Insurance Australia : Independent auditor's report 2022 (99.54 KB)

INDEPENDENT

AUDITOR'S REPORT

TO THE SHAREHOLDERS OF INSURANCE AUSTRALIA GROUP LIMITED

REPORT ON THE AUDIT OF THE FINANCIAL REPORT Opinion

We have audited the Financial Report of Insurance Australia Group Limited (the Company).

In our opinion, the accompanying Financial Report of the Company is in accordance with the Corporations Act 2001, including:

• giving a true and fair view of the Group's financial position as at 30 June 2022 and of its financial performance for the year ended on that date; and
• complying with Australian Accounting Standards and the Corporations Regulations 2001.

The Financial Report comprises:

• Consolidated balance sheet as at 30 June 2022;
• Consolidated statement of comprehensive income, Consolidated statement of changes in equity, and Consolidated cash flow statement for the year then ended;
• Notes including a summary of significant accounting policies; and
• Directors' Declaration.

The Group consists of the Company and the entities it controlled at the year-end or from time to time during the financial year.

Basis for opinion

We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the Financial Report section of our report.

We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board's APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our other ethical responsibilities in accordance with these requirements.

Key Audit Matters

The Key Audit Matters we identified are:

• Valuation of Gross outstanding claims liability
• Valuation of Reinsurance and other recoveries on outstanding claims
• Valuation of Goodwill
• Customer refunds provision

Valuation of Gross outstanding claims liability ($13,964 million) Refer to Note 2.2 of the Financial Report

The Key Audit Matter

Valuation of Gross outstanding claims liability is a Key Audit Matter due to the following factors:

• judgement is required by us to consider the central estimate of the gross outstanding claims liability. This is a significant estimate as the eventual outcomes of incurred, but unsettled, claims at the balance sheet date are inherently uncertain;
• there is limited information available and a greater level of uncertainty inherent in assessing the Group's estimations of claims which have been incurred by the balance sheet date but have not yet been reported;

Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Report of the current period.

These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

How the matter was addressed in our audit

We involved our actuarial specialists and senior personnel with industry experience. Our key procedures included:

• comparing the Group's actuarial methodologies with the methodologies applied in the industry, prior periods and the requirements of the accounting standards;
• evaluating the assumptions including loss ratios, claim frequencies, average claim sizes, ultimate claims costs and allowance for future claims inflation, by comparing these to our expectations based on the Group's historical experience, our industry knowledge and externally observable trends (e.g. APRA and regulatory statistics);

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• judgement is required when considering the Group's application of historical experience of claims development to determine current estimates. This includes the variability between the original estimation and the ultimate settlement of claims where there is a long time delay between the claim being incurred and the ultimate settlement. Examples include claims arising from Workers' Compensation, Liability, Compulsory Third Party (CTP) and the Canterbury earthquakes;
• claims estimation uses an actuarial modelling process which involves complex and subjective actuarial methodologies, as well as judgements and assumptions about future events and developments, both within and external to the Group. Actuarial assumptions include loss ratios, claim frequencies and average claim sizes, and allowance for future claims inflation. Changes in methodologies, judgements and assumptions can have significant implications to the quantification of outstanding claims liabilities, as outlined in Note 2.2 (D). There are currently elevated inflationary pressures on claims costs which are difficult to estimate. Judgement is required when considering the use of recent experience to determine outstanding claims liabilities;
• judgement is required to assess the Group's estimation of the probability of claims arising from circumstances connected with Business Interruption claims as a result of the COVID-19 pandemic. This includes the judgement in respect to the probability of special leave being granted and applications to the High Court of Australia, the estimation of potential losses on a probability-weighted basis and assumptions on the level of economic losses to insured businesses and industries;
• judgement is required to assess the Group's estimation of the periods the claims are expected to be settled in;
• the estimation of claims at year end relies on the integrity of the underlying data, including claim payments and individual estimates of unsettled claims, which is gathered from a number of different systems; and
• outstanding claims includes statistically determined risk margins developed by the Group to make allowance for the inherent uncertainty in estimating ultimate claim settlements. The risk margins are included to achieve a specified probability of adequacy for the total outstanding claims reserves.

We involved actuarial specialists to supplement our senior audit team members in assessing this key audit matter.

• comparing the prior year claims liability estimate to actual experience in the current year. We used this information to assess the current year's actuarial assumptions applied in the valuation;
• evaluating scenario analyses prepared by the Group for the estimation of insurance liabilities associated with Business Interruption claims. This includes stress testing the probabilities associated with special leave being granted and policyholders ultimately being successful;
• considering judgements by the Group to estimate the period in which the claims will be settled by analysing historical payment patterns and any significant changes;
• assessing the risk margin parameters for significant portfolios to external sources of data including published statistics (e.g. APRA - published data), prior periods, our industry knowledge and externally observable trends (e.g. published data for large general insurance companies);
• for certain classes of business, we independently projected the gross outstanding claims liability by applying our own actuarial assumptions. We used this re-projection to compare our results to the Group's estimates and challenge significant differences;
• testing key inputs such as claim payments and estimates of unsettled claims in the valuation, financial records and controls by:
• • testing accounting and actuarial controls, such as reconciliations of key data. We involved our IT specialists for testing data integrity risks within the claims process and claims systems;
  • testing key controls (e.g. limits of authority or segregation of duties) within the claims case estimates and claims payments;
  • testing samples of claims case estimates and paid claims to third party evidence (such as quotes or invoices);
• assessing the disclosures in the financial report using our understanding obtained from our testing and against the requirements of the accounting standards.

Valuation of Reinsurance and other recoveries on outstanding claims ($7,886 million) Refer to Note 2.2 of the Financial Report

The Key Audit Matter

The valuation of Reinsurance and other recoveries on outstanding claims is a Key Audit Matter as:

• the Group has a complex range of significant reinsurance contracts which are designed to protect its aggregate exposure to catastrophic claim events. These reinsurance contracts comprise of the whole-of-account quota share arrangements, the catastrophe excess of loss program, adverse development covers in the form of excess of loss contracts, other quota share arrangements and other agreements covering particular exposures, giving rise to our evaluation of multiple features;

How the matter was addressed in our audit

In addition to the audit procedures undertaken to assess the valuation of gross outstanding claims liability above, our procedures included:

• testing a sample of key controls for entering reinsurance arrangements;
• testing the existence of reinsurance cover and the recognition of a reinsurance recovery asset through checking the scope and terms of a sample of underlying contracts. We did this with reference to accounting standards and our expectations based on past experience;

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KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation.

• implicit dependence on the estimation of gross outstanding claims; and
• the reinsurance arrangements represent a significant portion of assets.

The consideration of the accounting treatment across multiple contracts, assessment of recoverability in line with the reinsurance agreements, reinsurer counterparty credit worthiness and capital strength requires significant effort by our senior personnel.

Valuation of Goodwill ($2,823 million)

Refer to Note 5.1 of the Financial Report

The Key Audit Matter

Valuation of Goodwill is a Key Audit Matter as:

• judgement is involved by us in assessing the cash- generating units identified by the Group; and
• our evaluation involves judgement in relation to the Group's forecast cash flows and key forward looking assumptions, in particular discount rates, risk premium, growth rates, profit measures and terminal growth rates. We focused specifically on those cash-generating units where there were potential impairment indicators (e.g. performance compared to budget).

The Group uses complex discounted cash flow models to perform their annual testing of goodwill for impairment. The models are manually developed, use adjusted historical performance, and a range of internal and external sources as inputs to the assumptions. Complex modelling using forward- looking assumptions tends to be prone to greater risk for potential bias, error and inconsistent application. These conditions necessitate additional scrutiny by us, in particular to address the objectivity of sources used for assumptions, and their consistent applications.

We involved valuation specialists to supplement our senior audit team members in assessing this key audit matter.

Customer Refunds Provision ($309 million)

Refer to Note 5.3(D) of the Financial Report

The Key Audit Matter

Customer refunds provision is a Key Audit Matter as:

• judgement is involved in determining the existence of a present obligation arising as a result of a past event against the criteria in the accounting standards;
• judgement is involved in determining a reliable estimate of the amounts which may be paid based on available information, including estimates of related costs;
• customers may be impacted across multiple historic years, with varying pricing implications, adding complexity to the estimate of possible refunds;

• evaluating a sample of reinsurance recoveries for whole-of- account quota share contracts. We referred to the key terms of the reinsurance contracts, and applied them to the Group's underlying claims estimates and paid claims data to assess the reinsurance and other recoveries due. These independently generated results were compared to the amounts recognised by the Group;
• assessing the recoverability of balances owed by reinsurer counterparties by considering their credit worthiness and capital strength, payment history of amounts and evaluation of any indicators of disputes with counterparties;
• assessing the disclosures in the financial report using our understanding obtained from our testing and against the requirements of the accounting standards.

How the matter was addressed in our audit

With the assistance of our valuation specialists, our procedures included:

• considering the appropriateness of the value in use method applied by the Group in their annual testing of goodwill for impairment against the requirements of the accounting standards;
• comparing the forecast cash flows contained in the discounted cash flow models to Board approved budgets and business plans;
• assessing the accuracy of past budgets to actual cash flows in order to challenge the Group's current forecasts;
• assessing the Group's key assumptions used in the discounted cash flow models such as discount rates, risk premium, growth rates, profit measures and terminal growth rates by comparing them to external, observable metrics (e.g. GDP growth and inflation including forecasts provided by Oxford Economics and IBIS World), historical experience, our knowledge of the markets, and current market practice;
• performing sensitivity testing, using the Group's models, to evaluate the impact of varying key assumptions such as growth rates and discount rates within a possible range. This enabled us to critically challenge the Group's quantification of assumptions and focus our procedures to the most sensitive assumptions;
• evaluating the internally prepared discounted cash flow model. This included assessing the integrity of the models used, including the accuracy of the underlying formulas;
• assessing the disclosures in the financial report using our understanding obtained from our testing and against the requirements of the accounting standards.

How the matter was addressed in our audit

Our procedures included:

• obtaining an understanding of the Group's processes for estimating customer refund payments and associated project costs;
• enquiring with the Group regarding ongoing legal, regulatory and other investigation into remediation activities;
• evaluating correspondence with relevant regulatory bodies for consistency to the basis of estimation made by the Group;

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• potential for legal proceedings, further investigations, and reviews from its regulators leading to a wider range of estimation outcomes for us to consider.

These features and the significance of the remediation program necessitates significant effort by our senior team members.

• evaluating the basis for recognition of a provision and associated costs against the accounting standard AASB 137 Provisions, Contingent Liabilities and Contingent Assets. We did this using our understanding of the matter, records of its status and progress, and assessing these against the recognition criteria of the accounting standard;
• testing the valuation and accuracy of the provision by:
• • Assessing and challenging the method, data and key assumptions against our experience;
  • Sample checking data accuracy to underlying systems;
  • Performing model integrity checks;
• testing a sample of customer refund payments to internal and third party evidence (such as refund letters and bank reports) to test the movement in the provision during the year;
• testing completeness by evaluating where exposures may have arisen based upon our knowledge and experience of broader industry matters, the Group's documentation and the current regulatory environment. We also checked the features of these exposures against the criteria defining a provision or a contingency in the accounting standards;
• assessing the disclosures in the financial report using our understanding obtained from our testing and against the requirements of the accounting standards.

Other Information

Other Information is financial and non-financial information in Insurance Australia Group Limited's annual reporting which is provided in addition to the Financial Report and the Auditor's Report. The Directors are responsible for the Other Information.

Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion.

In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor's Report we have nothing to report.

Responsibilities of the Directors for the Financial Report

The Directors are responsible for:

• preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001;
• implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error; and
• assessing the Group and Company's ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group and Company or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the audit of the Financial Report

Our objective is:

• to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error; and
• to issue an Auditor's Report that includes our opinion.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists.

Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the Financial Report.

A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at https://www.auasb.gov.au/admin/file/content102/c3/ar1_2020.pdf. This description forms part of our Auditor's Report.

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KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation.

REPORT ON THE REMUNERATION REPORT

Opinion

In our opinion, the Remuneration Report of Insurance Australia Group Limited for the year ended 30 June 2022, complies with Section 300A of the Corporations Act 2001.

KPMG

Brendan Twining

Partner

Sydney

12 August 2022

Directors' responsibilities

The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with Section 300A of the Corporations Act 2001.

Our responsibilities

We have audited the Remuneration Report included in pages 31 to 53 of the Directors' report for the year ended 30 June 2022.

Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards.

Andrew Reeves

Partner

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KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation.