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Notes to the consolidated fnancial statements (continued)

for the year ended 30 June 2011

33. Signifcant accounting policies (continued)

33.2 Signifcant accounting policies specifcally applicable to General Insurance (continued)

33.2.1 General Insurance revenue and expense recognition (continued)

(b) Managed funds income

The Suncorp Group manages statutory insurance funds for external clients and earns income from the provision of services such as premium collection and claims processing (base fee) as well as an incentive fee based on performance results. Income for the base fee is recognised as the service is provided and for the incentive fee, as the income is earned. Fees receivable are based on management’s best estimate of the likely fee at balance date. There is a signifcant amount of judgement involved in the estimation process of the fees receivable which may not be fnalised for a number of years. The statutory authorities allocate the base fee to each authorised agent based on factors such as market share and service capability. The performance fee is allocated to each authorised agent based on performance components set by each statutory authority. (c) Claims expense

Claims expense represents payments for claims and the movement in outstanding claims liabilities. Claims represent the benefts paid or payable to the policyowner on the occurrence of an event giving rise to a loss or accident according to the terms of the policy. Claims expenses are recognised in proft or loss as losses are incurred, which is usually the point in time when the event giving rise to the claim occurs. (d) Outwards reinsurance expense

Premiums ceded to reinsurers are recognised as an expense from the attachment date over the period of indemnity of the reinsurance contract in accordance with the expected pattern of the incidence of risk.

33.2.2 Financial assets backing General Insurance liabilities

The Suncorp Group has designated fnancial assets held in portfolios that match the average duration of a corresponding insurance liability as assets backing General Insurance liabilities. These fnancial assets are designated as fair value through proft or loss as they are managed and their performance is evaluated on a fair value basis for internal and external reporting in accordance with the investment strategy. These fnancial assets include investment securities and receivables from policyowners, intermediaries and reinsurers; and investment settlement receivables. Receivables are valued at fair value which is approximated by taking the initially recognised amount and reducing it for credit risk and time value of money as appropriate. Short duration receivables with no stated interest rate are normally measured at the original invoice amount which approximates fair value.

33.2.3 Financial assets not backing General Insurance liabilities

Financial assets that do not back General Insurance liabilities include investment securities and receivables. Investment securities have been designated as fair value through proft or loss as they are managed and their performance evaluated on a fair value basis.

33.2.4 Reinsurance and other recoveries receivables

Reinsurance and other recoveries are measured as the present value of the expected future receipts, calculated on the same basis as the liability for outstanding claims.

33.2.5 Deferred insurance assets

(a) Deferred acquisition costs

Acquisition costs are deferred and recognised as assets where they can be reliably measured and where it is probable that they will give rise to premium revenue that will be recognised in proft or loss in subsequent reporting periods. Deferred acquisition costs are amortised systematically in accordance with the expected pattern of the incidence of risk under the general insurance contracts to which they relate. This pattern of amortisation corresponds to the earning pattern of the corresponding premium revenue.

Deferred acquisition costs are recognised as assets to the extent that the related unearned premiums exceed the sum of the deferred acquisition costs and the present value of both future expected claims and settlement costs, including an appropriate risk margin. Where there is a shortfall, the deferred acquisition cost asset is written down and if insuffcient, an unexpired risk liability is recognised. (b) Deferred reinsurance premiums

Reinsurance premiums are deferred and recognised as an asset where there are future economic benefts to be received from reinsurance premiums. The amortisation of deferred reinsurance premiums is in accordance with the pattern of reinsurance service received.

33.2.6 Unearned premium liability

Premium revenue received and receivable but not earned is recognised as an unearned premium liability. The carrying value of the unearned premium liability is assessed at each reporting date by carrying out a liability adequacy test (LAT). This test assesses whether the net unearned premium liability less any deferred acquisition costs is suffcient to cover future claims costs for in-force insurance contracts. Future claims costs are calculated as the present value of the expected cash fows relating to future claims, and include a risk margin to refect the inherent uncertainty in the central estimate. The assessment is carried out on a portfolio of contracts basis. If a LAT defciency occurs, it is recognised in the proft or loss with a corresponding write down of related deferred acquisition costs. Any remaining balance would be recognised as an unexpired risk liability on the statement of fnancial position.

The LAT test is based on prospective information and so is heavily dependent on assumptions and judgements which are explained in note 6.6.2.