MIPS Annual Report 2010/11 by Medical Indemnity Protection Society

annual report 2010 - 2011 Medical Indemnity Protection Society Ltd and its subsidiaries

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

This financial report covers Medical Indemnity Protection Society Ltd as an individual entity and the group consisting of Medical Indemnity Protection Society Ltd and its subsidiaries (group). Medical Indemnity Protection Society Ltd is a company limited by guarantee and shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Level 3, 15-31 Pelham St Carlton Vic 3053 Australia A description of the nature of the group’s operations and its principal activities are

contained in the directors’ report on pages 19-22. The financial report has been authorised for issue by the directors on 12 October 2011. MIPS has the power to amend and reissue the financial report. Medical Indemnity Protection Society Ltd (MIPS) is an Australian Financial Services Licensee (AFS Licence 301912). MIPS Insurance Pty Ltd (MIPS Insurance) is a wholly owned subsidiary of MIPS and holds an authority issued by APRA to conduct general insurance business and is an Australian Financial Services Licensee (AFS Licence 247301). ABN 64 007 067 281

MIPS annual report 2010-2011

contents

MIPS board

MIPS chairman’s report

MIPS insurance chairman’s report

MIPS managing director and chief executives officer's report

governance report

service to members

member benefits

risk management activity

financial report directors’ report

auditor’s independence declaration

statement of comprehensive income

statement of financial position

statement of changes in equity

statement of cash flows

notes to the financial report

directors’ declaration

independent audit report

MIPS board

Medical Indemnity Protection Society board The Board of MIPS is made up of a broad spread of experienced health and business professionals each of whom brings their unique expertise to the organisation. Mr William Turner (Chairman) MBBS LLB FRCS FRACS FACLM FAICD William Turner holds the position of Chairman of MIPS and Deputy Chairman of MIPS Insurance, having previously been a Director of both Professional Insurance Australia and MIPS. Based in Hobart, he has been a successful orthopaedic surgeon for over 28 years, and has a degree in Law which provides a strong medico-legal background. He is also the current President of The Medical Protection Society of Tasmania Inc., and a Director of the Winston Churchill Memorial Trust. Former positions he has held include Chairman of the Medical Advisory Board at Hobart Private Hospital, and Director of Rehab Tasmania.

Ms Susan Bitter BEc (Hons), Dip App Fin&Inv, FICA MAICD Susan Bitter is the Chief Operating Officer of Corrs Chambers Westgarth and Chief Executive and a Director of its service entity, Corrs Support Services Pty Ltd. Former positions include being a Board member of Worksafe Victoria and Chair of its Audit and Risk Management Committee and the Joint Worksafe/Transport Accident Committee ITSS (Technology) Committee, Chief Executive Officer of Slater & Gordon Australia and Partner of Arthur Andersen Worldwide in its Audit and Business Advisory practice. Susan has had extensive experience in corporate governance and related issues, risk management, together with knowledge of the insurance industry.

Mr Anthony A Fraser BJuris LLB Tony Fraser was admitted to practice as a solicitor in 1973. After spending three years in private practice, he joined a life insurer/funds manager, initially as Legal Counsel. Over the next 20 years he was involved in senior management positions, including five years as Managing Director of the financial planning subsidiary of the parent company. In 1998 he returned to private practice as principal of his own law firm. In September 2011 Tony merged his firm with another where he continues to provide legal services as a Consultant Lawyer.

Adjunct Associate Professor Leanne Rowe AM MBBS MD FRACGP FAICD Leanne Rowe graduated from medicine at Monash University in 1980 and is currently working in clinical practice in the area of doctors’ health. She is a Presiding Member for Medical Panels in Victoria and South Australia, and serves as Deputy Chancellor of Monash University and on the Boards of Medibank Private and beyondblue: the national depression initiative. She was awarded the Order of Australia for services to medicine, and the Rose Hunt Medal by the Royal Australian College of General Practitioners for her contribution as chairman of the college and her work with disadvantaged youth. In the past, she has also worked in Aboriginal health and as a rural general practitioner. Leanne is also a medical writer and her recent books include: “First do no harm: being a resilient doctor in the 21st century” and “Save your life and the lives of those you love: your GP’s 6 step plan to staying healthy longer”.

MIPS annual report 2010-2011

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

Associate Professor Charles Steadman MBBS MD FRACP FAICD Charles Steadman graduated in medicine from the University of Queensland in 1980. After service as a rural medical practitioner he trained in internal medicine and gastroenterology at the Princess Alexandra Hospital in Brisbane and then was a Fulbright scholar at the Mayo Clinic in the USA. He returned to Australia as Director of Gastroenterology and Hepatology at Princess Alexandra Hospital and later entered private specialist practice in Brisbane. He is a Fellow of the Australian Institute of Company Directors, Associate Professor of Medicine with the University of Queensland, a Director of Queensland Doctors Mutual Pty Ltd and Queensland Gastroenterology Pty Ltd. He is also a national examiner of the Royal Australasian College of Physicians and has served overseas as an ADF medical officer.

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

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

MIPS chairman’s report

MIPS chairman’s report I am pleased to report that the MIPS group has once again enjoyed a successful year with a significant increase in members’ surplus and also in net members’ assets. More detail of the financial results is contained in the reports of the Chairman of MIPS Insurance and the Managing Director of MIPS. These reports outline the reasons for the improvement in the consolidated results.

The financial results of the group are a cause of satisfaction to Board and management and are indicative of sound financial budgeting and controls. They should also provide comfort to members who may be assured that risks arising from their practices are well protected.

insurance covers, MIPS Protections for non-medical indemnity matters not otherwise covered by a policy of insurance, access to an extensive range of risk management resources and representation and advocacy on behalf of MIPS members.

MIPS remains committed to being the pre-eminent 'doctors for doctors' medical defence organisation in Australia. MIPS' principle objective under its constitution is to promote honourable and discourage irregular practice. Its obligations are to its current members – MIPS does not expose members’ assets to the risk of claims of non-members.

With respect to the latter, the Managing Director continues to be involved with a number of working parties and committees. These can all be found in his report. Of particular relevance this year, have been submissions to the Productivity Commission in relation to the National Disability and Long Term Care Scheme and the National Injury Insurance Scheme. He has also made a submission and given evidence to the Senate inquiry into the operation of the Professional Services Review.

MIPS provides members with a number of standard benefits including access to medical indemnity insurance cover underwritten by our wholly owned APRA regulated subsidiary MIPS Insurance. MIPS, however, believes a holistic approach to the provision of protection and support to our members requires more than a policy of insurance and accordingly we provide other benefits including 24 hour medico-legal assistance from well qualified clinicians, practice entity and personal accident

As indicated in my last report, changes were anticipated in the composition of the Board. Dr Bob Dickens retired at the end of 2010 after making an invaluable contribution particularly during the difficult transition from medical indemnity as a discretionary product to being subject to a contract of insurance. I take this opportunity to express my thanks to him together with those of the rest of the Board. As many members will know he remains at MIPS in his capacity as Chairman, Claims Senior Management Group. The Board was delighted to welcome two new directors appointed in January. They are Ms Susan Bitter and Adjunct Associate Professor Leanne Rowe AM. Brief biographies can be found elsewhere in the Annual Report but Professor Rowe has a background in general practice and Ms Bitter in accounting and as an executive in major legal firms. They have both shown themselves to be very able directors and present some new and challenging ideas

MIPS annual report 2010-2011

at Board meetings. Since commencing, Professor Rowe has also been appointed to the MIPS Insurance Board and Ms Bitter to the Group Audit Risk and Compliance Committee. It only remains to me to express my thanks to my fellow MIPS directors for their support and invaluable assistance over the last year. My thanks also goes to Mr Barry Gilbert, Chairman of MIPS Insurance together with the other directors of MIPS Insurance for their diligence throughout the year and to the Heads of the Divisions of MIPS and to all the other MIPS staff who work so assiduously to provide members with the services they require.

R W L Turner Chairman

MIPS insurance chairman’s report

MIPS insurance chairman’s report MIPS Insurance (MIPSi) has once again successfully weathered the unsettled economic and investment conditions. The financial result was a profit after tax of $3.5 million.

The Australian Prudential Regulation Authority (APRA) has released discussion and technical papers on a number of proposed changes in the minimum capital requirements for general insurers. APRA requested that each general insurer complete a Quantitative Impact Study (QIS) to assist APRA in assessing the impact of the proposed changes on the general insurance industry as well as at an individual insurer level. MIPSi participated in the QIS1 and also QIS2 which assessed some further changes. MIPSi has also provided feedback to APRA directly and via MIPSi membership of the Insurance Council of Australia. Under the current APRA rules, MIPSi is comfortably above the APRA minimum capital requirement of 1.5 times of the APRA capital base for medical indemnity insurers and 1.2 for general insurers. MIPSi’s capital adequacy multiple at 30 June 2011 is reported as 3.09. MIPSi is maintaining its strategy of holding solvency to be comfortably (but not excessively) greater than required by APRA.

MIPSi continues to exercise due care and diligence to ensure the security of capital and reinsurance assets held to meet the claims of MIPS members. Preservation of capital is a key factor in setting and maintaining our investment strategy and when purchasing reinsurance coverage. Preservation of capital has been shown to be a sound strategy during this prolonged period of economic uncertainty. The underwriting result is materially influenced by the assumptions used by the Actuary in calculating future claims liabilities. These actuarial assumptions are detailed in note 3 to the accounts. Net claims incurred for the current year was $33 million and after a $1 million release from prior years the net claims incurred for the 2010-2011 year was $32 million compared to $26 million in 20092010. The net underwriting result was a loss of $2.9 million.

A major contributor to MIPSi’s overall result this year was the investment result of $11 million, exceeding expectations. It is worth commenting that including gains and losses on investments, MIPSi has had a profitable investment return throughout the global financial crisis. With another year of development in incurred claims, total liabilities (predominately outstanding claims liabilities) increased by $19 million. Total assets (predominately investments and cash and cash equivalents) increased by $23 million. The movement in net assets of $3.5 million reflects total equity in MIPS Insurance increasing to $81 million. MIPSi has a strong balance sheet and a particularly strong panel of reinsurers, all providing excellent security for MIPS members. MIPSi has disciplined risk acceptance and pricing practices, a very high professional standard of claims handling and support which provides MIPS members the high quality insurance cover required to meet their needs.

MIPS annual report 2010-2011

These fundamental business procedures are supported by sound governance, audit and risk management practices, and highly skilled management and staff led by Dr. Troy Browning. I thank MIPSi Board members, management and staff for another very successful year.

Barry S Gilbert Chairman MIPS Insurance Pty Ltd

MIPS managing director and chief executives officer's report

MIPS managing director and chief executives officer's report I am pleased to report that the financial results for the MIPS Group to 30 June 2011 include: • $17 million increase in members’ surplus to $150 million • $46 million increase in total members’ assets to $327 million

This result represents further financial strengthening of the MIPS Group providing additional protection for members. The most significant factors contributing to that result were: • higher than anticipated total income reflecting continued growth through new members in addition to maturing of members risk • improved investment result compared with prior year and budget • better than budgeted nonindemnity operating expenses • increase in projected High Cost Claims Scheme recoveries based on actuarial claims estimates MIPS has elected to continue a comprehensive approach to minimise possible exposure of the MIPS Group to volatility from infrequent but high value medical indemnity claims. In addition to comprehensive reinsurance programs the MIPS Group has chosen to maintain reserving of medical indemnity liabilities at a higher level of sufficiency than that required under prudential standards. Each year the MIPS Group boards consider a range of factors to determine the appropriate level of sufficiency to be adopted for reserving. To better position MIPS as a ‘buying group’ for members , MIPS extended its approach of providing medical indemnity insurance cover under master policy arrangements to all members. This is detailed in the MIPS Membership Benefits booklet including product disclosure statements. Following that change MIPS undertook a

comprehensive, objective and impartial review of its existing insurance and reinsurance structures. As part of this ‘root and branch’ review MIPS invited expressions of interest from appropriate potential insurance and reinsurance providers and subsequently undertook a tender. A condition of the tender, to ensure the best ongoing outcome for members, was that MIPS maintain all interaction with members including the important services of advice and claims management. The main outcomes of that extensive review process were; • further enhancement of current reinsurance structures to further limit the potential for adverse and/ or volatile claims and financial results (therefore helping to ensure stable membership fee pricing while protecting members’ assets) and • confirmation that the MIPS Group is providing significant value to MIPS members compared with pricing of alternative insurance cover by well informed commercial insurers experienced in the area of medical malpractice. As a result of the review, which we believe is a unique initiative, MIPS is reassured that it’s current operational framework is well placed to continue to meet member’s needs on a long term, stable and sustainable basis.

growth MIPS saw an increase in non-student membership numbers of approximately 5.5% during the year. Overall, MIPS

experienced an increase in total membership (including students) of approximately 4% to bring total membership numbers as at 30 June 2011 to over 32,000.

representation and advocacy Throughout the year, MIPS staff participated on a number of working parties and committees relating to areas that affect members, including: • National e-Health Transition Authority (NeHTA) • Open Disclosure Advisory Group • several Insurance Council working parties including the Medical Indemnity Working Group. MIPS also contributed to a number of submissions, which ensured that its views on matters that may affect members were heard. The most significant of the submissions during the year were: • submissions and communications to various stakeholders in relation to collaborative care arrangements, pathology and telehealth • recent submissions to the Senate in respect of the Review of the Professional Services Review functions to help ensure a fairer, more transparent, timely and accountable process • submissions to the Productivity Commission in relation to the National Disability and Longterm Care Scheme and National (catastrophic) Injury Insurance Scheme (NIIS). The NIIS has the potential to significantly impact

MIPS annual report 2010-2011

members’ medical indemnity costs. Potential outcomes include; -- changes to the various government schemes particularly the High Cost Claims Scheme -- increase in costs from inclusion of lifetime care costs from catastrophic no-fault matters (to be funded by the scheme in addition to the current ‘at fault’ matters) -- Transfer of all cerebral palsy lifetime care costs to the National Disability Insurance Scheme.

regulation APRA is nearing finalisation of its ‘Life and General Insurance Capital’ project. The outcomes of that project have the potential to adversely affect medical indemnity costs through impact on capital requirement. MIPS has provided comment through its membership of the Insurance Council and also has been involved in various Insurance Council working parties, including participating in quantitative impact studies and providing feedback to help ensure the best longterm outcomes for MIPS current and future members. In summary, it has been a year of strong advocacy and representation of and for our members and the 30 June 2011 MIPS Group results have added materially to the security that MIPS offers.

Dr Troy Browning Managing Director

governance report

governance report The key governance structures within the MIPS Group are: • MIPS Board • MIPS Insurance Board • MIPS Group Audit, Risk and Compliance Committee (GARCC). The MIPS and MIPSi boards have 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 MIPS Group Audit, Risk and Compliance Committee (GARCC) which consists of highly skilled and experienced independent non-executive directors from both boards. A sound corporate governance structure continues to protect members’ interests through risk management and compliance management frameworks. These governance structures ensure that the business adequately addresses its compliance related risks and meets appropriate prudential, statutory and other obligations and standards. Internal audit and a MIPS Group Investment Committee are part of the governance structure. Risks confronting the MIPS Group are regularly reviewed by management on an inherent and residual basis, and risk controls are rated according to management’s assessment of their effectiveness. Strategies are developed to manage risks as appropriate.

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

MIPS Group Audit, Risk and Compliance Committee (GARCC) The MIPS Group Audit, Risk and Compliance Committee (GARCC)’s primary responsibility is reviewing and monitoring the MIPS Groups Risk Management Strategy and Enterprise Risk Management process. GARCC is made up of independent directors, and is responsible, through management, for monitoring compliance with the Boards’ policies, as well as prudential and statutory requirements. It reports to the Boards on the progress of the internal audit programme, the risk management system and adherence to the compliance plan each quarter, or more frequently as required. GARCC met six times throughout the year and in carrying out its duties, monitored, reviewed and approved processes used to:

• identify higher risk areas within the MIPS Group’s operations and verify the integrity, relevance and effectiveness of the management of those risks, including the risks associated with: -- investment -- financial systems -- risk management systems -- legal obligations • ensure the integrity of all financial and management information upon which the Boards rely • maintain an effective and efficient control and risk management environment • ensure the MIPS Group meets the requirements of the Appointed Auditor’s programme and undertakes appropriate actions in response to the Appointed Auditor’s report • ensure the MIPS Group complies with the relevant regulatory requirements. The members of the GARCC are detailed in the Director’s Report.

internal audit The MIPS Group Internal Auditor is an in-house appointment that utilises the services of external providers of internal audit services as and when required. Internal Audit provides independent and objective assurance and consulting services, designed to add value and

MIPS annual report 2010-2011

improve the efficiency and effectiveness of the MIPS Group’s operations.

MIPS Group Investment Committee (GIC)

The objective of the Internal Audit is to determine that the enterprise risk management framework, control and corporate governance processes are adequate and are functioning as intended. Internal Audit provides assurance to GARCC and the Boards that:

The MIPS Group Investment Committee (GIC) is responsible for reviewing, guiding and making recommendations to the Boards regarding investment matters. The GIC is a Board and management committee and comprises as a minimum two directors, the Managing Director and Chief Executive Officer and Chief Financial Officer.

• risks are appropriately identified and managed

Norman Newbon Chairman GARCC

• interaction with the various governance MIPS Groups occurs as needed • significant financial, managerial and operating information is accurate, reliable and timely • employees’ actions are in compliance with policies, standards, procedures, and applicable laws and regulations • resources are acquired economically, used efficiently and adequately protected • programmes, plans and objectives are achieved • quality and continuous improvement are fostered in the MIPS Group’s control process

Kerry Roxburgh Convenor and member of the Group Investment Committee

• significant legislative or regulatory issues impacting the MIPS Group are recognised and addressed appropriately.

The day to day maintenance of the investment portfolio is undertaken by the CFO and the Finance Division in conjunction with the MIPS Group appointed lnvestment Manager. The GIC met formally twice during the year however, matters were routinely and regularly communicated and discussed using telephone and/ or email. In carrying out its duties the GIC: • reviews and recommends to the Boards any changes to the investment objectives, policies and strategic asset allocation ranges and benchmarks • reviews and recommends to the Boards any additional investment sectors or types of securities • reviews the appropriateness of the mandate of the external investment manager

governance report

• reviews the past 12 months’ performance of both internal and external investment management processes against relevant benchmarks • reviews and considers the tactical asset allocation and recommends to the Boards any changes • recommends to the Boards the appointment or termination of external investment managers • meets formally with the external investment manager • reviews the effectiveness of the investment risk management procedures • considers whether there should be any variations to the approved asset allocation ranges • considers what systems have been formulated by the MIPS Group to monitor compliance with legislative, regulatory and internal investment policies • considers what measures are being taken by the MIPS Group to ensure assets are managed in accordance with investment mandates and benchmarks approved by the Boards • considers what internal and external audit checks were made on the investment policies and procedures of the MIPS Group and their findings over the past 12 months. During a period of significant financial uncertainty, the GIC has been closely monitoring the investment market. As a result, MIPS has maintained a positive investment return throughout this period and the GIC continues its daily reviews in order to best preserve members’ funds into the future.

Membership Assessment, Acceptance and Advisory Committee The MIPS Group Membership Assessment, Acceptance and Advisory Committee (‘Membership Committee’) considers membership matters within the authority delegated by the MIPS Board and the terms of the MIPS Constitution. The Membership Committee consists of the Chairman Claims Senior Management Group, MIPS Chairman / MIPSi Deputy Chairman, MIPS Managing Director / MIPSi CEO, MIPS Chief Operating Officer, MIPS Head of Claims, MIPS Head of Marketing and Communications and MIPS Clinical Risk Manager. Other attendees may include MIPS Member Services Officers and MIPS Directors and invited attendees who may be required to provide the Membership Committee with technical assistance. The Membership Committee operates on a continuous ‘as required’ daily basis. Frequency is however determined by the nature and type of applications. A formal meeting of the full Membership Committee is usually held each week. The Membership Committee reviews exceptional or complex matters at its formal weekly meetings. Matters for consideration by the Committee may also include new membership categories or membership benefit considerations.

During the year the Membership Committee formally considered over seven hundred matters. Some of the issues considered related to: • collaborative arrangements • telehealth • new procedures/treatments. Those issues are important to ensure that members and assets of the membership are protected (by ensuring patients are protected from potential avoidable adverse outcomes) and MIPS continues to act in accordance with its constitution ‘to promote honourable and discourage irregular practice’. Regular matters considered by the Membership Committee include: • large numbers of members seeking extension and confirmation of their benefits of membership to undertake: -- provision of gratuitous services for overseas volunteer work -- therapeutic trials and clinical studies • members seeking confirmation that they hold appropriate qualifications, training and experience for intended practice • membership category enquiries and clarifications including practising, Extended Reporting Period and Run-Off Cover Scheme categories • queries regarding practice entity structures.

MIPS annual report 2010-2011

Other matters such as applications by members to vary their retroactive date and membership category selection queries are also referred by Member Services Officers for consideration by the Membership Committee. Each year the Claims Division coordinates data provision prior to renewal through the MIPS Membership Committee to review the claims and incidents notifications for all members. Members identified by that process who display abnormal practice profiles may be counselled and/or advised of changes to their membership terms and conditions; and/or have practice restrictions imposed; or be advised that they will not be provided an invitation to apply for membership renewal and/or their application for membership renewal will not be accepted.

Responsible Managers' Committee The MIPS Group holds two Australian Financial Service Licences (AFSL’s) - one for MIPS and one for MIPS Insurance. AFS licensees must have and maintain organisational competence to provide the financial services covered by their licenses. MIPS’ three Responsible Managers ensure that the company meets these organisational competence obligations by: • being directly responsible for significant day to day decisions about the ongoing provision of financial services • having the appropriate knowledge and skills for all MIPS Group financial services and products, and • individually demonstrating the required knowledge and skills.

Responsible Managers Committee meetings are held monthly and any matters identified at meetings of the Responsible Managers Committee which may have a material impact on MIPS being able to maintain its organisational competence or any other material matter will be reported to the MIPS Group Audit Risk and Compliance Committee. Over the 2010-2011 membership year the Responsible Managers Committee: • improved education, reporting, monitoring and analysis of management of expressions of dissatisfaction (widened from just complaints) by members to ensure that all issues were reviewed promptly • ensured that MIPS continuously complied with financial service provision requirements to improve service provision to members • continued review and monitoring of the extensive ongoing AFSL education program required of all staff including contracted risk management education presenters • required contracted risk management education presenters to provide periodic financial service license compliance attestation/ certification • restructured and improved MIPS AFSL compliance monitoring and reporting structure • reviewed and improved AFSL compliance certification and assurance procedures and monitoring and supervision procedures documents

• introduced more frequent review of the central monitoring and supervision activity register • participated in relevant industry conferences • noted the expanded and reformed consumer protection and unfair practice laws under the Competition and Consumer Act.

service to members

service to members During the past 12 months, MIPS processed over 50,000 incoming calls, emails, facsimiles and paper correspondence. This included approximately 4,000 membership fee estimates to prospective dental and medical members, with the number of medical fee estimates up 10 percent on the previous year. Strong renewal retention of our existing members rounded off an excellent result for 2010-2011. The new MIPS website, launched in May, was designed with membersâ&#x20AC;&#x2122; needs in mind. Better access to information, a secure member only site, an online booking for risk management events and a range of other improvements has proved most beneficial. Since the implementation of the 'my membership' area, approximately one third of MIPS medical and dental members have viewed and amended their 2011-2012 membership details as part of the June renewal process.

MIPS annual report 2010-2011

member benefits As a member organisation, MIPS is committed to providing a range of benefits to members to meet their needs in accordance with the MIPS constitution. MIPS Protections MIPS Membersâ&#x20AC;&#x2122; Medical Indemnity Insurance Policy MIPS Membersâ&#x20AC;&#x2122; Practice Entity Policy* MIPS Membersâ&#x20AC;&#x2122; Group Personal Accident Policy medico-legal advice (24/7 advice helpline) risk management workshops & advice medico-legal Seminars and training online risk management modules range of club MIPS member benefits MIPS review and MIPS student review * These membership benefits do not apply to Student Membership Categories The extent of access to MIPS comprehensive and flexible membership benefits is determined by the membership category selected by a member. MIPS continues to expand the benefits it provides members in anticipation of and/or response to developing needs while keeping associated paperwork to a necessary minimum.

medico-legal advice and claims assistance One of the many facets of MIPS that makes it different from other MDOs is that all MIPS medico-legal advisors and claims file managers are experienced, senior medical or dental practitioners. They all have substantial experience in clinical practice and this expertise is brought to the fore in the advice and assistance they provide to members in need. Their professional specialties include: general practice, obstetrics/gynaecology, anaesthetics, orthopaedic surgery, general surgery, internal medicine, pain management, general dentistry, endodontics and prosthodontics.

During the 2010-2011 membership year, MIPS received approximately 4,000 new contacts from members seeking advice, solace, assistance and support. Approximately 80% of these contacts related to non-liability matters such as advice on matters or incidents deemed not likely to give rise to a claim. Claims trends remain unchanged. The most significant claims by patients still relate to a failure and/or delay in diagnosis (principally breast and skin cancer), and delays in referral for investigation of suspicious bowel symptomatology. What makes the latter almost indefensible is a failure to undertake a basic rectal examination at the time of presentation and delay or lack of priority in the referral for subsequent specialist investigation.

One of the more recently observed adverse trends has been the number of claims arising from patients seen with presenting symptoms of cardiac origin where some basic diagnostic investigations are performed but a diagnosis is not made. Often in these cases the ECG is unremarkable and troponin is in the normal range giving practitioners false confidence that other differential diagnoses should be explored. Unfortunately, in many cases the patient dies within days or weeks of ischaemic heart failure.

member benefits

cases of significance One case run by MIPS that was widely reported in the medical media was a case involving an infection acquired after the administration of an injection of local anaesthetic and corticosteroid into soft tissue. The case ran to verdict, and then went on to Appeal where the first instance decision was upheld. In spite of sound expert evidence supporting the injection technique and noting the type of bacteria that caused the infection was of gastrointestinal origin, the courts still erred on the side of the claimant. MIPS experts felt it was a case that had to be run and appealed in view of the facts. Another case was defended to verdict following allegations that a contraceptive implant had caused a bizarre range of physical and psychiatric reactions, including welts, rashes, malaise and generalised muscle pain to the extent that it had to be removed. The claim was entirely without clinical basis and the fact that the patient had a marked hysterical reaction was not due to any negligence on the part of our member. The case was found in MIPS’ favour and costs are currently being pursued. In an extraordinary chain of events, another case without any clinical merit went to trial. In retrospect it was found the solicitor for the plaintiff had never passed on any of the offers made by MIPS regarding withdrawing the action, nor did he have his client’s instructions on any points. Indeed, his expert was not even informed of his need for court attendance. The Judge quickly found for the member and referred the legal practitioner for disciplinary investigation. Costs are also being pursued.

MIPS claims experience however, has demonstrated that significant medicolegal resources have been diverted into defending members in relation to disciplinary matters (including mandatory notifications) and dealing with other matters involving regulators and/or related to billing related claims (e.g. Medicare Australia). There is little doubt that Medicare audits may impact more in coming years, with the mandated number of audits being increased to 2,500 per annum and the recent introduction of a legal right of access to notes for all services provided after 19 April 2011. Patient complaints to the Australian Health Practitioners Regulation Agency and Health Complaints bodies seem to be increasing and whilst these can very often simply reflect a perception that something was not right, there does seem to be a trend that better communication at the point of consultation could avert much of this re-work and minimise the adverse impact on the scarcest of members’ resources – time.

investigation and inquiry assistance: One of the key membership benefits accessed by members relates to assistance for matters involving potential conflict of interests. This may be experienced in coronial inquests where there can be dispute between respective clinicians (or even with the employing hospital) about the patient’s care or for example, where the family of the deceased may have instigated civil litigation or an AHPRA complaint. Other areas where MIPS provides support and assistance can be disputes in the workplace or with employers, collegiate conflicts and matters relating to registration and qualifications. Accepting that often very little can be done in respect of the requirements of registration bodies, MIPS experience and knowledge of the system and having someone with those skills to provide counsel and direction can often make a significant difference for members.

development table – notifications by number (30-06-11) 4000 3500 3000 2500 2000 1500

assistance with claims The philosophy of MIPS in relation to claims acceptance is simple. If the claim has legal merit (i.e. the patient will establish liability and causation), it is in everyone’s interests to settle the matter equitably and promptly. If it has no merits we will not settle the claim and will pursue any costs incurred without fear or favour. There is little doubt that tort reform has impacted upon the frequency of claims and has also removed a lot of the minor claims.

1000 500 0 2003/2004

claims

2004/2005

2005/2006

2006/2007

incidents likely

2007/2008

2008/2009

2009/2010

incidents not likely

2010/2011

advisory

MIPS annual report 2010-2011

distribution of 2010-2011 notifications by liability vs non liability

2010-2011 notifications by speciality

18% 7% 2% 3% 4% 7%

54% 82% 2%

liability

non proc GP

psychi

emp indem

dental

non liability

proc GP

O&G

DITs

surgical

physician

anaes

no pte prac

distribution of 2010-2011 notifications by state of origin

distribution of payments 2010-2011 by type

1% 6%

32%

21%

37%

63%

2% 1% 36%

Vic

ACT

damages & like

NSW

Qld

Tas

representation only

risk management activity

risk management activity One of the many important benefits of MIPS membership is the provision of risk management education. MIPS provides a range of risk workshops, on-line modules, seminars, webinars, various risk management communications including MIPS Review and website news.

The purpose of risk management education is to help members better manage risk in their day-to-day working life, to help prevent adverse outcomes to patients, or in the event they do occur, help mitigate the outcomes. Attendance at a workshop, seminar, webinar or completion of an on-line module also enables members to meet the mandatory requirement under the Premium Support Scheme (PSS) to complete risk management in the year the subsidy is provided. MIPS is an Accredited Activity Provider of the RACGP for the 2011-13 triennium. This is of great significance to our general practitioner members, and applies to MIPS workshops and on-line modules. It enables those of our members enrolled in the RACGP QI program to obtain CPD points and have them directly processed by MIPS. MIPS is currently seeking accreditation with the ACCRM for accreditation of risk education. There was a significant enhancement of the workshop program with the introduction of five new workshops and a new service provider. These included MIPS Hot Topics, Risks for IMGs and Limiting your Medico Legal Risk. These workshops supplemented the traditional workshops provided by the Cognitive Institute offering members wider choice. In all, 61 workshops were provided, which were attended by 1,026 members across the country. The overwhelming evaluation of the workshops by members was very positive and feedback indicated that the workshops had been very rewarding.

MIPS medico-legal presenters also delivered risk management education presentations at a further 87 events including, hospital education programs and conferences. In regard to on-line modules, an additional module 'Risks for IMGs' was introduced. Over the membership year 585 members completed an on-line module. A further module 'Dealing with Difficult Patients' is to be introduced in the near future. The MIPS Review continues to provide contemporary risk management contributions. This membership year there have been many articles with information specifically for our IMG members including, the very successful 'Transition to Australian Practice' written by one of MIPSâ&#x20AC;&#x2122; members from rural Victoria. Webinars for our dental and IMG members were provided. Dental workshops are to be introduced into the Spring 2011 risk workshop program.

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries directorsâ&#x20AC;&#x2122; report Your directors present their report on the consolidated entity ('Group') consisting of Medical Indemnity Protection Society Ltd ('Society') and its subsidiaries at the end of, or during, the year ended 30 June 2011.

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: S Bitter (Appointed on 27/01/2011) A T Browning, Managing Director (Appointed 27/07/2010) D R V Dickens, (Retired on 31/12/2010) A A Fraser K C D Roxburgh L Rowe (Appointed on 27/01/2011) C J Steadman B E Taylor R W L Turner, Chairman

meetings of directors The number of meetings of the Societyâ&#x20AC;&#x2122;s directors held during the year ended 30 June 2011, and the number attended by each director during the time the director held office during the year ended 30 June 2011 are disclosed below: board meetings held during the year

board meetings attended

S Bitter

A T Browning

D R V Dickens

A A Fraser

K C D Roxburgh

L Rowe

C J Steadman

B E Taylor

R W L Turner, Chairman

meetings of the Group Audit, Risk and Compliance Committee (GARCC) The number of meetings of the GARCC held during the year ended 30 June 2011, and the number attended by each member of the GARCC during the time the member of the GARCC held office during the year ended 30 June 2011 are disclosed below: GARCC meetings held during the year

GARCC meetings attended

Nil

B S Gilbert

N Newbon , Chairman

K C D Roxburgh

S Bitter (Appointed 1/07/2011)

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

directors’ report

Medical Indemnity Protection Society Ltd and its subsidiaries directors’ report (cont’d) meeting of the Group Investment Committee (GIC) The number of meetings of the GIC held during the year ended 30 June 2011, and the number attended by each member of the GIC during the time the member of the GIC held office during the year ended 30 June 2011 are disclosed below. The GIC meets formally as and when required however matters were routinely and regularly communicated and discussed using electronic means. GIC meetings held during the year

GIC meetings attended

R J Miles

K C D Roxburgh, Convenor

C J Steadman

B E Taylor

A T Browning 1

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

information on directors director

qualifications

special responsibilities and experience

S Bitter

BEc (Hons), Dip App Fin&Inv, FICA, MAICD

Chief Operating Officer of Corrs Support Services Pty Ltd Director, Longstocking Pty Ltd

A T Browning

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

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

A A Fraser

BJuris, LLB

MIPS Holdings Pty Ltd

K C D Roxburgh

BCOM, MBA, MESAA

Member Group Audit Risk & Compliance Committee Convenor and member of the Group Investment Committee Director, MIPS Insurance Pty Ltd Director, Charter Hall Funds Management Ltd Director, Charter Hall Ltd Director, Ramsay Health Care Ltd Director, Tyro Payments Ltd

L Rowe

AM, MBBS, MD, FRACGP, FAICD

Director, Beyond Blue Ltd Director, Medibank Private Ltd

C J Steadman

MBBS, FRACP, MD, FAICD

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

B E Taylor

MDSc, FRACDS, FADI, FICD, FPFA

Member of the Group Investment Committee Director, MIPS Holdings Pty Ltd Director, MIPS Insurance Pty Ltd

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries directors’ report (cont’d)

director

qualifications

special responsibilities and experience

R W L Turner Chairman

MBBS, LLB, FRCS, FRACS, FACLM, FAICD

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

company secretary W F Berryman

special responsibilities and experience FANZIIF, GRAD DIP BUS (INS), ACIS

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

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

review of operations and results group 2011 profit for the year

society 2010

2011

2010

$’000

17,251

20,262

13,472

16,958

basis of preparation The financial report is a general purpose financial report which has been prepared in accordance with the Australian Accounting Standards, Corporations Act 2001, including the application of ASIC Class Order 10/654 allowing the disclosure of Parent entity financial statements due to Australian Financial Services Licensing obligations.

dividends The Society’s constitution prohibits the payment of dividends to professional members or shareholders. No dividend was therefore paid or proposed for the year ended 30 June 2011 (2010: $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 2011.

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.

directors’ report

Medical Indemnity Protection Society Ltd and its subsidiaries directors’ report (cont’d) significant events after balance date No matters or circumstances have arisen since 30 June 2011 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 25. This report is made in accordance with a resolution of the directors.

R W L Turner Director

A T Browning Managing Director

Melbourne 12 October 2011

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries auditorsâ&#x20AC;&#x2122; independence declaration

statement of comprehensive income

Medical Indemnity Protection Society Ltd and its subsidiaries statement of comprehensive income for the year ended 30 June 2011 group

society

2011

2010

2011

2010

notes

$’000

operating income

57,167

55,370

60,476

24,821

reinsurance and other recoveries revenue

14,787

1,568

investment result

14,978

11,440

3,757

2,160

86,932

68,378

64,233

26,981

(46,856)

(27,588)

(2,873)

(39,669)

(12,800)

(11,899)

(12,867)

(11,855)

(5,713)

(5,800)

total income claims expense

master policy expenses other operating expenses

outwards reinsurance premium expense indemnification benefit/(expenses)

2,107

2,070

1,916

1,782

insurance levy

(1,849)

(1,929)

total expenses

(67,984)

(45,146)

(50,620)

(10,073)

18,948

23,232

13,613

16,908

(1,697)

(2,970)

(141)

17,251

20,262

13,472

16,958

614

1,318

614

1,318

(184)

(395)

(184)

(395)

430

923

430

923

17,681

21,185

13,902

17,881

profit before income tax income tax (expense)/benefit profit for the year net fair value gains on available for sale financial assets income tax on items of other comprehensive income other comprehensive income, net of tax total comprehensive income for the year

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

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries statement of financial position As at 30 June 2011 group

society

notes

2011 $’000

2010 $’000

2011 $’000

2010 $’000

cash and cash equivalents

34,992

64,028

15,074

24,808

receivables

7,675

1,844

8,819

3,526

investments

180,222

139,464

55,555

30,430

reinsurance and other recoveries receivable

8,827

5,727

2,153

2,048

other assets

current assets

total current assets

3,912

3,948

10,540

19,523

235,628

215,011

92,141

80,335

non-current assets investments

56,512

44,148

15,774

11,689

reinsurance and other recoveries receivable

32,887

19,694

3,516

4,679

plant and equipment

691

857

588

830

investments in subsidiaries

6,508

deferred tax asset

1,326

1,011

91,416

65,710

26,386

23,706

327,044

280,721

118,527

104,041

5,356

6,959

2,937

1,163

291

590

17,910

14,556

other liabilities

34,314

26,757

34,314

26,757

provisions

2,590

7,321

2,590

7,321

60,461

56,183

39,841

35,241

total non-current assets total assets current liabilities payables

current tax liabilities outstanding claims liability

total current liabilities non-current liabilities outstanding claims liability

102,365

76,175

provisions

13,449

15,275

7,155

11,293

deferred tax liabilities

553

431

total non-current liabilities

115,814

91,450

7,708

11,724

total liabilities

176,275

147,633

47,549

46,965

net assets

150,769

133,088

70,978

57,076

equity share capital

100

1,638

1,208

1,638

1,208

retained profits

149,031

131,780

69,240

55,768

total equity

150,769

133,088

70,978

57,076

investment revaluation reserve

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

statement of changes in equity

Medical Indemnity Protection Society Ltd and its subsidiaries statements of changes in equity for the year ended 30 June 2011 share capital

retained earnings

total

$’000

investment revaluation reserve $’000

$’000

100

285

38,810

39,195

society at 1 July 2009 profit for the year

16,958

other comprehensive income

923

total comprehensive income for the year

923

16,958

17,881

at 30 June 2010

100

1,208

55,768

57,076

profit for the year

13,472

other comprehensive income

430

total comprehensive income for the year

430

13,472

13,902

100

1,638

69,240

70,978

100

285

111,518

111,903

profit for the year

20,262

other comprehensive income

923

total comprehensive income for the year

923

20,262

21,185

at 30 June 2010

100

1,208

131,780

133,088

profit for the year

17,251

other comprehensive income

430

total comprehensive income for the year

430

17,251

17,681

100

1,638

149,031

150,769

at 30 June 2011

group at 1 July 2009

at 30 June 2011

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

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries statement of cash flows for the year ended 30 June 2011 group notes

2011 $’000

society 2010 $’000

2011 $’000

2010 $’000

cash flows from operating activities receipts from members and other income received

56,791

47,403

59,065

27,644

outwards reinsurance premium

(5,713)

(5,800)

reinsurance recoveries

master policy costs paid

(30,328)

(20,563)

(18,774)

(16,426)

3,501

1,238

indemnification costs paid

(6,041)

(1,094)

(6,041)

(1,094)

ROCS levy

(3,562)

(9)

2,269

1,885

771

644

11,330

8,793

2,803

2,342

(14,386)

(12,010)

(10,795)

(12,075)

claims paid non-reinsurance claims recoveries

dividends received interest received other expenses paid other revenue received income taxes paid movement in restricted trust account net cash used in operating activities

(473)

4,005

3,673

8,137

(2,496)

(2,110)

(203)

(164)

22,446

25,875

18,945

4,871

(133)

(197)

(31)

(197)

10,608

221,947

265,113

52,176

63,175

cash flows from investing activities purchase of plant and equipment proceeds from sale of PIA proceeds from investments payments for investments

(273,296)

(288,058)

(80,824)

(62,272)

net cash used in investing activities

(51,482)

(12,534)

(28,679)

11,314

net (decrease) / increase in cash and cash equivalents

(29,036)

13,341

(9,734)

16,185

cash and cash equivalents at the beginning of period

64,028

50,687

24,808

8,623

34,992

64,028

15,074

24,808

cash and cash equivalents at the end of period

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

notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

note 1 summary of significant accounting policies The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial report includes separate financial statements for Medical Indemnity Protection Society Limited as an individual entity (the 'Society') and the consolidated entity consisting of Medical Indemnity Protection Society Limited and its subsidiaries (the 'Group'). The financial report of the Society and the Group for the year ended 30 June 2011 was authorised for issue in accordance with a resolution of the directors on 12 October 2011.

(a) basis of preparation This general purpose financial report has been prepared in accordance with Australian equivalents to International Financial Reporting Standards (AIFRS), other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001, including the application of ASIC Class Order 10/654 allowing the disclosure of Parent entity financial statements due to Australian Financial Services Licensing obligations. The financial report complies with Australian Accounting Standards and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. This financial report is prepared on a historical cost basis except for those financial assets and financial liabilities that have been measured at fair value, as described in accounting policies below. The financial report is presented in Australian dollars, which is the Groupâ&#x20AC;&#x2122;s functional and presentational currency.

(b) new accounting standards adoption of new accounting standards The Group has adopted 2009-5 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project [AASB 5, AASB 8, AASB 101, AASB 107, AASB 117, AASB 118, AASB 136 & AASB 137]; 2010-3 Amendments to Australian Accounting Standards arising from the Annual Improvements Project [AASB 3, AASB 7, AASB 121, AASB 128, AASB 131, AASB 132 & AASB 139]; Disclosures and all consequential amendments which became applicable on 1 July 2010. 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 2011 ('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 2011, are considered to be not applicable to the Group. The impact of the inoperative standards has been assessed and the impact has been identified as not being material. The Group only intends to adopt the inoperative standards at the date at which their adoption becomes mandatory.

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011 reference title

summary

AASB 9

AASB 9 includes requirements for the 1 January classification and measurement of financial 2013 assets resulting from the first part of Phase 1 of the IASBâ&#x20AC;&#x2122;s project to replace IAS 39 Financial Instruments: Recognition and Measurement (AASB 139 Financial Instruments: Recognition and Measurement).

Financial Instruments

These requirements improve and simplify the approach for classification and measurement of financial assets compared with the requirements of AASB 139. The main changes from AASB 139 are described below. (a) Financial assets are classified based on (1) the objective of the entityâ&#x20AC;&#x2122;s business model for managing the financial assets; (2) the characteristics of the contractual cash flows. This replaces the numerous categories of financial assets in AASB 139, each of which had its own classification criteria. (b) AASB 9 allows an irrevocable election on initial recognition to present gains and losses on investments in equity instruments that are not held for trading in other comprehensive income. Dividends in respect of these investments that are a return on investment can be recognised in profit or loss and there is no impairment or recycling on disposal of the instrument. (c) Financial assets can be designated and measured at fair value through profit or loss at initial recognition if doing so eliminates or significantly reduces a measurement or recognition inconsistency that would arise from measuring assets or liabilities, or recognising the gains and losses on them, on different bases.

application date of standard*

impact on group financial report

application date for group

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 2013

notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011 reference title

summary

application date of standard

impact on group financial report

application date for group

AASB 2009-11

Amendments to Australian Accounting Standards arising from AASB 9 [AASB 1, 3, 4, 5, 7, 101, 102, 108, 112, 118, 121, 127, 128, 131, 132, 136, 139, 1023 & 1038 and Interpretations 10 & 12]

These amendments arise from the issuance of AASB 9 Financial Instruments that sets out requirements for the classification and measurement of financial assets. The requirements in AASB 9 form part of the first phase of the International Accounting Standards Boardâ&#x20AC;&#x2122;s project to replace IAS 39 Financial Instruments: Recognition and Measurement.

1 January 2013

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 2013

Application of Tiers of Australian Accounting Standards

This Standard establishes a differential financial reporting framework consisting of two Tiers of reporting requirements for preparing general purpose financial statements:

1 July 2013

1 July 2011

AASB 1053

This Standard shall be applied when AASB 9 is applied.

(a) Tier 1: Australian Accounting Standards (b) Tier 2: Australian Accounting Standards â&#x20AC;&#x201C; Reduced Disclosure Requirements Tier 2 comprises the recognition, measurement and presentation requirements of Tier 1 and substantially reduced disclosures corresponding to those requirements AASB 1054

Australian Additional Disclosures

This standard is as a consequence of phase 1 of the joint Trans-Tasman Convergence project of the AASB and FRSB. This standard relocates all Australian specific disclosures from other standards to one place and revises disclosures in the following areas: (a) Compliance with Australian Accounting Standards (b) The statutory basis or reporting framework for financial statements (c) Whether the financial statements are general purpose or special purpose (d) Audit fees (e) Imputation credits

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011 reference

title

summary

application date of standard*

impact on group financial report

application date for group

AASB 2010-4

Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project [AASB 1, AASB 7, AASB 101, AASB 134 and Interpretation 13]

Emphasises the interaction between quantitative and qualitative AASB 7 disclosures and the nature and extent of risks associated with financial instruments.

1 January 2011

1 July 2011

Amendments to Australian Accounting Standards

This Standard makes numerous editorial amendments to a range of Australian Accounting Standards and Interpretations, including amendments to reflect changes made to the text of IFRS by the IASB.

1 January 2011

1 July 2011

The amendments increase the disclosure requirements for transactions involving transfers of financial assets. Disclosures require enhancements to the existing disclosures in IFRS 7 where an asset is transferred but is not derecognised and introduce new disclosures for assets that are derecognised but the entity continues to have a continuing exposure to the asset after the sale.

1 July 2011

AASB 2010-5

Clarifies that an entity will present an analysis of other comprehensive income for each component of equity, either in the statement of changes in equity or in the notes to the financial statements. Provides guidance to illustrate how to apply disclosure principles in AASB 134 for significant events and transactions.

[AASB 1, 3, 4, 5, 101, 107, 112, These amendments have no major impact 118, 119, 121, on the requirements of the amended 132, 133, 134, pronouncements. 137, 139, 140, 1023 & 1038 and Interpretations 112, 115, 127, 132 & 1042] AASB 2010-6

Amendments to Australian Accounting Standards â&#x20AC;&#x201C; Disclosures on Transfers of Financial Assets [AASB 1 & AASB 7]

notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011 reference

title

summary

application date of standard*

impact on group financial report

application date for group

AASB 2010-7

Amendments to Australian Accounting Standards arising from AASB 9 (December 2010)

The requirements for classifying and measuring financial liabilities were added to AASB 9. The existing requirements for the classification of financial liabilities and the ability to use the fair value option have been retained. However, where the fair value option is used for financial liabilities the change in fair value is accounted for as follows:

1 January 2013

1 July 2013

1 July 2011

[AASB 1, 3, 4, 5, 7, 101, 102, 108, 112, 118, 120, â&#x20AC;˘ The change attributable to changes 121, 127, 128, in credit risk are presented in other 131, 132, 136, comprehensive income (OCI) 137, 139, 1023, & 1038 and â&#x20AC;˘ The remaining change is presented in interpretations 2, profit or loss 5, 10, 12, 19 If this approach creates or enlarges an & 127] accounting mismatch in the profit or loss, the effect of the changes in credit risk are also presented in profit or loss. AASB 2011-1

Amendments to Australian Accounting Standards arising from the Trans-Tasman Convergence project

This Standard amendments many 1 July 2011 Australian Accounting Standards, removing the disclosures which have been relocated to AASB 1054.

[AASB 1, AASB 5, AASB 101, AASB 107, AASB 108, AASB 121, AASB 128, AASB 132, AASB 134, Interpretation 2, Interpretation 112, Interpretation 113] * designates the beginning of the applicable annual reporting period unless otherwise stated

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

(c) principles of consolidation subsidiaries The Group consolidated financial statements comprise the financial statements of the Society and its subsidiaries as at 30 June each year. The financial statements of the subsidiaries are prepared for the same reporting year as the Society, using consistent accounting policies. All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions that are recognised in assets, are eliminated in full. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and will continue to be consolidated until the date that such control ceases. associates The Society sold its investment in its associate, Professional Insurance Australia Pty Ltd (PIA) with settlement being achieved on 29 June 2010. Investments in associates were accounted for in the consolidated financial statements using the equity method of accounting. In accordance with AASB 128 â&#x20AC;&#x201C; Investments in Associates equity accounting has been recorded in the Group results to 30 June 2009 and discontinued in the Society since 1 July 2003, when consolidated financial statements were first prepared.

(d) subscription revenue The Society obtains revenue through annual subscriptions paid by its members. Subscriptions income is recognised evenly over the period of the membership, being twelve months from 1 July each year. All subscriptions expire on 30 June each year. Subscription monies received prior to 1 July which relate to future membership subscription periods are recorded as current liabilities.

(e) premium revenue Premium income is recognised evenly over the period of the insurance policy. The policy year is twelve months from 1 July with an expiry date of 30 June each year. All premium received prior to 1 July which relate to insurance for post 1 July is recorded as a current liability. Premium revenue comprises only the premium charged to indemnify policy holders including the amounts in the premium collected to allow the Group to meet its obligation in relation to payments due to the Commonwealth Government of Australia for the funding of the Run-Off Cover Scheme (ROCS). Premium revenue excludes stamp duty, GST and other amounts collected on behalf of third parties. premium support scheme (PSS) The Medical Indemnity Act 2002 establishes a Premium Support Scheme (PSS) which in general terms provides a subsidy to medical practitioners whose total indemnity costs exceed a set proportion of their income (as defined in the legislation). The Group is responsible for administering the PSS for its members and in this role it obtains details of estimated income to determine the subsidy, if any, for each eligible member to be collected from Medicare Australia. In subsequent years, the Group obtains actual income details from participating medical practitioner members and either collects monies from the members for any amounts required to be reimbursed to Medicare Australia or seeks additional subsidies from Medicare Australia to be passed through to the eligible member. As the Group is responsible for credit risk and is impacted by the timing of cash flows, amounts due to and from Medicare Australia and policyholders are recognised on the Statement of financial position.

(f) outwards reinsurance Amounts paid to reinsurers under insurance contracts held by the Group are recorded as an outward reinsurance expense and are recognised in the Statement of comprehensive income from the attachment date over the period of indemnity of the reinsurance contract in accordance with the expected pattern of the incidence of risk ceded.

notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

(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 MIPS Insurance Pty Ltd (MIPSi), as all insurance contracts are subject to broadly similar risks. If the present value of the expected future cash flows relating to future claims plus the additional risk margin to reflect the inherent uncertainty in the central estimate exceeds the unearned premiums less related intangible assets and related deferred acquisition costs then unearned premiums are deemed to be deficient. Any such deficiency is recognised immediately and entirely in the Statement of comprehensive income both gross and net of reinsurance. The deficiency is recognised first by writing down any related intangible assets and then related deferred acquisition costs, with any excess being recorded in the Statement of financial position as an unexpired risk liability. No deficiency has been identified for either balance date or the comparative balance date.

(h) outstanding claims liability The liability of outstanding claims is recognised on a claims made basis and is measured as the central estimate of the present value of expected future payments against claims incurred at the reporting date under general insurance contracts issued by MIPSi, with an additional prudential (or risk) margin to allow for the inherent uncertainty in the central estimate. The expected future payments include those in relation to claims reported but not yet paid and anticipated claims handling costs. Claims handling costs include costs that can be directly associated with individual claims, such as legal and professional fees, and costs that can only be indirectly associated with individual claims, such as claims administration costs. Outstanding claims are determined taking into account an actuarial valuation. A summary of the actuarial methodology and key assumptions is disclosed in Note 3. Expected future payments are discounted to present value using a risk free rate. prudential margin MIPSi includes a prudential margin in its liability for outstanding claims. Under prudential standards issued by the Australian Prudential Regulation Authority (APRA), a licensed insurer must include a prudential margin in its estimate of outstanding claims liabilities for prudential reporting so that the probability of the estimate for outstanding claims being sufficient to meet all claims is a minimum of 75%. MIPSi has elected to increase the probability of sufficiency to well above the 75% minimum. Without a prudential margin the liability for outstanding claims represents the central estimate for which all claims will be settled. That is, there is a 50% probability of it being either too high or too low. The Group has elected to adopt a prudential margin that is different for accounting and prudential reporting purposes. Details of the levels adopted are disclosed in Note 20. The prudential margin is reassessed each year taking into account actuarial valuations as part of the process of determining the liability for outstanding claims of the MIPSi. A summary of the level of sufficiency achieved by the prudential margin is disclosed in Note 3.

(i) provisions and employment benefits Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of comprehensive income net of any reimbursement. Provisions are measured at the present value of managementâ&#x20AC;&#x2122;s best estimate of the expenditure required to settle the present obligation at the reporting date. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision resulting from the passage of time is recognised in finance costs. provision for indemnity obligations The provision for indemnity obligations arises from the discretionary indemnity provided by the Group to members prior to 30 June 2003. In general terms, following the enactment of Medical Indemnity legislation, the Group is not able to indemnify

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011 members other than through insurance in relation to medical indemnity incidents occurring after 30 June 2003. The discretionary indemnity provided by the Group to its members covers incidents reported under extended reporting benefit and death, disability or retirement arrangements. The provision for discretionary indemnity obligations, is determined taking into account an actuarial valuation and includes an allowance for incidents that have occurred but for which a request for indemnity has yet to be received. The valuation is based on the fair value that the Group would rationally pay to settle or transfer the indemnity obligations. The Group includes a prudential margin in determining the fair value of the provision, as a transfer of obligations would typically include such a margin to allow for inherent uncertainty. As the Group is no longer providing discretionary medical indemnity cover to its members for new incidents, and the nature of indemnity obligations is volatile, the prudential margin for the provision has been based on a 75% confidence interval. The provision is discounted to present value at balance date. Further details on the assumptions supporting the estimate are disclosed in Note 2. provisions for employee leave benefits (i) wages and salaries, annual leave and personal leave Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating personal leave expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for nonaccumulating personal leave are recognised when the leave is taken and measured at the rates paid or payable. (ii) long service leave The liability for long service leave is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yield at the reporting date on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash flows. (iii) retirement benefit obligations The 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.

(j) reinsurance and other recoveries receivable The Group has insurance risk in the normal course of business for all of its businesses. Reinsurance assets represent balances due from reinsurance companies. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision or settled claims associated with the reinsurer’s policies and are in accordance with the related reinsurance contract. Reinsurance assets are reviewed for impairment at each reporting date or more frequently when an indication of impairment arises during the reporting year. Impairment occurs when there is objective evidence as a result of an event that occurred after initial recognition of the reinsurance asset that the Group may not receive all outstanding amounts due under the terms of the contract and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer. The impairment loss is recorded in the income statement. Reinsurance assets or liabilities are derecognised when the contractual rights are extinguished or expire or when the contract is transferred to another party. Reinsurance and other recoveries receivable on paid claims, reported claims not yet paid, indemnity paid and the provision for indemnity obligations are recognised as revenue. Recoveries on claims not yet paid and the provision for indemnity obligations are measured as the present value of expected future receipts, calculated on the same basis as the liability for outstanding claims and provision for indemnity obligations. high cost claims scheme (HCCS) Other recoveries include amounts due from the Commonwealth Government’s High Cost Claims Scheme 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.

notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

(k) run-off cover scheme The Medical Indemnity Act 2002 established the Run-Off Cover Scheme (ROCS) as part of a framework for providing medical indemnity insurance for medical practitioners who have ceased practice. Under the framework: • if a practitioner has ceased practice for three years or has reached age 65, the practitioner’s most recent medical indemnity insurer must offer a Run-Off Cover Scheme policy. Any accepted claims from the practitioner under a ROCS policy will be reimbursed by Medicare Australia from ROCS scheme funds; • under the terms of a contract with government for the first three years following cessation of practice and whilst the practitioner is under age 65, the practitioner’s most recent medical indemnity insurer must make an offer to provide insurance coverage, at a nominal premium for those members with 10 or more years of qualifying membership; • a levy is imposed on medical indemnity insurers to cover the cost of ROCS, with the rate currently set at 5% of premium received. This levy is incorporated into the premiums charged by insurers; and • 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.

(l) deferred acquisition costs The acquisition costs incurred in obtaining general insurance contracts are deferred and recognised as assets where they can be reliably measured and where it is probable that they will give rise to premium revenue that will be recognised in the statement of comprehensive income in subsequent reporting periods. The Group has not deferred any acquisition costs at year end or the comparative year end.

(m) Income tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities based on the current period’s taxable income. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date. Deferred income tax is provided on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax credits and unused tax losses can be utilised. The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at each reporting date and are recognised to the extent that it has

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011 become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. other taxes Revenues, expenses and assets are recognised net of the amount of GST except: • When the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable. • Receivables and payables, which are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the Statement of financial position. Cash flows are included in the statement of cash flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority is classified as part of operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. taxation of financial arrangements (tofa) New rules have been introduced (TOFA rules) which modernise the tax treatment of gains and losses on financial arrangements. The key provisions of the TOFA rules are found in Division 230 of the Income Tax Assessment Act (ITAA) 1997 which generally provides firstly the method (accruals, realisation, fair value, retranslation, hedging and reliance on financial reports) for calculating gains and losses from financial arrangements, and secondly the time at which the gains and losses from financial arrangements will be brought to account. TOFA is effective from 1 July 2010.

(n) assets backing general insurance liabilities The investments portfolio of MIPSi is actively managed as part of the Group’s investment strategy to ensure that investments mature in accordance with the expected pattern of future cash flows arising from general insurance liabilities. The Group has determined that all investments of MIPSi are held to back general insurance liabilities and their accounting treatment is described below. As these assets are managed under the Risk Management Statement (“RMS”) of MIPSi on a fair value basis and are reported to the Board of MIPSi on this basis, they have been valued at fair value through profit or loss.

(o) investments Investments within the scope of AASB 139 Financial Instruments: Recognition and Measurement are categorised as investments at fair value through profit or loss, held-to-maturity or available-for-sale. The classification depends on the purpose for which the investments were acquired. When investments are recognised initially, they are measured at fair value, plus in the case of assets not at fair value through profit or loss, directly attributable transaction costs. recognition and derecognition All regular way purchases and sale of investments are recognised on the trade date 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.

notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011 subsequent measurement i) investments – fair value through profit or loss Investments classified as held for trading are included in the category of ‘Investments at fair value through profit or loss’. Investments are classified as held for trading if they are acquired for the purpose of selling in the near term with intention of making a profit. Investments designated as ‘fair value through profit of loss’ are re-measured to fair value at balance date. Investments backing general insurance liabilities are designated ‘fair value through profit or loss’. Gains or losses on financial assets held for trading are recognised in profit or loss. ii) held-to-maturity investments Non-derivative investments with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Group has the positive intention and ability to hold to maturity. Investments intended to be held for an undefined period are not included in this classification. Investments that are intended to be held-to-maturity, such as bank bills are subsequently measured at amortised cost. This cost is computed as the amount initially recognised minus principal repayments (if any), plus or minus the cumulative amortisation using the effective interest method or any difference between the initially recognised amount and the maturity amount. Bank bills are designated as ‘held-to-maturity’ as the Group intends to hold these investment to maturity. iii) available-for-sale investments Available-for-sale investments are those non-derivative investments, principally equity securities that are designated as availablefor-sale or are not classified as any of the two preceding categories. After initial recognition, available-for-sale securities are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is recognised in profit or loss. All investments are initially recognised at fair value, which is the cost of acquisition. We capitalise all acquisition cost. Sales cost net off the proceeds. Otherwise transactions costs are capitalised on initial recognition. Details of fair value for the different types of investments are listed below: • Cash assets are carried at face value of the amounts deposited or drawn. The carrying amount of cash approximates to their fair value; and • Shares, fixed interest securities, options and units in trusts listed on the stock exchange are measured at the quoted bid price of the instrument at Statement of financial position date. Where there is no quoted market price, fair value of an investment is determined by reference to the current market value of another instrument which is substantively the same or alternatively is calculated based on the expected cash flows of the underlying net asset base of the investment. Dividends and distributions are recognised as revenue when the right to receive payment is established. Interest revenue is recognised on an accruals basis, using the effective interest rate method.

(p) plant and equipment Plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the Statement of comprehensive income during the financial period in which they are incurred. Depreciation for plant and equipment is calculated using the reducing balance method to allocate their cost, while depreciation for leasehold improvements is calculated using the straight line method to allocate their cost, net of their residual values, over their estimated useful lives of 5 years. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each Statement of financial position date. The Group conducts an annual internal review of asset values, which is used as a source of information to assess for any indicators of impairment. External factors, such as changes in expected future processes, technology and economic conditions, are also monitored to assess for indicators of impairment. If any indication of impairment exists, an estimate of the asset’s recoverable amount is calculated.

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011 The assets carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount and are included in the Statement of comprehensive income.

(q) impairment of non-financial assets The Group conducts an annual internal review of asset values, which is used as a source of information to assess for any indicators of impairment. External factors, such as changes in expected future processes, technology and economic conditions, are also monitored to assess for indicators of impairment. If any indication of impairment exists, an estimate of the asset’s recoverable amount is calculated.

(r) leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Operating lease payments are recognised as an expense in the Statement of comprehensive income on a straight-line basis over the lease term. Operating lease incentives are recognised as a liability when received and subsequently reduced by allocating lease payments between rental expense and reduction of the liability.

(s) trade and other payables Trade and other payables are carried at amortised cost and due to their short-term nature they are not discounted. They represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within 30 days of recognition.

(t) receivables Receivables are initially recognised at fair value, being the amounts due. They are subsequently measured at amortised cost. A provision for doubtful debts is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows. The charge is recognised in the Statement of comprehensive income.

(u) cash and cash equivalents Cash and cash equivalents in the Statement of financial position comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. For the purposes of the Statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above.

(v) rounding of amounts The Group is of a kind referred to in Class order 98/0100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the financial report. Amounts in the financial report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar.

notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

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

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

2011

2010

5.4 years

3.7 years

• at end of report year

50%

average weighted term to settlement from indemnity requested date uplift for initial under-reserving on claims greater than $250,000: • 1 year after end of report year

45%

• 2 years after end of report year

35%

• 3 years after end of report year

reduction for incidents converting to indemnity requests (by value)

50%

40%

reduction for incidents converting to indemnity requests (by number)

85%

70%

expense rate

9.0%

discount rate

3.4%

3.2%

inflation (normal plus superimposed) rate

6.5%

6.0%

$140,000

$132,000

75%

average claim size for incidents occurred but indemnity not yet requested level of sufficiency achieved by prudential margin sensitivities

In estimating the liability for incidents occurred but indemnity not yet requested, the actuary considers the sensitivity by using a stochastic model which treats assumptions as random rather than fixed variables. Each assumption takes a range of different values, each with associated probabilities. The key assumptions that will affect the liability calculations are the uplift factors for initial under-reserving, the probability of incidents likely actually becoming claims, the 6.5% 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 $279,402 decrease in profit and equity (with an equivalent $279,402 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. (iv) assets arising from reinsurance contracts and other recoveries Assets arising out of reinsurance contracts are also calculated 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.

notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

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 reduction for medical incidents converting to claims by value

2011

2010

3.8 years

3.7 years

50.0%

40.0%

expense rate

9.0%

discount rate

4.8%

4.6%

inflation rate

4.0%

superimposed inflation rate level of sufficiency achieved by prudential margin

2.5%

2.0%

92.5%

These assumptions represent the following: average weighted term to settlement The average weighted term to settlement is based on historic settlement patterns. reduction for incidents converting to claims by value The reduction to allow for the fact that many adverse incident reports do not become claims is based on an analysis of past conversion rates with each case weighted by the value of those claims. expense rate Claims handling expenses were calculated by reference to both current and projected 2011/12 claims handling costs, as a percentage of projected 2011/12 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.

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011 inflation Inflation assumptions are set by reference to current economic indicators and are consistent with assumptions that were adopted in previous years. superimposed inflation Superimposed inflation occurs due to non-economic effects such as court settlement amounts increasing at a faster rate than wages or CPI inflation. An allowance for superimposed inflation was made, after considering both the superimposed inflation present in the portfolio and industry superimposed inflation trends.

sensitivity analysis â&#x20AC;&#x201C; insurance contracts (i) summary The approved Actuary conducts sensitivity analyses to quantify the exposure to the risks of changes in the key underlying variables. The valuations included in the reported results are calculated using certain assumptions about these variables as disclosed above. The movement in any key variable will impact the performance and equity of the Group. The tables below describe how a change in each assumption will affect the insurance liabilities and show an analysis of the sensitivity of the profit / (loss) and equity to changes in the three key assumptions both gross and net of reinsurance. variable

impact of movement in variable

average weighted term to settlement

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

reduction for incidents converting to claims

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

expense rate

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

discount rate

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

inflation and superimposed inflation rates

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

notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011 (ii) impact of changes in key variables movement in variable

impact on group profit / (loss) before tax

impact on group equity / profit for the year after tax

$’000

+3.25%

(4,540)

(3,178)

-3.25%

3,897

2,728

+1%

(1,022)

(715)

-1%

1,022

715

variable Inflation and superimposed inflation Claims handling costs Incident probability reduction

+25%

9,921

6,945

-25%

(9,943)

(6,960)

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; and • Business is limited to only one class of insurance.

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011 terms and conditions of insurance business The terms and conditions attaching to insurance contracts affect the level of insurance risk accepted by the Group. All insurance contracts written are entered into on a standard form basis. The Group writes insurance contracts only on a claims-made basis, i.e. liabilities may arise in respect of claims reported during the term of the insurance contract, however, where retroactive cover is provided the event that gave rise to the claim could have occurred in a previous period. There are no other special terms and conditions in any of the contacts that have a material impact on the financial statements. concentration of insurance risk Apart from operating as a monoline insurer, the Company’s exposure to concentration of insurance risks is minimised as the Company is not affected by any natural disasters and mitigates its risk through comprehensive reinsurance programmes. The Group’s exposure to concentration of monoline insurance risk is mitigated by providing insurance for diversified membership categories in all Australian States and Territories. To manage the risks associated with various membership categories, a risk based pricing model is adopted. development and sensitivities of claims There is a possibility that changes may occur in the estimate of the Group’s obligations at the end of a contract period. The tables in note 20 disclose the estimates of total claims outstanding for each underwriting year at successive year ends. Note 3 identifies the sensitivities associated with the determination of the liability for outstanding claims. reinsurance counterparty risk When there is reliance on a few reinsurers, there is a potential credit risk. As far as appropriate and in accordance with the RMS, the Group will seek to diversify the reinsurance security it sources. This objective is tempered by the security constraint (which is absolute in relation to counter-party risk ratings) and the relative reinsurance capacity shortage in this segment particularly in relation to Aggregate Stop Loss Protection. Such a decision also needs to recognise the needs of reinsurers for minimum underwriting lines and the requirement for preferential access to participation in the Excess of Loss Programme for desirable Reinsurers willing to participate in the Aggregate Stop Loss Programme. The administration costs that must be passed on to the Group if multiple reinsurers with small lines are involved in the programme must also be considered. Financially strong reputable reinsurers who have significant involvement in a programme have the resources to add value to the operations of the reinsured. As opportunities arise, the Group will seek to diversify security while respecting the long-term support offered by those well-known and established reinsurers with whom relationships already exist. Long-term significant relationships are important in order to weather the regular cycles of a hardening reinsurance market and if unexpected adverse experience occurs in an underwriting year. In addition, due to the nature of insurance offered by the Group, eventual realisation of recoveries from reinsurers is likely to be over an extended period of time, during which the credit quality of the reinsurer may decline. As noted above in (a), the Group reassesses the security of reinsurers each balance date based on information in the public domain and gathered through internal investigation and advice from its reinsurance brokers.

(b) credit risk Credit risk represents the risk that the counterparty to the financial instrument will fail to discharge an obligation and cause the Group to incur a financial loss. With respect to credit risk arising from the financial assets and liabilities of the Group, the Group’s exposure to credit risk arises from potential default of the counterparty, with the current exposure equal to the fair value of these instruments as disclosed in the Statement of financial position. This does not represent the maximum risk exposure that could arise in the future as a result of changes in values, but best represents the current maximum exposure at the reporting date. The Group trades only with recognised, creditworthy third parties, and as such collateral is not requested nor is it the Group’s policy to securitise its trade and other receivables. The Group holds no collateral as security or any other credit enhancements. There are no financial assets that are impaired, or would otherwise be impaired except for the terms having been renegotiated. Credit risk is not considered to be significant to the Group except in relation to investments in debt securities. With respect to all other financial assets, concentration of credit risk is managed by counterparty, and by industry sector.

notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011 Counterparty risk is not considered to be significant for cash as the total cash balance is held by counter parties with an AA or AAA rating. The split of investment by class (bank term deposits, bank bills, equity and fixed interest securities) and maturity profile is shown in note 15. An industry sector analysis of the investments in financial assets is as follows: group

society

2011

2010

2011

2010

$’000

energy

2,487

2,653

848

900

materials

8,578

6,693

2,951

2,302

485

1,360

166

465

consumer discretionary

1,174

1,104

431

387

consumer staples

4,572

2,447

1,533

841

health care

1,020

918

346

311

216,187

166,991

64,291

36,416

1,272

1,446

435

497

industrials

financials telecommunications utilities total

959

328

236,734

183,612

71,329

42,119

(c) credit quality per class of financial assets 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. 2011

insurance recoverables bank bills bank term deposits corporate bonds indexed bonds government bonds total

AAA to AA-

A+ to AA-

BBB+ to BBB-

other *

total

$’000

22,675

120,138

28,247

28,264

199,324

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011 2010 AAA to AA-

A+ to AA-

BBB+ to BBB-

other *

total

$’000

bank bills

28,865

bank term deposits

80,060

corporate bonds

19,638

insurance recoverables

indexed bonds government bonds total

24,610

153,173

*Other consists of debt instruments which do not yet have a rating for example for new issues, but are selected in line with the investment mandate of the Group. The table below shows the credit quality by class of asset for debt instruments for the Society. 2011

insurance recoverables bank bills bank term deposits corporate bonds indexed bonds government bonds

AAA to AA-

A+ to AA-

BBB+ to BBB-

other *

total

$’000

977

41,887

9,611

6,163

58,638

AAA to AA-

A+ to AA-

BBB+ to BBB-

other *

total

$’000

3,985

bank term deposits

16,110

corporate bonds

5,685

6,054

31,834

total

2010

insurance recoverables bank bills

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 Society.

notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

(d) liquidity risk Liquidity risk arises from the financial liabilities of the Group and the Group’s subsequent ability to meet their obligations to repay their financial liabilities as and when they fall due. The Group manages liquidity risk primarily through the investment strategy (discussed above) and ongoing monitoring of its capital adequacy multiple for MIPSi. MIPSi’s capital adequacy multiple is calculated every quarter as part of routine reporting to APRA and serves as a measure of insurer solvency. Trade payables and other financial liabilities of the Group and Society excluding indemnity related provisions held by the Society generally mature within 12 months of being incurred. Indemnity related provisions held by the Society (refer note 22) take considerably longer to mature and have an average weighted term to settlement referred to in note 2. The methodology used to derive the indemnity provision encompasses a range of actuarial assumptions and is based on historical information (refer note 2), as such a more comprehensive maturity profile cannot be ascertained given the underlying nature of those matters which are indemnified by the Society and how they are calculated.

(e) market risk Market risk is the risk that the fair value of future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rates and equity prices. Market risk is managed and monitored using sensitivity analysis, and minimised through ensuring that all investment activities are undertaken in accordance with established mandate limits and investment strategies. In accordance with its investment strategy, the Group invests in equities and hybrids with designated allocation targets. There are specified allowable ranges within which the investments portfolio may vary from the neutral/target allocation. The investment strategy includes an assessment of the risk profile of the shares in which the Group invests and also exposure restrictions based on APRA credit ratings. There are no off-Statement of financial position derivative transactions or open option positions at year end. The Group’s financial assets and liabilities are carried at amounts that approximate their fair value.

(f) interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments. The Group has established limits on investments in interest bearing assets, which are monitored on a daily basis. The Group may use derivatives to hedge against unexpected increases in interest rates. The following table demonstrates the sensitivity of the Group’s Statement of comprehensive income to a reasonably possible change in interest rates, with all other variables held constant. The sensitivity of the Statement of comprehensive income is the effect of the assumed changes in interest rates on: • The interest income for one year, based on the floating rate financial assets held at 30 June 2011; and • Changes in fair value of investments for the year, based on revaluing fixed rate financial assets at 30 June 2011. The basis points sensitivity is based on the volatility of change in the global interest rates over the last 10 years. group interest rate

society

change in basis points increase / decrease

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

equity higher/ (lower) $’000

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

equity higher/ (lower) $’000

+150

(1,782)

(692)

-150

784

292

+150

(1,424)

(569)

-150

577

175

AUD 2011 2010

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

(g) equity price risk Equity price risk is the risk that the fair value of equities decreases as a result of changes in market prices, whether those changes are caused by factors specific to the individual stock or factors affecting all instruments in the market. Equity price risk exposure arises from the Group’s investment portfolio. The effect on net assets attributable to equity and operating profit before distribution due to reasonably possible changes in market factors, as represented by the equity indices, with all other variables held constant is indicated in the table below. accounting assumptions – variability of equity price The sensitivity is based on the volatility of change in the individual composite indices over the last 10 years. 2011 index

2010

change in equity price%

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

after tax effect on equity $’000

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

after tax effect on equity $’000

+20%

3,461

1,777

2,822

1,440

-20%

(3,461)

(1,777)

(3,054)

(1,208)

+20%

1,777

1,440

-20%

(1,777)

(232)

(1,208)

group asx society asx

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

notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

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

society

2011

2010

2011

2010

$’000

34,992

64,028

15,074

24,808

financial assets cash and cash equivalents

7,675

1,844

8,819

3,526

investments

receivables

236,734

183,612

71,329

42,119

other assets

3,912

3,948

10,540

19,523

283,313

253,432

105,762

89,976

5,356

6,959

2,937

1,163

other liabilities

34,314

26,757

34,314

26,757

Total

39,670

33,716

37,251

27,920

Total financial liabilities payables

note 6 operating income group

gross written premiums add/(less): movement in unearned premium premium revenue subscription and other income operating income

note 9

society

2011

2010

2011

2010

$’000

(63)

20,219

18,496

(63)

38,715

57,230

16,655

60,476

24,821

57,167

55,370

60,476

24,821

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

note 7 net claims incurred All insurance business is underwritten by MIPSi and all net claims incurred information relates to the Group. 2011 current year $’000

2011 prior years $’000

$’000

undiscounted

41,264

3,600

discount movement

(6,759)

2,943

gross discounted claims incurred

34,505

6,543

2011 total

2010 current year $’000

2010 prior years $’000

$’000

44,864

29,730

(3,186)

26,544

(3,816)

(4,450)

3,487

(963)

41,048

25,280

301

2010 total

gross claims incurred

prudential margin

25,581

6,287

(479)

5,808

4,322

(2,315)

2,007

40,792

6,064

46,856

29,602

(2,014)

27,588

(9,746)

(7,698)

(17,444)

(1,830)

(1,777)

2,175

482

2,657

317

(108)

209

reinsurance and other recoveries discounted

(7,571)

(7,216)

(14,787)

(1,513)

(55)

net claims incurred

33,221

(1,152)

32,069

28,089

(2,069)

claims expense reinsurance and other recoveries undiscounted discount movement

(1,568) 26,020

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. As disclosed in Note 16, the majority of recoveries are from the HCCS. * 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: 2011 gross claims $’000

2011 recoveries

2011 net

$’000

6,008

(6,925)

2010 recoveries

2010 net

$’000

2010 gross claims $’000

$’000

(917)

(55)

changes in assumptions claims development claims handling expenses discount rate/inflation total

535

(291)

244

241

6,543

(7,216)

(673)

301

(55)

246

notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

note 8 investment result group

society

2011 $’000

2010 $’000

2011 $’000

2010 $’000

interest received on bank accounts

1,193

1,055

524

216

investment revenue interest on investments - not held as FVTPL*

2,904

2,443

2,636

2,249

interest on investments - held as FVTPL*

7,881

6,333

dividends received

2,375

1,958

808

668

14,353

11,789

3,968

3,133

(422)

(125)

1,838

398

206

(720)

gains (losses) on investments realised gains on investments at FVTPL* unrealised gains on investments at FVTPL* realised gains (losses) on available-for-sale investments

(260)

(108)

(260)

(108)

1,156

165

(54)

(828)

expenses on investment not held as FVTPL*

(157)

(145)

(157)

(145)

expenses on investment held as FVTPL*

(374)

(369)

14,978

11,440

3,757

2,160

investment result *FVTPL – Fair value through profit & loss

note 9 subscriptions and other income group

subscription income service fee recovery of expenses incurred agents fees sundry income subscriptions and other income

society

2011 $’000

2010 $’000

2011 $’000

2010 $’000

56,298

12,338

56,298

12,338

119

922

1,071

922

1,071

3,245

4,145

3,127

7,148

57,230

16,655

60,476

24,821

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

note 10 indemnification benefit group

society

2011 $’000

2010 $’000

2011 $’000

2010 $’000

2,702

1,831

2,702

1,831

charge for indemnity obligations - undiscounted - discount

(501)

(814)

(501)

(814)

2,201

1,017

2,201

1,017

(862)

341

(862)

341

movement in recoveries - undiscounted - discount Net charge for indemnity obligations movement in prudential margin indemnification benefit

108

(754)

435

(754)

435

1,447

1,452

1,447

1,452

660

618

469

330

2,107

2,070

1,916

1,782

note 11 other operating expenses group

superannuation contribution other employee benefit expense less: reallocation to claims expense depreciation expense professional services expense financial institution charges risk management workshops advertising and printing it and communications expense occupancy expense other expenses from ordinary activities other operating expenses

society

2011 $’000

2010 $’000

2011 $’000

2010 $’000

788

732

676

640

6,089

5,875

5,757

5,529

(2,100)

(2,000)

299

372

273

364

2,386

2,261

1,818

1,691

500

430

130

114

259

171

259

171

1,236

880

1,236

880

766

771

766

771

772

730

772

730

1,805

1,677

1,180

965

12,800

11,899

12,867

11,855

notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

note 12 income tax group

society

2011 $’000

2010 $’000

2011 $’000

2010 $’000

18,948

23,232

13,613

16,908

5,685

6,970

4,084

5,072

1,210

(4,779)

(3,564)

(4,727)

(3,482)

reconciliation between net profit before tax and tax expense net profit before tax tax calculated at rate of 30% tax effect of amounts which are not deductible/(taxable) in calculating taxable income: tax on profit on sale of PIA net mutual (income)/expense share of net losses (profits) of associates

250

adjusted income tax

919

4,866

(633)

1,840

de-recognition of income tax benefit

633

(216)

rebateable dividend written off

203

165

203

165

writeoff of deferred tax asset (dta) balance

154

(4)

154

(209)

(2)

(1,632)

(1,630)

entertainment and other fines and penalties

impairment of investments per aasb 136

reinstatement of opening dta balance tax losses of prior years recouped under (over) provision in previous year

(210)

(216)

1,697

2,970

141

(50)

charge for current tax payable

2,191

2,853

203

(261)

deferred tax movement

(284)

326

154

211

tax charge for the year income tax expense

adjustments in respect of prior years

(210)

(209)

(216)

1,697

2,970

141

(50)

deferred tax movement debited to equity

(184)

(395)

(184)

(395)

total tax charged to equity

(184)

(395)

(184)

(395)

total tax expense charged to statement of comprehensive income tax charged to equity

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

note 13 cash and cash equivalents group

cash at bank and on hand* 11am bank deposits total cash and cash equivalents

society

2011 $’000

2010 $’000

2011 $’000

2010 $’000

34,523

37,362

14,865

18,686

469

26,666

209

6,122

34,992

64,028

15,074

24,808

Cash at bank and trust account earns interest at a floating rate. As at 30 June 2011 the average interest rate was 4.79% (2010: 4.43%). Over the full year the weighted average interest rate was 5.28% (2010: 3.89%). *Restricted trust account is no longer in operation due to the master policy arrangement. Consequently the restricted trust account balance of $6,950,000 for 2010 has been reclassified into cash at bank.

note 14 receivables group

society

2011 $’000

2010 $’000

2011 $’000

2010 $’000

receivables from policyholders*

6,413

1,234

6,413

1,228

pss adjustments receivable

1,262

608

1,262

608

7,675

1,842

7,675

1,836

1,144

1,690

1,144

1,690

7,675

1,844

8,819

3,526

premiums and subscriptions receivable

other receivables receivable from related entities

total receivables

*Receivables past due but not considered impaired are; Group $30,513 (2010: $79,318); Society $30,513 (2010:$79,318): The ageing analysis of receivable past due but not considered impaired are as below:

2011 2010

31-60 days $

61-90 days $

over 91 days $

total $

group

30,513

society

30,513

group

2,717

76,601

79,318

society

2,717

76,601

79,318

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

notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

note 15 investments group

society

2011 $’000

2010 $’000

2011 $’000

2010 $’000

977

3,985

977

3,985

46,871

20,508

41,887

16,110

47,848

24,493

42,864

20,095

equity securities – listed entities

12,691

10,285

12,691

10,285

fixed interest securities

15,774

11,739

15,774

11,739

28,465

22,024

28,465

22,024

bank bills

21,698

24,880

bank term deposits

73,267

59,552

equity securities – listed entities

24,719

20,154

investments – ‘held-to-maturity’ bank bills bank term deposits investments – ‘available for sale’

investments – ‘fair value through profit or loss’

fixed interest securities

40,737

32,509

160,421

137,095

total investments

236,734

183,612

71,329

42,119

current

180,222

139,464

55,555

30,430

56,512

44,148

15,774

11,689

236,734

183,612

71,329

42,119

non-current total investments

The weighted average interest rate for bank bills is 5.81 % (2010:6.54%) and the following table summarises the interest rate sensitivity (repricing profile) of the Group’s exposure to fixed interest securities based on earlier of contractual maturity or repricing.

maturity less than 12 months

2011

2010

avg rate

$’000

avg rate

$’000

7.25%

100

7.44%

6,920

5.86%

2,045

6.11%

17,508

three to four years

5.94%

41,373

6.43%

5,165

four to five years

5.97%

8,219

6.47%

19,430

one to two years two to three years

over five years total fixed interest securities

56,512

44,248

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

note 16 reinsurance and other recoveries receivable group

society

2011 $’000

2010 $’000

2011 $’000

2010 $’000

4,843

215

- from HCCS

23,671

14,356

28,514

14,571

discounted to present value

(4,578)

(1,921)

6,199

2,637

30,135

15,287

2,877

3,555

2,877

3,555

- from ROCS

127

185

127

185

- from HCCS

2,471

2,647

2,471

2,647

5,475

6,387

5,475

6,387

(458)

(568)

(458)

(568)

935

1,333

652

908

expected future recoveries on outstanding claims - from reinsurers

prudential margin

expected future recoveries on indemnity obligations - from reinsurers

discounted to present value prudential margin

5,952

7,152

5,669

6,727

5,627

2,982

41,714

25,421

5,669

6,727

8,827

5,727

2,153

2,048

non-current

32,887

19,694

3,516

4,679

total reinsurance and other recoveries receivable

41,714

25,421

5,669

6,727

brought forward

15,287

14,541

recognised in the statement of comprehensive income (refer note 7)

14,787

1,568

retirement claim recoveries from rocs total reinsurance and other recoveries receivable current

movement – outstanding claim recoveries

movement in prudential margin

3,562

295

recoveries received during the year

(3,501)

(1,117)

carried forward

30,135

15,287

brought forward

7,152

7,672

6,727

7,035

recognised in the statement of comprehensive income (refer note 10)

(754)

435

(754)

435

movement in prudential margin

(398)

(410)

(256)

(198)

(48)

(545)

(48)

(545)

5,952

7,152

5,669

6,727

movement – indemnity obligation recoveries

recoveries received during the year carried forward

notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

note 17 other assets group

society

2011 $’000

2010 $’000

2011 $’000

2010 $’000

9,493

18,816

1,452

107

other

3,826

2,496

961

600

total other assets

3,912

3,948

10,540

19,523

deferred master policy premium prepayments

note 18 plant and equipment group

society

2011 $’000

2010 $’000

2011 $’000

2010 $’000

plant and equipment – at cost

2,537

2,453

2,305

2,274

less: accumulated depreciation

(1,846)

(1,596)

(1,717)

(1,444)

691

857

588

830

carrying amount at 1 July 2010

857

1,032

830

997

additions

136

223

total plant and equipment movements

disposals depreciation expense carrying amount at 30 June 2011

(3)

(57)

(3)

(56)

(299)

(341)

(273)

(334)

691

857

588

830

note 19 payables group notes related party payables

2011 $’000

society 2010 $’000

2011 $’000

2010 $’000

trade creditors

176

professional fees payable

159

125

1,819

net gst payable

rocs levy payable

3,171

2,315

2,348

653

accruals

1,132

1,230

291

376

707

1,409

5,356

6,959

2,899

1,163

5,356

6,959

2,937

1,163

other payables

total payables Payables are interest free and unsecured.

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

note 20 outstanding claims group

society

2011 $’000

2010 $’000

2011 $’000

2010 $’000

102,254

80,244

9,203

7,222

(a) outstanding claims liability central estimate claims handling costs

111,457

87,466

discount to present value

(15,925)

(12,108)

discounted claims liability

95,532

75,358

prudential margin (refer note 20(c))

24,743

15,373

120,275

90,731

17,910

14,556

total gross outstanding claims liability current non-current

102,365

76,175

total gross outstanding claims liability

120,275

90,731

81,154

41,048

25,581

9,370

2,302

claims payments during the year

(20,874)

(18,306)

carried forward

120,275

90,731

level of sufficiency (refer note 3)

92.5%

prudential margin as a percentage of the net discounted claims liability

25.9%

20.4%

(b) movements brought forward recognised in the statement of comprehensive income (refer note 7) - incurred claims - prudential margin

notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011 (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 eight accident years since incorporation of MIPSi. (i) gross accident year

2004 $’000

2005 $’000

2006 $’000

2007 $’000

2008 $’000

2009 $’000

2010 $’000

2011 $’000

at end of accident year

7,448

21,717

13,380

20,647

27,130

26,560 25,488

35,975

one year later

7,991

16,189

12,551

16,275

20,103

29,734

two years later

7,018

16,254

12,880

19,026

18,442

33,858

three years later

6,279

14,377

14,950

14,008

18,930

14.539

total $’000

estimate of ultimate claims cost:

four years later

7,495

13,788

16,189

five years later

8,886

14,505

18,448

six years later

8,941

14,471

seven years later

9,051

current estimate of cumulative claims cost

9,051

cumulative payments outstanding claims – undiscounted

(8,234) 817

14,471

22,525

18,448

14,539

18,930

33,858

22,525

(12,716) (13,994)

(9,811)

(9,665)

(7,686)

(2,879)

(558)

(65,543)

4,728

9,265

26,172

19,646

35,417

102,254

1,755

4,454

35,975

discount

167,797

(15,925)

claims handling costs

9,203

prudential margin

24,743

total gross outstanding claims per the statement of financial position

120,275

(ii) net accident year

2004 $’000

2005 $’000

2006 $’000

2007 $’000

2008 $’000

2009 $’000

2010 $’000

2011 $’000

at end of accident year

7,199

16,486

12,168 18,834

21,144

one year later

7,488

12,953

12,202

12,795

18,052

22,984

23,658

26,229

25,383

20,044

two years later

6,468

14,280

10,789 16,008

16,856

25,618

three years later

5,823

10,340

12,260

15,412

four years later

6,545

10,855

12,792 12,259

five years later

7,301

11,457

14,429

six years later

7,295

11,455

seven years later

7,302

total $’000

estimate of ultimate claims cost:

current estimate of cumulative claims cost cumulative payments outstanding claims – undiscounted discount claims handling costs

7,302 (7,345) (43)

11,455

14,429 12,259

(10,210) (12,066) 1,245

11,978

2,363

15,412

25,618

20,044

26,229

132,748

(9,366)

(9,065)

(7,520)

(2,878)

(558)

(59,008)

2,893

6,347

18,098

17,166

25,671

73,740 (11,347) 9,203

prudential margin

18,544

total net outstanding claims

90,140

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

note 21 other liabilities group

society

2011 $’000

2010 $’000

2011 $’000

2010 $’000

subscription income received in advance

34,314

26,757

34,314

26,757

total other liabilities

34,314

26,757

34,314

26,757

2011 $’000

2010 $’000

2011 $’000

2010 $’000

incidents occurred but request yet to be received

2,090

2,988

2,090

2,988

outstanding requested indemnity

5,486

13,381

5,486

13,381

prudential margin

2,544

3,602

1,877

2,602

note 22 provisions

group

society

provision for indemnity obligations (refer note 1(i))

discount to present value

(808)

(1,309)

(808)

(1,309)

9,312

18,662

8,645

17,662

(refer note 2(a)(iii))

5,627

2,982

employee entitlements (refer note 1(i))

1,100

952

1,100

952

16,039

22,596

9,745

18,614

2,590

7,321

2,590

7,321

non-current

13,449

15,275

7,155

11,293

total provisions

16,039

22,596

9,745

18,614

18,662

22,376

17,662

20,876

(2,201)

(1,017)

(2,201)

(1,017)

- prudential margin

(1,058)

(1,028)

(725)

(528)

indemnity payments made

(6,091)

(1,669)

(6,091)

(1,669)

9,312

18,662

8,645

17,662

carrying amount at start of year

2,982

2,658

increase (decrease) in estimate

2,645

324

carrying amount at end of year

5,627

2,982

eligible retirement claims (subject to rocs)

total provisions current

movements: provision for indemnity obligations carrying amount at start of year recognised in the statement of comprehensive income (refer note 10) - net indemnity charge

carrying amount at end of year provision for eligible retirement claims

notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

note 23 deferred tax (asset)/liability group

society

2011 $’000

2010 $’000

2011 $’000

2010 $’000

(45)

(36)

(9)

(6)

(261)

(229)

(261)

(229)

amounts recognised in profit or loss accrual for audit fees provision for employee entitlements

(2,761)

(2,167)

investment revaluations

provision for indirect claims handling costs

711

183

(12)

(20)

interest receivable

381

651

252

144

dividend receivable

101

(154)

216

(154)

216

702

302

702

302

(1,326)

(1,011)

553

431

(1,011)

(1,523)

431

250

184

395

184

395

adjustment to opening DTL/DTA

(216)

(209)

(216)

(209)

credited / charged to the statement of comprehensive income

(283)

326

154

(5)

(1,326)

(1,011)

553

431

732

854

(149)

129

(asset)/liability to reverse after 12 months

(2,058)

(1,865)

702

302

net deferred tax (asset)/liability

(1,326)

(1,011)

553

431

impairment of investments per AASB 136 amounts recognised in equity investment revaluations net deferred tax (asset)/liability movements opening balance at 1 July credited / charged to equity

closing balance at 30 June (asset)/liability to reverse within 12 months

note 24 share capital and members’ guarantee society

society

2011 shares

2010 shares

2011 $’000

2010 $’000

100,001

100

issued share capital ordinary shares – fully paid

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

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011 number of members 2011

2010

21,303

20,198

student

11,092

10,909

total members

32,395

31,107

membership category ordinary

note 25 key management personnel (a) directors The names of persons who were directors of the Society at any time during the financial year are as follows: S. Bitter, A T Browning, D R V Dickens, A A Fraser, L Rowe, 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 2011 and 2010 is set out below. The key management personnel are: all the directors of the Society and the persons with the authority and responsibility for planning, directing and controlling the activities of the Society (A T Browning, W F Berryman and R J Miles). group

short-term benefits post-employment benefits total renumeration of key management personnel

society

2011 $

2010 $

2011 $

2010 $

1,640,916

1,478,765

1,333,716

1,158,973

363,909

311,193

252,286

211,873

2,004,825

1,789,958

1,586,002

1,370,846

(c) other transactions with directors, key management personnel, director-related entities and key management personnel-related entities D R V Dickens provides the Society with specialist medical indemnity claim services. He is a member of various claims and management committees. He is paid sessional fees on terms and conditions no less favourable to the Society than normal commercial terms and conditions. Whilst a director, he received up until his retirement from the board $70,417 (2010:$130,000) above his directors fees for this work. These amounts are included within note 25(b). R W L Turner provides the Society with specialist medical indemnity claim services and medical practice category service. He is a member of various claims and membership committees. He is paid sessional fees on terms and conditions no less favourable to the Society than normal commercial terms and conditions. He received $128,700 (2010:$52,000) above his directors fees for this work. These amounts are included within note 25(b). C J Steadman provides the Society with specialist medical indemnity claim services and medical indemnity risk management services. He is paid sessional fees on terms and conditions no less favourable to the Society than normal commercial terms and conditions. He received $56,766 (2010: $26,000) above his directors fees for this work. These amounts are included within note 25(b). He was also was paid $8,834 (2010: $3,850) for conducting risk management workshops. This amount is not included within note 25(b).

notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

note 26 remuneration of auditors group

society

2011 $

2010 $

2011 $

2010 $

audit of the financial report

175,919

163,180

61,903

57,500

audit of regulatory returns

65,688

61,030

17,768

16,500

ernst & young

other audit related work

25,218

2,500

24,720

2,500

taxation compliance services

84,202

141,950

30,300

112,750

351,027

368,660

134,691

189,250

total renumeration of auditors

note 27 related parties shareholding of the society MIPS Holdings Pty Ltd (“MIPSH”) owns 100% (2010: 100%) of the issued ordinary shares of the Society. As a shareholder, MIPSH is not entitled to a dividend or any surplus assets (except for the return of capital) in the event of a winding up.

wholly-owned group The wholly-owned Group consists of the Society and its wholly-owned subsidiaries MIPS Insurance Pty Ltd (MIPSi), Queensland Doctor’s Mutual Pty Ltd (QDM) and Professional Management Australia Pty Ltd (PMA).

associates The Society sold its investment in PIA during the year ended 30 June 2010 and is not considered a related party during the year (refer note 29).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 2011, the Society and the Group received $33,084 (2010: $34,855) on account of interest on the escrow account. The Society paid an amount of $nil (2010:$ 142,711) to PIA, being refund of recoveries due to third party recoveries. group aggregate amounts of claims recoveries receivable from pia at balance date:

society

2011 $’000

2010 $’000

2011 $’000

2010 $’000

current

1,140

1,238

1,140

1,238

non-current

1,862

2,535

1,862

2,535

total claims recoverable from PIA

3,002

3,773

3,002

3,773

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. All insurance cover is provided to MIPS members as a member benefit by MIPS in the form of Master and Group policies. The Society has a Master Policy for insurance cover with its subsidiary MIPS Insurance Pty Ltd (“MIPSi”). During the year ended 30 June 2011 the Society paid $30,238,962 (2010: $18,816,267) to MIPSi.

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011 MIPSi pays the Society a service fee for the provision of service under a Service Level Agreement (“SLA”). During the year ended 30 June 2011 the Society received $4,100,000 (2010: $2,000,000) from MIPSi. A further performance fee of $1,000,000 (2010: $2,000,000) is payable by MIPSi to the Society relating to the year ended 30 June 2011. PIA paid the Society a service fee for the provision of services under a Service Level Agreement (“SLA”) which terminated at 30 June 2010. During the year ended 30 June 2011 the Society and the Group received $nil (2010:$ 108,753). group statement of financial position balances with related parties

society

2011 $’000

2010 $’000

2011 $’000

2010 $’000

PIA

MIPS insurance

1,144

1,688

1,144

1,690

MIPS insurance

monies held in trust on behalf of insurer (MIPSI)

(218)

premiums to be collected on behalf of MIPSI

218

receivables

payables

note 28 investments in subsidiaries group

society

2011 $’000

2010 $’000

2011 $’000

2010 $’000

MIPS Insurance Pty Ltd (“MIPSi”)

6,250

Professional Management Australia Pty Ltd (“PMA”)

250

Queensland Doctors’ Mutual Pty Ltd (“QDM”)

total investment in subsidiaries

6,508

name of company

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

principal activity

country of incorporation

class of shares

ownership 2011

interest 2010

insurance

australia

ordinary

100

dormant

australia

ordinary

100

medical defence organisation

australia

ordinary

100

notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

note 29 investments in associates group

society

2011 $’000

2010 $’000

2011 $’000

2010 $’000

Professional Insurance Australia Pty Ltd (“PIA”)

total investment in associates

unlisted associates

group name of company

Professional Insurance Australia Pty Ltd (PIA)

principal activity

ownership interest

carrying amount

2011 %

2010 %

2011 $’000

2010 $’000

professional indemnity insurance

PIA is a company that provides general insurance underwriting to medical defence organisations and undertakes related investment activities. Its activities have been in run-off since 1 July 2003. During the year ended 30 June 2010, the Society sold its investment in PIA for $10,607,570 with settlement being achieved on 29 June 2010 after Treasury approval. group 2011 $’000

2010 $’000

carrying amount at the beginning of the financial year

7,495

share of net profit / (loss)

sale proceeds

(10,608)

profit on sale of investment

3,113

carrying amount at the end of the financial year

profits / (loss) before income tax

income tax expense (credit)

net profit

Revenue

Net profit

Liabilities

movements

share of associates’ profits

Summarised financial information of associates

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

note 30 reconciliation of net profit to net cash inflow from operating activities group

net profit

society

2011 $’000

2010 $’000

2011 $’000

2010 $’000

17,251

20,262

13,472

16,958

299

398

273

390

(1,156)

(3,278)

(6,318)

(16,293)

(549)

1,058

308

(5,831)

(580)

(5,293)

(2,263)

non-cash items depreciation net (gain)/loss on investments changes in working capital (increase)/decrease in recoveries receivable (increase)/decrease in receivables (increase)/decrease in other assets

393

(1,929)

9,339

(18,788)

(357)

124

(357)

124

865

(1,603)

1,380

1,774

(2,743)

increase/(decrease) in provisions

(6,558)

(3,293)

(8,870)

(3,117)

increase/(decrease) in outstanding claims

29,544

9,577

increase/(decrease) in unearned premium

(18,496)

(increase)/decrease in interest receivable (increase)/decrease in rocs expense increase/(decrease) in accounts payable

increase/(decrease) in provision for tax payable

(485)

323

(184)

(420)

increase/(decrease) in provision for deferred income tax

(315)

512

122

181

increase/(decrease) in other liabilities

7,557

20,559

7,557

20,559

22,446

25,875

18,945

4,871

net cash inflow/(outflow) from operating activities

note 31 commitments group

society

2011 $’000

2010 $’000

2011 $’000

2010 $’000

not later than one year

899

856

899

856

later than one year but not later than two years

834

491

834

491

later than two years but not later than five years

583

279

583

279

2,316

1,626

2,316

1,626

operating lease commitments payable:

total commitments

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

notes to the financial report

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

note 32 capital adequacy All insurance business is underwritten by MIPSi and hence the requirement to disclose capital adequacy information. The below capital adequacy information relates to MIPSi.

paid-up ordinary shares retained earnings brought forward

2011 $â&#x20AC;&#x2122;000

2010 $â&#x20AC;&#x2122;000

6,250

71,590

64,571

current year earnings

3,529

7,019

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

8,170

4,851

premium liability surplus / (deficit) (net of tax)

(2,134)

87,405

82,691

less : deductions

(1,909)

(1,469)

net tier 1 capital

85,496

81,222

total capital base

85,496

81,222

minimum capital requirement

27,627

25,806

3.09

3.15

capital adequacy multiple

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

note 33 contingent liability a) legal proceedings: The Group operates in the insurance industry and is subject to legal proceedings in the normal course of business. While it is not practicable to forecast or determine the final results of all pending or threatened legal proceedings, management does not believe that such proceedings (including litigations) will have a material effect on the results of the Group or the Society and their financial position.

b) guarantees: The Group has issued the following guarantees at 30 June 2011: i) A bank guarantee of $85,000 (2010: $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 (2010: $80,000) issued to AMP Capital Investors Ltd in respect of rental bond for Suite 5.02, Level 5, 140 Arthur Street, North Sydney NSW (NSW office of the society) iii) A bank guarantee of $50,000 (2010: $50,000) issued to BNY Trust Company of Australia Ltd (2010: J.P Morgan Trust Australia Ltd) in respect of rental bond for Citilink Business Centre, 153 Campbell Street, Bowen Hills, Qld (Qld office of the Society).

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries notes to the financial report for the year ended 30 June 2011

note 34 events occurring after balance date No matters or circumstances have arisen since 30 June 2011 that have significantly affected, or may significantly affect: (a) the Group or Societyâ&#x20AC;&#x2122;s operations in future years, or (b) the results of those operations in future years, or (c) the Group or Societyâ&#x20AC;&#x2122;s state of affairs in future financial years.

note 35 authorisation of the financial report The financial report of the society for the year ended 30 June 2011 was authorised for issue in accordance with a resolution of directors on 12 October 2011

directors' declaration

Medical Indemnity Protection Society Ltd and its subsidiaries directorsâ&#x20AC;&#x2122; declaration In accordance with a resolution of the directors of the Company, we state that: In the opinion of the directors: (a) the financial statements and notes of the Company are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Companyâ&#x20AC;&#x2122;s financial position as at 30 June 2011 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; (b) the financial statements and notes also comply with International Financial Reporting Standards as disclosed in note Note 1; and (c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

On behalf of the Board

R W L Turner Director

A T Browning Managing Director

Melbourne 12 October 2011

MIPS annual report 2010-2011

Medical Indemnity Protection Society Ltd and its subsidiaries

Independent audit report

Medical Indemnity Protection Society Ltd and its subsidiaries

MIPS annual report 2010-2011

annual report 2010 - 2011 Medical Indemnity Protection Society Ltd ABN 64 007 067 281 MIPS Insurance Pty Ltd ABN 81 089 048 359 Level 3, 15-31 Pelham Street Carlton VIC 3053 Australia PO Box 25 Carlton South VIC 3053 Tel: (03) 8620 8888 Fax: (03) 9654 6923 Email: info@mips.com.au www.mips.com.au