Get a plain-English read of Outstanding Claims Provision — Insurance
Turn the raw legal text into a practical explanation grounded in Financial Sector (Collection of Data) (reporting standard) determination No. 7 of 2010 - GRS 210 (2010) - Insurance Risk Charge.
This instruction guide is designed to assist in the completion of GRF 210.0 Outstanding Claims Provision – Insurance Risk Charge.
The form can be used to calculate the risk capital charge associated with the licensed insurer’s Outstanding Claims Provision (OCP) in accordance with Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Capital Charge (GPS 115).
The value of the OCP and the reinsurance recoveries that are included in this form must be measured in accordance with Prudential Standard GPS 310 Audit and Actuarial Reporting and Valuation (GPS 310).
The purpose of this form is to provide detailed information in relation to the following:
OCP by class of business (direct business and reinsurance). OCP refers to outstanding claims liabilities measured in accordance with GPS 310;
Total OCP for insurance business written either directly by the insurer or by inward reinsurance;
Central estimate of OCP both gross and net of reinsurance and non-reinsurance recoveries;
Risk margin for OCP (in accordance with GPS 310) both gross and net of reinsurance and non-reinsurance recoveries; and
The surplus or deficit between the outstanding claims liability (OCL) held under AASB 1023 ‘General Insurance Contracts’ (AASB 1023) and the OCP held under GPS 310. .
Audit requirements
This form that relates to Authorised insurance entities and reinsurance entities is required to be subject to audit review and testing.
The scope and nature of audit testing required is outlined in the applicable Auditing and Assurance Standards Board Guidance Statement issued by the Auditing and Assurance Standards Board.
Information provided in the form in respect of a financial year of an insurer forms part of the insurer’s ‘yearly statutory accounts’ within the meaning of section 3 of the Insurance Act 1973 (the Act). This means that:
the completed form for the financial year must be audited by the Appointed Auditor of the insurer (see paragraph 49J(1)(a) of the Act);
the insurer must make such arrangements as to enable the auditor to do this (subsection 49J(2));
the auditor must give the insurer a certificate relating to the completed form (and other completed forms that are part of the insurer’s yearly statutory accounts), which must contain statements of the auditor’s opinion on the matters required by the prudential standards to be dealt with in the certificate (subsection 49J(3)); and
the certificate must be lodged with APRA as provided for in the prudential standards (paragraph 49L(1)(a)), namely by the due date for lodging the form in respect of the financial year for the insurer.
Reporting entity
This form is to be completed by:
Branch insurers of a foreign parent insurer (reference to licensed insurer in the form means total operations of the branch, excluding the parent operations);
Authorised insurance entities, including mutual entities (reference to licensed insurer in the form means total operations of the licensed entity); and
Authorised reinsurance entities (reference to licensed insurer in the form means total operations of the licensed entity).
Definitions
Definitions for data reporting items required by this form have been provided where possible in the instructions under the section headed ‘Specific Instructions’.
Unit of measurement
This form is to be prepared in thousands of Australian dollars (AUD). Amounts denominated in a currency other than Australian currency are to be converted to AUD in accordance with AASB 121 ‘The Effects of Changes in Foreign Exchange Rates’ (AASB 121).
The general requirements of AASB 121 for translation are:
Foreign currency monetary items[2] outstanding at the reporting date must be translated at the spot rate[3] at the reporting date;
Foreign currency non-monetary items[4] that are measured at historical cost in a foreign currency must be translated using the exchange rate at the date of the transaction; and
Foreign currency non-monetary items that are measured at fair value will be translated at the exchange rate at the date when fair value was determined.
Transactions arising under foreign currency derivative contracts at the reporting date must be prepared in accordance with AASB 139 ‘Financial Instruments: Recognition and Measurement’ (AASB 139). However, those foreign currency derivatives that are not within the scope of AASB 139 ‘(e.g. some foreign currency derivatives that are embedded in other contracts) remain within the scope of AASB 121.
For APRA purposes equity items must be translated using the foreign currency exchange rate at the date of investment or acquisition. Post acquisition changes in equity are required to be translated on the date of the movement.
As foreign currency derivatives are measured at fair value, the currency derivative contracts are translated at the spot rate at the reporting date.
Exchange differences should be recognised in profit and loss in the period which they arise. For foreign currency derivatives, the exchange differences would be recognised immediately in profit and loss if the hedging instrument is a fair value hedge. For derivatives used in a cash flow hedge, the exchange differences should be recognised directly in equity.
The ineffective portion of the exchange differences in all hedges would be recognised in profit and loss.
Translation of financial reports of foreign operations.
A foreign operation is defined in AASB 121 as meaning an entity that is a subsidiary, associate, joint venture or branch of a reporting entity, the activities of which are based or conducted in a country or currency other than those of the reporting entity.
Exchange differences relating to foreign currency monetary items that form part of the net investment of an entity in a foreign operation, must be recognised as a separate component of equity.
Translation of financial reports should otherwise follow the requirements in AASB 121.
Reporting period
Insurers are required to report the information in the reporting form on a quarterly and annual basis.
The quarterly information is to be completed in respect of each quarter based on the financial year of the insurer, not the calendar year.
The annual information is to be completed in respect of the financial year of the insurer.
The financial information requested in this form is to be reported as at the last day of the reporting period on a financial year to date basis of the insurer.
Reporting lag
This form must be lodged for each of the reporting units, within the number of business days after the end of the quarter as set out in Reporting Standard GRS 210.0 Outstanding Claims Provision – Insurance Risk Charge.
Specific instructions
Classes of Business (1)
Direct Business
The classes of insurance business are as follows:
(I). Houseowners/householders (H & H)
This class covers the common H & H policies inclusive of:
Contents;
Personal property;
Arson; and
Burglary.
Public liability normally attaching to these products are to be separated and included in Public and product liability class of business – item (XIII).
(II). Commercial Motor Vehicle
Motor vehicle insurance (including third party property damage) other than insurance covering vehicles defined below under Domestic motor vehicle. It includes long and medium haul trucks, cranes and special vehicles and policies covering fleets.
(III). Domestic motor vehicle
Motor vehicle insurance (including third party property damage) covering private use motor vehicles including utilities and lorries, motor cycles, private caravans, box and boat trailers and other vehicles not normally covered by business or commercial policies.
(IV). Travel
Insurance against losses associated with travel including loss of baggage and personal effects, losses on flight cancellations and overseas medical costs.
(V). Fire and Industrial Special Risks (ISR)
Fire
Includes all policies normally classified as 'Fire' and includes:
sprinkler leakage;
subsidence;
windstorm;
hailstone;
crop;
arson; and
loss of profits and any extraneous risk normally covered under fire policies, e.g. flood.
ISR
Standard policy wordings exist for this type of policy. All policies which contain such standard wordings or where the wording is substantially similar are to be classified as ISR.
(VI). Marine
Includes Marine Hull (including pleasure craft) and Marine Cargo (including sea and inland transit insurance).
(VII). Aviation
Aviation (including aircraft hull and aircraft liability).
(VIII). Mortgage
Insurance against losses arising from the failure of debtors to meet financial obligations to creditors or under which payment of debts is guaranteed. It includes lease guarantee.
(IX). Consumer credit
Insurance to protect a consumer's ability to meet the loan repayments on personal loans and credit card finance in the event of death or loss of income due to injury, illness or unemployment.
(X). Other accident
Includes the following types of insurance:
Miscellaneous accident (involving cash in transit, theft, loss of money);
All risks (baggage, sporting equipment, guns);
Engineering when not part of ISR or Fire policy;
Plate glass when not part of packaged policy (e.g. houseowners /householders)
Guarantee (Insurance Bonds);
Live Stock;
Pluvius; and
Sickness and Accident which by the terms of the policy provides benefits for no more than three years.
(XI). Other
All other insurance business not specifically mentioned elsewhere. It includes, for example:
Trade Credit;
Extended Warranty (where the insurer extends a manufacturer's or seller’s normal warranty;
Kidnap and Ransom; and
Contingency.
(XII). Compulsory Third Party Motor Vehicle (CTP)
This class consists only of CTP business.
(XIII). Public and Product Liability
Public Liability covers legal liability to the public in respect of bodily injury or property damage arising out of the operation of the insured's business. Product Liability includes policies that provide for compensation for loss and or injury caused by, or as a result of, the use of goods and also environmental clean-up caused by pollution spills where not covered by Fire and ISR policies.
Also will include builders warranty insurance.
Includes public liability attaching to houseowners/householders policies.
(XIV). Professional Indemnity (PI)
PI covers professionals against liability incurred as a result of errors and omissions in performing professional services which has resulted in economic losses suffered by third parties.
Includes Directors' and Officers' liability insurance plus legal expense insurance. Cover for legal expenses is generally included in this type of policy.
(XV). Employers' Liability (EL)
Includes:
Workers' compensation;
Seamen's compensation; and
Domestic workers compensation.
2. Reinsurance Business
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).