MIPS Annual Report 2008/09 by Medical Indemnity Protection Society

On your behalf

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

Annual Report ’09 Medical Indemnity Protection Society Ltd and its subsidiaries

The Medical Indemnity Protection Society Limited (MIPS) has been protecting, supporting and safeguarding the professional character and interests of its members since 1988. At MIPS, health professionals are involved in all areas of the Group’s operations from Governance through to frontline medico-legal advice to members. Contents 1 2 3 4 6 9 10 11

The year in review highlights MIPS Group Chairman’s report MIPS Insurance Chairman’s report MIPS Group CEO’s report Member benefits MIPS Board Organisational structure Financial Report MIPS Group Directors’ report (12) Income statements (16) Balance sheets (17) Statements of changes in equity (18) Cash flow statements (19) Notes to the financial report (20) Directors’ declaration (57) Independent auditor’s report (58) Senior Management team (60)

Medical Indemnity Protection Society Ltd and its subsidiaries (limited by guarantee and shares) ABN 64 007 067 281 Annual Report — 30 June 2009 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 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. A description of the nature of the Group’s operations and its principal activities are contained in the directors’ report on pages 12–14. The financial report has been authorised for issue by the directors on 14 October 2009. The Society has the power to amend and reissue the financial report.

The year in review Highlights

$7.3

million

after tax member surplus

15% $249

total assets â&#x20AC;&#x201C; up $10 million

increase in medical graduate membership

3662

members

participated in risk education

million

3800

enquiries were received by MIPS Claims Division

Advocacy

Dental retention

exceeded expectations

member views were represented through submissions in response to government initiatives

Medical Indemnity Protection Society Ltd and its subsidiaries â&#x20AC;&#x201D; Annual Report 2009

MIPS Group Chairman’s report Structure and philosophy

R W L Turner Chairman MIPS Group

The MIPS Group is a mutual organisation. All the assets of the Group belong to the members and no part of the assets or any annual surplus may be expended but for the benefit of the members. A feature which distinguishes MIPS from commercial insurers is that no dividends may be paid to any other party either from membership subscriptions or from premium income. The MIPS Group is principally comprised of the Medical Indemnity Protection Society, which is a medical defence organisation. When medical defence organisations in Australia were no longer permitted to provide medical indemnity cover, MIPS established MIPS Insurance, a wholly owned subsidiary to provide policies of medical indemnity insurance to MIPS graduate and student members and for members in relation to their practice entities. MIPS continues to provide all the back office services for MIPS Insurance. The MIPS Group is firmly committed to being first and foremost a membership organisation which provides a range of benefits and assistance to members. As well as insurance policies and medico‑legal advice, MIPS membership benefits include a number of other benefits which are covered in detail in the Chief Executive Officer’s Report. We believe that the MIPS approach allows the most comprehensive and cost-effective way of delivering those benefits to members. As a first point of contact to members who require advice in relation to problems arising from their practices, MIPS remains committed to making available well qualified medical and dental practitioners who can, in the vast majority of circumstances, provide an immediate response and are available 24 hours a day 7 days a week. 08/09 Financial year The MIPS Group showed an after tax members’ surplus of $7.3 million. This was less than last year and the decrease was due, in part, to a lower total amount paid by the membership in comparison to the previous year, and in significant part to changes in the actuarial valuations resulting in an increase in the accounting value for both current claims and for the unresolved claims from prior years. Nonetheless, there

has been an increase in the total assets of the Group to $249 million with an increase in net assets to $112 million. Members can be assured that both MIPS and MIPSi are well placed to provide them with the assistance they require as appropriate and in accordance with the MIPS Constitution and the members’ insurance policies. The Board There have been no changes to the Board in the last twelve months. The Board has once again submitted itself and the directors to an external independent review. This process was also undertaken by the Board of MIPS Insurance. The findings of the review were satisfactory and indicate that the members of both Boards were satisfied that the Boards operate effectively and in the best interests of MIPS and MIPS Insurance. Directors have continued to undertake an ongoing core online education program as advised in my report last year. Conclusion Finally, I must thank all the directors of MIPS and MIPS Insurance together with MIPS Senior Management, led by Dr Troy Browning, and of course all the other staff in MIPS who contribute to providing the members with the best service possible. MIPS is after all a service organisation and our members are our raison d’être.

R W L Turner Chairman MIPS Group

MIPS Insurance Chairman’s report

Barry S Gilbert Chairman MIPS Insurance Pty Ltd

MIPS Insurance completed a very satisfactory financial performance in the 2008/2009 year, in spite of extremely challenging economic and investment conditions throughout the year. This result was achieved whilst maintaining a high level of probability if sufficiency for the outstanding claims liability consistent with previous years, and with a solvency ratio of 2.94, again well in excess of the APRA minimum requirement of 1.2 for general insurers and 1.5 for medical indemnity insurers. Profit after tax was $2.7 million, compared with $9.7 million in 2007/2008. Members are reminded that all profit is added to members’ assets that are held in MIPS Insurance. Those additional assets in turn mitigate any upward pricing pressure in subsequent years. Much of the reduction in this accounting profit was due to changes in key actuarial assumptions compared with last year. These mandatory changes included adoption of a discount rate of 4.9%, compared with 6.8% last year, and an inflation rate of 4.0% compared with 4.75%. All other things being equal, this has led to an increase in the provision for outstanding claims liabilities, and a reduction in reported profit for this year. This is probably a short-term “blip”, with the economic forecasters in Australia at least anticipating increases in interest rates and inflation rates from the abnormal levels adopted this year, by June 2010. Having said that, it is worth remembering that medical indemnity claims take a long time to settle, and by nature are volatile as to their anticipated and actual outcomes. Hence the need for the conservative reserving policies as used by MIPSi, added to which is the security of the MIPSi reinsurance program underwritten by highly rated reinsurers in Australia and internationally. Notwithstanding rating downgrades of some reinsurers by rating agencies during the past year, generally triggered by large investment losses and catastrophic losses from natural disasters, the MIPSi reinsurance program remains secure and there has been further recognition at reinsurance renewal by reinsurers of the comparatively lower risk profile of MIPS membership.

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

Investment income, whilst an improvement from the previous year, was well down on normal expected returns, principally due to the GFC related environment. Although a lot of insurers reported an investment loss in both years, MIPS Insurance had positive investment returns. Economic recovery in the current year has seen a return to more normal yields so far, without making any predictions for the remainder of the year. Total MIPS Insurance assets have increased to $177.5 million and equity is $70.8 million, up from $68.0 million last year. It is worth remembering that this has grown from the initial seed capital from MIPS of $6.25 million in 2003. Having achieved this rapid growth in capital, which has been necessary to establish a sound and secure base for members, the ongoing objective of MIPSi is to maximise the security offered to its members. Retained profit from annual earnings is an important ingredient in preserving this secure base, but other factors – such as the correct assessment of insured risks, appropriate pricing and providing the necessary professional support to members in receipt of claims – are at least as important for a member based insurer! Board and management continue to be informed in decision making by the annual Insurance Liabilities Valuation Report and the annual Financial Conditions Report prepared by our actuaries. Corporate governance and risk management internally ensures that the key risks to the business are identified, minimised and closely monitored. The Group Audit, Risk and Compliance Committee, chaired by Norman Newbon, is important in this regard with responsibility to MIPSi and MIPS boards, and working closely with internal and external auditors. I thank members of the MIPSi Board, and the MIPS management team and staff led by Dr Troy Browning, for the successful 2008/09, and look forward to continued success in the years to follow.

Barry S Gilbert Chairman MIPS Insurance Pty Ltd

MIPS Group CEO’s report 2008/2009 PERFORMANCE SUMMARY The financial year ended 30 June 2009 has had its challenges. I am therefore pleased to report that despite the negative effects of the global financial crisis during the year on: • investment earnings • the value of some asset classes Dr Troy Browning Chief Executive Officer MIPS Group

• falling interest rates (leading to both a decrease in investment earning on members’ funds and an increase in the value of claims liabilities in the accounts) an increase in members’ net assets of over $7 million after tax was achieved.

Growth

Compared with the prior year position, MIPS members’ total assets have increased by approximately 4.4% to $249 million while, importantly, members’ net assets have increased by approximately 7% to $112 million.

During the 08/09 year MIPS non-student medical member numbers increased by approximately 15% over 07/08. Overall, MIPS experienced an increase in total membership (including students) of approximately 10%, bringing total membership numbers as at 30 June 2009 to just under 30,000.

Financial results

Operational matters

The most significant factors affecting the 2008/2009 results for the MIPS Group were:

To better service NSW and ACT members, MIPS Sydney office was relocated from Bondi Junction to premises in North Sydney. The Sydney office is operating well and we believe NSW and ACT members are benefiting from that change.

• Lower total amount paid by members compared with the prior year. However, total income was higher than anticipated as a consequence of continued new medical member growth during the year and retention of dental members exceeding expectations • Claims experience reported in 2008/2009 was better than anticipated • Better than predicted claims development in prior years • Reduced investment result compared with prior year due to challenging financial market conditions. It is important to note that despite difficult conditions MIPS is again able to advise a positive return on invested members assets • 17% decrease in non-indemnity operating expenses with savings in administration and other operating expenses exceeding budget saving targets. In line with the prudent approach of the Group, and to protect against the potential volatility from low number but high value medical indemnity claims, the MIPS Group has continued to reserve for liabilities at a higher level of confidence than that required under accounting standards.

Members will be aware that under the 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 …” Any annual members’ surplus is added to members’ total assets. Additional members’ net assets provide members with higher levels of prudential security and help to reduce the year on year volatility of the amount members are charged, as the net asset/solvency position is considered every year as part of price setting.

MIPS’s Western Australian presence has been very positively received and ensures that members in that state have enjoyed improved access to member benefits, in particular MIPS risk management initiatives. Ongoing refinements of MIPS systems and operations have further improved member service delivery and efficiency. MIPS staff have worked hard to enhance member benefits and services while at the same time achieving significant reductions in administration costs. There has been significant public debate over recent months in relation to executive salaries in the financial services sector. Members should be aware that there has been no change in MIPS’s approach – all MIPS employees are salaried – there are no exceptions. Data provision MIPS is required to provide data to Federal and State governments and others under various legislation and other instruments.

During the year MIPS provided data to: • APRA - (MIPSi Claims and Policy data and “mutual” data) • Department of Health and Ageing – (Policy, Risk Management and other data) for the Premium Support Scheme, Run-Off Cover Scheme and High Cost Claims Scheme • NSW Department of Health – (Policy/ claims/premium relativity/workforce data) • ACT – (Claims and Policy data) • MINC – (Claims data for public/private medical indemnity claims analysis) • ACCC – for the 6th Medical Indemnity Insurance Monitoring Report. Risk management initiatives Increased resources over prior years were invested to provide clinical risk management opportunities to members. As a result: • approximately 1150 members registered for MIPS Risk Management Workshops • over 400 members viewed one of MIPS’s online risk modules • approximately 1780 members attended a MIPS medico-legal presentation • MIPS also provided approximately 200 risk management presentations • MIPS distributed approximately 60,000 MIPS Review publications. Whilst last minute developments can make it impossible for members to attend their scheduled workshops, we remind members that “no-shows” deprive other members of the opportunity to attend and waste member funds. Please advise cancellations in advance.

clinical issues, thus reducing the adverse impact on members’ time. MIPS does not employ in-house lawyers. Although external legal consultants may be more expensive than in-house staff, 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 results for members. MIPS accounts again show that in general terms claims results continue to be better than anticipated. 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’s 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. Representation and advocacy Since the previous year’s annual report MIPS has initiated and participated in a number of initiatives and submissions in relation to matters that will affect MIPS’s members. The most significant of those are: • a proposal for the extension of the Run‑Off Cover Scheme or Premium Support for significant periods of non‑voluntary cessation of practice caused by accident or illness

Claims performance

• a submission to the NSW “Review of Statutory Privilege in Relation to Root Cause Analysis and Quality Assurance Committees”

During the 08/09 membership year MIPS Claims Division received approximately 3,800 new contacts from members, 80% of these relating to advisory matters or incidents deemed not likely to give rise to a claim.

• attendances at consultation for and lodging of submissions in relation to legislation for a National Registration and Accreditation Scheme for the Health Professions

MIPS’s frontline medico-legal advisers are all experienced medical and dental practitioners from a wide range of dental and medical craft groups. These practitioners also act as claims handlers, which ensures that there is efficient interaction with legal advisers regarding

• participation with other stakeholders in producing a submission to the Australian Law Reform Commission – Enhancing National Privacy Protection.

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

Challenges Following its application this financial year of increases to capital loadings that apply to some types of asset investment, APRA is currently undertaking a broad analysis of capital requirements for general insurance, including potential catastrophic (maximum) events that insurers might face. It is hoped the outcome of such a review will not adversely affect medical indemnity costs. Where appropriate, MIPS will make representations either directly or through its membership of the Insurance Council to help ensure the best long-term outcomes for protection of MIPS’s current and future members. As you will see from the MIPS Insurance Chairman’s report, MIPS Insurance has a high level of solvency – well in excess of that required by APRA. Members should also draw comfort in that when MIPS is assessed on a similar basis, it shows an even higher level of solvency than its subsidiary, MIPS Insurance. Any changes in a reinsurer’s security ratings will also have a potential to affect insurers relying on them and may adversely affect the solvency position of those insurers. MIPS only invites higher rated and capitalised reinsurers onto its reinsurance program. That said, the accounts show that the MIPS Group has a modest exposure to reinsurance recovery assets. Future direction MIPS’s 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 benefits to members. In summary, despite the challenges of the effect of the GFC the 30 June 2009 MIPS Group results add materially to the security that MIPS provides its members.

Dr Troy Browning Chief Executive Officer MIPS Group

Member benefits Advice MIPSâ&#x20AC;&#x2122;s frontline medico-legal advisers are all experienced medical and dental practitioners from a wide range of dental and medical craft groups. These practitioners also act as claims handlers, which ensures that there is efficient interaction with external legal advisers regarding clinical issues. MIPS does not employ in-house lawyers. Although external legal consultants may be more expensive than in-house staff, 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 results for members. Nationally, there are 16 medico-legal advisers/file managers spanning the clinical disciplines of general practice, obstetrics/gynaecology, anaesthetics, orthopaedic surgery, general surgery, internal medicine, general dentistry, endodontics and prosthedontics.

Member benefits Clinical risk education

MIPS Protections

Claims

Clinical risk education is provided to assist members in avoiding adverse outcomes and to thereby improve patient outcomes.

MIPS member benefits include the MIPS Medical Indemnity Policy, MIPS Members’ Practice Entity Policy, MIPS Student Member’s Policy and MIPS Member Group Personal Accident Policy. In addition, MIPS members have access to MIPS’s unique MIPS Protections for non-medical indemnity matters.

The 2008/2009 year was a very successful year from a Claims Division perspective. The Claims Division provides advice and claims management services to members.

A range of new clinical risk management initiatives, which proved highly popular with members and stakeholders, were undertaken during this year. These included two new online modules on Health Records and Open Disclosure, which are also available as risk education resources on the MIPS website. New topics for risk workshops were added and provided on behalf of MIPS by the Cognitive Institute. Online modules and risk workshops are available to medical and dental members. MIPS also provided medico-legal seminars using case scenarios of adverse health care outcomes. These were held in Sydney, Melbourne and Brisbane with the welcome support of Deacons, Perry Maddocks Trollope and TressCox. Further risk management offerings are being developed for the 2010 year, focusing on risks faced by particular member groups and the emerging issues associated with national registration and national codes of conduct.

MIPS Protections provide members with the ability to request assistance for non-medical indemnity matters. Members can request that the MIPS Board consider their claim for protection in accordance with the Constitution of MIPS’s and the law. This offers members peace of mind that should an unknown, unanticipated non-medical indemnity risk emerge that is not covered by an insurance policy they can seek assistance from the MIPS Board. Gratuitous health care services MIPS encourages members who wish to provide gratuitous services to make an application to MIPS, specify the nature of the work intended, where the services will be provided and the period over which these services will be provided. Member benefits provided by MIPS include Medical Indemnity Insurance underwritten by MIPS Insurance and MIPS Protections for members intending to provide gratuitous health care service as a volunteer in third world countries or when accompanying sporting and cultural groups to countries other than the USA or where USA laws apply. Member benefits for approved gratuitous practice are provided at no additional cost to members in an otherwise appropriate category.

Development table – notifications by number

That was probably due in part to the ongoing effect of tort reforms, but more importantly MIPS risk management initiatives, ongoing conservatism when considering both new and renewing membership applications, effective claims management strategies, solid and effective legal representation and an overall cooperative approach from members in providing timely, meaningful, information and instructions. MIPS is different in that all medico-legal advisers and file managers are experienced senior medical or dental practitioners. Nationally, there are 16 MIPS medico-legal advisers/file managers spanning the clinical disciplines of general practice, obstetrics/ gynaecology, anaesthetics, orthopaedic surgery, general surgery, internal medicine, general dentistry, endodontics and prosthedontics. Although the majority of contacts by members each year relate to advisory matters or incidents involving patients that are thought unlikely to lead to a claim, divisional time remains evenly split between providing advice to members and managing all aspects of incident notifications. Advisory services deal with most issues that arise out of the health practitioner member/ patient relationship. Some recent examples of relatively straightforward matters include advice on how to manage a subpoena, how to disengage from an irate patient and how to deal with a worker’s compensation or other insurer’s request for records. Notifications by state/territory of origin

4000

Advisory

Incidents Likely

ACT

3500

Incidents Not Likely

Claims

NSW

3000

2500

Qld

2000

1500

Tas

1000

Vic

500 0

WA 2003/2004

2004/2005

2005/2006

2006/2007

2007/2008

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

2008/2009

An interesting recent development has been the advent of so called electronic Patient Authorities. In our experience most are manifestly deficient and represent a threat to patient privacy. Emerging issues such as this are usually the subject of articles in the MIPS Review. The family doctor who finds themselves in the middle of family law disputes seems to be an increasing trigger for contacting MIPS and, in our experience, is a no-win situation for all concerned. Members are advised that it is vital to ensure the orders of the court are complied with, which is especially helpful in acrimonious circumstances. Advisory matters can also include a member’s involvement in sensitive and complex clinical circumstances and often include time critical advice in relation to serious and sometimes life changing circumstances. We have had a number of contacts from members following police and Medicare investigators arriving at their practices with a search warrant. Rarely are practitioners arrested by police. There appears there may be an increasing propensity for patient initiated violence and aggression towards clinical and practice staff. Members also contact MIPS for advice in relation to the complex issues of preparing an effective and objective statement to a coroner’s office: for example, in relation to patient suicide.

Notifications 2008/2009

Other advisory services that have been of critical importance during the year to some members relate to the particularly sensitive matters of collegiate and personal impairment due to illness, drugs/alcohol etc. Claims management services involve complex medico-legal skills being focused on incident notifications as notified matters evolve into claims on the negotiating closure of meritorious claims with the patient (or their representatives). MIPS does not employ in-house lawyers, choosing to allocate work externally to the best lawyers for the job. These decisions are made on a case-by-case basis to ensure the most appropriate representation is secured according to jurisdiction and past experience. Lawyers in each jurisdiction are thoroughly scrutinised for their skills and experience, as well as their up-to-date knowledge of the jurisdiction and the prevailing issues. As a member focused 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 remains cognisant of the need for this balance. The combined team is highly skilled at developing defences and a litigation strategy with these objectives in mind.

Notifications by value

“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 undertaken by MIPS is focused on professional and disciplinary Board matters and an increasing number of investigations being conducted by statutory bodies (e.g. Medicare Australia, health practitioner Boards and Tribunals). These are often very labour intensive, involving a plethora of complex issues. Significant effort is directed towards 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’s 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 (including MIPS setting aside funds in reserve for such a contingency) so that if a claim does crystalise MIPS is in the best position to respond.

Notifications (non advisory) – by craft group (%) Surgical

Liability Non Liability

ACT

Non Proc GP

NSW

Proc GP

Qld

Physician

Tas

Psychiatry

Vic

O&G Anaesthetics Emp Indem DITs No Pte Prac

MIPS Board

William Turner (Chairman) MBBS, LLB, FRCS, FRACS, FACLM, FAICD

Charles Steadman MBBS, MD, FRACP, FAICD

Kerry Roxburgh BCom, MBA, SDIAM

Tony Fraser B Juris, LLB

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

Bob Dickens MBBS, FRACS

Bruce Taylor MDSc, FRACDS, LDS, FADZ, FICD, FDFA

Organisational structure The key governance structures within the MIPS Group are (see diagram below): • MIPS Board • MIPS Insurance Board • MIPS Group Audit, Risk and Compliance Committee (“GARCC”). Both the MIPS and MIPSi boards are comprised of a majority of independent non executive directors. 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 MIPSi boards are supported by the Group Audit Risk and Compliance Committee (“GARCC”), whose aim is to help reduce risk to the Group organisation through identification, mitigation and oversight of risk management.

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. The GARCC is assisted in its operations by the Audit, Risk and Compliance Manager and by an audit firm engaged to provide independent, expert outsourced and ongoing professional internal audit services to the MIPS Group. 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.

including the risk management strategy, the reinsurance management strategy, the enterprise risk management process and the risk assessment matrix. 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 compliance management framework includes an overarching Group compliance policy, strategy and detailed compliance plans and schedules. 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 organisation.

The MIPS Group risk management framework complies with Australian Standards and includes the formulation and regular review of the framework and important elements,

MIPS Group Governance and Management

MIPS Group

MIPS Insurance Board

MIPS Board

CEO

Information & Projects Division

Corporate Administration

Member Services Division & Marketing Communications

Claims Division

GARCC

Finance Division

Audit, Risk & Compliance

Financial Report

Contents of financial report 12 16 17 18 19

MIPS Group Directors’ report Income statements Balance sheets Statements of changes in equity Cash flow statements

NOTES TO THE FINANCIAL REPORT 20 30 32 34 39 39 39 40 41 41 42 42 43 43 44 45 46 47 47 47 48 50 50 51 51 52 52 52 54 54 55 55 56 56 56 57 60

Summary of significant accounting policies Critical accounting judgements and estimates Actuarial assumptions and methods Financial risk management objectives and policies Fair values Segment information Premium revenue Net claims incurred Investment result Subscriptions and other revenues Indemnification expenses Other operating expenses Income tax Cash and cash equivalents Receivables Investments Reinsurance and other recoveries receivable Other assets Plant and equipment Payables Outstanding claims Other liabilities Provisions Deferred tax (asset)/liabilities Share capital and members’ guarantee Key management personnel Remuneration of auditors Related parties Investments in subsidiaries Investments in associates Reconciliation of net profit to net cash inflow from operating activities Commitments Capital adequacy Contingent liability Events occurring after balance date Directors’ declaration Senior management team

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

MIPS Group 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 2009. 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: D R V Dickens A A Fraser K C D Roxburgh C J Steadman B E Taylor R W L Turner Meetings of directors The number of meetings of the Society’s directors held during the year ended 30 June 2009, and the number attended by each director during the time the director held office during the year ended 30 June 2009, are disclosed below: Board meetings held Board meetings during the year attended D R V Dickens

A A Fraser

K C D Roxburgh

C J Steadman

B E Taylor

R W L Turner

Meetings of the Group Audit, Risk and Compliance Committee (“GARCC”) The number of meetings of the GARCC held during the year ended 30 June 2009, and the number attended by each director during the time the director held office during the year ended 30 June 2009, are disclosed below: Board meetings held Board meetings during the year attended B S Gilbert

N Newbon

K C D Roxburgh

Information on directors Director

Qualifications

Relevant experience

D R V Dickens

MBBS, FRACS

Director, Professional Insurance Australia Pty Ltd Director, Queensland Doctors’ Mutual Pty Ltd Director, Professional Management Australia Pty Ltd

A A Fraser

B Juris, LLB

Former director, Professional Insurance Australia Pty Ltd Former director, Professional Management Australia Pty Ltd Former director, FPI Ltd

K C D Roxburgh

Bcom, MBA, SDIAM

Director, Charter Hall Group Director, MIPS Insurance Pty Ltd 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

Director, QGI Pty Ltd Director, Queensland Gastroenterology Pty Ltd Director, Queensland Doctors’ Mutual Pty Ltd Director, Steady Care Pty Ltd

B E Taylor

MDSc, FRACDS, LDS, FADZ, FICD, FDFA

Director, Victorian Medical Insurance Agency Ltd Director, MIPS Insurance Pty Ltd Director, Australian Dental Research Foundation Ltd

R W L Turner

MBBS, LLB, FRCS, FRACS, FACLM, FAICD

Chairman

Director, MIPS Insurance Pty Ltd President, Medical Protection Society of Tasmania Director, Queensland Doctors’ Mutual Pty Ltd Director, Professional Management Australia Pty Ltd

Company Secretary

Qualifications

Experience

W F Berryman

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 Company Secretary, Professional Insurance Australia Pty Ltd

The Group’s business is to protect, support and safeguard the character and interests of medical practitioners and to provide indemnity insurance to medical practitioners, including dental practitioners. Review of operations and results Group 2009 $’000 Profit for the year

7,311

2008 $’000

Society 2009 $’000

2008 $’000

18,027

3,450

8,224

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 2009 (2008: $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 2009.

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

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. Matters subsequent to the end of the financial year

No matters or circumstances have arisen since 30 June 2009 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 15. This report is made in accordance with a resolution of the directors.

R W L Turner Director

Melbourne 14 October 2009

D R V Dickens Director

Auditorâ&#x20AC;&#x2122;s independence declaration In relation to our audit of the financial report of Medical Indemnity Protection Society Ltd for the financial year ended 30 June 2009, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct.

Tim Dring Partner

Ernst & Young Melbourne 14 October 2009

Medical Indemnity Protection Society Ltd and its subsidiaries â&#x20AC;&#x201D; Annual Report 2009

Income statements For the year ended 30 June 2009

Notes Premium revenue

Group 2009 $’000 35,089

Society 2009 $’000

2008 $’000

37,107

–

Outwards reinsurance premium expense Net earned premiums

(4,700)

(5,020)

–

30,389

32,087

–

Claims expense

(29,957)

(23,406)

–

2,101

8,861

–

(27,856)

(14,545)

–

Reinsurance and other recoveries revenue Net claims incurred

Acquisition costs Run-Off Cover Scheme (“ROCS”) levy Underwriting expenses

(104)

(125)

–

(1,665)

(2,762)

–

(1,769)

(2,887)

–

Underwriting result

764

14,655

–

Investment revenue

11,923

12,085

3,268

3,544

(Losses)/Gains on investments

(4,867)

(4,371)

(1,806)

218

(485)

(486)

(162)

(143)

Investment expenses Investment result

6,571

7,228

1,300

3,619

Subscription and other revenue

12,325

13,439

14,170

16,965

Indemnification expenses

1,036

2,227

899

1,979

Other operating expenses

(12,997)

(15,208)

(12,845)

(14,464)

364

458

2,224

4,480

Share of net profits/(losses) of associate Profit before income tax

902

(143)

–

8,601

22,198

3,524

8,099

Income tax (expense)/benefit Profit for the year

(1,290)

(4,171)

(74)

125

7,311

The above income statements should be read in conjunction with the accompanying notes contained on pages 20 to 56.

2008 $’000

18,027

3,450

8,224

Balance sheets As at 30 June 2009

Notes

Group 2009 $’000

2008 $’000

Society 2009 $’000

2008 $’000

CURRENT ASSETS Cash and cash equivalents

50,687

49,688

8,623

13,940

Receivables

1,264

1,045

1,264

2,847

Investments

107,748

112,292

25,863

26,842

Reinsurance and other recoveries receivable

5,516

4,834

1,832

910

153

(3,988)

–

126

3,008

3,022

860

826

168,376

166,893

38,442

45,491

51,437

38,468

16,669

15,016

Reinsurance and other recoveries receivable

19,356

24,803

5,203

7,053

Plant and equipment

1,032

1,015

997

969

Investments in subsidiaries

–

6,508

Investments in associates

7,495

6,593

3,461

Deferred tax asset

1,523

1,041

–

Current tax assets Other assets Total current assets NON-CURRENT ASSETS Investments

Total non-current assets Total assets

80,843

71,920

32,838

33,007

249,219

238,813

71,280

78,498

CURRENT LIABILITIES Payables

Unearned premiums

5,579

7,209

3,905

7,053

18,496

16,153

–

Outstanding claims liability

16,010

13,674

–

Other liabilities

6,198

5,555

6,198

5,555

Provisions Total current liabilities

5,163

5,473

5,163

5,470

51,446

48,064

15,266

18,078

NON-CURRENT LIABILITIES Outstanding claims liability

65,144

58,678

–

Provisions

20,725

27,668

16,567

24,588

Deferred tax liabilities

Total non-current liabilities Total liabilities Net assets

–

250

276

85,869

86,346

16,817

24,864

137,315

134,410

32,084

42,942

111,904

104,403

39,196

35,556

EQUITY Share capital Investment revaluation reserve Retained profits Total equity

100

286

111,518

104,207

38,810

35,360

111,904

104,403

39,196

35,556

The above balance sheets should be read in conjunction with the accompanying notes contained on pages 20 to 56.

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

Statements of changes in equity For the year ended 30 June 2009

Share capital $’000

Investment revaluation reserve $’000

Retained earnings $’000

Total $’000

100

1,874

27,136

29,110

– Increment in the revaluation

–

(2,539)

–

(2,539)

– Tax impacts

–

761

–

761

–

(1,778)

–

(1,778)

SOCIETY At 1 July 2007 Direct equity adjustments

Profit for the year

–

Recognised income and expense At 30 June 2008

–

8,224

100

(1,778) 96

–

8,224 35,360

6,446 35,556

– Increment in the revaluation

–

271

–

271

– Tax impacts

–

(81)

–

Direct equity adjustments

190

(81) 190

Profit for the year

–

3,450

Recognised income and expense At 30 June 2009

– 100

190 286

3,450 38,810

3,640 39,196

GROUP At 1 July 2007

100

1,874

86,180

88,154

– Increment in the revaluation

–

(2,539)

–

(2,539)

– Tax impacts

–

761

–

761

–

(1,778)

–

(1,778)

Direct equity adjustments

Profit for the year

–

Recognised income and expense At 30 June 2008

–

18,027

100

(1,778) 96

–

18,027 104,207

16,249 104,403

– Increment in the revaluation

–

271

–

271

– Tax impacts

–

(81)

–

(81)

–

190

–

190

Direct equity adjustments

Profit for the year

–

7,311

Recognised income and expense At 30 June 2009

–

190 286

7,311 111,518

7,501 111,904

100

The above statements of changes in equity should be read in conjunction with the accompanying notes contained on pages 20 to 56.

Cash flow statements For the year ended 30 June 2009

Group 2009 $’000

2008 $’000

Premium income

39,115

45,413

–

Subscriptions and other income received

12,252

13,273

14,097

16,656

Outwards reinsurance recoveries/(paid)

(4,700)

(5,020)

–

Claims paid

(12,302)

(6,435)

–

Indemnification costs paid

(6,709)

(2,419)

ROCS levy

(1,776)

(2,423)

–

Dividends received

2,157

2,075

632

514

Interest received

10,546

10,863

2,849

3,247

Other expenses paid

(19,079)

(22,781)

(14,431)

(22,368)

715

963

715

1,106

(5,838)

(4,584)

100

145

Notes

Society 2009 $’000

2008 $’000

CASH FLOWS FROM OPERATING ACTIVITIES

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

(6,709)

(2,419)

–

2,887

12,077

14,381

28,925

140

8,958

CASH FLOWS FROM INVESTING ACTIVITIES (361)

(156)

(361)

(156)

Proceeds from investments

281,861

175,266

57,202

40,774

Payments for investments

(294,882)

(189,893)

(59,410)

(45,975)

(13,382)

(14,783)

(2,569)

(5,357)

999

14,142

(2,429)

3,601

49,688

35,546

9,076

5,475

50,687

49,688

6,647

9,076

Purchase of plant and equipment

Net cash used in investing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of period Cash and cash equivalents at the end of period

The above cash flow statements should be read in conjunction with the accompanying notes contained on pages 20 to 56.

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

Notes to the financial report For the year ended 30 June 2009

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”). (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. 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]; 2008-12 Amendments to Australian Accounting Standards arising from the Reclassification of Financial Assets [AASB 7, AASB 139 & AASB 2008-10]; Disclosures and all consequential amendments which became applicable on 1 July 2008. The adoption of this standard has only affected disclosures in these financial statements. There has been no effect on profit and loss or the financial position of the Group. The Group has adopted 2009-3 Amendments to Australian Accounting Standards arising from Embedded Derivatives [AASB 139 & Interpretation 9]; Disclosures and all consequential amendments which became applicable on 30 June 2009. The adoption of this standard has only affected disclosures in these financial statements. There has been no effect 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 2009 (“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 2009 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.

Note 1 – Summary of significant accounting policies (continued)

The Group’s assessment of the impact of these new standards and interpretations is set out below: Application date of standard*

Impact on Group financial report

Application date for Group

Reference

Title

Summary

AASB 8 and AASB 2007-3

Operating Segments and consequential amendments to other Australian Accounting Standards

New standard replacing AASB 114 Segment Reporting, which adopts a management reporting approach to segment reporting.

1 January 2009

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 July 2009

AASB 101 (revised),

Presentation of Financial Statements and Consequential amendments to other Australian Accounting Standards

Introduces a statement of comprehensive income.

1 January 2009

1 July 2009

AASB 123 (Revised) and AASB 2007-6

Borrowing Costs and consequential amendments to other Australian Accounting Standards

The amendments to AASB 123 require 1 January that all borrowing costs associated 2009 with a qualifying asset be capitalised.

The Group has not adopted the standard early. Application of the standard will neither affect any of the amounts recognised or information disclosed in the financial statements.

1 July 2009

AASB 127 (Revised)

Consolidated and Separate Financial Statements

There are a number of changes arising from the revision to AASB 127 relating to changes in ownership interest in a subsidiary without loss of control, allocation of losses of a subsidiary and accounting for the loss of control of a subsidiary. Specifically in relation to a change in the ownership interest of a subsidiary (that does not result in loss of control) – such a transaction will be accounted for as an equity transaction.

1 July 2009

The Group has not adopted the standard early. Application of the standard will neither affect any of the amounts recognised or information disclosed in the financial statements.

1 July 2009

AASB 2008-3

Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127

Amending Standard issued as a consequence of revisions to AASB 3 and AASB 127. Refer above.

1 July 2009

The Group has not adopted the standard early. Application of the standard will neither affect any of the amounts recognised or information disclosed in the financial statements.

1 July 2009

AASB 2007-8 and 2007-10

Other revisions include impacts on the presentation of items in the statement of changes in equity, new presentation requirements for restatements or reclassifications of items in the financial statements, changes in the presentation requirements for dividends and changes to the titles of the financial statements.

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

Note 1 â&#x20AC;&#x201C; Summary of significant accounting policies (continued)

Reference

Title

AASB 2008-5 Amendments to Australian Accounting Standards arising from the Annual Improvements Project

Summary The improvements project is an annual project that provides a mechanism for making non-urgent, but necessary, amendments to IFRSs. The IASB has separated the amendments into two parts: Part 1 deals with changes the IASB identified resulting in accounting changes; Part II deals with either terminology or editorial amendments that the IASB believes will have minimal impact.

Application date of standard*

Impact on Group financial report

Application date for Group

1 January 2009

1 July 2009

This was the first omnibus of amendments issued by the IASB arising from the Annual Improvements Project and it is expected that going forward, such improvements will be issued annually to remove inconsistencies and clarify wording in the standards. The AASB issued these amendments in two separate amending standards; one dealing with the accounting changes effective from 1 January 2009 and the other dealing with amendments to AASB 5, which will be applicable from 1 July 2009 (refer below AASB 2008-6). AASB 2008-6 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project

This was the second omnibus of amendments issued by the IASB arising from the Annual Improvements Project. Refer to AASB 2008-5 above for more details.

Note 1 – Summary of significant accounting policies (continued)

Reference

Title

Summary

AASB 2008-7

Amendments to Australian Accounting Standards – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate

The main amendments of relevance to Australian entities are those made to AASB 127 deleting the “cost method” and requiring all dividends from a subsidiary, jointly controlled entity or associate to be recognised in profit or loss in an entity’s separate financial statements (i.e., parent company accounts). The distinction between pre- and post-acquisition profits is no longer required. However, the payment of such dividends requires the entity to consider whether there is an indicator of impairment.

Application date of standard* 1 January 2009

Impact on Group financial report

Application date for Group

1 July 2009

AASB 127 has also been amended to effectively allow the cost of an investment in a subsidiary, in limited reorganisations, to be based on the previous carrying amount of the subsidiary (that is, share of equity) rather than its fair value. AASB 2009-2

Amendments to Australian Accounting Standards – Improving Disclosures about Financial Instruments [AASB 4, AASB 7, AASB 1023 & AASB 1038]

The main amendment to AASB 7 requires fair value measurements to be disclosed by the source of inputs, using the following three-level hierarchy:

Annual reporting periods beginning on or after 1 January • quoted prices (unadjusted) in active markets for identical assets 2009 that end on or or liabilities (Level 1); after 30 • inputs other than quoted April 2009. prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2); and • inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3). These amendments arise from the issuance of Improving Disclosures about Financial Instruments (Amendments to IFRS 7) by the IASB in March 2009. The amendments to AASB 4, AASB 1023 and AASB 1038 comprise editorial changes resulting from the amendments to AASB 7.

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

Note 1 â&#x20AC;&#x201C; Summary of significant accounting policies (continued)

Reference

Title

AASB 2009-5 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project [AASB 5, 8, 101, 107, 117, 118, 136 & 139]

Summary 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.

Application date of standard*

Impact on Group financial report

Application date for Group

1 January 2010

1 July 2010

The main amendment of relevance to Australian entities is that made to AASB 117 by removing the specific guidance on classifying land as a lease so that only the general guidance remains. Assessing land leases based on the general criteria may result in more land leases being classified as finance leases and if so, the type of asset which is to be recorded (intangible v property, plant and equipment) needs to be determined. These amendments arise from the issuance of the IASBâ&#x20AC;&#x2122;s Improvements to IFRSs. The AASB has issued the amendments to IFRS 2, IAS 38, IFRIC 9 as AASB 2009-4 (refer above). AASB 2009-6 Amendments to Australian Accounting Standards

These comprise editorial amendments and are expected to have no major impact on the requirements of the amended pronouncements.

1 January 2009

1 July 2009

AASB 2009-7

These comprise editorial amendments and are expected to have no major impact on the requirements of the amended pronouncements.

1 July 2009

Amendments to Australian Accounting Standards [AASB 5, 7, 107, 112, 136 & 139 and Interpretation 17]

*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.

Note 1 – Summary of significant accounting policies (continued)

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 Investments in associates are 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 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 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 12 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 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. Premium income is recognised evenly over the period of the insurance policy. The policy year is 12 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. Premium revenue comprises only the premium charged to policy holders including the additional 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 Subsidy (“PSS”) for policyholders whose total indemnity costs exceed a set proportion of their income (as defined in the legislation). The Group is responsible for administering the subsidy and in this role it obtains details of estimated income to determine that portion of total indemnity costs to be collected from Medicare Australia. In subsequent years, the Group obtains actual income details from policyholders and either collects monies from policyholders for those amounts required to be reimbursed to Medicare Australia or seeks additional subsidies from Medicare Australia to be passed through to the policyholder. 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 balance sheet. 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 income statement 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.

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

Note 1 â&#x20AC;&#x201C; Summary of significant accounting policies (continued)

The entire deficiency is recognised immediately in the income statement 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 balance sheet 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. 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 liability for outstanding claims being sufficient to meet all claims is a minimum of 75%. MIPSi has elected to increase the probability of outstanding claims being sufficient to well above the 75% minimum. Without a prudential margin the liability for outstanding claims represents the best (or 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 21. 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 MIPSi. A summary of the level of sufficiency achieved by the prudential margin is disclosed in Note 3. 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 in relation to medical indemnity incidents occurring after 30 June 2003. The indemnity provided by the Group to its members covers incidents reported under extended reporting benefit and death, disability or retirement arrangements. The provision for 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 medical indemnity cover to its members for new incidents, and the nature of indemnity obligations is volatile, the prudential margin 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. (i) Reinsurance and other recoveries receivable 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 (â&#x20AC;&#x153;HCCSâ&#x20AC;?) 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.

Note 1 – Summary of significant accounting policies (continued)

(j) 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 3 years or has reached age 65, the practitioner’s most recent medical indemnity insurer must offer a Run-Off Cover Scheme policy. Any accepted 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 3 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 to practitioners and is disclosed on premium notices • 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. 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. (k) 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 income statement in subsequent reporting periods. The Group has not deferred any acquisition costs at year end or the comparative year end. (l) Income tax The income tax expense or credit for the period is the tax payable on the current period’s taxable income adjusted by changes in deferred assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and any unused tax losses. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantially enacted. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. (m) 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.

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

Note 1 – Summary of significant accounting policies (continued)

(n) 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. 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 remeasured 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. 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 “available-forsale” 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. For investments recorded at “fair value through profit or loss” transaction costs are expensed in the income statement. 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 balance sheet 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. (o) 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 income statement 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.

Note 1 – Summary of significant accounting policies (continued)

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. The asset’s 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 income statement. (p) Impairment of non-financial assets other than goodwill Intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. 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. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of either an asset’s fair value less costs to sell or value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows that are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered impairment are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed. (q) Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. (r) 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 income statement. (s) Cash and cash equivalents For cash flow statement presentation purposes, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions and other, other short-term, highly liquid investments with original maturities of 3 months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. (t) Employee benefits (i) Wages and salaries, annual leave and sick leave Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating sick leave expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employees’ 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 sick 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 employees’ 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. (u) Goods and Services Tax (“GST”) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense.

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

Note 1 – Summary of significant accounting policies (continued)

Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flow. (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. 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 be 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 claims cost of claims incurred but not settled at the balance sheet 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(j), 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. 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.

Note 2 â&#x20AC;&#x201C; Critical accounting judgements and estimates (continued)

The key measures relating to the actuarial valuation of the provision for indemnity obligations are as follows: 2009 3.5 years

2008 3.5 years

At end of report year

50%

10%

1 year after end of report year

50%

2 years after end of report year

35%

Average weighted term to settlement from indemnity requested date Uplift for initial under-reserving on claims greater than $250,000

Reduction for incidents converting to indemnity requests

70%

Expense rate

9.0%

6.0%

3 or more years after end of report year

Discount rate

3.4%

4.7%

Inflation (normal and superimposed) rate

6.0%

6.5%

$113,500

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

75%

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% results in a $732,647 decrease in profit and equity (with an equivalent $732,647 increase in profit and equity with a 4.5% 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. At 30 June 2009 there were 791 doctors who had qualified for ROCS and at that date two claims in respect of those policyholders had been notified. Based on an analysis of past reporting patterns the actuaries have estimated the claims that will be reported in the future for the period the doctor was covered when a policyholder of the Company, assuming that the doctors concerned formed a representative sample of the overall policyholders covered by the Company. (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.

Medical Indemnity Protection Society Ltd and its subsidiaries â&#x20AC;&#x201D; Annual Report 2009

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. Average weighted term to settlement from reporting date

2009 3.5 years

2008 3.3 years

50.0%

90.0%

Expense rate

9.0%

Discount rate

4.9%

6.8%

Inflation rate

4.0%

4.75%

Superimposed inflation rate

2.0%

92.5%

Reduction for medical incidents converting to claims

Level of sufficiency achieved by prudential margin 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

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 2009/2010 claims-handling costs, as a percentage of projected 2009/2010 gross claims payments. 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.

Note 3 – Actuarial assumptions and methods (continued)

Superimposed inflation Superimposed inflation occurs due to non-economic effects such as court settlements 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 – 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 2 or 3 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 rate to be used for the valuation is effectively specified by APRA and is not a variable and therefore no sensitivity analysis is performed. 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.

(ii) Impact of changes in key variable Impact on Group profit/(loss) before tax $’000

Impact on Group equity/profit for the year after tax $’000

+3%

(4,556)

(3,189)

–3%

4,105

2,874

+1%

(727)

(509)

–1%

727

509

Movement in variable Variable Inflation and superimposed inflation Claims-handling costs Incident probability reduction

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

+25%

9,675

6,773

–25%

(9,675)

(6,773)

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 • 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 does not have any material individual policies and writes only professional indemnity class of business, which is not affected by any natural disasters. The Group’s exposure to concentration of monoline insurance risk is mitigated by underwriting insurance for diversified practice categories in all Australian States and Territories. To manage the risks associated with various practice categories, 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 ay the end of a contract period. The tables in Note 21 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.

Note 4 – Financial risk management objectives and policies (continued)

Reinsurance counter-party 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. (b) Credit risk Credit risk represents the risk that the counter-party 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 default of the counter-party, with the current exposure equal to the fair value of these instruments as disclosed in the balance sheet. 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 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. 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 counter-party, and by industry sector. Counter-party 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 16. An industry-sector analysis of the Group’s investments in financial assets is as follows: Group

2009 $’000

2008 $’000

Energy

1,764

2,028

Materials

4,875

7,906

894

3,485

Consumer discretionary

1,122

2,301

Consumer staples

1,890

1,646

Industrials

Health care Financials Telecommunications Utilities Total

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

1,715

1,814

145,658

130,305

1,267

1,069

–

206

159,185

150,760

Note 4 – Financial risk management objectives and policies (continued)

An industry-sector analysis of the Society’s investments in financial assets is as follows: 2009 $’000

Society

2008 $’000

643

744

1,553

2,511

Industrials

295

1,146

Consumer discretionary

360

826

Consumer staples

634

542

Energy Materials

Health care Financials Telecommunications Utilities Total

572

605

38,057

34,924

418

355

–

206

42,532

41,859

(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.

2009

AAA to AA– $’000

A+ to AA– $’000

BBB+ to BBB– $’000

Other* $’000

Total $’000

Insurance recoverables Interest-bearing securities held for trading

83,701

–

83,701

Corporate bonds

17,550

10,582

–

28,132

Indexed bonds Government bonds

2008

3,524

3,377

–

6,901

16,405

–

16,405

121,180

13,959

AAA to AA– $’000

A+ to AA– $’000

BBB+ to BBB– $’000

Other* $’000

Total $’000

72,699

–

72,699

16,421

16,783

–

33,204

–

3,435

–

3,435

8,805 97,925

– 20,218

– –

8,805 118,143

135,139

Insurance recoverables Interest-bearing securities held for trading Corporate bonds Indexed bonds Government bonds Total

*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.

Note 4 – Financial risk management objectives and policies (continued)

The table below shows the credit quality by class of asset for debt instruments for the Society.

2009

AAA to AA– $’000

BBB+ to BBB– $’000

A+ to AA– $’000

Other* $’000

Total $’000

Insurance recoverables

–

Interest-bearing securities held for trading

17,829

–

17,829

Corporate bonds

5,460

3,669

–

9,129

Indexed bonds

1,007

482

–

1,489

Government bonds

6,161

–

6,161

Total

30,457

4,151

2008

AAA to AA– $’000

A+ to AA– $’000

BBB+ to BBB– $’000

Other* $’000

Total $’000

15,996

–

15,996

5,329

5,394

–

10,723

491

–

491

–

3,912

–

31,122

34,608

Insurance recoverables Interest-bearing securities held for trading Corporate bonds Indexed bonds Government bonds Total

– 3,912 25,237

– 5,885

*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.

(d) Liquidity risk 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 23) 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 of 30% for MIPS and 22% for MIPSi. 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-balance sheet 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.

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

Note 4 – Financial risk management objectives and policies (continued)

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 income statement to a reasonably possible change in interest rates, with all other variables held constant. The sensitivity of the income statement 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 2009; and • changes in fair value of investments for the year, based on revaluing fixed-rate financial assets at 30 June 2009. The basis-points sensitivity is based on the volatility of change in the global interest rates over the last 10 years.

Interest rate AUD GROUP 2009 2008 SOCIETY 2009 2008

Change in basis points increase/ decrease

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

Equity higher/ (lower) $’000

+150

(531)

(272)

–150

416

290

+150

(552)

(323)

–150

556

329

+150

(272)

–150

(16)

290

+150

(323)

–150

(5)

329

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.

Note 4 – Financial risk management objectives and policies (continued)

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.

Index

Change in equity price%

2009 After-tax effect on profit higher/(lower) $’000

After-tax effect on equity $’000

2008 After-tax effect on profit higher/(lower) $’000

After-tax effect on equity $’000

GROUP ASX

+20%

2,257

1,109

3,063

1,503

–20%

(2,257)

(1,109)

(3,063)

(1,503)

SOCIETY ASX

–

+20% –20%

(823)

1,109

–

1,503

(286)

–

(1,503)

NOTE 5 FAIR VALUES The financial assets and liabilities included in the balance sheet 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 2009 $’000

2008 $’000

Society 2009 $’000

2008 $’000

FINANCIAL ASSETS 50,687

49,688

8,623

13,940

Receivables

1,264

1,045

1,264

2,847

Investments

159,185

150,760

42,532

41,858

Other assets

3,008

3,022

859

825

214,145

204,515

53,278

59,470

5,579

7,209

3,905

7,053

Cash and cash equivalents

FINANCIAL LIABILITIES Payables Other liabilities

6,198

5,555

6,198

5,555

11,777

12,764

10,103

12,608

NOTE 6 SEGMENT INFORMATION Business segments The Group operates predominantly in one industry segment, that being the provision of medical indemnity coverage. Geographic segment The activities of the Group are carried out solely in Australia. NOTE 7 PREMIUM REVENUE

Gross written premiums Add/(less): Movement in unearned premium

Group 2009 $’000

2008 $’000

37,432

37,947

–

(840)

–

(2,343) 35,089

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

37,107

Society 2009 $’000

2008 $’000

NOTE 8 NET CLAIMS INCURRED All insurance business is underwritten by MIPSi. Therefore, all net claims incurred information relates to the Group. 2009 Current year $’000

2009 Prior years $’000

2009 Total $’000

2008 Current year $’000

30,548

(2,563)

27,985

31,076

2008 Prior years $’000

2008 Total $’000

GROSS CLAIMS INCURRED Undiscounted Discount movement Gross claims discounted

(4,624) 25,924

6,010 3,447*

1,386 29,371

(5,015)

26,061

(5,928)

2,361

25,148

(2,654)*

22,494

(3,567)

REINSURANCE AND OTHER RECOVERIES Undiscounted Discount movement

(4,054)

4,132

(5,986)

(5,890)

(11,876)

440

(2,619)

(2,179)

1,686

1,329

3,015

Reinsurance recoveries discounted

(3,614)

1,513*

(2,101)

(4,300)

(4,561)*

(8,861)

Net of reinsurance recoveries discounted Prudential margin

22,310

4,960*

27,270

20,848

(7,215)*

13,633

3,815

(3,229)

Net claims incurred

26,125

1,731

586

4,778

(3,866)

912

27,856

25,626

(11,081)

14,545

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:

2009 Gross claims $’000

2009 Recoveries $’000

2009 Net $’000

2,319

1,513

3,832

(3,355)

–

701

–

701

1,128

–

1,128

–

3,447

1,513

4,960

2008 Gross claims $’000

2008 Recoveries $’000

2008 Net $’000

CHANGES IN ASSUMPTIONS Claims development Claims-handling expenses Discount rate/inflation Total

(2,654)

(4,561)

(7,916)

(7,215)

NOTE 9 INVESTMENT RESULT Group 2009 $’000

2008 $’000

Society 2009 $’000

2008 $’000

Investment revenue Interest received on bank accounts

1,627

1,936

359

811

Interest on investments – not held as FVTPL*

2,346

2,189

2,121

2,069

Interest on investments – held as FVTPL*

5,647

5,775

–

Dividends received

2,303

2,185

788

664

11,923

12,085

3,268

3,544

(3,848)

445

–

787

(5,034)

–

Gains (losses) on investments Realised gains on investments at fair value through profit or loss Unrealised gains on investments at fair value through profit or loss Realised gains (losses) on available-for-sale investments

(1,806) (4,867)

218

(1,806)

218

(4,371)

(1,806)

218

(162)

(143)

Expenses on investment not held as FVTPL*

(162)

(143)

Expenses on investment held as FVTPL*

(323)

(343)

Investment expense

–

6,571

7,228

1,300

3,619

Group 2009 $’000

2008 $’000

Society 2009 $’000

2008 $’000

11,448

12,445

11,448

12,445

Service fee

307

275

452

518

Recovery of expenses incurred

567

512

567

857

*FVTPL – fair value through profit and loss.

NOTE 10 SUBSCRIPTIONS AND OTHER REVENUES

Subscription revenue

Agents’ fees

–

1,700

3,140

Sundry income

208

12,325

13,439

14,170

16,965

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

NOTE 11 INDEMNIFICATION EXPENSES Group 2009 $’000

2008 $’000

Society 2009 $’000

2008 $’000

Charge for indemnity obligations – undiscounted

(2,511)

494

(2,511)

892

– discount

2,122

285

2,122

185

(389)

779

(389)

1,077

– undiscounted

799

(2,390)

699

(2,390)

– discount

(391)

308

(391)

308

408

(2,082)

308

(2,082)

(1,303)

(81)

(1,005)

Movement in recoveries

Net charge for indemnity obligations Movement in prudential margin

(1,056)

(924)

(818)

(974)

(1,037)

(2,227)

(899)

(1,979)

Group 2009 $’000

2008 $’000

NOTE 12 OTHER OPERATING EXPENSES

Superannuation contribution

2008 $’000

962

800

770

Other employee benefit expense

6,261

6,401

5,913

5,825

Less: Reallocation to claims expense

(1,700)

(1,570)

–

341

351

330

334

Professional services expense

1,972

2,641

1,458

1,742

Financial institution charges

405

138

103

136

Depreciation expense

Risk management workshops Advertising and printing IT and communications expense Occupancy expense Other expenses from ordinary activities

900

Society 2009 $’000

184

301

184

301

1,165

947

1,165

947

829

960

827

835

847

676

847

676

1,793

3,401

1,218

2,898

12,997

15,208

12,845

14,464

NOTE 13 INCOME TAX Group 2009 $’000

2008 $’000

Society 2009 $’000

2008 $’000

Net profit before tax

8,641

22,198

3,523

8,099

Tax calculated at rate of 30% (2008: 30%)

2,592

6,659

1,057

2,430

(2,467)

(3,089)

(2,430)

(3,023)

(283)

Reconciliation between net profit before tax and tax expense

Tax effect of amounts which are not deductible/(taxable) in calculating taxable income: Net mutual (income)/expense Share of net losses (profits) of associates Entertainment and other Adjusted income tax De-recognition of income tax benefit Rebateable dividend written off Writeoff of deferred tax asset balance Timing difference written off Tax losses of prior years recouped Under (over) provision in previous year Tax charge for the year

–

(153)

3,621

(1,368)

(585)

1,369

585

1,368

585

181

154

181

154

(107)

–

(89)

–

(89)

(12)

(3)

–

12 1,290

(183) 4,171

–

(276)

(125)

Income tax expense Charge for current tax payable Deferred tax movement Adjustments in respect of prior years Total tax expense charged to income statement

1,846

2,261

181

148

(568)

2,092

(107)

12 1,290

(182) 4,171

–

(276)

(125)

Tax charged to equity Deferred tax movement debited to equity Total tax charged to equity

(81)

(761)

(81)

(761)

(81)

(761)

(81)

(761)

NOTE 14 CASH AND CASH EQUIVALENTS

Cash at bank and on hand

Group 2009 $’000

2008 $’000

Society 2009 $’000

2008 $’000

45,677

41,208

4,279

7,066

–

1,976

4,864

5,010

8,480

2,368

2,010

50,687

49,688

8,623

13,940

Restricted cash – trust account 11 am bank deposits

Cash at bank and trust account earns interest at a floating rate. The interest paid by the Group’s bank was renegotiated during the year. As at 30 June 2009 the average interest rate was 3.01% (2008: 7.13%). Over the full year the weighted average interest rate was 6.20% (2008: 7.56%). 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.

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

Note 14 – Cash and cash equivalents (continued)

(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 2009 $’000 50,687

Cash and cash equivalents as above Less: Restricted cash – trust account Balances per cash flow statements

2008 $’000 49,688

–

50,687

49,688

Society 2009 $’000

2008 $’000

8,623

13,940

(1,976)

(4,864)

6,647

9,076

Society 2009 $’000

2008 $’000

NOTE 15 RECEIVABLES Group 2009 $’000

2008 $’000

Premiums and subscriptions receivable Receivables from policyholders*

436

389

436

PSS adjustments receivable

810

656

810

656

1,246

1,045

1,246

1,045

Other receivables

–

Receivable from related entities

–

389

1,802

–

1,802

1,264

1,045

1,264

2,847

61–90 days $ – –

Over 91 days $ 58,112 58,112

Total $ 113,870 113,870

Receivables are unsecured and interest free. *Receivables past due but not considered impaired are: Group $113,662 (2008: $881,099); Society $113,662 (2008: $881,099).

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

2009

Group Society

31–60 days $ 55,758 55,758

2008

Group

–

881,399

Society

–

881,399

Other balances within receivable from policyholders and 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.

NOTE 16 INVESTMENTS Group 2009 $’000

2008 $’000

Society 2009 $’000

2008 $’000

22,244

19,996

17,829

15,996

7,924

10,736

7,924

10,736

Investments–“held-to-maturity” Bank bills/term deposit Investments–“available for sale” Equity securities – listed entities Fixed-interest securities

16,779

15,126

16,779

15,126

24,703

25,862

24,703

25,862

61,458

52,703

–

16,122

Investments – “fair value through profit or loss” Bank bills

21,881

–

34,658

30,318

–

112,238

104,902

–

Total investments

159,185

150,760

42,532

41,858

Current

107,748

112,292

25,863

26,842

51,437

38,468

16,669

15,016

150,760

42,532

41,858

Equity securities – listed entities Fixed-interest securities

Non-current

159,185

The weighted average interest rate for bank bills is 6.54% (2008: 6.65%), 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. Maturity

2009 Avg. rate

2009 $’000

2008 Avg. rate

2008 $’000

Less than 12 months

7.17%

6,272

5.82%

6,976

One to two years

6.14%

27,425

7.25%

3,963

Two to three years

4.08%

8,952

6.19%

25,999

Three to four years

8.25%

3,705

7.27%

4,829

Four to five years

6.00%

5,083

8.25%

3,411

Over five years

6.50% 51,437

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

265 45,443

NOTE 17 REINSURANCE AND OTHER RECOVERIES RECEIVABLE Group 2009 $’000

2008 $’000

Society 2009 $’000

2008 $’000

Expected future recoveries on outstanding claims 125

2,501

–

13,787

13,598

–

13,912

16,099

–

Discounted to present value

(1,712)

(3,891)

–

Prudential margin

2,342

7,766

–

14,542

19,974

–

3,775

3,675

– from reinsurers – from HCCS

Expected future recoveries on indemnity obligations 3,675

3,775

– from ROCS

201

339

201

339

– from HCCS

2,615

3,275

2,615

3,275

6,591

7,289

6,591

7,289

(662)

(1,053)

(662)

(1,053)

1,743

– from reinsurers

Discounted to present value Prudential margin Retirement-claim recoveries from ROCS Current

1,727

1,106

1,727

7,672

7,963

7,035

7,963

2,658

1,700

–

24,872

29,637

–

5,516

4,834

1,832

910

19,356

24,803

5,203

7,053

24,872

29,637

7,035

7,963

19,974

3,716

–

2,101

8,861

–

Movement in prudential margin

(5,424)

7,766

–

Recoveries received during the year

(2,110)

(369)

–

Non-current Movement – outstanding claim recoveries Brought forward Recognised in the income statement (refer Note 8)

14,541

19,974

–

Brought forward

8,701

4,154

7,963

4,154

Recognised in the income statement (refer Note 11)

(408)

2,082

(307)

2,082

Movement in prudential margin

(621)

2,465

(621)

1,727

Carried forward Movement – indemnity-obligation recoveries

Recoveries received during the year Carried forward

–

7,672

8,701

7,035

7,963

NOTE 18 OTHER ASSETS Group 2009 $’000

2008 $’000

Society 2009 $’000

2008 $’000

Deferred ROCS expense

865

754

–

Prepayments

170

Other

1,973

2,227

690

784

3,008

3,022

860

826

Group 2009 $’000

2008 $’000

NOTE 19 PLANT AND EQUIPMENT Society 2009 $’000

2008 $’000

Plant and equipment – at cost

2,451

2,138

2,262

1,947

Less: Accumulated depreciation

(1,419)

(1,123)

(1,265)

(978)

Total Plant and Equipment

1,032

1,015

997

969

Movements 1,015

1,213

969

1,151

Additions

371

153

371

153

Disposals

(13)

–

(13)

–

(351)

(330)

(335)

997

969

Carrying amount at 1 July 2008

(341)

Depreciation expense Carrying amount at 30 June 2009

1,032

1,015

Group 2009 $’000

2008 $’000

NOTE 20 PAYABLES Notes Related party payables

Society 2009 $’000

2008 $’000

–

2,792

4,317

–

2,792

4,317

226

854

226

447

Other payables Trade creditors Agency fees payable – external ROCS levy payable Net GST payable UMP support payments Accruals Other payables

129

866

698

–

2,082

1,790

477

448

–

946

2,330

319

1,591

1,361

1,395

194

5,579

7,209

1,113

2,736

5,579

7,209

3,905

7,053

Payables are interest free and unsecured.

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

NOTE 21 OUTSTANDING CLAIMS Group 2009 $’000

2008 $’000

Society 2009 $’000

72,676

61,444

–

6,552

5,530

–

79,228

66,974

–

2008 $’000

(a) Outstanding claims liability Central estimate Claims-handling costs Discount to present value

(11,146)

(12,531)

–

Discounted claims liability

68,082

54,443

–

Prudential margin (Refer Note 21(c))

13,072

17,909

–

Gross outstanding claims liability

81,154

72,352

–

Current

16,010

13,674

–

Non-current

65,144

58,678

–

Total

81,154

72,352

–

72,352

49,552

–

– Incurred claims

29,371

22,494

–

– Prudential margin

(4,837)

8,678

–

Claims payments during the year

(15,732)

(8,372)

–

Carried forward

81,154

72,352

–

Level of sufficiency (Refer Note 3)

92.5%

–

Prudential margin as a percentage of discounted claims liability

19.2%

32.9%

–

(b) Movements Brought forward Recognised in the income statement (refer Note 8)

(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 six accident years since incorporation of MIPSi.

Note 21 – Outstanding claims (continued)

(i) Gross Accident year

2004 $’000

2005 $’000

2006 $’000

2007 $’000

2008 $’000

2009 $’000

7,448

21,717

13,380

20,647

27,130

26,560

20,093

Total $’000

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

7,991

16,189

12,551

16,275

Two years later

7,018

16,254

12,880

19,026

Three years later

6,279

14,377

14,950

Four years later

7,495

13,788

Five years later

8,886

Current estimate of cumulative claims cost

8,886

13,788

14,950

19,026

20,093

26,560

103,303

Cumulative payments

(5,567)

(10,309)

(6,332)

(4,417)

(2,786)

(1,216)

(30,627)

Outstanding claims – undiscounted

3,319

3,479

8,618

14,609

17,307

25,344

72,676

Discount

(11,146)

Claims-handling costs

6,552

Prudential margin

13,072

Total gross outstanding claims per the balance sheet

81,154

(ii) Net 2004 $’000

2005 $’000

2006 $’000

2007 $’000

2008 $’000

2009 $’000

At end of accident year

7,199

16,486

12,168

18,834

21,144

22,984

One year later

7,488

12,953

12,202

12,795

18,052

Two years later

6,468

14,280

10,789

16,008

Three years later

5,823

10,340

12,260

Four years later

6,545

10,855

Five years later

7,301

Current estimate of cumulative claims cost

7,301

10,855

12,260

16,008

18,052

(5,268)

(9,061)

(5,948)

(4,417)

2,033

1,794

6,312

11,591

Accident year

Total $’000

Estimate of ultimate claims cost:

Cumulative payments Outstanding claims – undiscounted

22,984

87,460

(2,786)

(1,216)

(28,696)

15,266

21,768

58,764

Discount

(9,434)

Claims-handling costs

6,552

Prudential margin

10,730

Total net outstanding claims

66,612

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

NOTE 22 OTHER LIABILITIES Group 2009 $’000

2008 $’000

Society 2009 $’000

2008 $’000

6,198

5,555

6,198

5,555

6,198

5,555

6,198

5,555

Group 2009 $’000

2008 $’000

Society 2009 $’000

2008 $’000

Incidents occurred but request yet to be received

4,094

6,807

4,094

6,807

Outstanding requested indemnity

15,775

22,251

15,775

22,251

Subscription income received in advance

NOTE 23 PROVISIONS

Provision for indemnity obligations (refer Note 1(j))

Prudential margin

4,630

5,569

3,130

4,569

Discount to present value

(2,123)

(4,245)

(2,123)

(4,245)

22,376

30,382

20,876

29,382

–

380

–

2,658

1,700

–

2,658

2,080

–

854

679

854

676

25,888

33,141

21,730

30,058

Provision for retirement claims Insurer retirement claims (refer Note 1(l)) Eligible retirement claims (subject to ROCS) (refer Note 2(a)(iii))

Employee entitlements (refer Note 1(u))

5,163

5,473

5,163

5,470

20,725

27,668

16,567

24,588

25,888

33,141

21,730

30,058

Carrying amount at start of year

2,080

–

Increase (decrease) in estimate Carrying amount at end of year

578

–

2,658

2,080

–

31,120

30,784

29,382

29,534

(389)

1,517

(389)

1,077

Current Non-current Movements Provision for retirement claims

Provision for indemnity obligations Carrying amount at start of year Recognised in the income statement (refer Note 11) – net indemnity charge

– prudential margin

(1,677)

803

(1,439)

753

Indemnity payments made Carrying amount at end of year

(6,678)

(1,984)

(6,678)

(1,982)

22,376

31,120

20,876

29,382

NOTE 24 DEFERRED TAX (ASSET)/LIABILITIES Group 2009 $’000

2008 $’000

Society 2009 $’000

2008 $’000

AMOUNTS RECOGNISED IN PROFIT OR LOSS (22)

(31)

–

(5)

–

(81)

–

(80)

(1,966)

(1,439)

–

Investment revaluations

(45)

(283)

–

Interest receivable

340

617

107

218

Dividend receivable

–

123

(1,523)

(1,041)

250

276

(1,041)

1,734

276

1,008

(762)

Accrual for audit fees Provision for employee entitlements Provision for indirect claims-handling costs

Reversal of offset of last year’s DTA now written off 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 income statement Closing balance at 30 June (Assets)/liabilities to reverse within 12 months (Assets)/liabilities to reverse after 12 months

(762)

(2,092)

–

(568)

(1,523) 320

(3)

(107)

(1,041)

250

276

356

127

235

(1,843)

(1,397)

123

(1,523)

(1,041)

250

276

Group 2009 Shares

2008 Shares

NOTE 25 SHARE CAPITAL AND MEMBERS’ GUARANTEE Society 2009 $’000

2008 $’000

Issued share capital Ordinary shares – fully paid

100,001

100

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 general meeting appoint directors. 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 2009 2008 Membership category Ordinary

19,398

19,875

Student

10,361

7,173

29,759

27,048

Total members

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

NOTE 26 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 2009 and 2008 is set out below. The key management personnel are: all the directors of the Society and the executives with the authority for the strategic direction and management of the Society. Group 2009 $ Short-term benefits Post-employment benefits Termination benefits

2008 $

Society 2009 $

2008 $

1,145,463

1,170,673

900,967

893,198

363,720

423,928

303,020

269,950

–

1,509,183

1,594,601

1,203,987

1,163,148

(c) Other transactions with directors, key management personnel, director-related entities and key management personnel-related entities There were no such transactions during the year or prior years. Any such transactions would occur on terms and conditions no less favourable to the Society than normal commercial terms and conditions. NOTE 27 REMUNERATION OF AUDITORS Group 2009 $

2008 $

Society 2009 $

2008 $

ERNST & YOUNG Audit of the financial report

117,963

144,200

65,138

51,500

Audit of regulatory returns

58,400

56,650

15,700

15,450

–

Other audit-related work Taxation-compliance services

66,557

82,015

51,128

70,190

242,920

282,865

131,966

137,140

NOTE 28 RELATED PARTIES Shareholding of the Society MIPS Holdings Pty Ltd (“MIPSH”) owns 100% (2008: 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 Doctors’ 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 2009, the Society and the Group received $nil (2008: $nil) of recoveries from PIA.

Note 28 – Related parties (continued)

Group 2009 $’000

2008 $’000

Society 2009 $’000

2008 $’000

Aggregate amounts of claims recoveries receivable from PIA at balance date: Current Non-current

1,832

910

1,832

910

5,203

7,053

5,203

7,053

7,035

7,963

7,035

7,963

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 2009 the Society received $1,700,000 (2008: $3,140,000) from MIPSi. PIA pays the Society a service fee for the provision of services under a Service Level Agreement (“SLA”). During the year ended 30 June 2009 the Society and the Group received $285,000 (2008: $275,000). Balance sheet balances with related parties

Group 2009 $’000

2008 $’000

Society 2009 $’000

2008 $’000

RECEIVABLES PIA

–

MIPS Insurance

–

1,803

QDM

–

(1)

–

1,802

PIA

–

MIPS Insurance

–

159

–

Monies held in trust on behalf of insurer (“MIPSi”)

–

300

4,229

Premiums to be collected on behalf of MIPSi

–

2,333

–

2,792

4,316

PAYABLES

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

NOTE 29 INVESTMENTS IN SUBSIDIARIES Group 2009 $’000

2008 $’000

Society 2009 $’000

2008 $’000

MIPS Insurance Pty Ltd (“MIPSi”)

–

6,250

Professional Management Australia Pty Ltd (“PMA”)

–

250

Queensland Doctors’ Mutual Pty Ltd (“QDM”)

–

6,508

Principal Country of activity incorporation

Class of shares

Name of company

Insurance

Australia

Ordinary

100

Dormant

Australia

Ordinary

100

Medical defence organisation

Australia

Ordinary

100

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

Ownership interest 2009 2008 % %

NOTE 30 INVESTMENTS IN ASSOCIATES Group 2009 $’000

2008 $’000

Society 2009 $’000

7,535

6,593

3,461

7,495

6,593

3,461

2008 $’000

UNLISTED ASSOCIATES Professional Insurance Australia Pty Ltd (“PIA”)

Principal activity Name of company PIA(1)

Professional Indemnity Insurance

Ownership interest 2009 2008 % % 33.28

33.28

Carrying amount 2009 2008 $’000 $’000 7,535

(1) PIA is a company that provides general insurance underwriting and undertakes related investment activities. Its activities have been in run-off since 1 July 2003.

Group 2009 $’000

2008 $’000

6,593

6,736

MOVEMENTS Carrying amount at the beginning of the financial year Share of net profit/(loss) Carrying amount at the end of the financial year

902 7,495

(143) 6,593

SHARE OF ASSOCIATES’ PROFITS 1,280

(220)

Income tax expense (credit)

(378)

Net profit SUMMARISED FINANCIAL INFORMATION OF ASSOCIATES

902

(143)

Revenue

1,513

1,628

Net profit

2,711

(430)

Assets

43,826

47,994

Liabilities

21,307

28,186

Profits/(loss) before income tax

6,593

NOTE 31 RECONCILIATION OF NET PROFIT TO NET CASH INFLOW FROM OPERATING ACTIVITIES Group 2009 $’000 NET PROFIT Net (gain)/loss on investments

2008 $’000

Society 2009 $’000

2008 $’000

7,311

18,027

3,450

8,224

4,867

4,371

1,806

(218)

341

351

330

334

(902)

143

–

4,765

(20,067)

928

(3,809)

(220)

422

1,583

(1,373) 12,077

NON-CASH ITEMS Depreciation Share of (profit)/losses of associates CHANGES IN WORKING CAPITAL (Increase)/decrease in recoveries receivable (Increase)/decrease in receivables

–

2,887

(Increase)/decrease in other assets

494

1,368

334

730

(Increase)/decrease in interest receivable

(369)

(367)

(369)

(367)

(Increase)/decrease in restricted trust account

–

(111)

339

Increase/(decrease) in accounts payable

(1,630)

755

(3,147)

(7,275)

Increase/(decrease) in provisions

(7,253)

(286)

(8,328)

(29)

Increase/(decrease) in outstanding claims

8,802

Increase/(decrease) in unearned premium

2,343

Increase/(decrease) in provision for tax payable

(4,217)

2,207

600

(482)

(2,775)

(26)

(732)

642

796

642

796

14,381

28,925

140

8,958

(Increase)/decrease in ROCS expense

Increase/(decrease) in provision for deferred income tax Increase/(decrease) in other liabilities Net cash inflow/(outflow) from operating activities

–

22,800

–

840

–

NOTE 32 COMMITMENTS Group 2009 $’000

2008 $’000

Society 2009 $’000

2008 $’000

OPERATING LEASE COMMITMENTS PAYABLES Not later than one year

785

665

785

665

Later than one year but not later than two years

708

642

708

642

Later than two years but not later than five years

481

806

481

806

1,974

2,113

1,974

2,113

The Group has entered into leases for office buildings. These leases have an average life of between 2 to 5 years with renewal options included in the contracts. The Group has no capital commitments as at balance sheet date.

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

NOTE 33 CAPITAL ADEQUACY All insurance business is underwritten by MIPSi and hence required to disclose capital adequacy information. The following capital adequacy information relates to MIPSi. 2009 $’000

2008 $’000

Paid-up ordinary shares

6,250

Retained earnings brought forward

61,801

52,105

Current year earnings

2,771

9,696

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

4,342

5,393

75,164

73,444

Less: deductions

(1,777)

(1,333)

Net Tier 1 capital

73,386

72,111

Total capital base

73,386

72,111

Minimum capital requirement

24,939

21,036

2.94

3.43

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(i) 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 34 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 2009: i) A bank guarantee of $85,000 (2008: $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 (2008: $nil) issued to AMP Capital Investors Ltd in respect of rental bond for Suite 5.02, Level 5, 140 Arthur Street, North Sydney NSW 2060 (NSW office of the Society) iii) A bank guarantee of $50,000 (2008: $28,932.78) issued to BNY Trust Company of Australia Ltd (2008: J.P. Morgan Trust Australia Ltd) in respect of rental bond for Citilink Business Centre, 153 Campbell Street, Bowen Hills, Qld 4006 (Qld office of the Society). iv) A bank guarantee of $nil (2008: $20,000) issued to Perpetual Trustee Company Ltd in respect of rental bond for Suite 2104, Tower 2, Westfield Shoppingtown, 101 Grafton Street, Bondi NSW 2022 (the former NSW office of the Society). NOTE 35 EVENTS OCCURRING AFTER BALANCE DATE No matters or circumstances have arisen since 30 June 2009 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.

Directors’ declaration In accordance with a resolution of the directors of the Society, I state that: 1) In the opinion of the directors: (a) the financial statements, notes and the additional disclosures included in the directors’ report designated as audited, of the Group and of the Society, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s and Society’s financial position as at 30 June 2009 and of their performance for the year ended on that date; and (ii) complying with Accounting Standards and Corporations Regulations 2001; and (b) there are reasonable grounds to believe that the Society will be able to pay its debts as and when they become due and payable. 2) This declaration has been made after receiving the declarations required to be made to the directors in accordance with section 295A of the Corporations Act 2001 for the financial year ending 30 June 2009. On behalf of the Board

R W L Turner Director

D R V Dickens Director

Melbourne 14 October 2009

Medical Indemnity Protection Society Ltd and its subsidiaries — Annual Report 2009

Senior management team MIPS Group Chief Executive Officer Dr Troy Browning Chief Financial Officer Roger Miles Manager, Claims Division Dean Rayner Audit Risk and Compliance Manager (ARCM) and Assistant Company Secretary Chris McCann Company Secretary Bill Berryman Manager, Information and Projects Division Maurice Tersigni

On your behalf

Annual Report ’09 Medical Indemnity Protection Society Ltd and its subsidiaries