Hey, What’s VMIA?
Have you ever wondered how iconic Victorian assets like Flinders Street Station, Fed Square and the State Library of Victoria are insured? I sure hadn’t.
It turns out the Victorian State Government set up a captive insurance pool to provide insurance coverage to its vast array of assets and risks. The entity is named the Victorian Managed Insurance Authority, or simply VMIA.
I have spent the last couple of years working at VMIA as its Actuarial Manager and I wanted to share the fascinating structure of the scheme and my thoughts on what actuaries can take away from a rather unique entity in Australia.
How does VMIA work?
VMIA provides insurance coverage to cover the vast array of activities undertaken by the Victorian Government. This spans property and liability insurance for assets including roads, train systems, government buildings and building contents, all the way to medical indemnity insurance for government hospitals and health services, and even motor and travel insurance for government employees.
Since May 2010 and at the direction of the Victorian Government, VMIA has also provided builders warranty insurance, called Domestic Building Insurance or ‘DBI’ in Victoria.
DBI provides some protection to Victorian homeowners in the event that their building project can’t be completed or there are defective works which cannot be rectified as their builder has died, disappeared, become insolvent, or failed to comply with a VCAT or Court order. To focus on the government side of VMIA, this article largely ignores DBI which would itself require an article. This article also ignores VMIA’s function as a risk advisor to clients and to the State.
To cover the cost of claims and other expenses of running VMIA, premiums are charged to departments and agencies depending on their historical claims experience and risk profile. These fund the insurance liabilities, which are reserved on VMIA’s own balance sheet. To support the long-term financial viability of VMIA, commercial reinsurance is sought, ceding risk above the retention primarily for catastrophic property and liability risks.
In sum, VMIA has total premium of over $600 million and insurance liabilities of over $3 billion, reflecting the quantum of underlying claims arising from a wide variety of risks. This consists of mainly the medical indemnity, DBI, property and liability portfolios, which are the main source of claims (particularly large ones!).
VMIA has seen significant claims growth over recent years. VMIA’s largest risks are long-tailed liability risks, so common law trends relating to increasing awards to plaintiffs and a growing litigation culture have been significant upward drivers of VMIA’s claims and premiums. Flooding has also been a key natural peril for VMIA, causing considerable damage to roads, pathways and other assets.
How does VMIA compare to commercial insurers?
One of the most fascinating aspects of VMIA is what VMIA is not. As a State Government captive insurer, VMIA shares similarities with commercial insurers in that it also manages a wide variety of insurance risks by charging premiums to clients and using externally sourced reinsurance cover.
However, there are important differences with significant implications for financial/capital management and operations. The main differences are explored in the table below.
This table outlines the differences between VMIA and commercial insurers across several features.
| Feature | VMIA | Commercial Insurers |
|---|---|---|
| Quantum and growth of business | Client membership is restricted and therefore insurance pool size sees limited growth. This means technical premium pools are charged and intermediation focuses mostly on risk advice, such as risk optimisation and harm reduction, as well as administrative support. | New business and retention are central to operations, particularly intermediation where channels are tapped to meet emerging customer needs and win new business. |
| Underwriting | Used primarily for technical pricing. The State orders specific risks be insured although policy conditions can be imposed, such as limits, deductibles and exclusions. | Risk selection is essential to risk management. Some significant risks underwritten by VMIA are largely uninsurable in the commercial market (such as legal representation costs for government officers at inquiries). |
| Financial backing | Supported by reserves and capital but ultimately backed by the State. | Reserves and capital can be supported by a Group or Parent entity, but this is often not the case. So there is strong reliance on capital strength on a standalone basis. |
| Capital management | Governed by the Government’s Prudential Insurance Standard, including an economic capital approach backed by a Dynamic Financial Analysis model. | Governed by APRA capital standards regarding regulatory capital, capital management planning and risk management. Prescribed capital ratios are actively monitored by APRA. Commercial insurers may or may not utilise a Dynamic Financial Analysis model. |
| Investment strategy | Majority growth assets to target relatively higher long-term investment returns. The higher returns offset technical premium pools and hence provide savings to the State. | Focus on short-term liquidity via fixed interest/ cash as required by APRA. |
Concluding remarks
From an actuarial perspective, VMIA’s story is the story of any member-centric insurance captive. Risks have been pooled and long-term costs are reduced using a long-term investment strategy. How VMIA differs from the commercial market reflects the nature of an insurance captive.
Hopefully readers have found it interesting to have the particulars of VMIA fleshed out by an insider. Personally, I have personally found the work to be captive-ating, so to speak.
Because VMIA has been my workplace for years, I’d like to finish on a personal note. From a non-actuarial perspective, VMIA’s story is the story of the Victorian people. As a proud Victorian and actuary, it has been a joy and a privilege to combine important aspects of my life and belief system into my professional work: my love for where I was born and live, my career in insurance, and my adamantine respect for the important role of Government in our society and world.
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