Insurance Act 1973 - Determination of Prudential Standards - GPS 110 - Capital Adequacy for General Insurers; GPS 120 - Assets in Australia for General Insurers; GPS 210 - Liability Valuation for General Insurers; GPS 220 - Risk Management for General Insurers; GSP 230 - Reinsurance Arrangements for General Insurers; GPS 410 - Transfer and Amalgamation of Insurance Business for General Insurers and Transitional Prudential Standard GPS 900- Early Approvals of Auditors and Actuaries (07/02/2002)
Determining the level of the MERDetermining the level of the MER
Start here
Get a plain-English read of Determining the level of the MER
Turn the raw legal text into a practical explanation grounded in Insurance Act 1973 - Determination of Prudential Standards - GPS 110 - Capital Adequacy for General Insurers; GPS 120 - Assets in Australia for General Insurers; GPS 210 - Liability Valuation for General Insurers; GPS 220 - Risk Management for General Insurers; GSP 230 - Reinsurance Arrangements for General Insurers; GPS 410 - Transfer and Amalgamation of Insurance Business for General Insurers and Transitional Prudential Standard GPS 900- Early Approvals of Auditors and Actuaries (07/02/2002).
Determining the level of the MER
- The insurer should base the calculation of its MER on:
(a) the relevant area of concentration (eg geographic region);
(b) which peril produces the greatest MER;
(c) the return period of the relevant catastrophe and the sensitivity of the MER to changes in the return period;
(d) results produced by modelling the insurer’s own past experience; and
(e) any externally, commercially available data and modelling facilities, bearing in mind the appropriateness of these data to the insurer’s portfolio of risks.
-
The MER must be calculated in a manner consistent with the processes for setting, monitoring and altering the MER outlined in the insurer’s Reinsurance Management Strategy (REMS), as required under GPS 230 Reinsurance Arrangements.
-
It is common practice for insurers to use computer-based modelling techniques, developed either in-house or by external providers,to estimate likely losses under different catastrophe scenarios. Where an insurer uses such a model, the model must be conceptually sound and capable of consistently producing realistic calculations of the MER. APRA will expect the insurer to be able to demonstrate an understanding of the model used in estimating the MER. This understanding will include:
(a) the type of data and assumptions used in the model;
(b) the methodology used to incorporate the data and assumptions into the model; and
(c) the sensitivity of the resulting MER figure to changes in the model’s assumptions.
-
Insurers must be able to demonstrate that they have thoroughly researched the model and tested at least several different scenarios of return period for each type of catastrophic event that may affect their portfolio of risks. Similarly, an insurer must calculate its MER using data that is consistent, accurate and complete. Where an insurer lacks access to the relevant data, it must be able to explain the rationale for, and details of, any estimates of data that it uses. This would include analysis of the sensitivity of the results to changes in the estimates and assumptions.
-
In setting an appropriate level of MER, the Board must consider the insurer’s claims history, capital availability and reinsurance arrangements. While the MER will ultimately be governed by the insurer’s particular portfolio, some simple methods could be used to guide the decision. For example, insurers who have determined that their maximum event would be a natural catastrophe could apply the standard PML factors produced by the Insurance Council of Australia to their aggregate exposures. This will provide an estimate of the gross loss to which the insurer is exposed. The insurer could then apply their reinsurance protections to this amount to obtain their MER.