Financial Sector (Collection of Data) (reporting standard) determination No. 3 of 2009 - LRS 100.0 - Solvency
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Form LRF 100.0 Solvency (LRF 100.0) provides APRA with the necessary information on the solvency requirement of each statutory fund, the solvency position, reserve, ratio & coverage, and component details, to undertake an assessment of a life insurance company’s regulatory solvency position. It also assists APRA in its supervision of compliance with the requirements of the Life Insurance Act 1995.
This Instruction Guide is designed to assist reporting entities in the completion of LRF 100.0. The Instruction Guide provides:
general directions and notes regarding preparation and lodgement; and
instructions relating to specific items.
General directions and notes
Reporting levels
LRF 100.0 must be completed by all life insurance companies, including friendly societies.
The form is to be completed separately for each statutory fund (approved benefit fund).
Within each section, reporting items are to be completed at total fund level.
For the purposes of reporting under this form, contracts are to be classified in accordance with Prudential Standard LPS 350 Contract Classification for the Purpose of Regulatory Reporting to APRA (LPS 350).
Unit of measurement
LRF 100.0 is to be prepared in thousands of Australian dollars (AUD). Amounts denominated in foreign currency are to be converted to AUD in accordance with AASB 121 The Effects of Changes in Foreign Exchange Rates.
Definitions
Definitions for data reporting items required by this form have been provided where appropriate in the instructions under the section headed ‘Instructions for specific items’.
Definitions, unless specified, apply to all life insurance companies, including friendly societies as if each reference to a statutory fund, or shareholders’ fund, were a reference to an approved benefit fund, or management fund, respectively. Likewise, reference to shareholders should be taken to embrace ‘members’ of a mutual association and/or a society. The term ‘life companies’ or ‘life insurance companies’ includes friendly societies unless stated otherwise. This is in line with the usage of terms in the Life Insurance Act 1995.
Reporting period
Life companies are required to report the information in the reporting form on a quarterly and annual basis.
The quarterly information is to be completed as at the end of each quarter based on the financial year of the life company, not the calendar year.
The annual information is to be completed as at the end of the financial year of the life company.
The financial information requested in this form is to be reported as at the close of business for the last day of the reporting period.
Basis of preparation
In completing this form, unless specifically stated otherwise, institutions are to follow the basis that is used for the preparation of the annual financial statements in accordance with the Australian accounting standards.
Asset values are to include interest or dividend income accrued but not received. All assets of a statutory fund are to be reported in this form at Fair Value, with movements in Fair Values recognised in Profit or Loss. NB this treatment differs from Australian accounting standards, which do not allow assets to be valued at Fair Value in all circumstances eg owner occupied property.
Actuarial valuations and calculations included in, or used in the preparation of, the form must be in accordance with prudential standards.
Whilst maintaining that the requirements of Prudential Standard LPS 2.04 Solvency Standard (LPS 2.04) apply on a continuous basis, APRA recognises that for some periods life insurance companies (including friendly societies) may not carry out full accounting, actuarial valuation, and audit procedures or do so in sufficient time to report on the return (for quarterly returns). Where this applies, some estimation could be applied reasonably at the current quarter to determine an approximation to the results that would be obtained if full detailed valuations had been carried out.
APRA expects that all life insurance companies (including friendly societies) will utilise their best endeavours to ensure that any estimations adopted are a good and reasonable basis of approximation, and are consistent with the requirements set out in LPS 2.04. The estimation process needs to be sufficiently rigorous in order to be acceptable and at a minimum should be of a standard that would be considered appropriate for use in reporting to management and the Board of directors. APRA generally expects that the approximation methodology used will be approved by the Appointed Actuary; this provides an assurance that he or she is satisfied that the methods should be reasonably acceptable and consistent with the requirements in LPS 2.04.
If additional clarification is required for specific items in this form, reference should be made to the section ‘Instructions for specific items’, which is provided as a guide.
Solvency Requirement to be calculated on a gross of reinsurance basis
APRA would like to remind reporting entities that LPS 2.04 applies on a gross of reinsurance basis. This includes MTV, CTV and Solvency Liability as elements of the Solvency Requirement. In effect, the gross policy liabilities ceded under reinsurance are no longer to be set off against the liabilities side (i.e. netting against gross policy liabilities assumed, either directly and/or as reinsurance inwards), but are to be added to the assets side.
For further background, refer to subsection 3.6 (‘Reinsurance’) in LPS 2.04; and in particular, paragraph 6.4 of LPS 2.04 (under Part B – Methodologies).
Instructions for specific items
This form is designed to report items defined by LPS 2.04. Therefore the following instructions are largely intended to deal with matters not already defined or discussed in LPS 2.04 or to highlight particular aspects of the reporting requirements.
While these instructions apply to all life insurance companies, including friendly societies, not all items may be applicable to both: some items may not be applicable to friendly societies while others may not be applicable to life insurers.
Solvency Requirement
This part of the form consists of Items 1.1 to 1.11 inclusive. This section of the form aligns directly with the methodology of LPS 2.04 as set out in Section 6 of that Prudential Standard.
1.1. Greater of Solvency Liability and Minimum Termination Value (MTV)
Each of Items 1.1.1 to 1.1.3 inclusive are to be reported under three columns, relating to the amounts for each item –
Gross of outwards reinsurance (Column 1);
Reinsurance ceded under outwards reinsurance (Column 2); and
Net of outwards reinsurance (Column 3).
In paragraphs 6.2 and 6.3 of LPS 2.04, the actuary is relieved of calculating the total Solvency Liability (SL) and the total MTV (respectively) for a related product group (RPG) under certain conditions. For aggregating and reporting purposes, the single amount calculated for an RPG should be included in both the SL and the MTV, rather than not including any value for the inapplicable item.
Amounts under Columns 1 and 2 for Item 1.1.3 are reported amounts, not derived amounts, as effectively the maximum in each case is taken at the RPG level and then aggregated across the statutory fund. Therefore each of these amounts will not necessarily match the greater of the corresponding amounts entered under Items 1.1.1 and 1.1.2.
Note that amounts under Column 2 are expected to be entered with the opposite arithmetical sign to amounts under Column 1. Therefore Column 3 is derived for each item as the sum of Columns 1 and 2.
1.1.4. Amount of reinsurance/risk mitigation difference applicable to Item 1.1.3
While the above items (SL, MTV and ‘Greater of’ amount) are to be included in the calculation of Solvency Requirement on a Gross of reinsurance basis, paragraph 6.4 of LPS 2.04 allows an item of difference to be included as an offset or addition to each of these items. Report the effective amount of difference that is applicable to Item 1.1.3.
1.2. Expense Reserve
For friendly societies, report ‘zero’ under Items 1.2.1 and 1.2.2 as according to paragraph 9.1 of LPS 2.04, the expense reserve is Nil in the case of a friendly society.
1.2.2. Less: Offset Statutory Capital
Value of Offset Statutory Capital should be shown as a negative number under this item.
1.2.3. Expense Reserve [derived item]
This item is calculated automatically by the form, as the sum of Items 1.2.1 and 1.2.2. The amount of the derived item should not be less than zero.
1.3. Sub-total of above items [derived item]
This item is calculated automatically by the form, as the sum of Items 1.1.5 and 1.2.3.
1.4. Solvency Current Termination Value (SCTV)
1.4.3. Solvency Current Termination Value (SCTV) [derived item]
This item is calculated automatically by the form, as the sum of Item 1.4.1 ‘Current Termination Value’ and Item 1.4.2 ‘Amount of reinsurance/risk mitigation difference applicable to CTV’. Appropriate values must therefore be entered for those items; they should not be left blank solely because the minimum does not apply.
1.6. Other Liabilities
Other Liabilities are required to be entered as the value of Other Liabilities in accordance with subsection 3.3 of LPS 2.04 under the relevant Solvency scenario. To the extent that the value of Other Liabilities would further vary under the Resilience scenario, such impact is to be reflected in the Resilience Reserve for the relevant scenario.
1.6.2. Eligible Amount of Approved Subordinated Debt
The eligible amount is the quantum of the approved subordinated debt (as determined in accordance with the approval letter received from APRA) that can be used in meeting the solvency/capital adequacy requirements of the statutory fund. Any amounts of approved subordinated debt should be entered as positive values.
Refer to the instruction guide to Forms LRF 300.1 Statement of Financial Position (SF and SF Eliminations) (LRF 300.1) and LRF 300.2 Statement of Financial Position (SF Total, SHF, SH Elim, Entity) (LRF 300.2), Item 20 ‘Approved Subordinated Debt’ for more information. This is Item 20.1 on those forms.
1.6.3. Seed Capital
This is Item 13.3 on LRF 300.1.
1.6.4. Other Liabilities (adjusted for Subordinated Debt and Seed Capital) [derived item]
This item is calculated automatically by the form, as the difference between Item 1.6.1 and the sum of Items 1.6.2 and 1.6.3.
1.7. Total Amount of Liabilities for Solvency purposes ( = L ) [derived item]
No value needs to be entered under this item as it is calculated automatically by the form, as the sum of Items 1.5 and 1.6.4.
No value needs to be entered under this item as it is calculated automatically by the form.
1.9. Solvency Resilience Reserve
Details used in calculation of the Resilience Reserve are included under Section 4 of the form, Resilience Requirements. The results of those calculations are to be reported in Item 1.9 and should follow the requirements set out under LPS 2.04, Section 11.
1.9.1. Credit Risk component of Resilience Reserve
This item is expected to be calculated as:
RRCR = (L’ / A”) x (ΔACRY + ΔACRD)
Where:
RRCR = Credit Risk component of the Resilience Reserve;
L’ = Liabilities after prescribed change (per Section 4);
A” = Adjusted value of admissible assets (per Section 4);
ΔACRY = Credit Risk Yield Adjustment, per Column 2 of Section 4.1; and
ΔACRD = Credit Risk Default Adjustment, per Column 6 of Section 4.1.
1.9.2. Balance of Resilience Reserve
This item is expected to be calculated as:
RRB = RR - RRCR
Where:
RRB = Balance of the Resilience Reserve;
RR = Resilience Reserve = L’ x [A / A”] – L;
A = Assets prior to prescribed change (per Section 4); and
L = Liabilities prior to prescribed change (per Section 4).
1.10. Other Significant Item - Solvency
This item is for any reserves established by the Actuary in relation to additional risks or costs that are not otherwise reflected in the prescribed requirements of LPS 2.04. Include any transitional adjustment required to the Solvency Requirement.
This part of the form requires the input of Total Assets from LRF 300.1 and uses it to derive the excess (or shortfall, if applicable) of Total Assets over the Total Solvency Requirement for the fund.
2.1.1. Life Insurance Act Total Assets
This is Item 12 on LRF 300.1.
Item 2.1.2 [a derived item] is then calculated automatically by the form, as the difference between Item 2.1.1 and Item 1.11.
2.2. Solvency Reserve
Solvency Reserve (at Item 2.2.5, which is a derived item) represents the excess of Total Solvency Requirement over the total minimum liabilities for the fund. Note that while other sections of this form are on a gross of reinsurance basis, the Solvency Reserve and related metrics are effectively net of reinsurance. This achieves consistency and continuity with the old series as established under the former prudential rules.
2.2.2. Less: Total Gross Policy Liabilities Ceded under Reinsurance
This is to be entered as a subtracted item, where the amount to be subtracted is the sum of Items 11.2 and 11.5 on LRF 300.1.
2.2.3. Less: Net Minimum Termination Value (MTV) excluding IL risk margin [derived item]
This is derived as a subtracted item, where the amount being subtracted is calculated automatically by the form as the difference between Item 1.1.2 [Net Amount, per Column 3] and Item 1.1.6.
2.2.4. Less: Other Liabilities adjusted for Subordinated Debt and Seed Capital
This is to be entered as a subtracted item, where the amount to be subtracted is one that corresponds with Item 1.6.4 above, except that for Item 2.2.4 it is to be calculated on the basis used for preparation of LRF 300.1. Therefore this amount may differ from the result at Item 1.6.4.
2.3. Solvency Reserve Ratio (%) [derived item]
This is calculated automatically by the form, as:
Solvency Reserve (Item 2.2.5)
divided by
[ The sum of Total Solvency Requirement (Item 1.11) and
Less: Total Gross Policy Liabilities Ceded under Reinsurance (Item 2.2.2),
minus
Solvency Reserve (Item 2.2.5) ]
{This denominator equates to Net MTV (Item 1.1.2) + Other liabilities (Item 2.2.4).}
2.4. Amounts Available for Solvency Reserve
This is the amount that will be compared with the Solvency Reserve at Item 2.2.5 to establish ‘Solvency Coverage’. The following components reconcile with items in LRF 300.1 and are summed to obtain Item 2.4.6 (which is a derived item):
2.4.1. Life Insurance Act Net Assets
This is Item 28 (or, equally, Item 23) on LRF 300.1. Note that it includes the amount of Unallocated Benefit Fund reserves (Item 25.1 on LRF 300.1).
2.4.2. Policy Owner Retained Profits at end of period
This is Item 18 on LRF 300.1.
2.4.3. Eligible Amount of Approved Subordinated Debt [derived item]
This is Item 1.6.2.
2.4.4. Seed Capital [derived item]
This is Item 1.6.3.
2.4.5. Surplus or Deficit (if any) of Net Policy Liability relative to Net MTV
This item is to be calculated Net of outwards reinsurance (for both parts of the calculation: Policy Liability, and MTV).
2.5. Solvency Reserve Coverage [derived item]
This is calculated automatically by the form, as:
Total Amounts Available for Solvency Reserve (Item 2.4.6)
divided by
Solvency Reserve (Item 2.2.5)
Inadmissible Assets
In completing this section, life companies should refer to LPS 2.04 Section 10.
Amounts entered in the Value column are the full value of any asset which is wholly or partly inadmissible, and should be consistent with what is reported in LRF 300.1. A Value entry is not required for Item 3.6.
Amounts entered in the Inadmissible Amounts column represent the inadmissible portion of the assets reported in the Value column. These amounts add up to the Inadmissible Assets Reserve.
Resilience Requirements
In completing this section, life companies should refer to LPS 2.04 Section 11.
While the first ‘Adjustment’ column relates solely to the Yield change element of Credit Risk, the second ‘Adjustment’ column reflects the prescribed yield change and the application of the Diversification benefit. The insertion of this further column assists in making the logical flow of this part of the form align more closely with the methodology in LPS 2.04.
4.1. Resilience Requirements
4.1.12. Assets with non-standard resilience factors
This asset class should only be used in rare cases. It is intended to cover situations where assets are disaggregated into (1) an identifiable sub-asset and (2) a residual that does not fit into any of the asset sectors specified by LPS 2.04 for resilience purposes, or where a non-standard resilience risk has been modelled in accordance with paragraph 11.10 of LPS 2.04.
4.2. Assets with no Resilience Requirement
This is for assets that are admissible but do not have resilience requirements, as specified in LPS 2.04, subsections 11.3 and 11.5.2.
Paragraph 11.5.2 of LPS 2.04 states: “Where the policy owner liabilities of the statutory fund move in harmony with the assets supporting them, the Resilience Reserve in respect of those liabilities can be zero. A Resilience Reserve may be required, however, in respect of the Other Liabilities of the fund.” For statutory funds where this applies, the assets supporting policy liabilities should be entered at Item 4.2 Assets with no resilience requirement, while the assets other than those supporting policy liabilities should be entered in Section 4.1, across Items 4.1.1 to 4.1.13 as appropriate.
4.3. Total Admissible Assets
The sum of Total Admissible Assets and Total Inadmissible Amounts (from Item 3.7) should be equal to Total Assets in LRF 300.1.
4.4. Liabilities for Resilience
4.4.2. Solvency liabilities, excluding other liabilities
While the amount at Item 4.4.1 Solvency liabilities, excluding other liabilities for the amount ‘Prior to Prescribed Change’ (L) is derived within the form, this amount may not be the amount that has been used for resilience purposes, e.g.in the situation of an investment linked fund, where policy owner liabilities move in harmony with the assets supporting them. The amount to be entered at this item for the amount ‘After Prescribed Change’ (L’) may be equal to (or very similar to) L. For an investment linked fund, the difference that is implied in the amount reported at this item may be limited to the impact of the prescribed change on the risk margin for investment linked policies, as described in Paragraph 4.9.1 of LPS 2.04.
4.4.3. Effective borrowings
These are to be calculated on a look through basis.
4.4.4. Other liabilities, apart from borrowings and tax liabilities
Only exclude the items specified in the title. Therefore this item includes approved subordinated debt.