With the exception of the recognition and measurement requirements of the items listed below, general insurers are requested to follow the Australian accounting standards regarding the recognition and measurement of items of income and expense (profit or loss) in completing this form, notably AASB 1023 ‘Financial Reporting of General Insurance Activities’.
Premium revenue;
Claims expense (associated with Premium Liabilities and Outstanding Claims Provision);
Reinsurance recoveries revenue (associated with Premium Liabilities and Outstanding Claims Provision);
Expected reinsurance recoveries;
Reinsurance expense (i.e. no deferral of reinsurance expense under prudential reporting);
Acquisition costs (i.e. no deferral of acquisition costs under prudential reporting); and
Commission revenue.
The interpretation and required measurement and recognition basis for these items listed are specified in these instructions below and under the appropriate item heading and also outlined in the introduction to the reporting package.
(1) Regulatory reporting items with different measurement basis to AASB 1023:
Premium revenue
For regulatory reporting recognise fully from date of acceptance of risk. Do not defer and amortise in accordance with AASB 1023.
Reinsurance expense
For regulatory reporting recognise fully as expense. Do not defer and amortise in accordance with AASB 1023.
Deferred acquisition costs
For regulatory reporting recognised fully as an expense. Do not defer and amortise in accordance with AASB 1023.
Commission revenue
For regulatory reporting recognise fully from date of acceptance of risk. Do not defer and amortise in accordance with AASB 1023.
(2) Recognition of items for regulatory reporting purposes not recognised under AASB 1023:
Expected reinsurance recoveries (associate with Premium Liabilities).
For regulatory reporting this is a new asset item and a new component of reinsurance recoveries disclosed in the statement of financial performance. This item is measured on a prospective basis similar to Premium Liabilities.
(3) The non-recognition of items for regulatory reporting purposes that are recognised under AASB 1023:
Unearned premiums provision.
This item is not recognised for prudential reporting as premium revenue is recognised fully from date of acceptance of risk.
Deferred reinsurance expense.
This item is not recognised for prudential reporting purposes as reinsurance premiums paid are recognised as an expense fully from date of acceptance.
Deferred acquisition costs are expensed fully when paid/payable as a component of underwriting expenses for the purposes of prudential reporting.
The reason for the changes to the accounting treatment for the areas outline above are provided below:
Premium Liabilities and Expected Reinsurance Recoveries
AASB 1023 requirements
AASB 1023 does not have a requirement for the recognition and measurement of Premium Liabilities and Expected Reinsurance Recoveries.
APRA requirements
GPS 210 Liability Valuation for General Insurers requires a prospective basis to the recognition and measurement of claims liabilities likely to arise from premium business written. For the purposes of the APRA prudential forms, Premium Liabilities are to be recognised as a liability in GRF 300.0 Statement of Financial Position. In addition the creation of (and movement in) Premium Liabilities is to be recognised and disclosed as a component of claims expense in GRF 310.0 Statement of Financial Performance (i.e. “claims expense attributable to future years”). Under this approach claims expense will have 2 separately identifiable components, one relating to the OCP (current year and prior year claims) and the other relating to the premium liabilities (i.e. relating to future years).
APRA considers that the concept of Premium Liabilities is a more effective means of recognising potential risk over the term of the policy written, compared to the accounting concept of premium ‘earned/unearned’.
Given the prospective basis required by GPS 210 Liability Valuation for General Insurers to measure and recognise Premium Liabilities, it is appropriate to recognise an asset that reflects the level of reinsurance cover associated with the Premium Liabilities recognised. This form of reinsurance recovery is deducted from the Premium Liabilities for the purposes of calculating the insurance capital charge and will be addressed in the actuary’s report. For the APRA prudential forms, this introduces a new asset in GRF 300.0 Statement of Financial Position (i.e. “Expected Reinsurance Recoveries”) and another reinsurance recovery item in GRF 310.0 Statement of Financial Performance (i.e. “Expected Reinsurance Recoveries”). Under this approach reinsurance recoveries will have 2 separately identifiable components, one relating to the OCP (current year and prior year claims) and the other relating to the Premium Liabilities (i.e. relating to future years).
Premium Revenue and Unearned Premium Provision
AASB 1023 requirements
Under AASB 1023 premium written is recognised as premium revenue on an earned/unearned basis. That component that is unearned is recognised as a liability – “Unearned Premium Provision”. While the APRA prudential standards have changed the accounting recognition requirements for Outstanding Claims Liabilities and Premium Liabilities, it is silent on the accounting treatment for the recognition of premium revenue.
APRA requirements
It is important to consider the accounting treatment underlying the recognition of Premium Liabilities comparative to that for unearned premium provision, specifically the profit and loss treatment. The earned/unearned basis for recognition of premium revenue prescribed by AASB 1023 is not appropriate for the APRA prudential forms as it is not consistent with the APRA framework for measuring insurance liabilities under GPS 210 Liability Valuation for General Insurers. The objective of the measurement of Premium Liabilities is to recognise potential future claim liabilities arising out of new insurance business written (on a prospective basis). Accordingly to be consistent, it is more appropriate to recognise premiums written up front as premium revenue.
Deferred Acquisition Costs (DAC) and Acquisition Costs
AASB 1023 requirements
DAC is recognised as an asset under AASB 1023 and is amortised as an underwriting expense to the profit and loss over the period to which the costs relate or the benefits from the expenses are to be derived.
APRA requirements
DAC is not permitted to be recognised as an asset under the APRA prudential capital framework. From a prudential accounting perspective it is more appropriate to require DAC to be fully written off as an acquisition expense in GRF 310.0 Statement of Financial Performance. This treatment of DAC is consistent with the proposed treatment for the recognition of premium revenue.
GGN 210.1 Actuarial Opinions and Reports on General Insurance Liabilities provides that an insurer may use its unearned premium provision (UPP) less its DAC as approximate method for determining the central estimate of its total Premiums Liabilities after adjusting for the profit margin in the UPP. This is allowed where this is a reasonable approximation of its Premiums Liabilities and does not in itself replace the role of the approved actuary to value Premium Liabilities.
Reinsurance Expense and Deferred Reinsurance Expense
AASB 1023 requirements
Under AASB 1023, expenses/premiums paid for reinsurance cover is required to be recognised as an expense on a basis that is consistent with the pattern of reinsurance. As a result under AASB 1023 this gives rise to the recognition of an asset – “Deferred Reinsurance Expense”, which is amortised (over a specified term/basis) to the Statement of Financial Performance as a reinsurance expense. Under AASB 1023 reinsurance expense is disclosed as an offset from premium revenue in the Statement of Financial Performance.
APRA requirements
Due to the change in the recognition of premium income for prudential reporting purposes (refer above), it is appropriate to recognise reinsurance expense on a consistent basis i.e. recognised fully upfront in the Statement of Financial Performance. As a result, for APRA prudential reporting (and Investment risk charge calculation), there will be no asset titled “Deferred Reinsurance Expense”.
Tax Effect Accounting/Adjustments
It is likely that the recognition of the Premium Liabilities and Outstanding Claims Provisions in accordance with GPS 210 Liability Valuation for General Insurers will give rise to tax effect accounting considerations. The measurement and recognition in GRF 300.0 Statement of Financial Position of tax effect accounting items (e.g. future income tax benefits) is to be determined in accordance with the requirements of AASB 1020 ‘Tax Effect Accounting’.
If the technical insurance provisions reported in GRF 300.0 Statement of Financial Position are determined to representing timing differences between recognition as an expense for accounting purposes and as a deductible expense for taxation purposes, then the associated measurement and recognition of taxation expense and deferred tax assets and liabilities is to be determined in accordance with AASB 1020.
Market value measurement of assets
AASB 1023 requires net market value to be used in measuring assets that are deemed to be ‘integral to the general insurance activities’. However for the purposes of regulatory reporting market value can be used (i.e. ignore transactions costs).
Market value or fair value has the same meaning as defined in the Australian Accounting standards. Market value is defined for accounting purposes as a subset of fair value, where fair value means the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's-length transaction, and is determined as follows:
The quoted market price in an active and liquid market (i.e. market value); or
When there is infrequent activity in a market, the market is not well established, small volumes are traded relative to the asset or liability to be valued, or a quoted market price is not available – an estimate of a price for the asset or liability in an active and liquid market.
AASB 1023 provides that assets that are deemed not to be ‘integral to the general insurance activities’ of the insurer are able to be valued using historical cost rather than net market value. This basis can be applied for the purposes of this form.