Financial Sector (Collection of Data) (reporting standard) determination No. 78 of 2008 - GRS 301.0 (2008) - Reinsurance Assets and Risk Charge
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With the exception of the definition, recognition and measurement requirements of the items listed below, general insurers are requested to follow the Australian accounting standards regarding the definition, recognition and measurement of assets, notably AASB 1023 ‘General Insurance Contracts’.
Outstanding Claims Provision;
Reinsurance Recoveries;
Premium Liabilities;
Expected Reinsurance Recoveries;
Non-Reinsurance Recoveries;
Deferred Reinsurance Expense; and
Deferred Acquisition Costs.
The interpretation and required measurement basis for these items listed above are specified in these instructions.
Recognition of items for regulatory reporting purposes not recognised under AASB 1023:
Premium Liabilities
For regulatory reporting, this is a new liability item and is measured on a prospective basis.
Expected reinsurance recoveries (associated with Premiums Liabilities).
For regulatory reporting this is disclosed in the statement of financial performance and is measured on a prospective basis similar to Premiums Liabilities.
The non-recognition of items for regulatory reporting purposes that are recognised under AASB 1023:
Unearned premiums provision.
This item is not recognised for prudential reporting as premium revenue is recognised fully from date of acceptance of risk.
Deferred reinsurance expense.
This item is not recognised for prudential reporting purposes as reinsurance premiums paid are recognised as an expense fully from date of acceptance of reinsurance by reinsurer(s).
Deferred acquisition costs are expensed fully when paid/payable as a component of underwriting expenses for the purposes of prudential reporting.
The reasons for the changes to the accounting treatment for the areas outlined above are provided below.
Premium Liabilities and Expected Reinsurance and Non-Reinsurance Recoveries
AASB 1023 requirements
AASB 1023 does not have a requirement for the recognition and measurement of Premium Liabilities and Expected Reinsurance Recoveries.
APRA requirements
Prudential Standards GPS 310 Audit and Actuarial Reporting and Valuation (GPS 310) requires a prospective basis to the recognition and measurement of premiums liabilities. For the purposes of the APRA prudential forms, Premium Liabilities are to be recognised as a liability in GRF 300.0 Statement of Financial Position. In addition the creation of (and movement in) Premium Liabilities is to be recognised and disclosed as a component of claims expense in GRF 310.0 Statement of Financial Performance (i.e. “claims expense attributable to future years”). Under this approach claims expense will have two separately identifiable components, one relating to the Outstanding Claims Provision (OCP - current year and prior year claims) and the other relating to the Premiums Liabilities (PL - relating to future years).
APRA considers that the concept of Premium Liabilities is a more effective means of recognising potential risk over the term of the policy written, compared to the accounting concept of premium ‘earned/unearned’.
Given the prospective basis required by GPS 310 to measure and recognise Premium Liabilities, it is appropriate to recognise expected reinsurance recoveries and non-reinsurance recoveries as assets that reflect the level of reinsurance cover and the availability of non-reinsurance recoveries associated with the Premium Liabilities recognised. The expected reinsurance and non-reinsurance recoveries are deducted from the Premium Liabilities for the purposes of calculating the insurance capital charge and will be addressed in the actuary’s report.
For the APRA prudential forms, this introduces new asset items in GRF 300.0 Statement of Financial Position and GRF 310.0 Statement of Financial Performance. Under this approach reinsurance and non-reinsurance recoveries will have two separately identifiable components, one relating to the OCP (current year and prior year claims) and the other relating to the PL (i.e. relating to future years).
Small insurers[6] may use accounting data as a proxy for APRA reporting purposes in valuing its premium liabilities and expected reinsurance recoveries on premium liabilities in the following manner:
For premium liabilities – small insurers may use AASB 1023 Unearned premium provision less deferred acquisition costs.
For expected reinsurance recoveries on premium liabilities – AASB 1023 Deferred reinsurance expense.
Definition of insurance business
Insurers are to follow the definition of insurance business provided in section 3 of the Act. The Act provides that insurance business means the business of undertaking liability, by way of insurance (including reinsurance), in respect of any loss or damage, including liability to pay damages or compensation, contingent upon the happening of a specified event, and includes any business incidental to insurance business as so defined, but does not include:
(a) Life insurance business;
(b) Accident insurance business undertaken solely in connection with life insurance business;
(c) Pecuniary loss insurance business carried on solely in the course of carrying on banking business and for the purposes of that business by the ADI;
(d) Business in relation to the benefit provided by a friendly society or a trade union for its members or their dependants;
(e) Business in relation to the benefits provided for its members or their dependants by an association of employees of employees and other persons that is an organisation within the meaning of Schedule 1B the Workplace Relations Act 1996;
(f) Business in relation to a scheme or arrangement under which superannuation benefits, pensions or payments to employees or their dependants (and not to any other persons) on retirement, disability or death are provided by an employer or an employer’s employees or both, wholly through an organization established solely for that purpose by the employer or the employer’s employees or by both;
(g) Business in relation to a scheme or arrangement for the provision of benefits consisting of:
(i) the supply of funeral, burial or cremation services, with or without the supply of goods connected with any such service; or
(ii) the payment of money, upon the death of a person, for the purpose of meeting the whole or a part of the expenses of and incidental to the funeral, burial or cremation of that person;
and no other benefits, except benefits incidental to the scheme or arrangement;
(h) business undertaken by a person, being a carrier, carrier’s agent, forwarding agent, wharfinger, warehouseman or shipping agent, relating only to the person’s liability in respect of goods belonging to another person and in the possession, or under the control, of the first-mentioned person for the purpose of the carriage, storage or sale of those goods;
(i) business undertaken by a person, being an innkeeper or lodging-house keeper, relating only to the person’s liability in respect of goods belonging to another person and in the possession or under the control of a guest at the inn or lodging-house of which the first-mentioned person is the innkeeper or lodging-house keeper or deposited with the innkeeper or lodging-house keeper for safe custody;
(j) the business of insuring the property of a religious organization where the person carrying on the business does not carry on any other insurance business;
(ja) health-related business within the meaning of section 131-15 of the Private Health Insurance Act 2007 carried on by a private health insurer within the meaning of that Act through a health benefits fund within the meaning of that Act;
(k) health insurance business within the meaning of Division 121 of the Private Health Insurance Act 2007, carried on by a private health insurer within the meaning of that Act; or
(l) reinsurance business carried on by:
(i) a body corporate incorporated in a foreign country; or
(ii) an unincorporated body established, under a law of a foreign country, that under that law may sue or be sued, or may hold property in the name of its secretary or of an office holder of the body duly appointed for that purpose;
that is not a general insurer.
Inside Australia
Section 28 of the Insurance Act, 1973 (the Act) requires all general insurers to maintain assets in Australia (excluding goodwill and other amounts excluded by Prudential Standards GPS 120 Assets in Australia (GPS 120)) of a value that equals or exceeds the total amount of the general insurer’s liabilities in Australia.
Requirement to maintain assets Inside Australia
This requirement is designed to ensure that the total value of assets held within the jurisdictional reach of APRA and the Australian courts is sufficient to meet a general insurer’s Australian liabilities. It assists in the application of subsection 116(3) of the Insurance Act 1973, which provides that in the winding up of a general insurer, the assets in Australia shall not be applied in the discharge of its liabilities other than its liabilities in Australia unless all the Australian liabilities have first been discharged.
Reinsurance
The Act permits certain reinsurance assets to be regarded as assets in Australia. For the purposes of the Act, an amount is taken to be an asset in Australia of a general insurer if:
(a) the insurer expects to recover the amount under a contract of reinsurance entered into with a person outside Australia; and
(b) the amount relates to claims in respect of liabilities in Australia of the insurer, whether or not the claims have been paid by the insurer; and
(c) under the terms of the contract, payments by way of reinsurance are to be made in Australia.
Reinsurance Assets due from non-APRA-authorised reinsurers
Different treatment is accorded to certain reinsurance assets[7] due from a ‘non-APRA-authorised reinsurer’[8] as specified in GPS 114.
The applicable investment risk charge is calculated in accordance with GPS 114 based on whether the amount is recoverable from ‘APRA-authorised reinsurers’[9] or non-APRA-authorised reinsurers. Different investment risk charges apply for reinsurance recoverables due from non-APRA-authorised reinsurers on and from the second balance date after the end of the financial year in which the event giving rise to the recoverables occurred. These risk charges apply only to the extent that the reinsurance recoverables are not supported by collateral, guarantee or a letter of credit and on contracts incepting on or after 31 December 2008.
Where reinsurance recoverables are supported by collateral, guarantee or a letter of credit, only the risk charges applying to the counterparty providing the support will be applied as calculated in GRF 130.3 Off Balance Sheet Business – Credit Support Received.
For the purposes of determining the amount of reinsurance recoverable, if there is an offsetting arrangement between the insurer and the reinsurer that results in premium being withheld by the insurer in lieu of claim payments, the withholding of that premium is taken to be payment. However, if there is a requirement for offsets to be approved by the reinsurer the date of the offset request is taken to be the date of the request for payment.
Limited Risk Transfer Arrangements
An insurer must submit to APRA details of all proposed Limited Risk Transfer Arrangements[10] for approval prior to entering into such arrangements. APRA may approve a Limited Risk Transfer arrangement as either a reinsurance arrangement or a financing arrangement.
APRA will generally consider a Limited Risk Transfer Arrangement to be a reinsurance arrangement where the purpose and effect of the arrangement is to genuinely transfer significant insurance risk from the insurer to another re(insurer).
A Limited Risk Transfer Arrangement that is approved by APRA as a reinsurance arrangement must be treated accordingly by the insurer for prudential purposes.
A Limited Risk Transfer Arrangement that is approved by APRA as a financing arrangement must be accounted for by the insurer so that:
(a) the arrangement has a legitimate purpose and effect; and
(b) the arrangement will not misrepresent, or is not designed to disguise, a material risk to the insurer’s current or continuing profitability, solvency or capital adequacy from any party.
The terms and conditions of the financing arrangement will determine the appropriate accounting treatment for prudential purposes.
Where APRA determines that a Limited Risk Transfer Arrangement is to be treated as a financing arrangement, the insurer must not treat the arrangement as reinsurance for the purpose of determining the minimum capital requirement under the Capital Standards[11] or as reinsurance for any other purpose.
Part Basis of preparation - Financial Sector (Collection of Data) (reporting standard) determination No. 78 of 2008 - GRS 301.0 (2008) - Reinsurance Assets and Risk Charge - Basis of preparation | Zoe