require time critical advice in relation to serious and sometimes life changing circumstances.

Our 24 hour a day claims hotline has been of invaluable service to members on many occasions and we pride ourselves on our ability to respond swiftly to any crisis Members may contact MIPS for advice in relation to the complex issues of preparing an effective and objective statement to a coroner’s office. Unfortunately, patient suicide is a not irregular trigger for members contacting MIPS and we are able to assist members negotiate the minefield of paperwork and processes that these unfortunate events generate. Should the matter proceed to an inquest where there is any concern of a finding against a member, counsel is usually provided to assist in the evidentiary stages. Claims management services involve complex medico-legal skills being focussed on incident notifications some of which evolve into claims and thence through to negotiating closure of claims with any legal merit with the patient (or their representatives). MIPS has made a very conscious decision to have no ‘in-house’ lawyers, choosing to allocate work out to the best lawyers for the job around the country. Decisions around which file manager and panel legal firm to use is made on a case-by-case basis to ensure the most appropriate representation is secured according to jurisdiction and past experience. All panel lawyers are thoroughly scrutinised for their skills and experience, as well as their up-to-date knowledge of the jurisdiction and the prevailing issues. MIPS panel firms are regularly reviewed to ensure that we continue to achieved the best outcomes for our members.

As a member focussed organisation MIPS always manages a claim for damages from the dual perspectives of achieving the best commercial outcomes for the membership as a whole, in balance with the need to preserve the individual member’s professional reputation. Naturally our clinician claims handlers are very aware of (and sympathetic to) that need, and ensure our legal panel remain cognisant of the need for this balance. The combined team is skilled at developing defence and litigation strategies with these objectives in mind. ’Claims‘ is a broad word and most members associate this with a patient suing a member for compensation. An increasingly large number of claims (notifications where a cost will be incurred) do not involve patient financial demands at all. A large proportion of the claims related work is focussed on professional and disciplinary Board matters and an increasing number of investigations being conducted by statutory Boards. These are often very labour intensive, and may involve a plethora of complex issues. Significant effort is directed toward addressing these matters to help resolve them quickly and efficiently and to mitigate any potential threat to a member’s ability to continue to practice. Apart from formal claims, notifications of matters that do not have a formal demand for compensation from a patient (but in MIPS experience have the potential to develop over time into a claim) are categorised as ‘incidents likely’. MIPS manage these matters as if they were a claim so that if a claim does crystallise, we are in the best position to respond to, and have set aside funds in reserve for, such a contingency.

MIPS Annual Report 2010 23

As with last year, the successes were due in part to some ongoing effect of tort reforms but more importantly consolidation of MIPS risk management initiatives, effective claims management strategies, solid and effective legal representation and an overall cooperative approach from members in providing timely, meaningful information and instructions.

The 2009-2010 year was another very successful year from a claims division perspective. Any anticipated impact of the global financial crisis upon claims did not materialise. High frequency/low severity notifications are often a feature of a tough economic environment, however our claims experience did not reflect this anticipated activity.

development table notifications by number 4000 3500 3000 2500 2000 1500 1000 500 0 2003/2004 claims

2004/2005

2005/2006

incidents likely

2007/2007

2007/2008 incidents not likely

2008/2009

2009/2010 advisory

24 MIPS Insurance Chairman’s Report

distribution of notifications 2009/2010 by number 17% liablility

83% non–liablility

distribution of 2009/2010 – notifications state of origin – by number 2% WA 0% ACT

33% VIC 36% NSW

7% TAS

1% NT

2% SA 19% QLD

MIPS Annual Report 2010 25

2009/2010 notifications (non advisory) by craft group surgical non procedural gps procedural gps physicians psychiatrists obstetricians and gynaecologists anaesthetists employer indemnified doctors in training no private practice

breakdown of claims 2009-2010

32% representation only 1.0 0.8 0.6 0.4 0.2 0.0

68% damages & like

26 Risk Management Activity

risk management activity Participation in a risk management activity is a tangible benefit of MIPS membership.

A suite of risk management and medico legal offerings are available to MIPS members. These comprise various risk workshops, a range of medico legal seminars, on-line modules and a number of risk management communications including MIPS review and website news. The first three of these activities meet the medicare requirement for mandatory risk management for participants of the Premium Support Scheme (PSS). This provides members with contemporary risk management education delivered by currently practicing medical and dental practitioners; it also hopefully results in safer outcomes for patients, providing a benefit to the community and to all MIPS members. It also provides members with valuable CPD points. Since 2004, almost 300 risk workshops have been provided to MIPS members. During the course of the year members participated in the following risk management activities: â&#x20AC;˘ 39 Risk workshops throughout Australia provided for MIPS by the Cognitive Institute and attended by 760 members (a 27% increase on 2008-2009) â&#x20AC;˘ Online modules completed by 679 members (a 61% increase on 2008-2009) â&#x20AC;˘ Medico legal seminars attended by 56 members.

A review of the Cognitive Institute risk workshop program showed overwhelming positive support for the program. The workshops are extremely well presented by skilled clinicians and educators and will continue however it was also determined that new topics be introduced to the program and the program be extended to include further options of a more practical nature for members and to meet the specific needs of craft groups. These will be provided over the course of 2010-2011. A further module for international medical graduates is to be produced to cater for the potentially unique risks faced by overseas graduates starting practice in Australia. Risk management resources specific for our dental members have been developed and are provided in the form of on line modules and risk workshops. MIPS is investigating more efficient measures of providing risk education, particularly to our rural and remote members.

MIPS MIPSAnnual annualReport report 2010 27

28 Contents of Financial Report

contents of financial report Directorsâ&#x20AC;&#x2122; report

Auditorâ&#x20AC;&#x2122;s independence declaration

Statements of comprehensive income

Statement of financial position

Statements of changes in equity

Statement of cash flows

Notes to the financial statements

Directorsâ&#x20AC;&#x2122; declaration

Independent audit report

MIPS Annual Report 2010 29

Medical Indemnity Protection Society Ltd and its subsidiaries directors’ report Your Directors present their report on the consolidated entity (the “Group”) consisting of Medical Indemnity Protection Society Ltd (the “Society”) and its subsidiaries at the end of, or during, the year ended 30 June 2010. Directors The following persons were Directors of Medical Indemnity Protection Society Ltd during the whole of the financial year and up to the date of this report unless otherwise noted: A T Browning, appointed as Managing Director of the Society effective 27 July 2010 D R V Dickens A A Fraser K C D Roxburgh C J Steadman B E Taylor R W L Turner, Chairman Meetings of Directors The number of meetings of the Society’s Directors held during the year ended 30 June 2010, and the number attended by each Director during the time the Director held office during the year ended 30 June 2010 are disclosed below: Board Meetings held during the year

Board Meetings attended

A T Browning*

–

D R V Dickens

A A Fraser

K C D Roxburgh

C J Steadman

B E Taylor

R W L Turner, Chairman

*A T Browning attended 7 of 7 meetings during the year in his role as Chief Executive Officer.

Meetings of the Group Audit, Risk and Compliance Committee (“GARCC”) The number of meetings of the GARCC held during the year ended 30 June 2010, and the number attended by each member of the GARCC during the time the member of the GARCC held office during the year ended 30 June 2010 are disclosed below:

GARCC Meetings held during the year

GARCC Meetings attended

B S Gilbert

N W Newbon , Chairman

K C D Roxburgh

B S Gilbert and N W Newbon are not Directors of the Society but are Directors of a wholly owned subsidiary, MIPS Insurance Pty Ltd.

30 directors’ report

Medical Indemnity Protection Society Ltd and its subsidiaries directors’ report (continued) Meeting of the Group Investment Committee (GIC) The number of meetings of the GIC held during the year ended 30 June 2010, and the number attended by each member of the GIC during the time the member of the GIC held office during the year ended 30 June 2010 are disclosed below. The GIC meets as and when required.

GIC Meetings held during the year

GIC Meetings attended

A T Browning1

R J Miles2

K C D Roxburgh, Convenor

C J Steadman3

B E Taylor

T Browning was not a Director of the Society during the year but as a member of the GIC attended 3 of 3 meetings during the year in his A role as Chief Executive Officer.

R J Miles is the Chief Financial Officer and is not a Director of the Society.

C J Steadman was appointed a member of the GIC on 9/12/2009.

Information on Directors Director

Qualifications

Special Responsibilities and Experience

A T Browning

MBBS, MBA, Grad Dip Ins ANZIIF (Fellow), AFAIM, CIP

Managing Director of the Society from 27 July 2010 Chief Executive Officer of the Society and MIPS Insurance Pty Ltd Member of the MIPS Group Investment Committee Member of various Claims and Membership committees

D R V Dickens

MBBS, FRACS

Director of Claims and member of various claims management committees Provides specialist claims advice in a sessional capacity Former Director, Professional Insurance Australia Pty Ltd Director and Chairman, Queensland Doctors’ Mutual Pty Ltd

A A Fraser

BJuris, LLB

K C D Roxburgh

BCOM, MBA, MESAA

Member Group Audit Risk & Compliance Committee Convenor and member of the MIPS Group Investment Committee Director, MIPS Insurance Pty Ltd Director, Charter Hall Group Former Director, Professional Insurance Australia Pty Ltd Director, Ramsay Health Care Ltd Director, LawCover Insurance Group Director, Marshall Investments Pty Ltd Director, Moneyswitch Ltd

C J Steadman

MBBS, FRACP, MD, FAICD

Member of the MIPS Group Investment Committee Provides specialist claims and medical indemnity risk management advice on a sessional basis Director, QGI Pty Ltd Director, Queensland Gastroenterology Pty Ltd Director, Queensland Doctors’ Mutual Pty Ltd Director, Steady Care Pty Ltd

MIPS Annual Report 2010 31

Medical Indemnity Protection Society Ltd and its subsidiaries directors’ report (continued) Director

Qualifications

Special Responsibilities and Experience

B E Taylor

MDSc, FRACDS, LDS, FADZ, FICD, FDFA

Member of the MIPS Group Investment Committee Director, Victorian Medical Insurance Agency Ltd Director, MIPS Insurance Pty Ltd Director, Australian Dental Research Foundation Ltd

R W L Turner Chairman

MBBS, LLB, FRCS, FRACS, FACLM, FAICD

Chairman of the Board Provides specialist claims advice on a sessional basis Member of various Claims and Membership Committees Director and Deputy Chairman, MIPS Insurance Pty Ltd President, Medical Protection Society of Tasmania Director, Queensland Doctors Mutual Pty Ltd Director, Professional Management Australia Pty Ltd

Company Secretary W F Berryman

Special Responsibilities and Experience FANZIIF, GRAD DIP BUS (INS), ACIS

Company Secretary, Medical Indemnity Protection Society Ltd Company Secretary, MIPS Insurance Pty Ltd Company Secretary, Queensland Doctors’ Mutual Pty Ltd Former Company Secretary, Professional Insurance Australia Pty Ltd Compliance Officer

Principal activities The Group’s business is to protect, support and safeguard the character and interests of medical practitioners and to provide medical membership benefits including indemnity insurance to members. Review of operations and results Group

Profit for the year

Society

2010 $’000

2009 $’000

2010 $’000

2009 $’000

20,262

7,311

16,958

3,450

Basis of preparation The financial report is a general purpose financial report which has been prepared in accordance with the Australian Accounting Standards, Corporations Act 2001, including the application of ASIC Class Order 10/654 allowing the disclosure of Parent entity financial statements due to Australian Financial Services Licensing obligations. Dividends The Society’s constitution prohibits the payment of dividends to professional members or shareholders. No dividend was therefore paid or proposed for the year ended 30 June 2010 (2009: $Nil). Significant changes in state of affairs There have been no significant changes in the state of affairs of the Group during the year ended 30 June 2010. Likely developments and expected results of operations Information on likely developments in the operations of the Group and the expected results of operations have not been included in this report because the directors believe it would be likely to result in unreasonable prejudice to the Group.

32 directors’ report

Medical Indemnity Protection Society Ltd and its subsidiaries directors’ report (continued) Significant events after balance date No matters or circumstances have arisen since 30 June 2010 that have significantly affected, or may significantly affect: (a) the Group’s operations in future years, or (b) the results of those operations in future years, or (c) the Group’s state of affairs in future financial years. Insurance of officers During the financial year, the Society paid a premium to insure the directors and officers of the Society. In accordance with normal commercial practice, disclosure of the total amount of premium payable under the insurance contract is prohibited by a confidentiality clause in the contract. No insurance cover has been provided by the Society for the benefit of the auditors. The liabilities insured include damages and legal costs incurred in defending a civil action brought against an insured director. Cover is also provided for legal costs incurred in the successful defence of criminal proceedings. The Society’s constitution states that the Society may pay premiums to insure officers against liabilities incurred in their capacity as officers. The liabilities include the costs of defending civil or criminal proceedings regardless of their outcome. Environmental regulation The Group has assessed whether there are any particular or significant environmental regulations which apply to it and has determined that there are none. Rounding of amounts The Group is of a kind referred to in Class Order 98/0100, issued by the Australian Securities & Investments Commission, relating to the “rounding off” of amounts in the directors’ report. Amounts in the directors’ report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar. Auditor Ernst & Young continues in office in accordance with Section 327 of the Corporations Act 2001. The Auditors’ Independence Declaration is set out on page 33. This report is made in accordance with a resolution of the directors.

R W L Turner Director

D R V Dickens Director

Melbourne 13 October 2010

MIPS Annual Report 2010 33

34 statement of comprehensive income

Medical Indemnity Protection Society Ltd and its subsidiaries statement of comprehensive income For the year ended 30 June 2010 Group

Society

Notes

2010 $’000

2009 $’000

2010 $’000

2009 $’000

38,715 (5,800)

35,089 (4,700)

– –

32,915

30,389

–

(27,588) 1,568

(29,957) 2,101

– –

(26,020)

(27,856)

–

Acquisition costs Run-off cover scheme (“ROCS”) levy

(101) (1,828)

(104) (1,665)

– –

Underwriting expenses

(1,929)

(1,769)

–

4,966

764

–

11,789 165 (514)

11,923 (4,867) (485)

3,133 828 (145)

3,268 (1,806) (162)

11,440

6,571

2,160

1,300

Subscription and other revenue Indemnification benefit Other operating expenses

9 10 11

16,655 2,070 (11,899) 6,826

12,325 1,036 (12,997) 364

24,821 1,782 (11,855) 14,748

14,170 899 (12,845) 2,224

Share of net profits / (losses) of associate

–

902

23,232

8,601

16,908

3,524

(2,970)

(1,290)

(74)

20,262

7,311

16,958

3,450

Net fair value gains on available for sale financial assets

1,318

271

1,318

271

Income tax on items of other comprehensive income

(395)

(81)

(395)

(81)

923 21,185

190 7,500

923 17,881

190 3,639

Premium revenue Outwards reinsurance premium expense Net earned premiums Claims expense Reinsurance and other recoveries revenue Net claims incurred

Underwriting result Investment revenue (Losses)/Gains on investments Investment expenses Investment result

Profit before income tax Income tax (expense)/benefit Profit for the year

Other comprehensive income, net of tax Total comprehensive income for the year

The above Statement of comprehensive income should be read in conjunction with the accompanying notes.

MIPS Annual Report 2010 35

Medical Indemnity Protection Society Ltd and its subsidiaries statement of financial position As at 30 June 2010 Group

Society

Notes

2010 $’000

2009 $’000

2010 $’000

2009 $’000

13 14 15 16

64,028 1,844 139,464 5,727 – 3,948

50,687 1,264 107,748 5,516 153 3,008

24,808 3,526 30,430 2,048 – 19,523

8,623 1,264 25,863 1,832 – 860

215,011

168,376

80,335

38,442

44,148 19,694 857 – – 1,011 65,710

51,437 19,356 1,032 – 7,495 1,523 80,843

11,689 4,679 830 6,508 – – 23,706

16,669 5,203 997 6,508 3,461 – 32,838

280,721

249,219

104,041

71,280

6,959 590 – 14,556 26,757 7,321 56,183

5,579 – 18,496 16,010 6,198 5,163 51,446

1,163 – – – 26,757 7,321 35,241

3,905 – – – 6,198 5,163 15,266

76,175 15,275 – 91,450

65,144 20,725 – 85,869

– 11,293 431 11,724

– 16,567 250 16,817

Total liabilities

147,633

137,315

46,965

32,084

Net assets

133,088

111,904

57,076

39,196

100 1,208 131,780

100 286 111,518

100 1,208 55,768

100 286 38,810

133,088

111,904

57,076

39,196

Current assets Cash and cash equivalents Receivables Investments Reinsurance and other recoveries receivable Current tax assets Other assets

Total current assets Non-current assets Investments Reinsurance and other recoveries receivable Plant and equipment Investments in subsidiaries Investments in associates Deferred tax asset Total non-current assets

15 16 18 28 29 23

Total assets Current liabilities Payables Current tax liabilities Unearned premiums Outstanding claims liability Other liabilities Provisions Total current liabilities Non-current liabilities Outstanding claims liability Provisions Deferred tax liabilities Total non-current liabilities

Equity Share capital Investment revaluation reserve Retained profits Total equity

20 21 22

20 22 23

The above Statement of financial position should be read in conjunction with the accompanying notes.

36 statements of changes in equity

Medical Indemnity Protection Society Ltd and its subsidiaries statement of changes in equity For the year ended 30 June 2010

Share Capital

Investment Revaluation Reserve

Retained Earnings

Total

$’000

Society At 1 July 2008 Profit for the year Other comprehensive income Total comprehensive income for the year At 30 June 2009

100 – – – 100

95 – 190 190 285

35,360 3,450 – 3,450 38,810

35,555 3,450 190 3,640 39,195

Profit for the year Other comprehensive income Total comprehensive income for the year At 30 June 2010

– – – 100

– 923 923 1,208

16,958 – 16,958 55,768

16,958 923 17,881 57,076

Group At 1 July 2008 Profit for the year Other comprehensive income Total comprehensive income for the year At 30 June 2009

100 – – – 100

95 – 190 190 285

104,207 7,311 – 7,311 111,518

104,402 7,311 190 7,501 111,903

Profit for the year Other comprehensive income Total comprehensive income for the year At 30 June 2010

– – – 100

– 923 923 1,208

20,262 – 20,262 131,780

20,262 923 21,185 133,088

The above Statement of changes in equity should be read in conjunction with the accompanying notes.

MIPS Annual Report 2010 37

Medical Indemnity Protection Society Ltd and its subsidiaries statement of cash flows For the year ended 30 June 2010 Group Notes

2010 $’000

Society 2009 $’000

2010 $’000

2009 $’000

Cash flows from operating activities Premium Income

19,759

39,115

–

Subscriptions & Other Income received

27,644

12,252

27,644

14,097

Outwards reinsurance premium

(5,800)

(4,700)

–

(20,563)

–

(16,426)

(12,302)

–

1,238

–

(1,094)

(6,709)

(1,094)

(6,709)

(9)

(1,776)

–

Master policy costs paid Claims paid Non-reinsurance claims recoveries Indemnification costs paid ROCS levy Dividends received

1,885

2,157

644

632

Interest received

8,793

10,546

2,342

2,849

(12,010)

(19,079)

(12,075)

(14,431)

Other expenses paid Other revenue received Income taxes paid Movement in restricted trust account Net cash used in operating activities

4,005

715

8,137

715

(2,110)

(5,838)

(164)

100

–

(4,974)

2,887

25,875

14,381

(103)

140

(197)

(361)

(197)

(361)

Cash flows from investing activities Purchase of plant and equipment Proceeds from Sale of PIA

10,608

–

10,608

–

Proceeds from investments

265,113

281,861

63,175

57,202

(288,058)

(294,882)

(62,272)

(59,410)

Net cash used in investing activities

(12,534)

(13,382)

11,314

(2,569)

Net (decrease) / increase in cash and cash equivalents

13,341

999

11,211

(2,429)

Cash and cash equivalents at the beginning of period

50,687

49,688

6,647

9,076

64,028

50,687

17,858

6,647

Payments for investments

Cash and cash equivalents at the end of period

The above Statement of cash flows should be read in conjunction with the accompanying notes.

38 notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010

Note 1 Summary of significant accounting policies The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial report includes separate financial statements for Medical Indemnity Protection Society Limited as an individual entity (“the Society) and the consolidated entity consisting of Medical Indemnity Protection Society Limited and its subsidiaries (“the Group”). The financial report of the Society and the Group for the year ended 30 June 2010 was authorised for issue in accordance with a resolution of the directors on 13 October 2010. (a) Basis of preparation This general purpose financial report has been prepared in accordance with Australian equivalents to International Financial Reporting Standards (AIFRS), other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001, including the application of ASIC Class Order 10/654 allowing the disclosure of Parent entity financial statements due to Australian Financial Services Licensing obligations. The financial report complies with Australian Accounting Standards and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. This financial report is prepared on a historical cost basis except for those financial assets and financial liabilities that have been measured at fair value, as described in accounting policies below. The financial report is presented in Australian Dollars, which is the Group’s functional and presentational currency. (b) New Accounting Standards. Adoption of new accounting standards The Group has adopted 2007-9 Amendments to Australian Accounting Standards arising from the Review of AASs 27, 29 and 31 [AASB 3, AASB 5, AASB 8, AASB 101, AASB 114, AASB 116, AASB 127 & AASB 137]; 2009-12 Amendments to Australian Accounting Standards arising from the Reclassification of Financial Assets [AASB 7, AASB 139 & AASB 2009-10]; Disclosures and all consequential amendments which became applicable on 1 July 2009. The adoption of this standard has only affected disclosures in these financial statements. There has been no affect on profit and loss or the financial position of the Group. The Group has adopted 2010-3 Amendments to Australian Accounting Standards arising from Embedded Derivatives [AASB 139 & Interpretation 9]; Disclosures and all consequential amendments which became applicable on 30 June 2010. The adoption of this standard has only affected disclosures in these financial statements. There has been no affect on profit and loss or the financial position of the Group. Australian Accounting Standards issued but not yet effective The Group has not applied any Australian Accounting Standards that have been issued as at balance date and applicable to the Group but are not yet operative for the year ended 30 June 2010 (“the inoperative standards”). All Australian Accounting Standards other than the inoperative standards, that have been issued as at balance date but are not yet operative for the year ended 30 June 2010 are considered to be not applicable to the Group. The impact of the inoperative standards has been assessed and the impact has been identified as not being material. The Group only intends to adopt the inoperative standards at the date at which their adoption becomes mandatory.

MIPS Annual Report 2010 39

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 The Group’s assessment of the impact of these new standards and interpretations is set out below: Reference

Title

Summary

Application date of standard*

Impact on Group financial report

Application date for Group

AASB 2009-5

Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project

The amendments to some Standards result in accounting changes for presentation, recognition or measurement purposes, while some amendments that relate to terminology and editorial changes are expected to have no or minimal effect on accounting except for the following:

1-Jan-10

The Group has not adopted the standard early. Application of the standard will not affect any of the amounts recognised in the financial statements, but may impact the amount of information disclosed

1-Jul-10

[AASB 5, 8, 101, 107, 117, 118, 136 & 139]

The amendment to AASB 101 stipulates that the terms of a liability that could result, at anytime, in its settlement by the issuance of equity instruments at the option of the counterparty do not affect its classification. The amendment to AASB 107 explicitly states that only expenditure that results in a recognised asset can be classified as a cash flow from investing activities. The amendment to AASB 118 provides additional guidance to determine whether an entity is acting as a principal or as an agent. The features indicating an entity is acting as a principal are whether the entity: • has primary responsibility for providing the goods or service; • has inventory risk; • has discretion in establishing prices; • bears the credit risk. The amendment to AASB 136 clarifies that the largest unit permitted for allocating goodwill acquired in a business combination is the operating segment, as defined in IFRS 8 before aggregation for reporting purposes. The main change to AASB 139 clarifies that a prepayment option is considered closely related to the host contract when the exercise price of a prepayment option reimburses the lender up to the approximate present value of lost interest for the remaining term of the host contract. The other changes clarify the scope of exemption for business combination contracts and provide clarification in relation to accounting for cash flow hedges.

40 notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 Reference

Title

Summary

Application date of standard*

Impact on Group financial report

Application date for Group

AASB 2009-9

Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards.

The amendments address the retrospective application of IFRSs to particular situations and are aimed at ensuring that entities applying IFRSs will not face undue cost or effort in the transition process.

1-Jan-10

The Group has not adopted the standard early. Application of the standard will not affect any of the amounts recognised in the financial statements, but may impact the amount of information disclosed.

1-Jul-10

AASB 2009-11

Amendments to Australian Accounting Standards arising from AASB 9

The revised Standard introduces a number of changes to the accounting for financial assets, the most significant of which includes:

1-Jan-13

1-Jul-13

1-Jan-11

1-Jul-11

[AASB 1, 3, 4, 5, 7, 101, 102, 108, 112, 118, 121, 127, 128, 131, 132, 136, 139, 1023 & 1038 and Interpretations 10 & 12]

• two categories for financial assets being amortised cost or fair value • removal of the requirement to separate embedded derivatives in financial assets • strict requirements to determine which financial assets can be classified as amortised cost or fair value, Financial assets can only be classified as amortised cost if (a) the contractual cash flows from the instrument represent principal and interest and (b) the entity’s purpose for holding the instrument is to collect the contractual cash flows • an option for investments in equity instruments which are not held for trading to recognise fair value changes through other comprehensive income with no impairment testing and no recycling through profit or loss on derecognition • reclassifications between amortised cost and fair value no longer permitted unless the entity’s business model for holding the asset changes • changes to the accounting and additional disclosures for equity instruments classified as fair value through other comprehensive income.

AASB 2009-12

Amendments to Australian Accounting Standards [AASBs 5, 8, 108, 110, 112, 119, 133, 137, 139, 1023 & 1031 and Interpretations 2, 4, 16, 1039 & 1052]

This amendment makes numerous editorial changes to a range of Australian Accounting Standards and Interpretations. The amendment to AASB 124 clarifies and simplifies the definition of a related party as well as providing some relief for government-related entities (as defined in the amended standard) to disclose details of all transactions with other government-related entities (as well as with the government itself)

MIPS Annual Report 2010 41

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 Reference

Title

Summary

Application date of standard*

Impact on Group financial report

Application date for Group

AASB 2009-13

Amendments to Australian Accounting Standards arising from Interpretation 19

This amendment to AASB 1 allows a first-time adopter may apply the transitional provisions in Interpretation 19 as identified in AASB 1048.

1-Jul-10

[AASB 1] *designates the beginning of the applicable annual reporting period unless otherwise stated

(c) Principles of consolidation Subsidiaries The Group consolidated financial statements comprise the financial statements of the Society and its subsidiaries as at 30 June each year. The financial statements of the subsidiaries are prepared for the same reporting year as the Society, using consistent accounting policies. All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions that are recognised in assets, are eliminated in full. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and will continue to be consolidated until the date that such control ceases. Associates During the year, the Society sold its investment in its associate, Professional Insurance Australia Pty Ltd with settlement being achieved on 29 June 2010 after Treasury approval. Due to the intention to sell its investment, the Group ceased using the equity method of accounting on 30 June 2009 and the difference between the equity accounted valuation and the sale proceeds is included within Sundry Income. Investments in associates were accounted for in the consolidated financial statements using the equity method of accounting. In accordance with AASB 128 – Investments in Associates equity accounting has been recorded in the Group results to 30 June 2009 and discontinued in the Society since 1 July 2003, when consolidated financial statements were first prepared. The carrying value of the investments in associates reported by the Society at 30 June 2009 therefore reflects the Society’s proportional interest in associates as at 30 June 2003 and includes $716,000 of retained profits attributable to associates at that time. (d) Subscription Revenue: The Society obtains revenue through annual subscriptions paid by its members. Subscriptions income is recognised evenly over the period of the membership, being twelve months from 1 July each year. All subscriptions expire on 30 June each year. Subscription monies received prior to 1 July which relate to future membership subscription periods are recorded as current liabilities. (e) Premium revenue For policy years ending 30 June 2010 the Society receives premiums on behalf of MIPS Insurance Pty Ltd. (“MIPSi”). These amounts are held in trust on behalf of MIPSi until they are remitted to the insurer and are not recognised as revenue by the Society. Premium revenue comprises premium from direct business only. Effective from 1 July 2010, all insurance cover is provided to MIPS members as a member benefit by MIPS in the form of Master and Group policies. Premium income is recognised evenly over the period of the insurance policy. The policy year is twelve months from 1 July. All policies expire on 30 June. All premiums received prior to 1 July which relate to insurance for post 1 July are recorded as current liabilities.

42 notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 Premium revenue comprises only the premium charged to policy holders including the amounts in the premium collected to allow the Group to meet its obligation in relation to payments due to the Commonwealth Government of Australia for the funding of the Run-Off Cover Scheme (“ROCS”). Premium revenue excludes stamp duty, GST and other amounts collected on behalf of third parties (such as the UMP Support Payment). Premium Support Scheme (“PSS”) The Medical Indemnity Act 2002 establishes a Premium Support Scheme (“PSS”) which in general terms provides a subsidy to medical practitioners whose total indemnity costs exceed a set proportion of their income (as defined in the legislation). The Group is responsible for administering the PSS for its members and in this role it obtains details of estimated income to determine the subsidy, if any, for each eligible member to be collected from Medicare Australia. In subsequent years, the Group obtains actual income details from participating medical practitioner members and either collects monies from the members for any amounts required to be reimbursed to Medicare Australia or seeks additional subsidies from Medicare Australia to be passed through to the eligible member. As the Group is responsible for credit risk and is impacted by the timing of cash flows, amounts due to and from Medicare Australia and policyholders are recognised on the statement of financial position. UMP Support Payment (“UMPSP”) Up until 30 June 2009 the Group was responsible for administering collections in respect of the Medical Indemnity (IBNR Contribution) Act 2002. The Group is required to collect the UMPSP imposed directly on former members of United Medical Protection Limited, who were members as at 30 June 2000 and remit the UMPSP to the Commonwealth. (f) Outwards reinsurance Amounts paid to reinsurers under insurance contracts held by the Group are recorded as an outward reinsurance expense and are recognised in the statement of comprehensive income from the attachment date over the period of indemnity of the reinsurance contract in accordance with the expected pattern of the incidence of risk ceded. (g) Unexpired risk liability At each reporting date the Group assesses whether unearned premiums are sufficient to cover all expected future cash flows relating to claims against current insurance contracts. This assessment is referred to as the liability adequacy test and is performed for MIPSi, as all insurance contracts are subject to broadly similar risks. If the present value of the expected future cash flows relating to future claims plus the additional risk margin to reflect the inherent uncertainty in the central estimate exceeds the unearned premiums less related intangible assets and related deferred acquisition costs then unearned premiums are deemed to be deficient. Any such deficiency is recognised immediately and entirely in the statement of comprehensive income both gross and net of reinsurance. The deficiency is recognised first by writing down any related intangible assets and then related deferred acquisition costs, with any excess being recorded in the statement of financial position as an unexpired risk liability. No deficiency has been identified for either balance date or the comparative balance date. (h) Outstanding claims liability The liability of outstanding claims is recognised on a claims made basis and is measured as the central estimate of the present value of expected future payments against claims incurred at the reporting date under general insurance contracts issued by MIPSi, with an additional prudential (or risk) margin to allow for the inherent uncertainty in the central estimate. The expected future payments include those in relation to claims reported but not yet paid and anticipated claims handling costs. Claims handling costs include costs that can be directly associated with individual claims, such as legal and professional fees, and costs that can only be indirectly associated with individual claims, such as claims administration costs. Outstanding claims are determined taking into account an actuarial valuation. A summary of the actuarial methodology and key assumptions is disclosed in Note 3. Expected future payments are discounted to present value using a risk free rate.

MIPS Annual Report 2010 43

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 Prudential margin MIPSi includes a prudential margin in its liability for outstanding claims. Under prudential standards issued by the Australian Prudential Regulation Authority (APRA), a licensed insurer must include a prudential margin in its estimate of outstanding claims liabilities for prudential reporting so that the probability of the estimate for outstanding claims being sufficient to meet all claims is a minimum of 75%. MIPSi has elected to increase the probability of sufficiency to well above the 75% minimum. Without a prudential margin the liability for outstanding claims represents the central estimate for which all claims will be settled. That is, there is a 50% probability of it being either too high or too low. The Group has elected to adopt a prudential margin that is different for accounting and prudential reporting purposes. Details of the levels adopted are disclosed in Note 20. The prudential margin is reassessed each year taking into account actuarial valuations as part of the process of determining the liability for outstanding claims of the MIPSi. A summary of the level of sufficiency achieved by the prudential margin is disclosed in Note 3. (i) Provisions and employment benefits Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of comprehensive income net of any reimbursement. Provisions are measured at the present value of managementâ&#x20AC;&#x2122;s best estimate of the expenditure required to settle the present obligation at the reporting date. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision resulting from the passage of time is recognised in finance costs. Provision for indemnity obligations The provision for indemnity obligations arises from the discretionary indemnity provided by the Group to members prior to 30 June 2003. In general terms, following the enactment of Medical Indemnity legislation, the Group is not able to indemnify members other than through insurance in relation to medical indemnity incidents occurring after 30 June 2003. The discretionary indemnity provided by the Group to its members covers incidents reported under extended reporting benefit and death, disability or retirement arrangements. The provision for discretionary indemnity obligations, is determined taking into account an actuarial valuation and includes an allowance for incidents that have occurred but for which a request for indemnity has yet to be received. The valuation is based on the fair value that the Group would rationally pay to settle or transfer the indemnity obligations. The Group includes a prudential margin in determining the fair value of the provision, as a transfer of obligations would typically include such a margin to allow for inherent uncertainty. As the Group is no longer providing discretionary medical indemnity cover to its members for new incidents, and the nature of indemnity obligations is volatile, the prudential margin for the provision has been based on a 75% confidence interval. The provision is discounted to present value at balance date. Further details on the assumptions supporting the estimate are disclosed in Note 2. Provisions for employee leave benefits (i) Wages and salaries, annual leave and personal leave Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating personal leave expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employeesâ&#x20AC;&#x2122; services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating personal leave are recognised when the leave is taken and measured at the rates paid or payable. (ii) Long service leave The liability for long service leave is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yield at the reporting date on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash flows. (iii) Retirement benefit obligations The employeesâ&#x20AC;&#x2122; nominated superannuation funds receive contributions from the Group as prescribed by law. Contributions to the funds are recognised as an expense as they become payable.

44 notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 (j) Reinsurance and other recoveries receivable The Group has insurance risk in the normal course of business for all of its businesses. Reinsurance assets represent balances due from reinsurance companies. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision or settled claims associated with the reinsurer’s policies and are in accordance with the related reinsurance contract. Reinsurance assets are reviewed for impairment at each reporting date or more frequently when an indication of impairment arises during the reporting year. Impairment occurs when there is objective evidence as a result of an event that occurred after initial recognition of the reinsurance asset that the Group may not receive all outstanding amounts due under the terms of the contract and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer. The impairment loss is recorded in the statement of comprehensive income. Reinsurance assets or liabilities are derecognised when the contractual rights are extinguished or expire or when the contract is transferred to another party. Reinsurance and other recoveries receivable on paid claims, reported claims not yet paid, indemnity paid and the provision for indemnity obligations are recognised as revenue. Recoveries on claims not yet paid and the provision for indemnity obligations are measured as the present value of expected future receipts, calculated on the same basis as the liability for outstanding claims and provision for indemnity obligations. High Cost Claims Scheme (“HCCS”) Other recoveries include amounts due from the Commonwealth Government established by the Medical Indemnity Act 2002. Under the scheme the Commonwealth Government makes financial contributions towards claims of the Group for each insurance or indemnification claim notified after 1 January 2003, of 50% of the amount in excess of the high cost claims threshold, currently $300,000. Recoveries under the HCCS on outstanding claims are measured at the net present value of the expected future receipts, calculated on the same basis as the liability for outstanding claims and provision for indemnification obligations. (k) Run-Off Cover Scheme The Medical Indemnity Act 2002 established the Run-Off Cover Scheme (“ROCS”) as part of a framework for providing medical indemnity coverage for medical practitioners who have ceased practice. Under the framework: • after a practitioner has ceased practice for three years or has reached age 65, the practitioner’s most recent medical indemnity insurer must offer a Run-Off Cover Scheme policy. Any accepted any claims from the practitioner under a ROCS policy will be reimbursed by Medicare Australia from ROCS scheme funds • under the terms of a contract with government for the first three years following cessation of practice and whilst the practitioner is under age 65, the practitioner’s most recent medical indemnity insurer must make an offer to provide insurance coverage, at a nominal premium for those members with 10 or more years of qualifying membership • a levy is imposed on medical indemnity insurers to cover the cost of ROCS, with the rate currently set at 5% of premium received This levy is incorporated into the premiums charged by insurers. • medical indemnity insurers receive a fee for handling retirement claims on behalf of ROCS and for associated policy administration under contracts with government Provision for retirement claims The Group recognises a provision for retirement claims (both eligible and insurer retirement) in relation to expected future payments to practitioners in retirement that have not accepted a retirement policy at balance date, based on actuarial advice. This provision is discounted to a present value at balance date and includes an allowance for the cost of handling these claims. Retirement claim recoveries The Group recognises recoveries in relation to expected future recoveries associated with the provision for retirement claims, based on actuarial advice. Such recoveries arise under ROCS (for eligible retirement only), the High Cost Claims Scheme and reinsurance contracts in place prior to balance date. The recoveries are measured as the present value of the expected future receipts, calculated on the same basis as the provision for retirement claims.

MIPS Annual Report 2010 45

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 ROCS levy A liability for the ROCS funding levy is recognised on business written to balance date. Levies payable are expensed on the same basis as the recognition of premium revenue, with the portion relating to unearned premium being recorded as a prepayment. (l) Deferred acquisition costs The acquisition costs incurred in obtaining 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 revenue that will be recognised in the statement of comprehensive income in subsequent reporting periods. The Group has not deferred any acquisition costs at year end or the comparative year end. (m) Income tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities based on the current period’s taxable income. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date. Deferred income tax is provided on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences except: • When the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. • When the taxable temporary difference is associated with investments in subsidiaries, associates or interests in joint ventures, and the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax credits and unused tax losses can be utilised, except: • When the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. • When the deductible temporary difference is associated with investments in subsidiaries, associates or interests in joint ventures, in which case a deferred tax asset is only recognised to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilised. The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority.

46 notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 Other taxes Revenues, expenses and assets are recognised net of the amount of GST except: • When the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable. • Receivables and payables, which are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the Statement of financial position. Cash flows are included in the statement of cash flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority is classified as part of operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. Taxation of financial arrangements (TOFA) New rules have been introduced (TOFA rules) which modernise the tax treatment of gains and losses on financial arrangements. The key provisions of the TOFA rules are found in Division 230 of the Income Tax Assessment Act (ITAA) 1997 which generally provides firstly the method (accruals, realisation, fair value, retranslation, hedging and reliance on financial reports) for calculating gains and losses from financial arrangements, and secondly the time at which the gains and losses from financial arrangements will be brought to account. TOFA is effective from 1 July 2010. (n) Assets backing general insurance liabilities The investments portfolio of MIPSi is actively managed as part of the Group’s investment strategy to ensure that investments mature in accordance with the expected pattern of future cash flows arising from general insurance liabilities. The Group has determined that all investments of MIPSi are held to back general insurance liabilities and their accounting treatment is described below. As these assets are managed under the Risk Management Statement (“RMS”) of MIPSi on a fair value basis and are reported to the Board of MIPSi on this basis, they have been valued at fair value through profit or loss. (o) Investments Investments within the scope of AASB 139 Financial Instruments: Recognition and Measurement are categorised as investments at fair value through profit or loss, held-to-maturity or available-for-sale. The classification depends on the purpose for which the investments were acquired. When investments are recognised initially, they are measured at fair value, plus in the case of assets not at fair value through profit or loss, directly attributable transaction costs. Recognition and Derecognition All regular way purchases and sale of investments are recognised on the trade i.e. the date that the Group commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets under contracts that require delivery of the assets within the period established generally by regulation or convention in the market place. Investments are derecognised when the right to receive cash flows from the investments have expired or been transferred. Subsequent measurement i) Investments – fair value through profit or loss Investments classified as held for trading are included in the category of “Investments at fair value through profit or loss. Investments are classified as held for trading if they are acquired for the purpose of selling in the near term with intention of making a profit. Investments designated as ‘fair value through profit of loss’ are re-measured to fair value at balance date. Investments backing general insurance liabilities are designated ‘fair value through profit or loss’. Gains or losses on financial assets held for trading are recognised in profit or loss.

MIPS Annual Report 2010 47

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 ii) Held-to-maturity investments Non-derivative investments with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Group has the positive intention and ability to hold to maturity. Investments intended to be held for an undefined period are not included in this classification. Investments that are intended to be held-to-maturity, such as bank bills are subsequently measured at amortised cost. This cost is computed as the amount initially recognised minus principal repayments (if any), plus or minus the cumulative amortisation using the effective interest method or any difference between the initially recognised amount and the maturity amount. Bank bills are designated as ‘held-to-maturity’ as the Group intends to hold these investment to maturity. iii) Available-for-sale investments Available-for-sale investments are those non-derivative investments, principally equity securities, that are designated as availablefor-sale or are not classified as any of the two preceding categories. After initial recognition, available-for-sale securities are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is recognised in profit or loss. All investments are initially recognised at fair value, which is the cost of acquisition. We capitalise all acquisition cost. Sales cost net off the proceeds. Otherwise transactions costs are capitalised on initial recognition. Details of fair value for the different types of investments are listed below: • Cash assets are carried at face value of the amounts deposited or drawn. The carrying amount of cash approximates to their fair value • Shares, fixed interest securities, options and units in trusts listed on the stock exchange are measured at the quoted bid price of the instrument at statement of financial Position date For investments where there are is no quoted market price, fair value is determined by reference to the current market value of another instrument which is substantively the same or alternatively is calculated based on the expected cash flows of the underlying net asset base of the investment. Dividends and distributions are recognised as revenue when the right to receive payment is established. Interest revenue is recognised on an accruals basis, using the effective interest rate method. (p) Plant and equipment Plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the Statement of comprehensive income during the financial period in which they are incurred. Depreciation for plant and equipment is calculated using the reducing balance method to allocate their cost, while depreciation for leasehold improvements is calculated using straight line method to allocate their cost, net of their residual values, over their estimated useful lives of 5 years. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each Statement of financial position date. The Group conducts an annual internal review of asset values, which is used as a source of information to assess for any indicators of impairment. External factors, such as changes in expected future processes, technology and economic conditions, are also monitored to assess for indicators of impairment. If any indication of impairment exists, an estimate of the asset’s recoverable amount is calculated. The assets carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount and are included in the Statement of comprehensive income.

48 notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 (q) Impairment of non-financial assets The Group conducts an annual internal review of asset values, which is used as a source of information to assess for any indicators of impairment. External factors, such as changes in expected future processes, technology and economic conditions, are also monitored to assess for indicators of impairment. If any indication of impairment exists, an estimate of the asset’s recoverable amount is calculated. (r) Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Operating lease payments are recognised as an expense in the Statement of comprehensive income on a straight-line basis over the lease term. Operating lease incentives are recognised as a liability when received and subsequently reduced by allocating lease payments between rental expense and reduction of the liability. (s) Trade and other payables Trade and other payables are carried at amortised cost and due to their short-term nature they are not discounted. They represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within 30 days of recognition. (t) Receivables Receivables are initially recognised at fair value, being the amounts due. They are subsequently measured at amortised cost. A provision for doubtful debts is established when there is objective evidence that the Group 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 asset’s carrying amount and the present value of estimated future cash flows. The charge is recognised in the Statement of comprehensive income. (u) Cash and cash equivalents Cash and cash equivalents in the Statement of financial position comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. For the purposes of the Statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above. (v) Rounding of amounts The Group is of a kind referred to in Class order 98/0100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the financial report. Amounts in the financial report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar.

MIPS Annual Report 2010 49

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010

Note 2 Critical accounting judgements and estimates (a) Critical estimates and assumptions The Group makes estimates and assumptions in respect of certain key assets and liabilities. Estimates and judgements are continuously evaluated and are based on historical experience and other factors, including expectations of future events that are believed to reasonable under the circumstances. The key areas where critical estimates are applied are described below. (i) The ultimate liability arising from claims made under insurance contracts Provision is made at the year end for the estimated cost of claims incurred but not settled at the statement of financial position date. The estimated cost of claims includes direct expenses to be incurred in settling claims gross of any recoveries. The Group takes all reasonable steps to ensure that it has appropriate information regarding its claims exposures. However, given the uncertainty in establishing claims provisions, particularly in the early stages after initial notification, it is likely that the final outcome will prove to be different from the original liability established. The medical indemnity liability class of business will typically display greater variations between initial estimates and final outcomes than other classes of insurance because there is a degree of difficulty in estimating reserves. In calculating the estimated cost of unpaid claims, the Group relies on a variety of estimation techniques, generally based on statistical analyses and review of historical experience, which assumes that the development pattern of current claims will be consistent with past experience. Allowance is made, however, for changes or uncertainties which may create distortions in the underlying statistics or which might cause the value of unsettled claims to increase or reduce when compared with the cost of previously settled claims including: • Changes in Group processes which might accelerate or slow down the development and / or notification of paid or incurred claims, compared with statistics from previous periods • Changes in legal environment • The effects of inflation • The impact of large losses • Movement in industry benchmarks • Medical and technological developments. Further information on and methods used in deriving the outstanding claims liability at year end are detailed in note 3. (ii) The ultimate obligation arising from claims made under discretionary cover In accordance with accounting policy 1(i), the Group recognises a liability for the estimated cost of settling discretionary indemnity obligations, including those incidents that have occurred but for which a request for indemnity has yet to be received. Due to the nature of the liability, it is likely that the final outcome will prove to be different from the original liability established. The liability is subject to the volatility discussed above in relation to insurance contracts, due to the nature of indemnity arrangements. Similar to the outstanding claims liability for insurance contracts, an actuarial valuation is obtained to estimate the liability for indemnity obligations.

50 notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 Actuarial approach The methodology adopted for indemnity obligations of the mutual entities is similar to that outlined in note 3 in relation to insurance contracts of MIPS. In addition, in estimating the liability for incidents that have occurred but for which a request for indemnity has yet to be received, the actuary uses the average claim size to project the liability. The key measures relating to the actuarial valuation of the provision for indemnity obligations are as follows: 2010

2009

3.7 years

3.5 years

Uplift for initial under-reserving on claims greater than $250,000: • At end of report year • 1 year after end of report year • 2 years after end of report year • 3 years after end of report year

50% 45% 35% 0%

50% 50% 35% 0%

Reduction for incidents converting to indemnity requests (by value)

40%

50%

Reduction for incidents converting to indemnity requests (by number)

70%

Expense rate

9.0%

Discount rate

3.2%

3.4%

Inflation (normal plus superimposed) rate

6.0%

$132,000

$113,500

75%

Average weighted term to settlement from indemnity requested date

Average claim size for incidents occurred but indemnity not yet requested Level of sufficiency achieved by prudential margin Sensitivities

In estimating the liability for incidents occurred but indemnity not yet requested, the actuary considers the sensitivity by using a stochastic model which treats assumptions as random rather than fixed variables. Each assumption takes a range of different values, each with associated probabilities. The key assumptions that will affect the liability calculations are the uplift factors for initial under-reserving, the probability of incidents likely actually becoming claims, the 6.0% pa used for future claims inflation and, for the IBNR liabilities, the incident to reporting delay pattern. Fortunately, when assessing the sensitivity of the results for known claims by varying assumptions, the presence of a comprehensive insurance programme means that there is comparatively limited scope for deterioration in experience to adversely affect the company finances. Claims handling costs have a direct impact on profit (with no tax impact, due to the tax status of the Society). An increase of claims handling costs by 4.5% points, results in a $497,908 decrease in profit and equity (with an equivalent $497,908 increase in profit and equity with a 4.5% points decrease in claims handling costs). (iii) The determination of retirement claims liabilities Over time, an increasing proportion of reported claims will be eligible for a recovery under ROCS policies. These claims will be in relation to former policyholders who had previously retired from medical practice over the age of 65, died or were permanently disabled and unable to work. ROCS policies will also cover qualifying claims against doctors on maternity leave or who are under age 65 but have ceased work for 3 years. (iv) Assets arising from reinsurance contracts and other recoveries Assets arising out of reinsurance contracts are also computed using the above methods. In addition, the recoverability of these assets is assessed on a periodic basis to ensure that the balance is reflective of the amounts that will be ultimately received, taking into consideration factors such as counter party and credit risks. Impairment is recognised where there is objective evidence that the Group may not receive amounts due to it and these amounts can be reliably measured. In estimating the recoveries from HCCS associated with incidents occurred, but indemnity not yet requested, the Group has assumed that only 50% of recoveries will be received due to the potential for termination of the HCCS scheme. (b) Critical judgements It has been determined that no critical accounting judgements have been made in the year.

MIPS Annual Report 2010 51

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010

Note 3 Actuarial assumptions and methods The Group provides medical indemnity insurance, which is long tail in nature. The process for determining the value of outstanding claims liability is described below. The valuation methodology adopted is to adjust individual case estimates based on the historical accuracy of claims reserving by the case handlers. Typically, individual claims are found in retrospect to be under-reserved at the end of the year in which they are reported due to insufficient information being available on which to base an accurate initial assessment. Thereafter, at successive year ends, the case estimates have proved in aggregate to be sufficient to meet the cost of settling reported claims based on current settlement values. Where an individual case estimate has been placed on a reported adverse incident that has not yet become a formal claim, a reduction factor is applied as past experience has shown that only a relatively small proportion of such adverse incident reports eventually become claims, although typically it is the more serious incidents with the largest case estimates that convert to claims. In order to project the ultimate payments that will be made, claims inflation is incorporated to allow for both general economic inflation as well as any superimposed inflation detected in the modelling of payment experience. The addition of superimposed inflation reflects the fact that over time claims inflation has exceeded both price inflation and wage inflation. Superimposed inflation may arise from non-economic factors such as developments of legal precedent. Projected individual claims are then compared with the appropriate threshold levels for recoveries under any reinsurance that has been secured and the HCCS. Projected payments are discounted for the time value of money. Inherent uncertainties in this class of business are considered when setting the appropriate risk margin. Actuarial assumptions The following assumptions have been made in determining the outstanding claims liabilities in respect of medical claims, which comprise by far the majority of the liabilities. 2010

2009

3.7 years

3.5 years

40.0%

50.0%

Expense rate

9.0%

Discount rate

4.6%

4.9%

Inflation rate

4.0%

Average weighted term to settlement from reporting date Reduction for medical incidents converting to claims by value

Superimposed inflation rate Level of sufficiency achieved by prudential margin

2.0%

92.5%

These assumptions represent the following: Average weighted term to settlement The average weighted term to settlement is based on historic settlement patterns. Reduction for incidents converting to claims by value The reduction to allow for the fact that many adverse incident reports do not become claims is based on an analysis of past conversion rates with each case weighted by the value of those claims. Expense rate Claims handling expenses were calculated by reference to both current and projected 2010/11 claims handling costs, as a percentage of projected 2010/11 gross claims payments.

52 notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 Discount rate Discount rates derived from market yields on Commonwealth Government securities as at the balance date with a term to redemption that matches as closely as possible to the term of the Groupâ&#x20AC;&#x2122;s liabilities. Inflation Inflation assumptions are set by reference to current economic indicators and are consistent with assumptions that were adopted in previous years. Superimposed inflation Superimposed inflation occurs due to non-economic effects such as court settlement amounts increasing at a faster rate than wages or CPI inflation. An allowance for superimposed inflation was made, after considering both the superimposed inflation present in the portfolio and industry superimposed inflation trends. Sensitivity analysis â&#x20AC;&#x201C; Insurance contracts (i) Summary The Approved Actuary conducts sensitivity analyses to quantify the exposure to the risks of changes in the key underlying variables. The valuations included in the reported results are calculated using certain assumptions about these variables as disclosed above. The movement in any key variable will impact the performance and equity of the Group. The tables below describe how a change in each assumption will affect the insurance liabilities and show an analysis of the sensitivity of the profit /(loss) and equity to changes in the three key assumptions both gross and net of reinsurance. Variable

Impact of movement in variable

Average weighted term to settlement

A decrease in the average term to settlement would lead to more claims being paid sooner than anticipated. As the annual rate of claims inflation is very similar to the rate of discount applied, any change in the term to settlement does not have a material impact on the liabilities.

Reduction for incidents converting to claims

The reduction factor applied is very important for assessing the liabilities for the most recent years of account which will tend to have a large number of adverse incident reports. As time passes, these either convert to claims or are closed without payment so that by two or three years out the impact is materially reduced.

Expense rate

An estimate for the internal costs of handling claims is included in the outstanding claims liability. An increase or decrease in the expense rate assumption would have a corresponding impact on the claims expense. The effect of a change in this variable is shown in the table below.

Discount rate

The outstanding claims liability is calculated by reference to expected future payments. These payments are discounted to adjust for the time value of money. The methodology to be used for the valuation is prescribed by the Australian Prudential Regulatory Authority (APRA) to a rate that should equal the yield on Commonwealth bonds with a term to redemption that matches as closely as possible the term of claims liabilities. As the discount rate relates to the yield on Government bonds which form a large part of the investment portfolio, any movement in the yield which has the effect of increasing or decreasing the liabilities should have a matching increase or decrease in the value of the assets.

Inflation and superimposed inflation rates

Expected future payments are inflated to take account of inflationary increases including an amount for superimposed non-economic inflationary factors. An increase or decrease in the assumed levels of either economic or superimposed inflation would have a corresponding impact on claims expense, although the presence of the HCCS and the reinsurance programme will reduce the impact. The effect of a change in this variable is shown in the following table.

MIPS Annual Report 2010 53

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 (ii) Impact of changes in key variables Movement in variable

Impact on Group

Impact on Group equity/ profit for the year after tax

$’000

+3%

(5,596)

(3,917)

-3%

5,021

3,514

+1%

(802)

(561)

-1%

802

561

+20%

8,915

6,240

-20%

(8,915)

(6,240)

Variable Inflation and superimposed inflation Claims handling costs

Incident probability reduction

Note 4 Financial risk management objectives and policies The financial condition and operation of the Group are affected by a number of key risks including insurance risk, interest rate risk, credit risk, liquidity risk and market risk. In accordance with Prudential Standards GPS 220 Risk Management for General Insurers and GPS 230 Reinsurance Arrangements for General Insurers issued by the Australian Prudential Regulation Authority (APRA), the Board and senior management of the Group have developed, implemented and maintain a sound and prudent Risk Management Strategy (RMS) and Reinsurance Management Strategy (REMS) for the licensed insurer subsidiary MIPSi. The RMS and REMS identify MIPSi’s policies and procedures, processes and controls that comprise its risk management and control systems. These systems address all material risks, financial and non financial, likely to be faced by MIPSi. Annually the Board of MIPSi certifies to APRA that adequate strategies have been put in place to monitor those risks, that MIPSi has systems in place to ensure compliance with legislative and prudential requirements and that the Board of MIPSi has satisfied itself as to the compliance with the RMS and REMS. The RMS and REMS have been approved by the Board and provided to APRA. The risk management framework that supports MIPSi’s RMS and REMS is used by the entire Group to manage risks outside the insurance operations. This includes development of an investment strategy that includes funds held by non-insurance entities. (a) Insurance risk MIPSi has an objective to control insurance risks thus reducing the volatility of financial results. In addition to the inherent uncertainty of insurance risk, which can lead to significant variability in the loss experience, financial results from insurance business are affected by market factors, particularly competition and movements in asset values. Short term variability is, to some extent, a feature of business. Key aspects of the processes established in the RMS to mitigate insurance risk include: • The maintenance and use of management information systems • Actuarial models, using information from the management information system, are used to calculate premium and monitor claims patterns. Past experience and statistical methods are used as part of the process • Documented procedures are followed for underwriting and accepting insurance risks • Reinsurance is used to limit the Group’s exposure to large single claims and aggregation of claims. When selecting a reinsurer the Group only considers those companies that provide high security. In order to assess this, rating information from the public domain or information gathered through internal investigation is used • In order to limit concentration of credit risk, in purchasing reinsurance the Group has regard to existing reinsurance assets and seeks to limit excess exposure to any single reinsurer or Group of related reinsurers • The Group does not undertake any form of alternate risk transfer

54 notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 • The mix of assets in which the Group invests is driven by the nature and term of insurance liabilities. The management of assets and liabilities is closely monitored to attempt to match maturity dates of assets with the expected pattern of claim payments • Business is limited to only one class of insurance. Terms and conditions of insurance business The terms and conditions attaching to insurance contracts affect the level of insurance risk accepted by the Group. All insurance contracts written are entered into on a standard form basis. The Group writes insurance contracts only on a claims-made basis, i.e. liabilities may arise in respect of claims reported during the term of the insurance contract, however, where retroactive cover is provided the event that gave rise to the claim could have occurred in a previous period. There are no other special terms and conditions in any of the contacts that have a material impact on the financial statements. Concentration of insurance risk Apart from operating as a monoline insurer, the Company’s exposure to concentration of insurance risks is minimised as the Company is not affected by any natural disasters and mitigates its risk through comprehensive reinsurance programmes. The Group’s exposure to concentration of monoline insurance risk is mitigated by providing insurance for diversified membership categories in all Australian States and Territories. To manage the risks associated with various membership categories, a risk based pricing model is adopted. Development and sensitivities of claims There is a possibility that changes may occur in the estimate of the Group’s obligations at the end of a contract period. The tables in note 20 disclose the estimates of total claims outstanding for each underwriting year at successive year ends. Note 3 identifies the sensitivities associated with the determination of the liability for outstanding claims. Reinsurance counterparty risk When there is reliance on a few reinsurers, there is a potential credit risk. As far as appropriate and in accordance with the RMS, the Group will seek to diversify the reinsurance security it sources. This objective is tempered by the security constraint (which is absolute in relation to counter-party risk ratings) and the relative reinsurance capacity shortage in this segment particularly in relation to Aggregate Stop Loss Protection. Such a decision also needs to recognise the needs of reinsurers for minimum underwriting lines and the requirement for preferential access to participation in the Excess of Loss Programme for desirable Reinsurers willing to participate in the Aggregate Stop Loss Programme. The administration costs that must be passed on to the Group if multiple reinsurers with small lines are involved in the programme must also be considered. Financially strong reputable reinsurers who have significant involvement in a programme have the resources to add value to the operations of the reinsured. As opportunities arise, the Group will seek to diversify security while respecting the long-term support offered by those well-known and established reinsurers with whom relationships already exist. Long-term significant relationships are important in order to weather the regular cycles of a hardening reinsurance market and if unexpected adverse experience occurs in an underwriting year. In addition, due to the nature of insurance offered by the Group, eventual realisation of recoveries from reinsurers is likely to be over an extended period of time, during which the credit quality of the reinsurer may decline. As noted above in (a), the Group reassesses the security of reinsurers each balance date based on information in the public domain and gathered through internal investigation and advice from its reinsurance brokers. (b) Credit risk Credit risk represents the risk that the counterparty to the financial instrument will fail to discharge an obligation and cause the Group to incur a financial loss. With respect to credit risk arising from the financial assets and liabilities of the Group, the Group’s exposure to credit risk arises from potential default of the counterparty, with the current exposure equal to the fair value of these instruments as disclosed in the Statement of financial Position. This does not represent the maximum risk exposure that could arise in the future as a result of changes in values, but best represents the current maximum exposure at the reporting date. The Group trades only with recognised, creditworthy third parties, and as such collateral is not requested nor is it the Group’s policy to securitise its trade and other receivables. The Group holds no collateral as security or any other credit enhancements. There are no financial assets that are impaired, or would otherwise be impaired except for the terms having been renegotiated.

MIPS Annual Report 2010 55

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 Credit risk is not considered to be significant to the Group except in relation to investments in debt securities. With respect to all other financial assets, concentration of credit risk is managed by counterparty, and by industry sector. Counterparty risk is not considered to be significant for cash as the total cash balance is held by counter parties with an AA or AAA rating. The split of investment by class (bank bills, equity and fixed interest securities) and maturity profile is shown in note 15. An industry sector analysis of the Group’s investments in financial assets is as follows: Group

2010 $’000

2009 $’000

Energy

2,653

1,764

Materials

6,693

4,875

Industrials

1,360

894

Consumer Discretionary

1,104

1,122

Consumer Staples

2,447

1,890

918

1,715

166,991

145,658

1,446

1,267

183,612

159,185

2010 $’000

2009 $’000

Health Care Financials Telecommunications Total

An industry sector analysis of the Society’s investments in financial assets is as follows: Society Energy Materials Industrials

900

643

2,302

1,553

465

295

Consumer Discretionary

387

360

Consumer Staples

841

634

Health Care Financials Telecommunications Total

311

572

36,416

38,057

497

418

42,119

42,532

(c) Credit quality per class of debt instrument The credit quality of financial assets is managed by the Group using Standard and Poor’s rating categories, in accordance with the investment mandate of the Group. The Group’s exposure in each grade is monitored on a daily basis. This review process allows the Group to assess the potential loss as a result of risks and take corrective action. The table below shows the credit quality by class of asset for debt instruments for the Group.

56 notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 2010

Insurance recoverables Interest bearing securities held for trading Corporate bonds Indexed bonds

Government bonds Total

AAA to AA$’000

A+ to AA$’000

BBB+ to BBB$’000

Other * $’000

Total $’000

–

107,925

–

1,000

–

107,925

19,638

–

19638

–

24,610

24,610 152,173

–

1,000

–

153,173

AAA to AA$’000

A+ to AA$’000

BBB+ to BBB$’000

Other * $’000

Total $’000

–

2009

Insurance recoverables Interest bearing securities held for trading

83,701

–

83,701

Corporate bonds

17,550

10,582

–

28,132

Indexed bonds

Government bonds Total

3,524

3,377

–

6,901

16,405

–

16,405

121,180

13,959

–

135,139

* Other consists of debt instruments which do not yet have a rating for example for new issues, but are selected in line with the investment mandate of the Group.

The table below shows the credit quality by class of asset for debt instruments for the Society. 2010 AAA to AA$’000

A+ to AA$’000

BBB+ to BBB$’000

Other * $’000

Total $’000

20,094

–

20,094

5,685

–

5,685

–

6,054

–

6,054

31,833

–

31,833

AAA to AA$’000

A+ to AA$’000

BBB+ to BBB$’000

Other * $’000

Total $’000

17,829

–

17,829

Corporate bonds

5,460

3,669

–

9,129

Indexed bonds

1,007

482

–

1,489

Interest bearing securities held for trading Corporate bonds Indexed bonds Government bonds

Total 2009

Interest bearing securities held for trading

Government bonds

Total

6,161

–

6,161

30,457

4,151

–

34,608

* Other consists of debt instruments which do not yet have a rating for example for new issues, but are selected in line with the investment mandate of the Society.

MIPS Annual Report 2010 57

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 (d) Liquidity risk Liquidity risk arises from the financial liabilities of the Group and the Group’s subsequent ability to meet their obligations to repay their financial liabilities as and when they fall due. The Group manages liquidity risk primarily through the investment strategy (discussed above) and ongoing monitoring of its capital adequacy multiple for MIPSi. MIPSi’s capital adequacy multiple is calculated every quarter as part of routine reporting to APRA and serves as a measure of insurer solvency. Trade payables and other financial liabilities of the Group and Society excluding indemnity related provisions held by the Society generally mature within 12 months of being incurred. Indemnity related provisions held by the Society (refer note 22) take considerably longer to mature and have an average weighted term to settlement referred to in note 2. The methodology used to derive the indemnity provision encompasses a range of actuarial assumptions and is based on historical information (refer note 2), as such a more comprehensive maturity profile cannot be ascertained given the underlying nature of those matters which are indemnified by the Society and how they are calculated. (e) Market risk Market risk is the risk that the fair value of future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rates and equity prices. Market risk is managed and monitored using sensitivity analysis, and minimised through ensuring that all investment activities are undertaken in accordance with established mandate limits and investment strategies. In accordance with its investment strategy, the Group invests in equities and hybrids with designated allocation targets. There are specified allowable ranges within which the investments portfolio may vary from the neutral/target allocation. The investment strategy includes an assessment of the risk profile of the shares in which the Group invests and also exposure restrictions based on APRA credit ratings. There are no off-Statement of financial position derivative transactions or open option positions at year end. The Group’s financial assets and liabilities are carried at amounts that approximate their fair value. (f) Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments. The Group has established limits on investments in interest bearing assets, which are monitored on a daily basis. The Group may use derivatives to hedge against unexpected increases in interest rates. The following table demonstrates the sensitivity of the Group’s statement of comprehensive income to a reasonably possible change in interest rates, with all other variables held constant. The sensitivity of the statement of comprehensive income is the effect of the assumed changes in interest rates on: • The interest income for one year, based on the floating rate financial assets held at 30 June 2010; and • Changes in fair value of investments for the year, based on revaluing fixed rate financial assets at 30 June 2010 The basis points sensitivity is based on the volatility of change in the global interest rates over the last 10 years.

58 notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 Group Interest rate

Change in basis points Increase/decrease

After tax effect on Profit higher/(lower) $’000

Equity higher/(lower) $’000

2010

+150

(1,424)

(569)

-150

577

175

2009

+150

(531)

(272)

-150

416

290

Change in basis points Increase/decrease

After tax effect on Profit higher/(lower) $’000

Equity higher/(lower) $’000

+150

–

(569)

-150

–

175

+150

(272)

-150

(16)

290

AUD

Society Interest rate

AUD 2010

2009

(g) Equity price risk Equity price risk is the risk that the fair value of equities decreases as a result of changes in market prices, whether those changes are caused by factors specific to the individual stock or factors affecting all instruments in the market. Equity price risk exposure arises from the Group’s investment portfolio. The effect on net assets attributable to equity and operating profit before distribution due to reasonably possible changes in market factors, as represented by the equity indices, with all other variables held constant is indicated in the table below. Accounting Assumptions – Variability of equity price The sensitivity is based on the volatility of change in the individual composite indices over the last 10 years.

2010 Index

2009

Change in equity price%

After tax effect on Profit higher/(lower) $’000

After tax effect on equity $’000

After tax effect on Profit higher/ (lower) $’000

After tax effect on equity $’000

+20%

2,822

1,440

2,257

1,109

-20%

(3,054)

(1,208)

(3,080)

(286)

Group ASX

Society ASX

+20%

–

1,440

–

1,109

-20%

(232)

(1,208)

(823)

(286)

(h) Foreign currency risk The Group has no foreign currency risk as all agreements and transactions are in Australian dollars.

MIPS Annual Report 2010 59

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010

Note 5 Fair values All of the Group’s financial asset are based upon quoted market prices. As a result all of the Group’s financial assets have been classified as level 1 investments. Level 1 method is where the fair value is calculated using quoted prices in active markets. Quoted market price represents the fair value determined based on quoted prices on active markets as at the reporting date without any deduction for transaction costs. The financial assets and liabilities included in the Statement of financial position are carried at their fair value or at amounts that approximate their fair values as disclosed in the table below. Refer to note 1 for the methods and assumptions adopted in determining fair values for investments. Group

Society

2010 $’000

2009 $’000

2010 $’000

2009 $’000

64,028

50,687

24,808

8,623

Financial assets Cash and cash equivalents Receivables

1,844

1,264

3,526

1,264

Investments

183,612

159,185

42,119

42,532

3,948

3,008

19,523

859

253,432

214,145

89,976

53,278

6,959

5,579

1,163

3,905

Other assets Total Financial liabilities Payables Other liabilities

26,757

6,198

26,757

6,198

Total

33,716

11,777

27,920

10,103

Note 6 Premium revenue Group

Society

2010 $’000

2009 $’000

2010 $’000

2009 $’000

Gross written premiums

20,219

37,432

–

Add/(less): Movement in unearned premium

18,496

(2,343)

–

Premium revenue

38,715

35,089

–

60 notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010

Note 7 Net claims incurred All insurance business is underwritten by MIPSi and all net claims incurred information relates to the Group.

2010 Current year $’000

2010 Prior years $’000

2010 Total $’000

2009 Current year $’000

2009 Prior years $’000

2009 Total $’000

Gross claims incurred Undiscounted

29,730

(3,186)

26,544

30,548

(2,563)

27,985

Discount movement

(4,450)

3,487

(963)

(4,624)

6,010

1,386

Gross claims discounted

25,280

301

25,581

25,924

3,447

Reinsurance and other recoveries Undiscounted

(1,830)

(1,777)

(4,054)

4,132

317

(108)

209

440

(2,619)

(2,179)

Reinsurance recoveries discounted

(1,513)

(55)

(1,568)

(3,614)

1,513

(2,101)

Net of Reinsurance recoveries discounted

23,767

246

24,013

22,310

4,960

4,322

(2,315)

2,007

3,815

(3,229)

586

28,089

(2,069)

26,020

26,125

1,731

27,856

Discount movement

Prudential margin Net claims incurred

29,371

27,270

Current year amounts relate to risks borne in the current financial year. Prior period amounts relate to a reassessment of the risks borne in all previous financial years. * These amounts are impacted by both changes in assumptions and other factors (including reassessments of individual case estimates). The significant changes in assumptions are as follows:

2010 Gross claims $’000

2010 Recoveries $’000

2010 Net $’000

2009 Gross claims $’000

2009 Recoveries $’000

2009 Net $’000

(55)

2,319

1,513

3,832

–

Discount rate/inflation

241

–

241

1,128

–

1,128

Total

301

(55)

246

3,447

1,513

4,960

Changes in assumptions Claims development Claims handling expenses

MIPS Annual Report 2010 61

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010

Note 8 Investment result Group

Society

2010 $’000

2009 $’000

2010 $’000

2009 $’000

1,055

1,627

216

359

Investment revenue Interest received on bank accounts Interest on investments - Not held as FVTPL*

2,443

2,346

2,249

2,121

Interest on investments - Held as FVTPL*

6,333

5,647

–

Dividends received

1,958

2,303

668

788

11,789

11,923

3,133

3,268

(125)

(3,848)

–

398

787

(720)

(108)

(1,806)

(108)

(1,806)

165

(4,867)

(828)

(1,806)

Gains (losses) on investments Realised gains on investments at FVTPL* Unrealised gains on investments at FVTPL* Realised gains (losses) on available-for-sale investments Expenses on Investment not held as FVTPL*

(145)

(162)

(145)

(162)

Expenses on Investment held as FVTPL*

(369)

(323)

–

11,440

6,571

2,160

1,300

Investment result *FVTPL – Fair value through profit & loss

Note 9 Subscriptions and other revenues Group

Subscription revenue Service fee Recovery of expenses incurred Agents fees Sundry Income Subscriptions and other revenues

Society

2010 $’000

2009 $’000

2010 $’000

2009 $’000

12,338

11,448

12,338

11,448

119

307

119

452

1,071

567

1,071

567

–

4,145

1,700

3,127

7,148

16,655

12,325

24,821

14,170

62 notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010

Note 10 Indemnification benefit Group

Society

2010 $’000

2009 $’000

2010 $’000

2009 $’000

1,831

2,511

1,831

2,511

Charge for indemnity obligations – undiscounted – discount

(814)

(2,122)

(814)

(2,122)

1,017

389

1,017

389

341

(799)

341

(699)

Movement in recoveries – undiscounted – discount Net charge for indemnity obligations Movement in prudential margin Indemnification benefit

391

435

(408)

435

(308)

1,452

(19)

1,452

618

1,056

330

818

2,070

1,037

1,782

899

Note 11 Other operating expenses Group 2010 $’000 Superannuation contribution Other Employee benefit expense Less: Reallocation to claims expense Depreciation expense

Society 2009 $’000

2010 $’000

2009 $’000

732

900

640

800

5,875

6,261

5,529

5,913

(2,000)

(1,700)

–

372

341

364

330

2,261

1,972

1,691

1,458

Financial institution charges

430

405

114

103

Risk management workshops

171

184

171

184

Advertising and printing

880

1,165

880

1,165

IT and communications expense

771

829

771

827

Professional services expense

Occupancy expense Other expenses from ordinary activities Other operating expenses

730

847

730

847

1,677

1,793

965

1,218

11,899

12,997

11,855

12,845

MIPS Annual Report 2010 63

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010

Note 12 Income tax Reconciliation between net profit before tax and tax expense.

Group

Net profit before tax Tax calculated at rate of 30%

Society 2009 $’000

2010 $’000

23,232

8,641

16,908

3,523

6,970

2,592

5,072

1,057

1,210

–

(3,564)

(2,467)

(3,482)

(2,430)

–

(283)

–

2010 $’000

2009 $’000

Tax effect of amounts which are not deductible/(taxable) in calculating taxable income: Tax on profit on sale of PIA Net mutual (income)/expense Share of net losses (profits) of associates Entertainment and other Adjusted Income Tax De-recognition of income tax benefit Impairment of investments per AASB 136 Rebateable dividend written off Writeoff of Deferred Tax Asset (DTA) balance Reinstatement of opening DTA balance Tax losses of prior years recouped Under (over) provision in previous year Tax charge for the year

250

4,866

(153)

1,840

(1,368)

–

1,369

–

1,368

(216)

–

(216)

–

165

181

165

181

(4)

(107)

–

(107)

(209)

–

(209)

–

(1,632)

(12)

(1,630)

–

2,970

1,290

(50)

2,853

1,846

(261)

181

Income tax expense Charge for current tax payable

326

(568)

211

(107)

Adjustments in respect of prior years

(209)

–

Total tax expense charged to statement of comprehensive income

2,970

1,290

(50)

Deferred tax movement debited to equity

(395)

(81)

(395)

(81)

Total tax charged to equity

(395)

(81)

(395)

(81)

Deferred tax movement

Tax charged to equity

Note 13 Cash and cash equivalents Group

Cash at bank and on hand

Society

2010 $’000

2009 $’000

2010 $’000

2009 $’000

37,362

45,677

11,736

4,279

–

6,950

1,976

11am bank deposits

26,666

5,010

6,122

2,368

Cash and cash equivalents

64,028

50,687

24,808

8,623

Restricted cash – trust account

64 notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 Cash at bank and trust account earns interest at a floating rate. As at 30 June 2010 the average interest rate was 4.43% (2009: 3.01%). Over the full year the weighted average interest rate was 3.89% (2009: 6.2%). A proportion of the funds held in the trust account are only available for use by the insurer and to meet government levies, duties and taxes (included within payables) and, therefore the trust account funds are restricted in use by the Society. (a) Reconciliation to cash at the end of the year The above figures are reconciled to cash at the end of the financial year as shown in the cash flow statements as follows: Group

Cash and cash equivalents as above

Society

2010 $’000

2009 $’000

2010 $’000

2009 $’000

64,028

50,687

24,808

8,623

Less: Restricted cash – trust account

–

(6,950)

(1,976)

Balances per Statement of cash flow

64,028

50,687

17,858

6,647

Note 14 Receivables Group

Society

2010 $’000

2009 $’000

2010 $’000

2009 $’000

1,234

436

1,228

436

608

810

608

810

1,842

1,246

1,836

1,246

1,690

1,844

1,264

3,526

1,264

Premiums and subscriptions receivable Receivables from policyholders* PSS adjustments receivable Other receivables Receivable from related entities Receivables

*Receivables past due but not considered impaired are; Group $79,318 (2009: $113,662); Society $79,319 (2009:$113,662):

The ageing analysis of receivable past due but not considered impaired are as below:

2010 2009

31-60 days

61-90 days

Over 91 days

Total

2,717

–

76,601

79,318

Society

2,717

–

76,601

79,318

Group

55,758

–

58,112

113,870

Society

55,758

–

58,112

113,870

Group

Other balances within receivable from policy holders & PSS adjustments receivable do not contain impaired assets and are not past due. It is expected that these other balances will be received when due.

MIPS Annual Report 2010 65

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010

Note 15 Investments Group

Society

2010 $’000

2009 $’000

2010 $’000

2009 $’000

24,493

22,244

20,095

17,829

Equity securities – listed entities

10,285

7,924

10,285

7,924

Fixed interest securities

11,739

16,779

11,739

16,779

22,024

24,703

22,024

24,703

Bank bills

84,432

61,458

–

Equity securities – listed entities

20,154

16,122

–

Investments – ‘held-to-maturity’ Bank bills/term deposit Investments – ‘available for sale’

Investments – ‘fair value through profit or loss’

32,509

34,658

–

137,095

112,238

–

Total investments

183,612

159,185

42,119

42,532

Current

139,464

107,748

30,430

25,863

44,148

51,437

11,689

16,669

183,612

159,185

42,119

42,532

Fixed interest securities

Non-current Total investments

The weighted average interest rate for bank bills is 6.54 % (2009:6.54%) and the following table summarises the interest rate sensitivity (repricing profile) of the Group’s exposure to fixed interest securities based on earlier of contractual maturity or repricing.

Group Maturity

2010

2009

Avg rate

$’000

Avg rate

$’000

Less than 12 months

7.25%

100

7.17%

6,272

One to two years

6.00%

2,045

6.14%

27,425

Two to three years

7.35%

17,508

4.08%

8,952

Three to four years

6.00%

5,165

8.25%

3,705

Four to five years

5.96%

19,430

6.00%

5,083

Over five years Total fixed interest securities

–

44,248

51,437

66 notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010

Note 16 Reinsurance and other recoveries receivable Group

Society

2010 $’000

2009 $’000

2010 $’000

2009 $’000

215

125

–

14,356

13,787

–

14,571

13,912

–

(1,921)

(1,712)

–

Expected future recoveries on outstanding claims – from reinsurers – from HCCS Discounted to present value Prudential Margin

2,637

2,342

–

15,287

14,542

–

3,555

3,775

3,555

3,775

Expected future recoveries on indemnity obligations - from reinsurers - from ROCS

185

201

185

201

- from HCCS

2,647

2,615

2,647

2,615

6,387

6,591

6,387

6,591

Discounted to present value

(568)

(662)

(568)

(662)

Prudential Margin

1,333

1,743

908

1,106

7,152

7,672

6,727

7,035

2,982

2,658

–

25,421

24,872

6,727

–

Retirement claim recoveries from ROCS Total reinsurance and other recoveries receivable

5,727

5,516

2,048

1,832

Non-current

19,694

19,356

4,679

5,203

Total reinsurance and other recoveries receivable

25,421

24,872

6,727

7,035

14,541

19,974

–

1,568

2,101

–

295

(5,424)

–

Current

Movement – outstanding claim recoveries Brought forward Recognised in the statement of comprehensive income (refer Note 7) Movement in Prudential Margin Recoveries received during the year

(1,117)

(2,110)

–

Carried forward

15,287

14,541

–

7,672

8,701

7,035

7,963

435

(408)

435

(307)

Movement in Prudential Margin

(410)

(621)

(198)

(621)

Recoveries received during the year

(545)

Carried forward

7,152

Movement – indemnity obligation recoveries Brought forward Recognised in the statement of comprehensive income (refer Note 10)

(545) 7,672

6,727

7,035

MIPS Annual Report 2010 67

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010

Note 17 Other assets Group

Society 2010 $’000

2010 $’000

2009 $’000

Deferred ROCS expense

–

865

–

Deferred Master Policy Premium

–

18,816

–

2009 $’000

Prepayments

1,452

170

107

170

Other

2,496

1,973

600

690

Total other assets

3,948

3,008

19,523

860

2010 $’000

2009 $’000

2010 $’000

2009 $’000

2,453

2,451

2,274

2,262

(1,596)

(1,419)

(1,444)

(1,265)

857

1,032

830

997

1,032

1,015

997

969

223

371

223

371

Note 18 Plant and equipment Group

Plant and equipment – at cost Less: Accumulated depreciation Total Plant and Equipment

Society

Movements Carrying amount at 1 July 2009 Additions Disposals Depreciation expense Carrying amount at 30 June 2010

(57)

(13)

(56)

(13)

(341)

(334)

(330)

857

1,032

830

997

Note 19 Payables Group

Related party payables

Society

Notes

2010 $’000

2009 $’000

2010 $’000

2009 $’000

–

2,792

–

2,792

226

125

Other payables Trade creditors Professional fees payable ROCS levy payable

1,819

866

–

Net GST payable

2,315

2,082

653

477

Accruals

1,230

946

376

319

Other payables

1,409

1,361

6,959

5,579

1,163

1,113

6,959

5,579

1,163

3,905

Total payables Payables are interest free and unsecured.

68 notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010

Note 20 Outstanding claims Group

Society 2010 $’000

2009 $’000

72,676

–

6,552

–

2010 $’000

2009 $’000

80,244 7,222

(a) Outstanding claims liability Central estimate Claims handling costs

87,466

79,228

–

Discount to present value

(12,108)

(11,146)

–

Discounted claims liability

75,358

68,082

–

Prudential margin (Refer Note 20(c))

15,373

13,072

–

Total gross outstanding claims liability

90,731

81,154

–

Current

14,556

16,010

–

Non-Current

76,175

65,144

–

Total gross outstanding claims liability

90,731

81,154

–

81,154

72,352

–

25,581

29,371

–

2,302

(4,837)

–

(18,306)

(15,732)

–

90,731

81,154

–

Level of sufficiency (Refer Note 3)

92.5%

–

Prudential margin as a percentage of discounted claims liability

20.4%

19.2%

–

(b) Movements Brought forward Recognised in the statement of comprehensive income (refer Note 7) - Incurred claims - Prudential margin Claims payments during the year Carried forward (c) Prudential margin

MIPS Annual Report 2010 69

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 d) Claims development table - Group The following tables show the development of gross and net undiscounted outstanding claims relative to the ultimate expected claims for the seven accident years since incorporation of MIPSi.

(i) Gross Accident year

2004 $’000

2005 $’000

2006 $’000

2007 $’000

2008 $’000

2009 $’000

2010 $’000

At end of accident year

7,448

21,717

13,380

20,647

27,130

26,560

25,488

One year later

7,991

16,189

12,551

16,275

20,103

29,734

Two years later

7,018

16,254

12,880

19,026

18,442

Three years later

6,279

14,377

14,950

14,008

Four years later

7,495

13,788

16,189

Five years later

8,886

14,505

Six years later

8,941

Current estimate of cumulative claims cost

8,941

14,505

16,189

14,008

(7,738)

(11,721)

(11,348)

(7,126)

(5,691)

1,203

2,784

4,841

6,882

12,751

Total $’000

Estimate of ultimate claims cost:

Cumulative payments Outstanding claims – undiscounted

18,442

29,734

25,488

127,307

(2,861)

(579)

(47,064)

26,873

24,909

80,243

Discount

(12,108)

Claims handling costs

7,222

Prudential margin

15,373

Total gross outstanding claims per the Statement of financial Position

90,730

(ii) Net Accident year

2004 $’000

2005 $’000

2006 $’000

2007 $’000

2008 $’000

2009 $’000

2010 $’000

7,199

16,486

12,168

18,834

21,144

22,984

23,658

25,383

Total $’000

Estimate of ultimate claims cost: At end of accident year One year later

7,488

12,953

12,202

12,795

18,052

Two years later

6,468

14,280

10,789

16,008

16,856

Three years later

5,823

10,340

12,260

11,978

Four years later

6,545

10,855

12,792

Five years later

7,301

11,457

Six years later

7,295

Current estimate of cumulative claims cost Cumulative payments Outstanding claims – undiscounted Discount Claims handling costs

7,295

11,457

12,792

11,978

16,856

25,383

23,658

109,419

(7,128)

(10,176)

(10,556)

(6,861)

(5,648)

(2,797)

(579)

(43,745)

167

1,281

2,236

5,117

11,208

22,586

23,079

65,674 (10,188) 7,222

Prudential margin

12,736

Total net outstanding claims

75,444

70 notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010

Note 21 Other liabilities Group 2010 $’000

Society 2009 $’000

2010 $’000

2009 $’000

Subscription income received in advance

26,757

6,198

26,757

6,198

Total other liabilities

26,757

6,198

26,757

6,198

2009 $’000

2010 $’000

Note 22 Provisions Group 2010 $’000

Society 2009 $’000

Provision for indemnity obligations (Refer Note 1(i)) Incidents occurred but request yet to be received Outstanding requested indemnity Prudential margin Discount to present value

2,988

4,094

2,988

4,094

13,381

15,775

13,381

15,775

3,602

4,630

2,602

3,130

(1,309)

(2,123)

(1,309)

(2,123)

18,662

22,376

17,662

20,876

2,982

2,658

–

2,982

2,658

–

952

854

952

854

22,596

25,888

18,614

21,730

Provision for retirement claims Eligible retirement claims (subject to ROCS) (Refer Note 2(a)(iii))

Employee entitlements (Refer Note 1(i)) Total provisions

7,321

5,163

7,321

5,163

Non-current

15,275

20,725

11,293

16,567

Total provisions

22,596

25,888

18,614

21,730

Current

Movements Provision for retirement claims 2,658

2,080

–

Increase (decrease) in estimate

324

578

–

Carrying amount at end of year

2,982

2,658

–

22,376

31,120

20,876

29,382

Carrying amount at start of year

Provision for indemnity obligations Carrying amount at start of year Recognised in the Statement of comprehensive income (refer note 10) - net indemnity charge

(1,017)

(389)

(1,017)

(389)

- prudential margin

(1,028)

(1,677)

(528)

(1,439)

Indemnity payments made

(1,669)

(6,678)

(1,669)

(6,678)

Carrying amount at end of year

18,662

22,376

17,662

20,876

MIPS Annual Report 2010 71

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010

Note 23 Deferred tax (asset)/liabilities Group

Society

2010 $’000

2009 $’000

2010 $’000

2009 $’000

(36)

(22)

(6)

–

Amounts recognised in profit or loss Accrual for audit fees

(229)

–

(229)

–

(2,167)

(1,966)

–

Investment revaluations

183

(45)

(20)

Interest receivable

651

340

144

107

216

–

216

–

302

123

302

123

(1,011)

(1,523)

431

250

(1,523)

(1,041)

250

276

395

(209)

–

Provision for employee entitlements Provision for indirect claims handling costs

Dividend receivable Impairment of investments per AASB 136 Amounts recognised in equity Investment revaluations Net deferred tax liabilities Movements Opening balance at 1 July Credited / charged to equity Adjustment to opening DTL/DTA Credited / charged to the Statement of comprehensive income Closing balance at 30 June (Assets)/Liabilities to reverse within 12 months

326

(568)

(5)

(107)

(1,011)

(1,523)

431

250

854

320

129

127

(Assets)/Liabilities to reverse after 12 months

(1,865)

(1,843)

302

123

Total deferred tax (asset)/liability

(1,011)

(1,523)

431

250

Note 24 Share capital and members’ guarantee Group

Society

2010 Shares

2009 Shares

2010 $’000

2009 $’000

100,001

100

Issued share capital Ordinary shares – fully paid

The Society is limited by shares and guarantee, having both shareholders and general members. Members and Shareholders are not entitled to dividends. Each General Member has one vote at a meeting of General Members. The Shareholders in a general meeting appoint directors.

72 notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 If the Society is wound up the constitution states that each Member (other than a Member who has been a Former Member for more than one year or an Honorary Member) may be required to contribute to the assets of the Society up to an amount not exceeding $5 for payment of the debts and liabilities of the Society including the costs of the winding up.

Number of members 2010

2009

Ordinary

20,198

19,398

Student

10,909

10,361

Total Members

31,107

29,759

Membership Category

Note 25 Key management personnel (a) Directors The names of persons who were directors of the Society at any time during the financial year are as follows: D R V Dickens, A A Fraser, K C D Roxburgh, C J Steadman, B E Taylor and R W L Turner (b) Remuneration Key management personnel compensation for the years ended 30 June 2010 and 2009 is set out below. The key management personnel are: all the directors of the Society and the persons with the authority and responsibility for planning, directing and controlling the activities of the Society (A T Browning, W F Berryman and R J Miles). Group

Short-term benefits Post-employment benefits Total remuneration of key management personnel

Society

2010 $

2009 $

2010 $

2009 $

1,478,765

1,145,463

1,158,973

900,967

311,193

363,720

211,873

303,020

1,789,958

1,509,183

1,370,846

1,203,987

(c) Other Transactions with Directors, Key Management Personnel, Director-related Entities and Key Management Personnel-related Entities D R V Dickens provides the Society with specialist medical indemnity claim services. He is a member of various claims and management committees. He is paid sessional fees on terms and conditions no less favourable to the Society than normal commercial terms and conditions. He received $130,000 (2009:$130,000) above his directors fees for this work. These amounts are included within note 25(b). R W L Turner provides the Society with specialist medical indemnity claim services and medical practice category service. He is a member of various claims and membership committees. He is paid sessional fees on terms and conditions no less favourable to the Society than normal commercial terms and conditions. He received $52,000 (2009:$52,000) above his directors fees for this work. These amounts are included within note 25(b). C J Steadman provides the Society with specialist medical indemnity claim services and medical indemnity risk management services. He is paid sessional fees on terms and conditions no less favourable to the Society than normal commercial terms and conditions. He received $26,000 (2009:Nil) above his directors fees for this work. These amounts are included within note 25(b). A company associated with C J Steadman was paid $3,850 (2009: $2,200) for conducting risk management workshops. This amount is not included within note 25(b).

MIPS Annual Report 2010 73

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010

Note 26 Remuneration of auditors Group

Society

2010 $

2009 $

2010 $

2009 $

Audit of the financial report

163,180

117,963

57,500

65,138

Audit of regulatory returns

61,030

58,400

16,500

15,700

2,500

–

2,500

–

Taxation compliance services

141,950

66,557

112,750

51,128

Total remuneration of auditors

368,660

242,920

189,250

131,966

Ernst & Young

Other audit related work

Note 27 Related parties Shareholding of the Society MIPS Holdings Pty Ltd (“MIPSH”) owns 100% (2009: 100%) of the issued ordinary shares of the Society. As a shareholder, MIPSH is not entitled to a dividend or any surplus assets (except for the return of capital) in the event of a winding up. Wholly-owned Group The wholly-owned Group consists of the Society and its wholly-owned subsidiaries MIPS Insurance Pty Ltd (MIPSi), Queensland Doctor’s Mutual Pty Ltd (QDM) and Professional Management Australia Pty Ltd (PMA). Associates The Society and QDM have policies with Professional Insurance Australia Pty Ltd (PIA) for the provision of professional indemnity insurance relating to claims arising prior to 1 July 2003. The premiums for these policies were paid prior to 1 July 2003. During the year ended 30 June 2010, the Society and the Group received $34,855 (2009: $nil) on account of interest on the escrow account. The Society paid an amount of $142,711(2009:$nil) to PIA, being refund of recoveries due to third party recoveries. The Society sold its investment in PIA during the year (refer note 29). Group Aggregate amounts of claims recoveries receivable from PIA at balance date:

2010 $’000

Society 2009 $’000

2010 $’000

2009 $’000

Current

2,048

1,832

2,048

1,832

Non-current

4,679

5,203

4,679

5,203

Total claims recoverable from PIA

6,727

7,035

6,727

7,035

Transactions with related parties The Group enters into transactions with its subsidiaries, associates and key management personnel in the normal course of business. Transactions are carried out on an arm’s length basis Details of significant transactions carried out during the year with related parties are as follows. MIPSi pays the Society a service fee for the provision of service under a Service Level Agreement (“SLA”). During the year ended 30 June 2010 the Society received $2,000,000 (2009: $1,700,000) from MIPSi. A further performance fee of $2,000,000 (2009: Nil) is payable by MIPSi to the Society relating to the year ended 30 June 2010. PIA paid the Society a service fee for the provision of services under a Service Level Agreement (“SLA”) which terminated during the year. During the year ended 30 June 2010 the Society and the Group received $108,753 (2009:$ 285,000). A company associated with a director during the year received payment for services (refer note 25 (c)).

74 notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010 Group

Society 2010 $’000

2009 $’000

–

1,688

–

1,690

MIPS Insurance

–

159

Monies held in trust on behalf of insurer (MIPSi)

–

(218)

300

Premiums to be collected on behalf of MIPSi

–

218

2,333

–

2,792

Statement of financial Position balances with related parties

2010 $’000

2009 $’000

PIA

MIPS Insurance

–

Receivables

Payables

Note 28 Investments in subsidiaries Group

Society

2010 $’000

2009 $’000

2010 $’000

2009 $’000

MIPS Insurance Pty Ltd (“MIPSi”)

–

6,250

Professional Management Australia Pty Ltd (“PMA”)

–

250

Queensland Doctors’ Mutual Pty Ltd (“QDM”)

–

Total investment in subsidiaries

–

6,508

Name of Company

MIPS Insurance Pty Ltd Professional Management Australia Pty Ltd Queensland Doctors’ Mutual Pty Ltd

Principal activity

Country of incorporation

Class of shares

Ownership interest 2010 %

2009 %

Insurance

Australia

Ordinary

100

Dormant

Australia

Ordinary

100

Medical defence organisation

Australia

Ordinary

100

MIPS Annual Report 2010 75

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010

Note 29 Investments in associates Group

Society

2010 $’000

2009 $’000

2010 $’000

2009 $’000

–

7,495

–

3,461

–

7,495

–

3,461

Unlisted associates Professional Insurance Australia Pty Ltd (“PIA”)

Name of Company

Professional Insurance Australia Pty Ltd (PIA)

Principal activity

Ownership interest

Group Carrying amount

2010 %

2009 %

2010 $’000

2009 $’000

–

33.28

–

7,495

Professional Indemnity Insurance

PIA is a company that provides general insurance underwriting to medical defence organisations and undertakes related investment activities. Its activities have been in run-off since 1 July 2003. During the year, the Society sold its investment in PIA for $10,607,570 with settlement being achieved on 29 June 2010 after Treasury approval. Due to the intention to sell its investment in PIA, the Group ceased to equity account for PIA on 30 June 2009. The profit on sale of investment in PIA is $3,112,599 in the Group and $7,146,665 in the Society; the difference in profit is due to the difference in accounting treatment of profit/(loss) of PIA in prior years in the Group and the Society. Group 2010 $’000

2009 $’000

7,495

6,593

–

902

(10,608)

–

3,113

–

7,495

Profits / (loss) before income tax

–

1,280

Income tax expense (credit)

–

(378)

Net Profit

–

902

Revenue

–

1,513

Net profit

–

2,711

Assets

–

43,826

Liabilities

–

21,307

Movements Carrying amount at the beginning of the financial year Share of net profit / (loss) Sale proceeds Profit on sale of investment Carrying amount at the end of the financial year Share of associates’ profits

Summarised financial information of associates

76 notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010

Note 30 Reconciliation of net profit to net cash inflow from operating activities Group

Society

2010 $’000

2009 $’000

2010 $’000

2009 $’000

20,262

7,311

16,958

3,450

398

341

390

330

–

(902)

–

(3,278)

4,867

(6,318)

1,806

(Increase)/decrease in recoveries receivable

(549)

4,765

308

928

(Increase)/decrease in receivables

(580)

(220)

(2,263)

1,583

–

(4,974)

2,887

(1,929)

494

(18,788)

335

124

(369)

124

(369)

Net profit Non-cash items Depreciation Share of (profit)/losses of associates Net (gain)/loss on investments Changes in working capital

(Increase)/decrease in restricted trust account (Increase)/decrease in other assets (Increase)/decrease in interest receivable (Increase)/decrease in ROCS expense Increase/(decrease) in accounts payable

865

(111)

–

1,380

(1,630)

(2,743)

(3,147)

(3,293)

(7,253)

(3,117)

(8,328)

Increase/(decrease) in outstanding claims

9,577

8,802

–

Increase/(decrease) in unearned premium

(18,496)

2,343

–

323

(4,217)

(420)

Increase/(decrease) in provisions

Increase/(decrease) in provision for tax payable

512

(482)

181

(26)

Increase/(decrease) in other liabilities

20,559

642

20,559

642

Net cash inflow/(outflow) from operating activities

25,875

14,381

(103)

140

2009 $’000

2010 $’000

Increase/(decrease) in provision for deferred income tax

Note 31 Commitments Group 2010 $’000

Society 2009 $’000

Operating lease commitments Payables Not later than one year

856

785

856

785

Later than one year but not later than two years

491

708

491

708

Later than two years but not later than five years

279

481

279

481

1,626

1,974

1,626

1,974

Total commitments

The Group has entered into leases for office buildings. These leases have an average life of between two to three years with renewal options included in the contracts. The Group has no capital commitments as at statement of financial Position date.

MIPS Annual Report 2010 77

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report For the year ended 30 June 2010

Note 32 Capital adequacy All insurance business is underwritten by MIPSi and hence the requirement to disclose capital adequacy information. The below capital adequacy information relates to MIPSi. 2010 $’000 Paid-up ordinary shares Retained earnings brought forward Current year earnings

2009 $’000

6,250

64,571

61,801

7,019

2,771

4,851

4,342

82,691

75,164

Less : deductions

(1,469)

(1,777)

Net Tier 1 capital

81,222

73,386

Total capital base

81,222

73,386

Minimum capital requirement

25,806

24,939

3.15

2.94

Technical provisions in excess of liability valuation (net of tax)

Capital adequacy multiple

Technical provisions in excess of liability valuation The liability required by GPS 110 for prudential reporting purposes differs from accounting purposes. As described in Note 1(h) the Company applies risk margins to the central estimate of net outstanding claims to achieve a level well above the 75% minimum as required by GPS 110. A summary of the level of sufficiency achieved by the prudential margin is disclosed in Note 3.

Note 33 Contingent Liability a) Legal proceedings: The Group operates in the insurance industry and is subject to legal proceedings in the normal course of business. While it is not practicable to forecast or determine the final results of all pending or threatened legal proceedings, management does not believe that such proceedings (including litigations) will have a material effect on the results of the Group or the Society and their financial position. b) Guarantees: The Group has issued the following guarantees at 30 June 2010: i) A bank guarantee of $85,000 (2009: $85,000) issued to McMullin Investments Pty Ltd in respect of rental bond for 15-31 Pelham St, Carlton, Victoria 3053 (Head Office of the Society). ii) A bank guarantee of $80,000 (2009: $80,000) issued to AMP Capital Investors Ltd in respect of rental bond for Suite 5.02, Level 5, 140 Arthur Street, North Sydney NSW (NSW office of the society) iii) A bank guarantee of $50,000 (2009: $50,000) issued to BNY Trust Company of Australia Ltd (2009: J.P Morgan Trust Australia Ltd) in respect of rental bond for Citilink Business Centre, 153 Campbell Street, Bowen Hills, Qld (Qld office of the Society).

Note 34 Events occurring after balance date No matters or circumstances have arisen since 30 June 2010 that have significantly affected, or may significantly affect: (a) the Group or Society’s operations in future years, or (b) the results of those operations in future years, or (c) the Group or Society’s state of affairs in future financial years.

Note 35 Authorisation of the financial report The financial report of the society for the year ended 30 June 2010 was authorised for issue in accordance with a resolution of directors on 13 October 2010

78 directors’ declaration

Medical Indemnity Protection Society Ltd and its subsidiaries directors’ declaration

In accordance with a resolution of the directors of the Company, we state that: In the opinion of the directors: (a) the financial statements and notes of the Company are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Company’s financial position as at 30 June 2010 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; (b) the financial statements and notes also comply with International Financial Reporting Standards as disclosed in note Note 1; and (c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

On behalf of the Board

R W L Turner Director

D R V Dickens Director

Melbourne 13 October 2010

MIPS Annual Report 2010 79

80 risk management activity

annual report 2009-2010 Medical Indemnity Protection Society Ltd ABN 64 007 067 281 MIPS Insurance Pty Ltd ABN 81 089 048 359 Level 3, 15-31 Pelham Street Carlton VIC 3053 Australia PO Box 25 Carlton South VIC 3053 Tel: (03) 8620 8888 Fax: (03) 9654 6923 Email: info@mips.com.au www.mips.com.au