Risk Management in Private Health Insurance

This assignment examines the risks faced by private health insurance companies in Australia. It requires an analysis of financial fraud trends within the sector, drawing on industry perspectives and case studies like Medibank's annual reports. The focus will be on evaluating risk management techniques employed by these companies, particularly internal controls over financial reporting as outlined by Auditing Standards (ASA 315) and frameworks like KPMG's Audit Quality Report. The assignment encourages using Deloitte's Insurance Regulatory Trends and OECD's Corporate Governance publications to provide a broader context for the analysis.

Running head: Auditing
Auditing

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Executive Summary
As per Australian Auditing Standard ASA 315, it deals with the auditor’s accountability to recognize and
evaluate the risks of substantial misstatements in the financial reports of the company. It is done
through comprehending the organization and its atmosphere, including its internal control. The aim of
the auditor is to recognize the threats of substantial mismanagement, occurred as a result of deception
or mistake.
The risk evaluation methods shall comprise of enquiring the managerial personnel, whether they have
any information which would help them in the evaluation of risk of substantial misstatements. The
others include analytical procedures and examination. The business risk comprises of the risk resulting
from certain circumstances, which could affect the organization’s ability to achieve its goals.
In this report, Medibank Private Limited, the largest provider of health insurance in Australia, would be
assessed to recognize and evaluate the risk of substantial mismanagement, by PricewaterhouseCoopers.
Also, the audit procedures applied to assert the risk and internal control methods to lessen it ,would be
reflected upon.

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Table of Contents
Executive Summary.....................................................................................................................................1
1. Report on the knowledge gained of this entity and its environment..................................................3
Introduction to the company...................................................................................................................3
Regulatory Authority of the private health insurance sector in Australia................................................3
Applicable Financial Framework on Medibank Private Limited...............................................................3
Nature of Company’s Operations, its governance structures and its investments..................................3
Application of Accounting Policies in Medibank Private Limited.............................................................4
2. Entity’s Objectives and Assessment of related Business Risks.............................................................5
Entity’s Objectives...................................................................................................................................5
Assessment of related Business and Financial Risks................................................................................5
3. Identification of Account Balances Subjected to Risk of Material Misstatement................................7
Conclusion...................................................................................................................................................9
References.................................................................................................................................................10

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1. Report on the knowledge gained of this entity and its environment
Introduction to the company
Medibank Private Limited is the largest private health insurance provider in Australia. It operates in the
health insurance industry. It insures and sells its policies under the brand names: Medibank and AHM. It
has around 3.8 Million members and covers 29.1% of the market share. It operates as a public listed
company on ASX. It also deals in assisting the health insurance business, thereby earning income from
its ‘Complimentary Services’. Resources are also retained to compensate its regulatory reserves, which
generates monetary benefits from its portfolio of investment assets.
Regulatory Authority of the private health insurance sector in Australia
The private health insurance sector is regulated by Australian Prudential Regulation Authority (APRA) in
Australia (APRA, 2018). The organizations operating in the private health insurance sector in Australia
have to comply with the ‘APRA rules’ and ‘Prudential Standards ’. Also it is mandatory for the private
health insurers to provide information under the Financial Sector (Collection of Data) Act, 2001 and its
reporting standard to APRA. The organizations have to submit certain forms and follow directions of
APRA in this regard (Kokobe & Gemechu, 2016).
Applicable Financial Framework on Medibank Private Limited
The applicable laws and legislations on the ‘Medibank Private Limited ‘are:
Auditing and Assurance Standards Board
1. Australian Accounting Standards Board
2. Australian Prudential Regulation Authority
3. Australian Securities and Investment Commission
4. Financial Reporting Council
5. Financial System Inquiry
6. Standard Business Reporting
Nature of Company’s Operations, its governance structures and its investments
The company operates in the private health insurance sector in which it provides health insurance to the
people. Along with this, it also provides consultancies for health management and telehealth services
for the government and corporate consumers. It also trades in the travel, life and pet insurance products
and services.

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The health insurance business granted 91.6 % of the group’s revenue and 95.4 % of the segment
operating profit in 2016 (Medibank, 2016). The amount of revenue amounted to 91.9 % whereas the
segment operating profit decreased to 93.3 % in 2017 (Medibank, 2017). From the overall income
earned by the group in 2016 and 2017, the resident health insurance policies sold to the retail and
corporate consumers contributed to 97.8 %.
In 2016 and 2017, the investment portfolio was $2.5 Billion comprising of cash and other investments. It
provides sufficient cash to cover the insurance obligations and the mandatory reserves to meet claims
related to the Health Insurance business (Medibank, 2017).
The governance structure of Medibank Private Limited is as follows:
1. Audit committee- It supervises the financial reporting
2. Risk Management Committee- It assesses the organization’s present and future risk
management.
3. Investment and Capital Committee- It controls the investments and capital management events.
4. People and Remuneration Committee- It supervise the policies related to remuneration and
people.
5. Nomination Committee- It controls the overall board and committee membership and hierarchy
of the organization.
Apart from the committees, the Chief Executive Officer and Executive Leadership Team are
accountable for the performance of the company.
According to the Medibank (2016) the net income after tax in 2016 amounted to $417 Million while
in 2017 it was $ 452 Million. The total assets amounted to $ 3266.2 Million in 2016, while in 2017 it
was $ 3462.5 Million (Medibank, 2017).The total liabilities amounted to $ 1578.7 Million in 2016
while in 2017, it was $ 1742.7 Million. The total equity which comprises of Contributed Equity,
Reserves and Retained Earnings amounted to $1578.7 Million in 2016 while in 2017; it amounted to
$ 1719.8 Million. The organization’s investment portfolio comprises of 25 % /75% for growth and
defensive assets respectively. The company invests in listed and unlisted securities which are
quoted at their fair value.

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Application of Accounting Policies in Medibank Private Limited
The financial statements of the entity are authorized to be issued according to the resolution of the
directors. They are prepared for the consolidated entity (Group) comprising of Medibank and its
subsidiaries. The statement of accounts has been prepared according to the ‘Historical Cost Convention’
except the financial assets, land and building and liabilities quoted at their fair value or market price.
Also it follows different accounting policies according to its various segments.
2. Entity’s Objectives and Assessment of related Business Risks
Entity’s Objectives
The organization has set the following objectives for achieving better health for the human community
as a whole:
1. It aims to diversify the Medibank and AHM products to distribute the best services and
consultancy to its consumers.
2. It focuses on developing and offering the leading services to its customers.
3. Also as a part of its corporate social responsibility, it invests $ 4 Million towards childhood
obesity.
4. The Medibank Better Health Foundation focuses to develop health awareness in the society.
5. It has evolved ecofriendly policies as it believes that a healthy environment can create healthy
humans. It has endeavored to develop the green space in urban areas up to 20% by
2020(Medibank, 2018).
Assessment of related Business and Financial Risks
The substantial business risk which could influence Medibank’s business activities are as follows
(Auditing and Assurance Standards Board, 2013):
1. Competition and retaining of consumers: The emergence of new firms, with their partnership
with the existing firms can pose a threat to company’s existence in the market. The private
health insurers and assessment websites compete to retain the consumers regarding price,
products, service and channels which results in the diversion of the customers.
2. Health care prices and utilization: The increase in the health care costs can have an impact on
product margins. This can lead to reduction in the value of products.

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3. Change in the legislations: The change in the government policy and legislations may affect the
regulatory incentives, resulting in the decrease in the number of members.
4. Product pricing and design: The products design and prices are subject to government’s
approval. So, if there is a change in the government’s policies, it can pose a threat to the
product’s value.
5. Inappropriate claims: Inappropriate claims may arise due to frauds or errors resulting in the
entity’s outflow.
6. Capital Management and Investment Returns: The portfolio is subject to market risks which can
influence the value of the investment and income volatility.
7. Loss of Healthcare Agreements: Non-fulfillment of the health care agreements may result in
poor consumer experiences, loss of brand value and market share.
8. Loss of data: There may be loss of data, procedures and mechanisms in the organization. Also, it
may be influenced by cyber-attack (Ridha & Alnaji ,2015)
The Financial Risk comprises of the following risks:
1. Market rate risk: It comprises of the risk resulting from the variations of fair value or future
cash flows of the financial instruments, resulting from the variations in the market prices. It
has the following parts:
(a) Interest rate risk: The fluctuations in the market interest rates resulting in the variations in
the future cash flows is the risk of interest rates. The company is facing the risk of variations
in the interest rates in the cash and cash equivalents and fixed income investments. In 2016,
$1883.5 Million of the financial assets were exposed to Australian variable interest rate risks
(Medibank, 2016). In 2017, the number increased to $ 2167.1 Million (Medibank, 2017).
(b) Foreign currency risk: The risk influencing the variations in the foreign exchange rates results
in the foreign currency risk. The company’s is facing transaction currency exposures,
emerging from the purchase in foreign currencies. They comprise of dealings from
operational cost within the business and purchase of foreign currency denominated
instruments .In 2016, the financial instruments exposed to foreign currency risk amounted
to $ 91.6 Million (Medibank, 2016). In 2017, the number decreased to $ 76.4 Million
(Medibank, 2017).
(c) Price Risk: The risk resulting from the variations of the market prices of the fair value of
future cash flows of financial instruments is price risk. The entity is subjected to equity price

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risk comprising of investments in the infrastructure, property and Australian and
international equities (Otieno & Nyangechi , 2013).
2. Credit risk: The risk arising from the possible defaults of counterparty is termed as credit
risk. The company is facing the credit risk to the amounts equal to its financial assets
consisting of cash and cash equivalents and the financial assets at a fair value.
3. Liquidity Risk: The risk faced by the company where it confronts the problems in arranging
funds to fulfill its commitments associated with financial instruments. It may result from
incapability to sell the financial assets at their fair value, failure of the counter party to repay
its contractual liabilities or the company is unable to arrange the funds or an unexpected
insurance liability due for payment (Deloitte, 2017).
In the overall liquidity risk, the financial assets consist of property, plant and machinery and
investments in working capital (OECD, 2014).
3. Identification of Account Balances Subjected to Risk of Material Misstatement
Specific account balance
(i) (ii) (iii)
Name of the
account balance
Liquidity Risk Credit Risk Price Risk
(a) Explain why
the account
balance is at
significant risk of
material
misstatement.
The firm is facing the
risk of raising funds to
fulfil the obligations
concerned with
financial instruments.
So, it may manipulate
the accounts
receivables by
liquidating them and
thereby increasing the
amounts of cash and
cash equivalents (PWC,
The firm is facing the risk
of possible defaults by
counterparty, thus it is
subjected to the risk of
material misstatements.
The firm does not have
any financial mechanisms
to lessen the credit
risk .Also all the
instruments are
unsecured. The
management can alter
The firm is facing the risk
of fluctuations in the fair
value of the financial
instruments .It occurs due
to variations in the
market prices. As the firm
is subjected to price risk
in the fixed income
investments due to
changes in its credit
spreads. The
management can falsify

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2016). the amounts of the
financial assets and
project false accounts in
the financial reports to
show that it applies
certain measures to
mitigate the risk.
the value of the
investments which are
influenced by the price
risk. It can manipulate the
value of equities in the
financial statements
(Flynn, 2016).
(b) Explain the key
assertion at risk of
not being valid.
Existence - The
auditors believe that
the amounts of the
resources and financial
obligations do not exist
as stated in the books
of accounts.
Completeness- The
financial events have not
been recorded and the
revelations are not made
in the books of accounts.
Accuracy- The auditors
have a doubt on the
valuations of the assets
and liabilities (ACCA,
2016).
(c) Detail one (1)
relevant
substantive audit
procedure to
address the
assertion at risk as
identified in b)
above.
Planning: According to
KPMG (2015),the
auditors shall analyse
the possible risks and
frauds by contrasting
the various amounts
related to accounts
receivables.
Testing Controls and
transactions: The auditors
shall evaluate the internal
controls and examine the
appropriateness of the
dealings.
Testing Balance: The
auditors shall examine
the company’s
performance by using the
financial ratios and
statistical sampling
(ICPAK , 2017).
(d) Detail one (1)
relevant practical
internal control
that would
mitigate the risk in
relation to the
assertion at risk as
identified in b)
above.
Reconciliations:
Sudden accounting
reconciliations can
guarantee that the
balances in the
company’s books can
match with those of
the other entities
(KPMG, 2018).
Trial Balances: With the
help of double entry book
keeping system, the
reliability regarding the
balancing of books of
accounts can be ensured.
Approval Authority:
Specified managers
should be allocated the
various responsibilities
regarding the authenticity
of transactions (AICPA,
2014).

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10
Conclusion
To, conclude, the auditors PricewaterhouseCoopers have conducted an analysis of the financial
statements of Medibank Private Limited regarding the assessment of its environment and business risks.
It has evaluated its various account balances and stated the results pertaining to its study. They have
identified the various risks of substantial mismanagement which can be minimized with the help of key
audit procedures (PWC, 2017).
The auditors have reviewed various audit policies and procedures complied by the firm with respect to
the rules and regulations of the APRA and other legislations as mentioned in the above paragraphs. Also
the firm follows the ‘Corporate Governance Principles’ and has formed various committees for better
administration and accomplishment of its strategies and objectives.
Also, the environment in which the organization operates is full of vulnerabilities and market
fluctuations. So, the auditors have observed all the accounting policies of the organization and with the
help of various audit procedures and assertions; they tried to regulate the risks of material
misstatements.

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References
ACCA(2016). The Audit of Financial Statement Assertions. Retrieved from
http://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-
study-resources/f8/technical-articles/assertions.html#
AICPA(2014). The Importance of Internal Control in Financial Reporting and Safeguarding Plan Assets.
Retrieved from
https://www.aicpa.org/content/dam/aicpa/interestareas/employeebenefitplanauditquality/
resources/planadvisories/downloadabledocuments/plan-advisoryinternalcontrol-hires.pdf
APRA(2018). About APRA. Retrieved from http://www.apra.gov.au/AboutAPRA/Pages/Default.
Auditing and Assurance Standards Board (2013). Auditing Standard ASA 315 Identifying and Assessing
the Risks of Material Misstatement through Understanding the Entity and Its Environment.
Retrieved from
http://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standard_ASA
_315.pdf
Deloitte(2017). 2017 Insurance Regulatory Trends. The Wall Street Journal. Retrieved from
http://deloitte.wsj.com/riskandcompliance/2017/03/21/2017-insurance-regulatory-trends/
Flynn, K.(2016). Financial fraud in the private health insurance sector in Australia: perspectives from the
industry. Journal of Financial Crime. 23(1).143-158.
ICPAK (2017).Conducting Risk Assessment & Auditing the Internal Control System. Retrieved from
https://www.icpak.com/wp-content/uploads/2017/03/RISK-ASSESSMENT-AUDITING-ICS1.pdf
Kokobe, S.A.& Gemechu, D.(2016). Risk Management Techniques and Financial Performance of
Insurance Companies. International Journal of Accounting Research.4(1).
KPMG(2015). Audit quality . Retrieved from
https://assets.kpmg.com/content/dam/kpmg/pdf/2016/03/audit-quality-report-2015.pdf

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KPMG(2018). Internal controls over Financial Reporting. Retrieved from
https://home.kpmg.com/be/en/home/insights/2017/12/internal-controls-over-financial-
reporting.html
Medibank(2016). Annual Report 2016. Retrieved from
https://www.medibank.com.au/content/dam/medibank/About-Us/reporting-centre-2016/
Annual%20report/Medibank_Annual_Report_2016.pdf
Medibank(2017). Annual Report 2017. Retrieved from
https://www.medibank.com.au/content/dam/medibank/About-Us/pdfs/MPL_Annual_Report_2
017.pdf
Medibank(2018). Corporate responsibility : Our Approach. Retrieved from
https://www.medibank.com.au/about/corporate-responsibility/community-fund/
OECD (2014). Corporate Governance: Risk Management and Corporate Governance. OECD Publishing.
Otieno ,S. & Nyangechi ,E. O. (2013). Effectiveness of Internal Control Procedures on Management
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resilience-can-help-drive-growth-in-financial-services.pdf
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audit.pdf
Ridha, M. B. & Alnaji , L. (2015). Analysis and Measurement of Risks in Business: A Case Study on the
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