Premium liabilitiesPremium liabilities

Premium liabilities

Premium Liabilities relate to future claim payments arising from future events insured under existing policies. For short tail business, the Premium Liabilities are of greater significance. The valuation of Premium Liabilities must include an amount in respect of the internal expenses that the insurer expects to incur in administering the policies and settling the relevant claims. Premium Liabilities are to be determined on a fully prospective basis; both net and gross of expected reinsurance recoveries.

The valuation of Premium 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 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 Premium 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 of General Insurers);
• 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 of General Insurers. The risk margin is a component of the value of Premium 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 Premium Liabilities value, it is therefore aimed at ensuring that the value of the Premium Liabilities is established at an appropriate and sufficient level.