Table 3: Reinsurance business (AustraliaTable 3: Reinsurance business (Australian Business by class)
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Turn the raw legal text into a practical explanation grounded in Financial Sector (Collection of Data) (reporting standard) determination No. 22 of 2009 - GRS 210.0_G (2009) - Outstanding Claims Liability - Insurance Risk Charge.
Table 3: Reinsurance business (Australian Business by class)
‘Australian Business’ means insurance business carried on by any Level 1 insurer within a Level 2 insurance group. The classes of Australian business for Level 2 insurance groups that provide reinsurance are as follows:
Treaty Proportional: This refers to all forms of quota share and surplus reinsurance written on a treaty reinsurance arrangement where the reinsurer is bound to accept all business ceded by the reinsured subject to the terms and conditions of the pre-agreed treaty wording, and shares in the same proportion of premium and losses of the reinsured.
Treaty Excess of Loss: This refers to all reinsurance arrangements where the reinsurer is bound to accept all business ceded by the reinsured and the reinsurer pays losses only above an agreed predetermined limit (retention) up to an agreed maximum amount.
Facultative Proportional: This refers to non-treaty arrangements where each reinsurance contract is on an individual offer and acceptance basis and the reinsurer shares in the same proportion of premium and losses of the reinsured.
Facultative Excess of Loss: This refers to non-treaty arrangements where each reinsurance contract is on an individual offer and acceptance basis. The reinsurer pays losses only above an agreed predetermined limit (retention) up to an agreed maximum amount.
Reinsurance non-split: This line item classification disclosed under Reinsurance class of business is to be used where it is not possible for the Level 2 insurance group to separately split out all the classes of reinsurance businesses. However as required by GPS 111, where a Level 2 insurance group underwrites an inwards reinsurance contract and is unable to split this business into the classes and types listed in that prudential standard, it must use one of the methods detailed below.
Where a Level 2 insurance group underwrites an inwards reinsurance contract which spans multiple classes and the Level 2 insurance group cannot readily split the contract between classes, the contract must be allocated by using an appropriate method (provided the same method is used for all contracts and for all subsequent periods), including 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.
Total (Reinsurance business (Australian business by class))
This is automatically calculated by the form and represents the sum of Australian classes of business.
Table 4: Reinsurance business (International)
‘International Business’[12] is insurance business carried on by an entity within the group that is not authorised under the Insurance Act 1973. The sum of the classes of business for each international region is to be entered into the form. International business should not be reported under the ‘Australia’ region.
Note: A Level 2 insurance group must not report Australian business in table 4 unless a determination has been made by APRA to report Australian business as a single region.
Total (Reinsurance business (International))
This is automatically calculated by the form and represents the sum of international business. This value excludes amounts reported under ‘Australia’ in table 4.
Table 5: Total
Total direct business
This is automatically calculated by the form and represents the sum of ‘Direct business (Australian business by class)’ and ‘Direct business (International)’. Total direct business will include Australian business reported as a single region in Table 2 where approved by APRA.
Total reinsurance business
This is automatically calculated by the form and represents the sum of ‘Reinsurance business (Australian business by class)’ and ‘Reinsurance business (International)’. Total reinsurance business will include Australian business reported as a single region in Table 4 where approved by APRA.
Group adjustments
Adjustments not recognised in Tables 1-4 are to be reported in this section of the form. Group adjustments are to be reported as negative values.
Total
This is automatically calculated by the form and represents the sum of ‘Total direct business’, ‘Total reinsurance business’ and ‘Group adjustments’.
The instructions below relate to all tables and are set out by column.
Outstanding Claims Liability
Outstanding claims liabilities relate to all claims incurred prior to the reporting date, whether or not they have been reported to the Level 2 insurance group. Outstanding claims liabilities are to be recognised and measured in accordance with GPS 311. The value of outstanding claims liabilities must not include any Government charges imposed such as levies, duties and taxes.
Outstanding claims liabilities are to be determined on a prospective basis; both net and gross of reinsurance recoverables 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 the central estimate values.
The valuation of insurance liabilities (i.e. outstanding claims liabilities and premiums liabilities) reflects the individual circumstances of the Level 2 insurance group. In any event, the value of insurance liabilities must be the greater of a value that is:
(a) determined on a basis that is intended to value the insurance liabilities of the Level 2 insurance group at a 75 percent level of sufficiency; and
(b) the central estimate plus one half of a standard deviation above the mean for the insurance liabilities of the Level 2 insurance group.
(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 must be based on assumptions as to future experience which reflect the experience and circumstances of the Level 2 insurance group and which are:
made using judgement and experience;
made having regard to reasonably available statistics and other information; and
neither deliberately overstated nor understated.
Where experience is highly volatile, model parameters estimated from the experience can also be volatile. The central estimate should therefore reflect as closely as possible the likely future experience of the Level 2 insurance group. Judgment may be required to limit the volatility of the assumed parameters to that which is justified in terms of the credibility of the experience data.
The central estimate will be measured as the present value of the future expected payments. This measurement process will involve prospective calculations and modelling techniques, and will require assumptions in respect of the expected future experience, taking into account all factors which are considered to be material to the calculation, including:
Discount rates;
Claims escalation;
Claims and policy management expenses; and
Claims run-off.
The assumptions used should be consistent for the estimation of both outstanding claims liabilities and premiums liabilities. Where they are not, the reasons must be documented.
(b) The risk margin
The risk margin is to be valued in accordance with the requirements of GPS 311. The risk margin is the component of the value of outstanding claims liability that relates to the inherent uncertainty that outcomes will differ from the central estimate. It is aimed at ensuring that the value of the outstanding claims liability is established at an appropriate and sufficient level. The risk margin does not relate to the risk associated with the underlying assets, including asset-liability mismatch risk.
Risk margins must be determined, for each class of business, and in total, on a basis that reflects the experience of the Level 2 insurance group. In any event, the risk margin must be valued so that the insurance liabilities of the Level 2 insurance group, after any diversification benefit, are the greater of a value that is:
(a) determined on a basis that is intended to value the insurance liabilities of the Level 2 insurance group at a 75 per cent level of sufficiency; and
(b) the central estimate plus one half of a standard deviation above the mean for the insurance liabilities of the Level 2 insurance group.
The risk margins must be determined having regard to the uncertainty of the gross insurance liabilities and to any uncertainty related to the estimate of reinsurance assets and non-reinsurance recoveries that are deducted from the estimate of gross insurance liabilities. Any allowance for diversification benefits must be apportioned across Australian classes of business and international regions.
The Level 2 insurance group is free to reserve for the outstanding claims liability in the GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group) at a different level to the amount required by GPS 311. However for the purposes of this form only, the outstanding claims liability is to be measured and reported in accordance with the requirements of GPS 311 and disclosed by type of insurance business (direct business and inward reinsurance business), i.e. must be at the 75% probability of sufficiency. If the outstanding claims liability is reported at a level greater than that required by GPS 311 in this form, the Level 2 insurance group will be subjecting itself to a greater insurance risk capital charge than required and will also be subjecting itself to a lower capital base since the value of excess technical provisions will be lower.
Note: any amount of the outstanding claims liability reported in the Statement of Financial Position in excess of the amount required by GPS 311, can be added back to Tier 1 capital in GRF 120.0_G Determination of Capital Base (Level 2 Insurance Group).
For the ‘Direct business’ and ‘Reinsurance’ business, amounts are to be reported as follows:
Direct business
Includes outstanding claims liability associated with the insurance business written directly by the Level 2 insurance group.
Reinsurance
Include outstanding claims liability associated with reinsurance business of the Level 2 insurance group under the ‘Reinsurance’ section.
Gross OCL - Central estimate (2)
For each line of business, report the central estimate of the gross outstanding claims liability that is calculated in accordance with GPS 311.
Gross OCL - Risk margin (3)
For each line of business, report the risk margin for the gross outstanding claims liability that is calculated in accordance with GPS 311.
Gross OCL - Total (4)
‘Gross outstanding claims liability-Total’ represents the sum of the central estimate and risk margin. This value is automatically calculated by the form.
For each line of business report the reinsurance recoveries associated with the outstanding claims liability calculated in accordance with GPS 311.
Level 2 insurance groups should recognise reinsurance recoveries, which are calculated in accordance with GPS 311, but which are due from reinsurance arrangements that do not fully meet the reinsurance documentation tests specified in Prudential Standard GPS 112 Capital Adequacy: Measurement of Capital (GPS 112).
Reinsurance recoveries would normally be estimated on the basis of each class of business written by the Level 2 insurance groups. However, there are certain forms of reinsurance where recoveries depend on the combined claims experience of several or all classes of business underwritten by the Level 2 insurance group. In such instances, the estimation will be required to factor in all the individual results by class of business covered by the reinsurance arrangement.
Non-reinsurance recoveries (6)
Non-reinsurance recoveries are amounts that may be recovered under arrangements other than reinsurance arrangements, such as salvage, subrogation and sharing agreements.
For each line of business report the non-reinsurance recoveries associated with the outstanding claims liability.
Outstanding Claims Liability - Net of reinsurance and non-reinsurance recoveries
Net OCL - Central estimate (7)
For each line of business report the central estimate, net of reinsurance and non-reinsurance recoveries, associated with the outstanding claims liability that is calculated in accordance with GPS 311.
Net OCL - Risk margin (8)
For each line of business, report the risk margin, net of reinsurance and non-reinsurance recoveries, associated with the outstanding claims liability that is calculated in accordance with GPS 311.
Total OCL net of RI recoveries and Non-RI recoveries (9)
Total Outstanding Claims Liability net of Reinsurance Recoveries and Non-reinsurance Recoveries is calculated as:
Net Outstanding Claims Liability - Central Estimate; plus
Net Outstanding Claims Liability – Risk Margin.
Do not enter a value as this is automatically calculated by the form.
OCL capital factor % (10)
This column states the insurance risk capital factor applicable to each line of Australian business. The capital factors are taken from Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Capital Charge (GPS 115).
A different treatment applies to international business (and Australian business reported as a single region) in this column. As part of the supplementary information provided to APRA, Level 2 insurance groups are required to have mapped their international business (and Australian business reported as a single region) to the Australian classes of business in order to assign an insurance risk capital charge. For international business (and Australian business reported as a single region), this column requires Level 2 insurance groups to report a weighted average capital factor which applies to the total of all the classes for each region.
OCL insurance risk capital charge (11)
This column represents the insurance risk capital charge applicable to each line of business. For Australian business reported by class, the capital charge is calculated on the basis of risk capital factors specified in GPS 115. For international business (and Australian business reported as a single region) the insurance risk capital charge is calculated based on the weighted average capital factor reported for each region under 'Outstanding Claims Liability Capital Factor %' in this form. The outstanding claims liability insurance risk charge is automatically calculated by the form.
The total of this column for direct business and reinsurance business (and Group adjustments) is included in the calculation of the minimum capital requirement for the Level 2 insurance group.
Technical provisions in excess of liability valuation
Include in this item the value of Outstanding Claims Liabilities that are recognised in GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group), that are in excess of the outstanding claims liabilities valuation required by GPS 311. This is calculated on a net basis as per the following.
Calculate the total Outstanding Claim Liabilities net of Reinsurance and Non-Reinsurance Recoveries (including input tax credits) as reported in GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group) (GRF 300.0_G) and GRF 301.0_G Reinsurance Assets and Risk Charge (Level 2 Insurance Group) (GRF 301.0_G) as:
Less sum of reinsurance recoveries and non-reinsurance recoveries (including input tax credits):
Item 1.1.5 (GRF 301.0_G) ‘Net amounts recoverable from reinsurance contracts on outstanding claims (all business)’; plus
Item 3.2.1. (GRF 300.0_G) ‘Total net amounts recoverable (other than reinsurance recoveries receivable) on unpaid claims’;
Less ‘Total OCL Net of Reinsurance and Non-Reinsurance Recoveries’ for all classes of business (including group adjustments) in GRF 210.0_G Outstanding Claims Liability - Insurance Risk Charge (Level 2 Insurance Group).
This value will be included in Item 1.1.4 of GRF 120.0_G Determination of Capital Base (Level 2 Insurance Group) - Technical provisions in excess of liability valuation.