The classes of business for companies that are specialist reinsurers are as follows:
(I). Facultative
(II). Proportional
(III). Excess of loss.
(I). Facultative Reinsurance.
The reinsurance of individual risks by offer and acceptance wherein the reinsurer has the “faculty” (option) to accept or reject each offer by the ceding company.
(II). Proportional Reinsurance.
A proportional treaty is an agreement between an insurer and a reinsurer in which the reinsurer shares an identical proportion of the premiums and losses of the ceding company.
(III). Excess of Loss Reinsurance.
Reinsurance which, subject to a specified limit, indemnifies the ceding company against the loss in excess of a specified retention. This type of reinsurance can involve:
any one risk reinsurance;
any one event reinsurance;
catastrophe reinsurance;
aggregate excess of loss reinsurance; and
stop loss reinsurance.
Reinsurance non-split
This line item classification disclosed under Reinsurance class of business is to be used where it is not possible for the insurer to separately slit out all the classes of reinsurance businesses. However as required by GGN 110.3 Insurance Risk Capital Charge, where an insurer writes inwards reinsurance business and is unable to split this business into the classes and types listed in Table 2 of that guidance note, they are to use the highest casualty factors on their outstanding claims liabilities.
Where an insurer writes inwards reinsurance which spans multiple classes and the insurer cannot readily split the contract between classes, APRA suggests that the contract should be allocated using one of the following methods:
(a) allocate the contract to the category which represents the greatest exposure; or
(b) allocate the contract to the category representing the greatest premium income.
An insurer that writes inwards reinsurance is free to choose which of the above methods it uses, or may use another appropriate method, provided the same method is used for all contracts and all subsequent periods.
Outstanding Claims Liabilities
Outstanding Claims Liabilities (Provision) relate to all claims incurred prior to the calculation date, whether or not they have been reported to the insurer. Long tail business is the most significant component of the value of the Outstanding Claims Liabilities. The valuation of Outstanding Claims Liabilities must include an amount in respect of the internal expenses that the insurer expects to incur in settling these claims. Outstanding Claims Liabilities are to be determined on a fully prospective basis; both net and gross of expected reinsurance and non reinsurance recoveries.
The valuation of Outstanding Claims Liabilities for each class of business must comprise:
(a) a central estimate (refer below); and
(b) a risk margin (refer below) that relates to the inherent uncertainty in each of these central estimates.
To ensure that valuation processes are consistent and sufficiently rigorous across the industry, the risk margin should be established on a basis that is intended to secure the insurance liabilities of the reporting insurer at a given level of sufficiency. The prescribed level of sufficiency in GPS 210 Liability Valuation for General Insurer is 75 per cent.
Due to the highly skewed nature of some insurance distributions, the 75 per cent level of sufficiency may result in a value regarded as insufficient for prudent purposes. Therefore, the risk margin should not be less than one half of the coefficient of variation for the Outstanding Claims Liabilities of the reporting insurer.
(a) The central estimate
The central estimate is intended to reflect the mean value in the range of possible values for the outcome (that is, the mean of the distribution of probabilistic outcomes). The determination of the central estimate should be based on assumptions as to future experience which reflect the experience and circumstances of the insurer and which are:
made using judgement and experience;
made having regard to reasonably available statistics and other information; and
neither deliberately overstate nor understate.
The central estimate will generally be measured as the present value of the future expected payments. This measurement process will involve prospective calculations and modelling techniques, taking into account all factors which are considered to be material to the calculation, including:
Discount rate (in accordance with GPS 210 Liability Valuation for General Insurer);
Claims escalation;
Claims expenses; and
The pattern of claims run-off.
(b) The risk margin
The risk margin is to be valued in accordance with the requirements of GPS 210 Liability Valuation for General Insurer. The risk margin is a component of the value of Outstanding Claims Liabilities that relates to the inherent uncertainty in the central estimate. The risk margin does not relate to the risk associated with the underlying assets, including asset-liability mismatch risk. As the risk margin is an additional component of the Outstanding Claims Liabilities value, it is therefore aimed at ensuring that the value of the Outstanding Claims Liabilities is established at an appropriate and sufficient level.
The insurer is free to provide for the OCP in the Statement of Financial Position at a level equal to or greater than the amount required by GPS 210 Liability Valuation for General Insurer. However for the purposes of this form only, the Outstanding Claims Provision is to be measured and reported in accordance with GPS 210 Liability Valuation for General Insurer and disclosed by type of insurance business (direct business and inward reinsurance business), i.e. must be at the 75% level. If the OCP is reported at a level greater than that required by GPS 210 Liability Valuation for General Insurer in this form, the insurer will be subjecting itself to a greater risk charge than required.
Note: any amount of the OCP reported in the Statement of Financial Position in excess of the amount required by GPS 210 Liability Valuation for General Insurer, can be added back to Tier 1 capital in GRF 120.0 Determination of Capital Base.
Quarterly actuarial reviews are not required to be conducted specifically for the purposes of completing this form.
For the “Direct business” and “Reinsurance” business, amounts are to be reported as follows:
Direct Business written:
Includes Outstanding Claims Provision associated with the insurance business written directly by the insurer. Include Outstanding Claims Provision associated with reinsurance business under the “Reinsurance” section of Type of Business column. Inward reinsurance includes amounts that relate to inward facultative reinsurance and to inward treaty reinsurance.
Reinsurance
Include Outstanding Claims Provision associated with reinsurance business under the “Reinsurance” section of Type of Business column. Inward reinsurance includes amounts, which relate to inward facultative reinsurance and to inward treaty reinsurance.
Total Outstanding Claims Provision - Gross of reinsurance recoveries
Central Estimate
For each line of business report the central estimate of the Outstanding Claims Provision that is calculated in accordance with GPS 210 Liability Valuation for General Insurer.
Risk Margin
For each line of business, report the prudential risk margin for the Outstanding Claims Provision that is calculated in accordance with GPS 210 Liability Valuation for General Insurer.
Total OCP
Represents the total of the central estimate and risk margin. Do not enter a value as this is automatically calculated by the form.
Reinsurance Recoveries
For each line of business report the Reinsurance Recoveries associated with the Outstanding Claims Provision that is calculated in accordance with GPS 210 Liability Valuation for General Insurer.
Non Reinsurance Recoveries
For each line of business report the Non Reinsurance Recoveries associated with the Outstanding Claims Provision that is calculated in accordance with GPS 210 Liability Valuation for General Insurer.
Total OCP net of Reinsurance Recoveries and Non-reinsurance Recoveries
The following calculates the Total OCP net of Reinsurance Recoveries and Non-reinsurance Recoveries:
Total Outstanding Claims Provision - Gross of reinsurance recoveries; less
Reinsurance Recoveries; less
Non Reinsurance Recoveries.
Do not enter a value as this is automatically calculated by the form.
Risk Capital Factor
This column states the insurance risk capital factor applicable to each line of business/product. The capital factors are taken from Table 1 and Table 2 of GGN 110.3 Insurance Risk Capital Charge.
OCP Insurance Risk Charge
This column represents the insurance risk capital charge applicable to each line of business/product. The capital charge is calculated based on the risk capital factors disclosed in accordance with requirements of GGN 110.3 Insurance Risk Capital Charge.
The insurance capital charge is automatically calculated, do not enter values. The total of this column for direct business and reinsurance business is included in the calculation of the minimum capital requirement for the insurer.
Outstanding Claims Provision Gross of Reinsurance Recoveries Classified as – Current Liabilities
For the total of Direct business and Reinsurance business, report the component of the Outstanding Claims Provision that can be classified by the insurer as a current liability.
The total of this column (Current Liabilities) does not necessarily have to equate to the total of Outstanding Claims Provision disclosed as a current liability in GRF 300.0 Statement of Financial Position. This will be the case (i.e. it is not equal) where the insurer as provided for Outstanding Claims Provision in excess of that valuation required by GPS 210 Liability Valuation for General Insurer (the value which is required to be reported in this form).
Outstanding Claims Provision Gross of Reinsurance Recoveries Classified as – Non-current Liabilities
For the total of Direct business and Reinsurance business, report the component of the Outstanding Claims Provision valuation that can be classified by the insurer as a non-current liability.
The total of this column (Non-Current Liabilities) does not necessarily have to equate to the total of Outstanding Claims Provision disclosed as a non-current liability in GRF 300.0 Statement of Financial Position. This will be the case (i.e. they are not equal) where the insurer as provided for Outstanding Claims Provision in excess of that valuation required by GPS 210 Liability Valuation for General Insurer (the value which is required to be reported in this form).