Issue
AusCF1
AusCF entities are:
(a) not-for-profit entities; and
(b) for-profit entities that are not applying the Conceptual Framework for Financial Reporting (as identified in AASB 1048 Interpretation of Standards).
For AusCF entities, the term ‘reporting entity’ is defined in AASB 1057 Application of Australian Accounting Standards and Statement of Accounting Concepts SAC 1 Definition of the Reporting Entity also applies. For-profit entities applying the Conceptual Framework for Financial Reporting are set out in paragraph Aus1.1 of the Conceptual Framework.
1
Medical Defence Organisations (MDOs) are mutual organisations that accept subscriptions or premiums from their members for professional indemnity cover. The membership rules of MDOs traditionally have included a discretion for the organisation over whether or not to pay claims made by members, which is a key difference from insurance contracts written by registered general insurers. For this reason, MDOs have been considered by the industry to be outside the scope of Accounting Standards dealing with general insurance. However, under legislative changes applying from 1 July 2003, MDOs (or their subsidiaries) are able to offer new or renewal medical indemnity cover only as general insurers, under contracts of insurance. Such contracts are accounted for in accordance with Accounting Standard AASB 1023 General Insurance Contracts. Discretionary indemnity still applies to some arrangements entered into prior to 1 July 2003, depending on any revision of the terms offered by an MDO.
2
Traditionally, MDOs accepted subscriptions on a claims-incurred basis, which requires the member to have been a member of the MDO at the time the incident (event) occurred in order to be able to report a claim for indemnity at any time in the future. However, MDOs generally now accept subscriptions or premiums on a claims-made basis, either in addition to or in place of the claims-incurred basis.
3
Under the claims-made basis, a member normally is required to report claims for indemnity to the MDO whilst they are a member, in respect of events which have occurred during their claims-made membership period, once the member has become aware of the event. Furthermore, MDOs generally require the member to have also been a member since the period in which the event occurred.
4
MDOs may also have offered Extended Reporting Benefits (ERB) indemnity, under which members could pay an exit fee (either upon resignation or over numerous years of membership) and subsequently make claims in relation to incidents that occurred prior to the claimant ceasing to be an active member of the MDO. Similar claims reporting benefits may have been offered by MDOs in relation to the death, disablement or retirement (DDR) of members, with members qualifying for DDR indemnity through death, disablement, purchase upon retirement or satisfying a minimum financial membership period requirement, such as ten or fifteen years’ membership. Legislative changes effective 1 July 2004 require MDOs or insurers to provide run-off cover contracts that encompass DDR and similar circumstances, such as not engaging in private medical practice for at least three years and cessation of private medical practice due to maternity. Members’ regular premiums include a component to pay for their run-off cover when they become eligible. As the Commonwealth Government will reimburse the claims and costs paid under the run-off cover scheme, a run-off cover support payment is imposed as a tax in relation to the premiums received by the MDO (or insurance subsidiaries) from members.
5
There are different views concerning when MDOs should recognise liabilities for claims by members, for example whether claims liabilities should be recognised prior to any formal exercise of discretion to assist a member with a claim (where discretion continues to be relevant) or prior to notification of the claim by the member, as claims incurred but not reported. Concern has been expressed that, in the absence of authoritative guidance, diverse or unacceptable liability recognition practices may continue in the industry. This will undermine the relevance and reliability of general purpose financial statements.
6
The issues are:
(a) should an MDO recognise a liability for a professional indemnity claim reported to the MDO by a member before, or only after, the MDO has exercised its discretion (where relevant) in favour of assisting the member with the claim;
(b) should an MDO recognise a liability for a professional indemnity claim incurred but not yet reported to the MDO (IBNRs) by a member, in relation to each of the following:
(i) the claims-incurred basis of indemnity;
(ii) extended reporting benefit indemnity, death, disablement or retirement arrangements, and other run-off cover; and
(iii) the claims-made basis of indemnity; and
(c) what disclosures are appropriate in the financial statements?