Turn the raw legal text into a practical explanation grounded in Financial Sector (Collection of Data) (reporting standard) determination No. 6 of 2011 - GRS 210.1_G (2011) - Premiums Liabilities - Insurance Risk Charge (Level 2 Insurance Group).
Premiums liabilities relate to all future claim payments arising from future events post the reporting period that will be insured under the Level 2 insurance group’s existing policies that have not yet expired. The value of the premiums liabilities must include an amount in respect of the expenses that the Level 2 insurance group expects to incur in administering and settling the relevant claims and allow for expected premium refunds.
Premiums liabilities are to be determined on a prospective basis (in accordance with GPS 310); both net and gross of expected reinsurance recoverables and non-reinsurance recoverables.
Premiums liabilities relating to insurance and reinsurance contracts written on a long-term (or continuous) basis, with the option for the party accepting the risk to cancel the contract at pre-agreed dates prior to the expiry date, must make allowance for future claims payments anticipated up to the next possible cancellation date. For instance, if a multi-year contract is written on the basis that it can be cancelled by the risk carrier on a particular date (cancellation date) or within a particular period (so that the earliest cancellation date may be determined). In this case, the Level 2 insurance group would need to account for premiums liabilities for any unexpired risks which may:
arise up to and including the cancellation date; or
remain after the cancellation date.
The estimation of reinsurance recoverables in respect of premiums liabilities for which reinsurance has not yet been purchased can assume that the necessary reinsurance related to those liabilities will be purchased and documented. Allowance must be made for the purchase cost of this reinsurance. This assumption must only be made when existing reinsurance arrangements are documented and when the estimated reinsurance recoverables relate to the same class of business that are currently covered by the existing documented reinsurance arrangements, and it is fully expected that the reinsurance will be replaced on similar terms when current arrangements expire. The adjustment should be made by first offsetting reinsurance recoveries for the cost of the future reinsurance expense (thus increasing net premiums liabilities) and there after increasing premiums liabilities expenses.
The existence of DRE on the balance sheet indicates the existence of reinsurance that may provide partial cover for the premiums liabilities. To the extent that the current reinsurance arrangements cover the premium liability exposure, insurers are not required to include the cost of reinsurance in the premiums liabilities. However, an additional reinsurance cost must be included for any part of the premiums liabilities not covered by current reinsurance arrangements.
For any part of the current reinsurance arrangements that covers future business that has not yet been written, that portion of the associated DRE asset cannot be used to reduce premiums liabilities calculated under this standard. To the extent that assets from the underlying reinsurance are not to be deducted in paragraph 25 of GPS 112, the future business portion of the DRE can be used to increase the surplus (or decrease the deficit) in premiums liabilities calculated under paragraph 16 (a) (v) of GPS 112.
The valuation of premiums 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 value for premiums liabilities.
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 minimum 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 generally 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 Premiums Liabilities that relates to the inherent uncertainty that outcomes will differ from the central estimate. It is aimed at ensuring that the value of the Premiums Liabilities 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 recoverables that are deducted from the estimate of gross insurance liabilities. For Australian business, adjustments to the risk margin will include any diversification benefits across classes of business and any diversification adjustments that can be attributed to the Australian business from its association with the international business of the group. Similarly, a Level 2 insurance group may recognise diversification benefits on international business when reporting premiums liabilities for geographic regions in part A of this form.
Note: any amount of the net insurances liabilities reported in GRF 302.0_G in excess of the amount reported in part A of this form, can be added back to Tier 1 capital in GRF 120.0_G. Credit towards Tier 1 capital is only available in respect to premiums liabilities that have been valued and reported in accordance with GPS 310.
Premiums liabilities are to be reported for:
‘Direct business’ in table 1 and table 2; and
‘Reinsurance business’ in table 3 and table 4.
Gross PL - Central estimate (2)
For each line of business, report the central estimate of the gross premiums liabilities that are calculated in accordance with GPS 311.
Gross PL - Risk margin (3)
For each line of business, report the risk margin for the gross premiums liabilities that are calculated in accordance with GPS 311.
Gross PL - Total (4)
‘Gross premiums liabilities-Total’ represents the total of the central estimate and risk margin. This value is automatically calculated by the form.