Financial Sector (Collection of Data) (reporting standard) determination No. 79 of 2006 - Reporting Standard GRS 210.1 (2007) - Premium Liabilities - Insurance Risk Charge
Reporting Form GRF 210.1Reporting Form GRF 210.1
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This instruction guide is designed to assist in the completion of GRF 210.1 - Premium Liabilities – Insurance Risk Charge.
The form can be used to calculate the risk capital charge associated with the licensed insurer’s Premiums Liabilities in accordance with GPS 110 Capital Adequacy.
The value of the premiums liabilities and the expected reinsurance recoveries that are included in this form must be measured in accordance with GPS 310 Audit and Actuarial Reporting and Valuation.
The purpose of this form is to provide detailed information on the following:
Premiums liabilities (PL) by class of business (direct business and Reinsurance);
Total premiums liabilities for insurance business written either directly by the insurer or by inward reinsurance;
Central estimate of premiums liabilities both gross and net of expected reinsurance and non reinsurance recoveries;
Risk margin for premiums liabilities (in accordance with GPS 310 Audit and Actuarial Reporting and Valuation) both gross and net of expected reinsurance and non reinsurance recoveries;
The component of premiums liabilities that are classified as current liabilities for financial reporting purposes and
The component of premiums liabilities that are classified as non-current liabilities for financial reporting purposes).
Audit requirements
The form relating 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 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. This means that:
the completed form for the financial year must be audited by the approved 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));
Part Reporting Form GRF 210.1 - Financial Sector (Collection of Data) (reporting standard) determination No. 79 of 2006 - Reporting Standard GRS 210.1 (2007) - Premium Liabilities - Insurance Risk Charge - Reporting Form GRF 210.1 | Zoe
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 entities
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’.
The general requirements of AASB 121 ‘The Effects of Changes in Foreign Exchange Rates’ for translation are:
Foreign currency monetary items[1] outstanding at the reporting date must be translated at the spot rate[2] at the reporting date; and
Foreign currency non-monetary items[3] that are measured at historical cost in a foreign currency must be translated using the exchange rate at the date of the transaction.
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’. However, those foreign currency derivatives that are not within the scope of AASB 139 ‘Financial Instruments: Recognition and Measurement’ (eg some foreign currency derivatives that are embedded in other contracts) remain within the scope of AASB 121 ‘The Effects of Changes in Foreign Exchange Rates’.
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 The Effects of Changes in Foreign Exchange Rates 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 The Effects of Changes in Foreign Exchange Rates.
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 210.1 Premium Liabilities – Insurance Risk Charge.
Specific instructions
Classes of Insurance Business
Direct Business
The classes of business for companies that are not specialist reinsurers 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), 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 (CCI)
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 provides stated benefits where the insured is killed or suffers loss of specific parts of the body or is prevented from carrying out the insured’s normal occupation. In addition, regular benefits may be paid over a short period of time (typically less than 3 years), noting that continuous disability policies are now considered to be Life Insurance Policies and should not be provided by general insurance companies).
(XI). Other
All other insurance business not specifically mentioned elsewhere. It includes, for example:
All guarantees (e.g. fidelity Guarantee)
Trade Credit;
Extended Warranty (includes insurance by a third party for a period in excess of the 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)
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 110 Capital Adequacy, 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 premiums liabilities.
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 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.
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 at pre-agreed dates 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 at annual anniversary dates, the insurer or reinsurer must account for premiums liabilities for any unexpired risks as at the annual anniversary 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 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 each of these central estimates.
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 generally 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 should 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 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, can be added back to Tier 1 capital in GRF 120.0 Determination of Capital Base.
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.
Reinsurance
Include premiums liabilities associated with reinsurance business under the “Reinsurance” section.
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.
Expected Reinsurance Recoveries
The term ‘Expected reinsurance recoveries’ is used to describe the expected value of reinsurance recoveries in respect of premiums liabilities. Expected reinsurance recoveries are to be calculated in accordance with GPS 310 Audit and Actuarial Reporting and Valuation.
Recognition of expected reinsurance recoveries on premiums liabilities will vary according to the type of reinsurance contract:
- Proportional reinsurance and all facultative
Expected reinsurance recoveries on premiums liabilities are to be recognised, by the direct insurer, from the date the underlying risk is accepted by the reinsurer and the outwards reinsurance expense is recognised.
- Excess of loss
Where excess of loss reinsurance is used, the recognition depends on the basis of the cover being either on a ‘risks attaching during the period of reinsurance’ basis or ‘losses occurring during the period of insurance’ basis.
‘Losses occurring during the period of reinsurance’: A reinsurance cover provided on this basis covers risks that have been accepted in the prior periods and also risks that are accepted and attach in the current period of the reinsurance contract. Where their risk profile is evenly distributed throughout the year, insurers must recognise 50 per cent of the reinsurance expense and expected reinsurance recoveries in the current period. The reinsurance expense and expected reinsurance recoveries for the remaining 50 per cent of the period are to be recognised at the midpoint of the period for the reinsurance cover for the remaining portion of the current year. Where the risk profile of the insurer is not evenly distributed throughout the year, the insurer will need to recognise the apportionment of reinsurance expense and expected reinsurance recoveries on the same business pattern as their risk profile. For seasonal insurers, with all policies incepting on the one date, all reinsurance expense and expected reinsurance recoveries will need to be recognised from the date of acceptance by the reinsurer(s) of the reinsurance contract.
‘Risks attaching during the period of reinsurance’: A reinsurance cover provided on this basis covers only the policies written during the reinsurance year and there are no prior year exposures to the reinsurance contact. For these contracts the reinsurance expense and the expected reinsurance recoveries are to be recognised from the date of acceptance by the reinsurer.
Insurers should recognise expected reinsurance recoveries, 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 110 Capital Adequacy.
Non Reinsurance Recoveries
Non-reinsurance recoveries are amounts that may be recovered under arrangements other than reinsurance arrangements, such as salvage, subrogation and sharing agreements.
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 Approved 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.
Premium Liabilities net of Expected Reinsurance Recoveries and Non-reinsurance Recoveries
Total Premiums Liabilities net of Expected Reinsurance Recoveries and Non-reinsurance Recoveries is calculated as under:
Total Gross Premium Liabilities - Gross of Expected reinsurance and Non reinsurance recoveries; less
Expected Reinsurance Recoveries; less
Expected Non Reinsurance Recoveries.
Do not enter a value as this is automatically calculated by the form.
PL Capital Factor %
This column states the insurance risk capital factor applicable to each line of business. The capital factors are specified in GPS 110 Capital Adequacy.
PL Insurance Risk Charge
This column represents the insurance risk capital charge applicable to each line of business. The capital charge is calculated based on the capital factors specified in GPS 110 Capital Adequacy.
The PL 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.
Premium Liabilities – Net of Expected Reinsurance and Non-reinsurance Recoveries
Net PL - Central Estimate
For each line of business, report the central estimate, net of expected reinsurance and non-reinsurance recoveries, associated with premiums liabilities that are calculated in accordance with GPS 310 Audit and Actuarial Reporting and Valuation.
Net PL - Risk Margin
For each line of business report the risk margin, net of expected reinsurance and non-reinsurance recoveries, associated with premiums liabilities that are calculated in accordance with GPS 310 Audit and Actuarial Reporting and Valuation.
Premium Liabilities Gross of Expected Reinsurance and Non-reinsurance Recoveries Classified as – Current Liabilities
Report the component of the premiums liabilities 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 Premiums Liabilities disclosed as a current liability in GRF 300.0 Statement of Financial Position. This will be the case (i.e. not equal) where the insurer has provided for Premiums Liabilities 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 Statement of Financial Position.
Premium Liabilities Gross of Expected Reinsurance and Non-reinsurance Recoveries Classified as – Non-current Liabilities
Report the component of the premiums liabilities 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 Premiums Liabilities disclosed as a non-current liability in GRF 300.0 Statement of Financial Position. This will be the case (i.e. not equal) where the insurer has provided for Premiums Liabilities 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 Statement of Financial Position.
The sum of Premiums Liabilities Gross of Expected Reinsurance and Non-reinsurance Recoveries classified as Current Liabilities and the amount classified as Non-current Liabilities must equate to Total Premiums Liabilities Gross of Expected Reinsurance and Non-reinsurance Recoveries.