Premiums liabilitiesPremiums liabilities

Premiums liabilities

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.

Small insurers[4] 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 Unearned premium provision less deferred acquisition costs.

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 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 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 310 Audit and Actuarial Reporting and Valuation. 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 assets and non-reinsurance recoveries that are deducted from the estimate of gross insurance liabilities.

The insurer is free to reserve for an amount of Premiums Liabilities in GRF 300.0 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, Premiums Liabilities are to be measured and reported in accordance with prudential standard 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 Premiums Liabilities are 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 Premiums Liabilities reported in GRF 300.0 Statement of Financial Position in excess of the amount required by GPS 310 Audit and Actuarial Reporting and Valuation, 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 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 Premium Liabilities. This will include amounts inside and outside Australia.

Reinsurance

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

Premium Liabilities

Gross PL - Central Estimate

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

Gross PL - Risk Margin

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

Gross PL - Total

Represents the total of the central estimate and risk margin. Do not enter a value as this is automatically calculated by the form.