Financial Sector (Collection of Data) (reporting standard) determination No. 79 of 2008 - GRS 310.0 (2008) - Statement of Financial Performance
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With the exception of the recognition and measurement requirements of the items listed below, general insurers are requested to follow the Australian accounting standards regarding the recognition and measurement of items of income and expense (profit or loss) in completing this form, notably AASB 1023 ‘General Insurance Contracts’.
Premium revenue;
Claims expense (Claim payments made in the current year plus the movement in Outstanding Claims Provision (OCP) and Premium Liabilities (PL));
Reinsurance recoveries revenue (Reinsurance recoveries received in the current year plus the movement in the reinsurance recoverables associated with OCP and PL);
Expected reinsurance recoveries;
Non-reinsurance recoveries;
Reinsurance expense (i.e. no deferral of reinsurance expense under prudential reporting);
Acquisition costs (i.e. no deferral of acquisition costs under prudential reporting); and
Commission revenue.
The interpretation and required measurement and recognition basis for these items listed are specified in these instructions below and under the appropriate item heading and also outlined in the introduction to the reporting package.
(1) Regulatory reporting items with different measurement basis to AASB 1023:
Premium revenue
For regulatory reporting recognise fully from date of acceptance of policy. Do not defer and amortise in accordance with AASB 1023.
Reinsurance expense
For regulatory reporting recognise fully as an expense. Do not defer and amortise in accordance with AASB 1023.
Deferred acquisition costs
For regulatory reporting recognised fully as an expense. Do not defer and amortise in accordance with AASB 1023.
Commission revenue
For regulatory reporting recognise fully from date of acceptance of risk. Do not defer and amortise in accordance with AASB 1023.
(2) 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 and non-reinsurance recoveries (associated with Premium Liabilities).
For regulatory reporting these are new asset items and are measured on a prospective basis similar to Premium Liabilities.
(3) 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.
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 items 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
GPS 310 Audit and Actuarial Reporting and Valuation 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 Premium 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 Audit and Actuarial Reporting and Valuation 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 new revenue items in GRF 310.0 Statement of Financial Performance. Under this approach 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).
Premium Revenue and Unearned Premium Provision
AASB 1023 requirements
Under AASB 1023 premium written is recognised as premium revenue on an earned/unearned basis. That component that is unearned is recognised as a liability – “Unearned Premium Provision”.
APRA requirements
It is important to consider the accounting treatment underlying the recognition of Premium Liabilities comparative to that for unearned premium provision, specifically the profit and loss treatment. The earned/unearned basis for recognition of premium revenue prescribed by AASB 1023 is not appropriate for the APRA prudential forms as it is not consistent with the APRA framework for measuring insurance liabilities under GPS 310 Audit and Actuarial Reporting and Valuation. The objective of the measurement of Premium Liabilities is to recognise potential future claim liabilities arising out of new insurance business written (on a prospective basis). Accordingly to be consistent, it is more appropriate to recognise premiums written up front as premium revenue.
Deferred Acquisition Costs (DAC) and Acquisition Costs
AASB 1023 requirements
DAC is recognised as an asset under AASB 1023 and is amortised as an underwriting expense to the profit and loss in accordance with the expected pattern of the incidence of risk under the related general insurance contracts.
APRA requirements
DAC is not permitted to be recognised as an asset under the APRA prudential capital framework. From a prudential accounting perspective it is more appropriate to require DAC to be fully written off as an acquisition expense in GRF 310.0 Statement of Financial Performance. This treatment of DAC is consistent with the proposed treatment for the recognition of premium revenue.
GPS 310 Audit and Actuarial Reporting and Valuation provides that an insurer may use its unearned premium provision (UPP) less its DAC as approximate method for determining the central estimate of its total Premiums Liabilities after adjusting for the profit margin in the UPP. This is allowed where this is a reasonable approximation of its Premiums Liabilities and does not in itself replace the role of the Appointed Actuary to value Premium Liabilities.
Reinsurance Expense and Deferred Reinsurance Expense
AASB 1023 requirements
Under AASB 1023, expenses/premiums paid for reinsurance cover is required to be recognised as an expense on a basis that is consistent with the pattern of reinsurance. As a result under AASB 1023 this gives rise to the recognition of an asset – “Deferred Reinsurance Expense”, which is amortised (over a specified term/basis) to the Statement of Financial Performance as a reinsurance expense. Under AASB 1023 reinsurance expense is disclosed as an offset from premium revenue in the Statement of Financial Performance.
APRA requirements
Due to the change in the recognition of premium income for prudential reporting purposes (refer above), it is appropriate to recognise reinsurance expense on a consistent basis i.e. recognised fully upfront in the Statement of Financial Performance. As a result, for APRA prudential reporting (and Investment risk charge calculation), there will be no asset titled “Deferred Reinsurance Expense”.
Tax Effect Accounting/Adjustments
It is likely that the recognition of the Premium Liabilities and Outstanding Claims Provisions in accordance with GPS 310 Audit and Actuarial Reporting and Valuation will give rise to tax effect accounting considerations. The measurement and recognition in GRF 300.0 Statement of Financial Position of tax effect accounting items (e.g. deferred tax) is to be determined in accordance with the requirements of AASB 112 ‘Income Taxes’.
If the technical insurance provisions reported in GRF 300.0 Statement of Financial Position are determined to representing timing differences between recognition as an expense for accounting purposes and as a deductible expense for taxation purposes, then the associated measurement and recognition of taxation expense and deferred tax assets and liabilities is to be determined in accordance with AASB 112.
Fair value measurement of assets
APRA applies the notion of activities integral to insurance operations for its regulatory reporting[10]. APRA does not follow the classification basis in AASB 1023 ‘General Insurance Contracts’. Therefore, the value of these investments reported in this form may or may not equate to the value of investments deemed to be assets backing insurance liabilities. For APRA regulatory reporting purposes, investments integral to the entity's general insurance activities means[11] investments that are controlled by the entity in the conduct of its general insurance activities.
Investments reported in this form that are integral to the entity's general insurance activities must be measured at fair value. The investments must not be valued at cost. Fair value has the same meaning as defined in the AASB 132 ‘Financial Instruments: Presentation’, that is, the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's-length transaction, and is determined as follows:
the quoted market price (i.e. bid or ask price) in an active and liquid market; or
When there is infrequent activity in a market, and the market is not well established, small volumes are traded relative to the asset or liability to be valued, or a quoted market price is not available – a realistic estimate of fair value on the basis of the results of a valuation technique that makes maximum use of market inputs, and relies as little as possible on entity-specific inputs[12].
Part Basis of preparation - Financial Sector (Collection of Data) (reporting standard) determination No. 79 of 2008 - GRS 310.0 (2008) - Statement of Financial Performance - Basis of preparation | Zoe