Financial Sector (Collection of Data) (reporting standard) determination No. 7 of 2010 - GRS 210 (2010) - Insurance Risk Charge
2. Reinsurance Business2. Reinsurance Business
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The classes of business for companies 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 insurer to separately split out all the classes of reinsurance businesses. However as required by GPS 115, where an insurer 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 the highest factors on its outstanding claims provision.
Where an insurer underwrites an inwards reinsurance contract which spans multiple classes and the insurer 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.
Outstanding Claims Provision
OCP relates to all claims incurred prior to the valuation date, whether or not they have been reported to the insurer. The value of the OCP must include an amount in respect of the expenses that the insurer expects to incur in settling these claims. The value of OCP must not include any Government charges imposed such as levies, duties and taxes.
OCP are to be determined on a prospective basis; both net and gross of reinsurance recoverables and non-reinsurance recoveries.
The valuation of OCP 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 estimates values.
The valuation of insurance liabilities (i.e. OCP and premiums liabilities) reflects the individual circumstances of the insurer. 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 insurer 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 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 must 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 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 insurer. Judgement 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 rate;
claims escalation;
claims and policy management expenses; and
claims run-off.
The assumptions used must be consistent for the estimation of both OCP 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 310. The risk margin is the component of the value of OCP that relates to the inherent uncertainty that outcomes will differ from the central estimate. It is aimed at ensuring that the value of the OCP 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 insurer. In any event, the risk margin must be valued so that the insurance liabilities of the insurer, after any diversification benefit, are not less than the greater of a value that is:
(a) determined on a basis that is intended to value the insurance liabilities of the insurer 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 insurer.
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 recoverables, expected reinsurance recoveries and non-reinsurance recoveries that are deducted from the estimate of gross insurance liabilities.
The insurer is free to reserve for the OCP in GRF 300.0 Statement of Financial Position at a level different to the amount required by GPS 310. However for the purposes of this form only, the OCP is to be measured and reported in accordance with GPS 310 and disclosed by type of insurance business (direct business and inward reinsurance business).
Note: Any amount of the OCP reported in GRF 300.0 Statement of Financial Position in excess or deficit of the amount required by GPS 310, will be added back to / deducted from net assets in Australia in GRF 110.0 Minimum Capital Requirement for branch insurers and added back to or deducted from Tier 1 capital in GRF 120.0 Determination of Capital Base for all other insurers.
Quarterly actuarial reviews are not required to be conducted specifically for the purposes of completing this form.
For ‘Direct business’ and ‘Reinsurance’ business, amounts are to be reported as follows:
Part 1: Direct business
Includes OCP associated with the insurance business written directly by the insurer.
Note: For the purposes of completing this form, Branch insurers (Category C insurers) are to report the total OCP. This will include amounts inside and outside Australia.
Part 2: Reinsurance business
Include OCP associated with reinsurance business written by the insurer.
Note: For the purposes of completing this form, Branch insurers (Category C insurers) are to report the total OCP. This will include amounts inside and outside Australia.
Outstanding Claims Provision
Gross OCP - Central Estimate (2)
For each line of business, report the central estimate of the OCP that is calculated in accordance with GPS 310.
Gross OCP - Risk Margin (3)
For each line of business, report the risk margin for the OCP that is calculated in accordance with GPS 310.
Gross OCP - Total (4)
Represents the total of the central estimate and risk margin. Do not enter a value as this is automatically calculated by the form.
Non-Reinsurance Recoveries (5)
Non-reinsurance recoveries are amounts that may be recovered under arrangements other than reinsurance arrangements, such as salvage and subrogation.
For each line of business report the non-reinsurance recoveries associated with the OCP.
For each line of business report the reinsurance recoverables associated with the OCP calculated in accordance with GPS 310.
Insurers should recognise reinsurance recoverables, which are calculated in accordance with GPS 310, 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.
Reinsurance recoverables would normally be estimated on the basis of each class of business written by the insurer. 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 insurer. In such instances, the estimation will be required to factor in all the individual results by class of business covered by the reinsurance arrangement.
OCP - Net of reinsurance and non-reinsurance recoveries
Net OCP - Central Estimate (7)
For each line of business report the central estimate, net of reinsurance and non-reinsurance recoveries, associated with the OCP that is calculated in accordance with GPS 310.
Net OCP - Risk Margin (8)
For each line of business, report the risk margin, net of reinsurance and non-reinsurance recoveries, associated with the OCP that is calculated in accordance with GPS 310.
Total OCP net of RI Recoveries and Non-RI Recoveries (9)
Total OCP net of Reinsurance Recoveries and Non-reinsurance Recoveries is calculated as:
Total OCP - Gross of reinsurance and non-reinsurance recoveries; less
Non-reinsurance recoveries; less
Reinsurance recoveries.
Do not enter a value as this is automatically calculated by the form.
OCP Capital factor % (10)
This column states the insurance risk capital factor applicable to each line of business. The capital factors are taken from GPS 115.
OCP Insurance risk charge (11)
This column represents the insurance risk capital charge applicable to each line of business. The capital charge is calculated on the basis of risk capital factors specified in GPS 115.
The OCP insurance risk charge is automatically calculated; do not enter values. The total of this column for direct business and reinsurance business is included in the calculation of the minimum capital requirement for the insurer.
Net OCL per GRF 300.0 (12)Include in this item the value of net outstanding claims liabilities that are recognised in GRF 300.0 Statement of Financial Position. This is calculated on a net basis as per the following:
Calculate the total OCL net of Reinsurance and Non-Reinsurance Recoveries (including input tax credits) as reported in GRF 300.0 Statement of Financial Position (GRF 300.0) and GRF 301.0 Reinsurance Assets and Risk Charge (GRF 301.0) as:
Item 16 (GRF 300.0) ‘Outstanding claims liability’; less
Item 2.4.1 (GRF 300.0) ‘Total net amount recoverable on reinsurance contracts reported in item 2.4, that related to claims recognised in the calculation of the Outstanding Claims Liability (i.e. other than reinsurance recoveries relating to claims that have been paid)’; less
Item 2.2.2.1 (GRF 300.0) Total net amounts recoverable relating to OCL (other than reinsurance recoveries receivable) that are reported in item 2.2.2 and that relate to claims recognised in the calculation of insurance liabilities that have not been paid.
OCP Surplus / (Deficit) (13)
This column is automatically calculated by the form and represents column (12) ‘Net OCL per GRF 300.0’ less column (9) ‘Total OCP net of RI Recoveries & Non-RI Recoveries’.
For all insurers except category C insurers, the difference (whether positive or negative) should be reported in item 1.1.4 ‘OCP surplus / (deficit) per GRF 210.0 Outstanding Claims Provision - Insurance Risk Charge’ of GRF 120.0 Determination of Capital Base.
For category C insurers the difference (whether positive or negative) should be reported in item 29.1 ‘OCP surplus / (deficit) inside Australia on form GRF 300.0 Statement of financial Position (B).