CREDIT RISK
a. NATURE OF THE RISK AND HOW MANAGED
Credit risk is the risk of loss from a counterparty failing to meet their financial obligations. The Group's credit risk arises predominantly
from investment activities, reinsurance activities and dealings with intermediaries. The Group’s credit risk appetite is approved by the
Board and the Group has a Credit Risk Policy which is consistent with the Board's risk appetite and also approved by the Board. The
policy outlines the framework and procedures in place to ensure an adequate and appropriate level of monitoring and management of
credit quality throughout the Group.
IAG Group Treasury is responsible for ensuring that the policies governing the management of credit quality risk are properly
implemented. Any new or amended credit risk exposures must be approved in accordance with the Group’s approval authority
framework.
Concentrations of credit risk exist where a number of counterparties have similar economic characteristics. At reporting date, there
are material concentrations of credit risk to the banking sector, in particular the four major Australian banks, also to securitised assets
in Australia and to reinsurers in relation to the reinsurance recoverables. Credit exposures are, however, sufficiently diversified so as
to avoid a concentration charge in the regulatory capital calculation (refer to the capital management note).
b. CREDIT RISK EXPOSURE
i. Premium and reinsurance recoveries on paid claims receivable
The maximum exposure to credit risk as at reporting date is the carrying amount of the receivables on the balance sheet.
An ageing analysis for certain receivables balances is provided below. The other receivables balances have either no overdue
amounts or an insignificant portion of overdue amounts. The amounts are aged according to their original due date. Receivables for
which repayment terms have been renegotiated represent an insignificant portion of the balances.
CONSOLIDATED
NOT OVERDUE
OVERDUE
TOTAL
<30 days
30-120 days
>120 days
$m
$m
$m
$m
$m
2015
Premium receivable
2,773
233
244
40
3,290
Provision for impairment - specific
-
(2)
(5)
(21)
(28)
Provision for impairment - collective
(5)
(1)
(1)
(4)
(11)
Net balance
2,768
230
238
15
3,251
Reinsurance recoveries on paid claims
176
87
10
27
300
Net balance
176
87
10
27
300
2014
Premium receivable
2,837
247
236
37
3,357
Provision for impairment - specific
-
(3)
(5)
(20)
(28)
Provision for impairment - collective
(7)
(1)
(1)
(4)
(13)
Net balance
2,830
243
230
13
3,316
Reinsurance recoveries on paid claims
153
29
14
34
230
Net balance
153
29
14
34
230
The majority of the premium receivable balance relates to policies which are paid on a monthly instalment basis. It is important to
note that the late payment of amounts due under such arrangements allows for the cancellation of the related insurance contract
eliminating both the credit risk and insurance risk for the unpaid amounts. Upon cancellation of a policy the outstanding premium
receivable and revenue is reversed.
ii. Reinsurance recoveries receivable on outstanding claims
Reinsurance arrangements mitigate insurance risk but expose the Group to credit risk. Reinsurance is placed with companies based
on an evaluation of the financial strength of the reinsurers, terms of coverage and price. The Group has clearly defined credit policies
for the approval and management of credit risk in relation to reinsurers. The Consolidated entity monitors the financial condition of its
reinsurers on an ongoing basis and periodically reviews the reinsurers’ ability to fulfil their obligations to the Consolidated entity under
respective existing and future reinsurance contracts. Some of the reinsurers are domiciled outside of the jurisdictions in which the
Group operates and so there is the potential for additional risk such as country risk and transfer risk.
The level and quality of reinsurance protection is an important element in understanding the financial strength of an insurer. The
financial condition of a reinsurer is a critical deciding factor when entering into a reinsurance agreement. The longer the tail of the
direct insurance, the more important is the credit rating of the reinsurer.
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