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DISCOVERY HOLDINGS LIMITED PRESS RELEASED (Registration 1999/007789/06) ISIN Number: ZAE000022331 SIN Number: DSY
Press reports this morning commented on a leaked copy of the KPMG report (`Report') into Discovery Health Medical Scheme (`Discovery'). Discovery has been calling for the release of the Report for some time and ultimately had to resort to legal proceedings to have the report officially released; we are therefore pleased that the contents of the report have appeared in the public domain, but are extremely concerned by the manner in which the leak took place.
We believe that the report must be released in the appropriate manner as prescribed by law and KPMG's requirements. Nevertheless, in the interests of transparency and openness we feel it important to provide the public with as much detail as possible with regard to the Report.
The central reason for the investigation and key focus of the report was around Discovery's use of reinsurance. During the preparation of the report ancillary issues in line with a normal audit were raised along with a consideration of the accounting treatment of the capitalisation of the medical scheme. We deal with each of these points below:
Discovery's use of reinsurance vindicated: As stated previously the
specific mandate of the KPMG report was to `carry out an inspection ..into the reinsurance practices of Discovery'. In this regard the findings are clear:
".. , there appears to be sound economic and business reasons to reinsure the risks faced by medical schemes and none of the arguments presented can be faulted. However, in the absence of actuarial input to the
investigation, we are not in a position to substantiate the presentations made." And further:
"The scheme is not in a position to start assuming more risk and thus needs to continue the practice of reinsuring."
These findings are consistent with the views of Discovery, the continual independent audits and independent actuarial opinions provided to Discovery. At all times the openly disclosed reinsurance arrangements were entered into to protect the best interests of Discovery members. This is evidenced by the continuous growth in membership together with the low numbers of members leaving the scheme and very competitive contribution increases.
We therefore believe that any doubt about Discovery's use of reinsurance should finally be put to rest and both Discovery and the industry can move forward in the constructive use of reinsurance to support medical schemes. This positive development we believe should play an important role in the debates currently underway with regard to amendments to the Medical Schemes Act in order to facilitate the continued use of appropriate reinsurance. As yet unaudited Ancillary Issues: It is standard practice for auditing firms to discuss the findings of a report with management prior to
finalisation. KPMG intended to provide Discovery with an opportunity to comment on their final report, in order to ensure that the investigation had been thoroughly conducted, all the issues clarified and that the Report was factually accurate.
KPMG's intention was however frustrated by the Council prohibiting KPMG from consulting with Discovery on the Report. This prohibition resulted in the ancillary issues being incomplete with regard to the issues raised.
Discovery however immediately upon receipt of the report from the Council, provided a detailed response to these ancillary issues to both KPMG and the Council.
Subsequently and in order to ensure that each and every issue raised by KPMG is finally put to rest, Discovery requested that KPMG conduct an audit into Discovery's response to the ancillary issues and into the steps which Discovery has taken. The Council has unfortunately, for reasons unknown to Discovery, refused to allow KPMG to proceed with this audit - resulting in Discovery approaching Price Waterhouse Coopers to conduct the audit in order to bring finality to these issues.
The issues raised, their impact on members and Discovery's response are detailed in Appendix I, which has been attached for reference.
Capitalisation and risk management of the medical scheme - the RMB
Structured Insurance (`RMBSI') agreement: One of the key reasons for the conclusion of the RMBSI agreement was to capitalise the Discovery scheme. Discovery, like other medical schemes requires capital, but cannot raise it directly unless it either raises members' contributions or reduces members' benefits. Discovery is in the unique position of having access to all the necessary capital and simply requires a viable method to place the capital into the scheme. A clearer method of providing capital would have been a subordinated loan. A subordinated loan requires the approval of the
Council. Given the problems in obtaining this approval Discovery chose the RMBSI agreement.
The accounting treatment of the RMBSI agreement is now the subject of an appeal by Discovery against the Council's decision of rejecting Discovery's annual financial statements for 2000. The appeal focuses on a technical accounting debate as to whether Discovery's auditors, Arthur Anderson & Co in conjunction with an opinion from Deloitte and Touche, had accurately reflected the RMBSI agreement. The appeal process has been delayed as a result of the Council not having constituted an appeal board as required by the Medical Schemes Act.
Since the KPMG report was completed prior to the completion of the Discovery Medical Scheme year end audit, Discovery in the interim requested KPMG to provide a complete opinion on whether or not the accounting treatment adopted by Discovery complies with Generally Accepted Accounting Practice. The Council has unfortunately denied KPMG the opportunity to provide such an opinion.
Discovery has further arranged for a R750 million subordinated loan to be made to the medical scheme in order to ensure that the medical scheme meets future statutory requirements. Approval for such a loan has been sought from the Council since May 2001 but as yet no final approval has been forthcoming.
We again welcome the introduction of this information into the public domain and look forward to continuing to improve the physical and financial health of our members in a sustainable way both today and in the future. Appendix I
Issues raised by the KPMG report, their impact on Discovery members and Discovery's response:
Ancillary issue Agree Impact on Changes made
with members by Discovery KPMG
Receipt of Agree The During
payments from collection further
members. of discussions
Payments were contributi with the
made directly to ons Registrar
the creates the process
administrator complexity has been
Discovery Health around changed so
(`Pty') Ltd and timing of that payment
then passed onto payments by members
the medical and bad and
scheme. debts, employers is
given that now made
the scheme directly
covers into the
over 80 medical
000 scheme, even
employers. though this
The is to the
methodolog detriment of
y ensured members. that members were protected against these factors, because the cost of interest and bad debts was borne by the administra tor.
An error was Agree Regular This was
noted in the internal corrected
performance of checks are during the
an interest carried year end
calculation. out to audit
detect process. errors. Discovery was aware of this error and no prejudice was suffered by members.
No formal Agree The formal With the
business case with business introduction
was presented regard case was of the new
when the to inherent Medical
decision in 1997 minutes, in the Schemes Act,
to reinsure was but Discovery the trustees
entered into and disagree business have
the decision with model and continuously
itself was not regard therefore scrutinised
minuted. to the not deemed the business
presenta necessary case and
tion of to be structure of
the presented the
business as all reinsurance
case. parties contracts,
were part with minutes
and parcel meticulously
of the kept. formation of the business model. The business model has been vindicated and has served the interests of members.
Records were not Disagree This has The KPMG
easily available no impact report was
on compiled
members. during the
completion
of our year
end audit.
This meant a
demand for
records by
two auditing
firms.In the
normal
course,
records are
easily
available.
No profit share Agree No profit Given the
agreements were share was Discovery
in place with in place track record
regard to the to reduce of low
reinsurance the cost increases no
arrangements of changes in
reinsuranc this respect
e. This are
approach expected. has been vindicated from a members' perspectiv e through a consistent history of low rate increases
Discovery Disagree The Nevertheless
Holdings accounts this change
accounts are were not has been
misleading due misleading adopted as
to the inclusion - all recommended
of medical transactio by KPMG. scheme ns were contributions as clearly revenue disclosed. In no event did this have any impact on members.
Reinsurance Disagree Discovery The Council
agreements were has has an
not submitted to submitted intimate
the Council its knowledge of
reinsuranc the workings e of
contracts Discovery's
to the reinsurance
Council on arrangements
four and this
separate will
occasions. continue for
As as long as
indicated the
the reinsurance
reinsuranc arrangements
e are in the
agreements best
have been interest of
in the members. best interests of members
It was Agree No impact The
recommended that on members administrato
that the r and
administrator insurance
and insurance company are
entities be now separate
seperated to entities as
facilitate clear recommended. demarcation and avoid confusion.
Only 4 trustees Agree This was At the 2001
existed at the correct at AGM of the
time of the the time scheme the
report not 5 of the members
report. elected 2
As further
trustees trustees.
are Currently 6
elected at member
the AGM of elected
the trustees
medical serve on the
scheme board. held in April of each year, the election of trustees was held over until April. This had no impact on members.
Final Disagree Insufficie All
reinsurance in nt time Discovery
1999 was not was reinsurance
fully reconciled available payments
by KPMG to provide have been
final reconciled
detail to and audited
KPMG to by the
complete schemes
this auditors
process. Arthur
Anderson &
Co.
