Premiums liabilities under GPS 310Premiums liabilities under GPS 310

Premiums liabilities under GPS 310

Premiums liabilities relate to all future claim payments arising from future events post the valuation date that will be insured under the insurer’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 insurer expects to incur in administering and settling the relevant claims and allow for expected premium refunds.

The value of premiums liabilities must not include any Government charges imposed such as levies, duties and taxes. Also a deferred acquisition cost asset must not be reported.

Premiums liabilities are to be determined on a prospective basis; both net and gross of expected reinsurance recoveries and non-reinsurance recoveries.

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 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 insurer or reinsurer 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 recoveries 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 recoveries 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 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 GSP 310. To the extent that assets from the underlying reinsurance are not to be deducted in paragraph 25 of Prudential Standard GPS 112 Capital Adequacy: Measurement of Capital (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. This revised surplus (or deficit) is included as part of net assets in Australia for Category C insurers and the capital base for all other insurers.

Small insurers[9] may use accounting data as a proxy for APRA reporting purposes in valuing its premiums liabilities and expected reinsurance recoveries on premiums liabilities subject to a liability adequacy test and in applying that test a 75 percent level of sufficiency is used. Where accounting data is used as a proxy, the premiums liabilities amounts should be determined in the following manner: AASB 1023 UPL less DAC.

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 provisions and premiums liabilities) reflects the individual circumstances of the insurer. In any event, the minimum value of insurance liabilities must be the greater of a value that is:

(c) determined on a basis that is intended to value the insurance liabilities of the insurer at a 75 percent level of sufficiency; and

(d) the central estimate plus one half of a standard deviation above the mean for the insurance liabilities of the insurer.

With respect to direct business and reinsurance business where policies incept in the following reporting period and where these policies would have a material impact on capital adequacy, net written premium for exposure that has not been included in the calculation of the premiums liabilities is to be subject to the premiums liabilities risk charge. The materiality of the business that incepts in the next reporting period should be determined in accordance with the Australian accounting and auditing standards subject to APRA’s discretion.

The calculation of an insurer’s minimum capital requirement (MCR) must reflect the full premium revenue for inwards proportional reinsurance for the full term of the current reinsurance contract.[10] To the extent that the MCR calculation is based on reported premium for inwards proportional reinsurance that does not reflect the full term of the current insurance contract, an adjustment must be made to the MCR. The adjustment is determined by applying the premiums liabilities risk charge factor to any inwards proportional reinsurance premium revenue not recognised.

(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. 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 rate;
• claims escalation;
• claims and policy management expenses; and
• claims run-off.

The assumptions used must be consistent for the estimation of both outstanding claims provisions 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 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 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 should establish premiums liabilities in GRF 300.0 Statement of Financial Position at a level consistent with that calculated under AASB 1023, as shown in Part 3B of GRF 210.1. However for the purposes of this form only, parts labelled as ‘GPS 310 Premiums Liabilities’ are to be measured and reported in accordance with GPS 310 and disclosed by type of insurance business (direct business and inwards reinsurance business).

Note: Any amount of the ‘AASB 1023 Net Premiums Liabilities’ reported in GRF 210.1 Premiums Liabilities – Insurance Risk Charge in surplus or deficit of the amount required by GPS 310, will be added back to or deducted from net assets in Australia in GRF 110.0 Minimum Capital Requirement for branch insurers and added back to Tier 1 capital in GRF 120.0 Determination of Capital Base for all other insurers. Such amounts will also be reflected in Part 3C of GRF 210.1.

Quarterly actuarial reviews are not required to be conducted specifically for the purposes of completing this form.

For the ‘Direct business’ and ‘Reinsurance business’, amounts are to be reported as follows:

Part 1A: Direct business - GPS 310 Premiums Liabilities

Includes premiums liabilities 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 premiums liabilities. This will include amounts inside and outside Australia.

Part 2A: Reinsurance business – GPS 310 Premiums Liabilities

Include premiums liabilities 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 premiums liabilities. This will include amounts inside and outside Australia.

Premiums Liabilities

Gross PL - Central Estimate (2)

For each line of business, report the central estimate of the premiums liabilities that are calculated in accordance with GPS 310.

Gross PL - Risk Margin (3)

For each line of business, report the risk margin for the premiums liabilities that are calculated in accordance with GPS 310.

Gross PL - 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 expected non-reinsurance recoveries associated with the premiums liabilities estimated in a manner consistent with the methodology used in the most recent Insurance Liability Valuation Report prepared by the Appointed Actuary.

The estimates of non-reinsurance recoveries expected to be received must be based on the nature of the expected claims and the history of non-reinsurance recoveries compared to claims.