Get a plain-English read of 2. Reinsurance Business
Turn the raw legal text into a practical explanation grounded in Financial Sector (Collection of Data) (reporting standard) determination No. 75 of 2008 - GRS 210.0 (2008) - Outstanding Claims Provision - Insurance Risk Charge.
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
Outstanding Claims Provision relates to all claims incurred prior to the valuation date, whether or not they have been reported to the insurer. The value of the outstanding claims provision must include an amount in respect of the expenses that the insurer expects to incur in settling these claims. The value of outstanding claims provision must not include any Government charges imposed such as levies, duties and taxes. Also, a deferred acquisition cost must not be reported.
Outstanding Claims Provision are to be determined on a prospective basis; both net and gross of reinsurance recoverables and non-reinsurance recoveries.
Subdivision 2. Reinsurance Business - Financial Sector (Collection of Data) (reporting standard) determination No. 75 of 2008 - GRS 210.0 (2008) - Outstanding Claims Provision - Insurance Risk Charge - 2. Reinsurance Business | Zoe
The valuation of Outstanding Claims Provision 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. outstanding claims provision 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:
(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. 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 provision 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 Audit and Actuarial Reporting and Valuation. The risk margin is the component of the value of Outstanding Claims Provision that relates to the inherent uncertainty that outcomes will differ from the central estimate. It is aimed at ensuring that the value of the Outstanding Claims Provision 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 assets and non-reinsurance recoveries that are deducted from the estimate of gross insurance liabilities.
The insurer is free to reserve for the Outstanding Claims Provision in the Statement of Financial Position at a level equal to or greater than the amount required by GPS 310 Audit and Actuarial Reporting and Valuation. However for the purposes of this form only, the Outstanding Claims Provision (OCP) is to be measured and reported in accordance with GPS 310 Audit and Actuarial Reporting and Valuation and disclosed by type of insurance business (direct business and inward reinsurance business), i.e. must be at the 75% level. If the OCP is reported at a level greater than that required by GPS 310 Audit and Actuarial Reporting and Valuation in this form, the insurer will be subjecting itself to a greater risk charge than required.
Note: any amount of the OCP reported in the Statement of Financial Position in excess of the amount required by GPS 310 Audit and Actuarial Reporting and Valuation, can be added back to 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.
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:
Direct Business
Includes Outstanding Claims Provision 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 Outstanding Claims Provision. This will include amounts inside and outside Australia.
Reinsurance
Include Outstanding Claims Provision associated with reinsurance business under the “Reinsurance” section.
Note: For the purposes of completing this form, Branch insurers (Category C insurers) are to report the total Outstanding Claims Provision. This will include amounts inside and outside Australia.
Outstanding Claims Provision
Gross OCP - Central Estimate
For each line of business, report the central estimate of the Outstanding Claims Provision that is calculated in accordance with GPS 310 Audit and Actuarial Reporting and Valuation.
Gross OCP - Risk Margin
For each line of business, report the risk margin for the Outstanding Claims Provision that is calculated in accordance with GPS 310 Audit and Actuarial Reporting and Valuation.
Gross OCP - Total
Represents the total of the central estimate and risk margin. Do not enter a value as this is automatically calculated by the form.
For each line of business report the reinsurance recoverables associated with the Outstanding Claims Provision calculated in accordance with GPS 310 Audit and Actuarial Reporting and Valuation.
Insurers should recognise reinsurance recoverables, which are calculated in accordance with GPS 310 Audit and Actuarial Reporting and Valuation, but which are due from reinsurance arrangements that do not fully meet the reinsurance documentation tests specified in 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.
Non Reinsurance Recoveries
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 Outstanding Claims Provision.
Total OCP net of Reinsurance Recoveries and Non-reinsurance Recoveries
Total OCP net of Reinsurance Recoveries and Non-reinsurance Recoveries is calculated as under:
Total Outstanding Claims Provision - Gross of reinsurance and non-reinsurance recoveries; less
Reinsurance recoveries; less
Non-reinsurance recoveries.
Do not enter a value as this is automatically calculated by the form.
OCP Capital Factor %
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
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.
OCP - Net of reinsurance and non-reinsurance recoveries
Net OCP - Central Estimate
For each line of business report the central estimate, net of reinsurance and non-reinsurance recoveries, associated with the Outstanding Claims Provision that is calculated in accordance with GPS 310 Audit and Actuarial Reporting and Valuation.
Net OCP - Risk Margin
For each line of business, report the risk margin, net of reinsurance and non-reinsurance recoveries, associated with the Outstanding Claims Provision that is calculated in accordance with GPS 310 Audit and Actuarial Reporting and Valuation.
Outstanding Claims Provision Gross of Reinsurance and Non-reinsurance recoveries classified as – Current Liabilities
Report the component of the Outstanding Claims Provision that can be classified by the insurer as a current liability for:
Direct business;
Reinsurance business; and
Total business.
Total Current Liabilities does not necessarily have to equate to the total of Outstanding Claims Provision disclosed as a current liability in GRF 300.0 Statement of Financial Position. This will be the case (i.e. it is not equal) where the insurer has provided for Outstanding Claims Provision in excess of the valuation required by GPS 310 Audit and Actuarial Reporting and Valuation (the value which is required to be reported in this form) in GRF 300.0 Statement of Financial Position.
Outstanding Claims Provision Gross of Reinsurance and Non-reinsurance recoveries classified as – Non-current Liabilities
Report the component of the Outstanding Claims Provision valuation that can be classified by the insurer as a non-current liability for:
Direct business;
Reinsurance business; and
Total business.
Total Non-Current Liabilities does not necessarily have to equate to the total of Outstanding Claims Provision disclosed as a non-current liability in GRF 300.0 Statement of Financial Position. This will be the case (i.e. they are not equal) where the insurer has provided for Outstanding Claims Provision in excess of that valuation required by GPS 310 Audit and Actuarial Reporting and Valuation (the value which is required to be reported in this form) in GRF 300.0 Statement of Financial Position.
The sum of Outstanding Claims Provision Gross of Reinsurance and Non-reinsurance Recoveries classified as Current Liabilities and the amount classified as Non-current Liabilities must equate to Total Outstanding Claims Provision Gross of Reinsurance and Non-reinsurance recoveries.