Guidance Note GGN 210.1

Actuarial Opinions and Reports on General Insurance Liabilities

Status

This Guidance Note has been issued by APRA as preliminary guidance for insurers and actuaries when determining the value of general insurance liabilities under GPS 210 Liability Valuation. The Institute of Actuaries of Australia (IAAust) is developing a professional standard and guidance notes on this issue, and it is intended that this Guidance Note will be replaced by the standards of the IAAust as they are developed.

Introduction

In April 2000, APRA released a policy discussion paper entitled Proposed Reforms to the Prudential Supervision of General Insurance Companies in Australia. This paper provided some detailed proposals for modernising prudential supervisory requirements that were first explored in policy discussion papers issued in September 1999. APRA has subsequently released Prudential Standards on a range of issues; this Guidance Note is intended to support GPS 210 Liability Valuation.
With respect to insurance liabilities, it was noted in the policy discussion papers that prudential regulation requires consistency, rigour and robustness in the estimation of such liabilities. Inconsistencies in the application of Accounting Standard AASB1023 compromise the integrity of the capital adequacy framework. These inconsistencies arise because of the standard’s silence on the issue of prudential margins. Industry practice with respect to prudential margins has been quite varied and depended on each insurer’s assessment and attitude towards risk, taxation and profit and loss implications.
The Insurance Act 1973 (the Act) contains a requirement that general insurers appoint an Approved Actuary.[30] The Approved Actuary has the responsibility of advising the Board and senior management of the insurer on the value of insurance liabilities that is consistent with GPS 210.
The nature of the advice required from the Approved Actuary, and from other actuaries assisting in the preparation of insurance liabilities for inclusion in this opinion, places a high level of responsibility on the actuarial profession. Actuaries accepting an appointment as an Approved Actuary, or being delegated the function of preparing an estimate of the value of insurance liabilities for inclusion in the Approved Actuary’s opinion, must consider in relation to the IAAust Professional Code of Conduct whether they have sufficient and relevant experience to justify acceptance. In addition, the actuary should have regard to this Guidance Note and any other relevant guidance issued by APRA or the IAAust.

Relationships

The relationships between Boards, management, auditors, internal actuaries and consulting actuaries can be very complex. It is the responsibility of the Approved Actuary to clarify the relationship between these parties for the purpose of preparing advice on the value of a company’s insurance liabilities consistent with GPS 210. The extent to which any information is obtained from, or work undertaken by, other parties must be disclosed in the Approved Actuary’s report.
It is the role of the Approved Actuary to make it clear that he or she may require access to and information from management, underwriters, other employees of the company and the company’s auditors. Approved Actuaries must, however, take full responsibility for their advice and reports and must therefore be satisfied as to the validity of information provided to them or work undertaken for them.
In providing a report under GPS 210, the Approved Actuary has a legal responsibility to provide advice that complies with the Act and GPS 210, and a professional responsibility to provide advice that complies with this Guidance Note and the professional standards of the IAAust. These responsibilities override any responsibility as an employee of, or consultant to, the insurer.

Scope

It is the responsibility of an actuary valuing insurance liabilities for the purpose of compliance with GPS 210 to be conversant with the requirements of the Standard and its implications for the preparation of an opinion and report.
An actuary should seek further instruction as to the scope of the opinion and report from the Board, management, other company staff or the Approved Actuary as appropriate. This is particularly important where the actuary has a delegation to form an opinion on some, but not all, of the value of a company’s insurance liabilities, thereby requiring another party to integrate the opinion with others to form an opinion for the company as a whole that complies with GPS 210.
GPS 210 specifies that when an Approved Actuary has been requested to prepare an opinion on the value of insurance liabilities, that opinion must at least include:

(a) a central estimate value of the Outstanding Claims Liabilities;

(b) a central estimate value of the Premiums Liabilities; and

Data

An actuary should be familiar with the administration and accounting procedures for policies and claims for the part of the company for which an opinion is required.
An actuary should be conversant with the characteristics of the insurance policies and claim processes that may materially impact upon the estimation of insurance liabilities. This may include familiarity with the:

(a) nature of coverage;

(b) underwriting strategy and the nature and mix of risks underwritten;

(d) reinsurance arrangements.

An actuary should also be familiar with economic, technological, medical, legal and social trends within the broader community that may impact upon the value of insurance liabilities.
It is an actuary’s responsibility to ensure that the data used gives an appropriate basis for estimating the insurance liabilities. This includes the insurer’s own exposure and claim experience data, but should extend to industry data, where the insurer’s own data is not sufficient to reduce uncertainty to an acceptable level. Where even industry data is sparse, it may be necessary to rely, to a greater or lesser extent, on subjective assessment. The appropriate compromise between the cost of better data and the benefit, in terms of more reliable estimation, is a matter for actuarial judgement, which should take into account the materiality of the reduction in uncertainty that might result.
An actuary should take reasonable steps to verify the consistency, completeness and accuracy of the data collated, against the company’s financial records. The degree to which an actuary relies upon the data provided by the company or upon earlier or later testing of the data by the company’s auditors, and the resulting limitations that this reliance places on the actuary’s confidence in the data, should be commented upon in the report.
In order to meet reporting deadlines, an actuary may be asked to value insurance liabilities as at a valuation date prior to the reporting date. It may be intended either to use this valuation as if it were at the reporting date, or to update it to the reporting date. Another approach is to develop a model based on analysis of data up to an earlier date, applied to data as at the valuation date. This practice is acceptable, provided that the actuary does not have reason to believe, on the basis of the data emerging since the full analysis, that a full valuation using more recent data would give significantly (in the technical statistical sense) different results. The actuary should comment in the report on any features of the subsequent data that might materially affect the result and quantify the difference.

The Central Estimate

- Class of Business

The estimation of insurance liabilities for a company is likely to require subdivision of risks into classes or sub-classes of business with similar characteristics. This subdivision requires an appropriate balance between homogeneity and statistical reliability.
It is the responsibility of the actuary to determine the most appropriate subdivision for the purpose of analysis and projection. However, the value of insurance liabilities must be assessed and reported for each class of business specified by APRA.

- Analysis

Policy and claim experience should be analysed on an individual policy or claim basis or on the basis of cohorts of similar claims. Depending on the nature of the class of business being examined and the availability and reliability of data, this analysis should consider the development over time of claim payments in relation to some or all of the following measures of exposure:

(a) number of policies;

(b) earned premium;

(i) reported;

(ii) continuing;

(iii) settled;

(iv) finalised; and

(v) reopened etc.

(d) prior payments;

(e) case estimates; and

(f) reported incurred costs.

It may be necessary for some models to analyse and consider the development of these exposure items.
The claim experience need not necessarily be analysed in a fashion that distinguishes claims of different status such as reported, IBNR and reopened.
In some cases, it may be necessary for an actuary to estimate future, or unclosed, premiums for policies underwritten up to the reporting date. The actuary should consider the delay between when the business is underwritten and when premiums are received and factors that influence this delay. The division between the amount of unclosed premium that is earned and unearned should also be considered. The principles in this Guidance Note with respect to Outstanding Claim Liabilities also apply, where relevant, to unclosed premiums.
The focus of GPS 210 is for estimates of insurance liabilities that are net of reinsurance and other recoveries. Ordinarily, analysis and valuation of outstanding claims will be on a gross basis, with separate estimates for reinsurance and other recoveries. The analysis of reinsurance and other recoveries should be appropriate to the circumstances. The estimation of reinsurance recoveries may require separate deterministic or stochastic analysis of large claims, large events or aggregate costs that approach or exceed reinsurance retentions. In some circumstances, however, it may be more suitable for the analysis and valuation to consider the net of reinsurance experience and add an allowance for reinsurance recoveries to arrive at the gross estimate.
The actuary should initially assume that reinsurance recoveries will be made in full. Under the capital adequacy framework, the risk that recoveries will not be received from the reinsurer is part of the investment risk for the company. Where there is a known material risk that one or more reinsurers will fail to meet their obligations, the actuary should separate reinsurance recoveries into amounts recoverable from each of those reinsurers to enable the appropriate investment and concentration risk charges to be made as prescribed by GPS 110 Capital Adequacy. If material, the actuary should also assess the potential range of amounts unrecoverable from reinsurers, based on the uncertainty of individual and aggregate gross losses.
The analysis should consider factors both internal and external to the company that may have influenced the observed patterns in historical experience. Such factors, and changes to them, may include, but are not limited to:

(a) underwriting strategies;

(b) mix of business;

(d) legislation;

(e) economic and social trends;

(f) claim management procedures; and

(g) reinsurance programs.

Valuation Model

The actuary is responsible for the selection of an appropriate valuation model, having regard to the availability and reliability of the data and the key drivers of claim cost as revealed by the data analysis or consistent with the nature of the class of business.
The actuary may investigate more than one valuation model for the estimation of insurance liabilities, then select one or blend the results from more than one as considered most appropriate.

- Claim Experience Assumptions

The selection of claim experience assumptions should have regard to the adopted valuation model or models and the analysis of experience. These assumptions should include trends, other than inflation as measured by standard economic indicators, in claim experience considered suitable for the projection of outstanding claim payments. These trends include the impact of social, economic, environmental, legislative and court precedent factors; often referred to as superimposed inflation.
Escalation due to wage or price inflation should also be allowed for.
Models vary depending on whether certain trends are explicit in the model or are implicitly allowed for by other assumptions. Where trends are implicit, this should be discussed in the report.
Where a sequence of explicit inflation or superimposed inflation rates are used, or where different inflation or superimposed inflation rates are used in different parts of the model, the equivalent single, level rate should be stated in the report.
In some cases, there may be an insufficient amount of claim experience data on which to reliably base assumptions for the selected model or models. The actuary may give partial or full weight to assumptions drawn from industry data, if satisfied that such an approach is appropriate. For classes where claims are reported slowly, or where there is little early information about the severity of claims, it may be appropriate to give partial or full weight to some or all of the premium assumptions or, if there are no such assumptions explicit, to assumptions based on expected actuarial loss ratios applied to the premiums charged.
All claim experience assumptions should be reviewed with each valuation of insurance liabilities and updated, if necessary, as considered appropriate. The actuary should be satisfied that the claim experience assumptions adopted at each valuation are realistic in the context of data known at that time. Changes required to assumptions must not be spread over more than one valuation, but this does not prevent the actuary from placing appropriate credibility on the claim experience that has emerged since the previous valuation, when determining such changes.

- Discount Rate

GPS 210 prescribes how the discount rate assumption is to be determined. This discount rate is the gross effective yield on a portfolio of sovereign fixed coupon and redemption value securities, in the currency of, and with a payment profile matching as far as possible, the expected payment profile. For all Australian insurance liabilities, the fixed interest securities to be used are Commonwealth Government Treasury notes and bonds. It is acceptable to use either the average rate or a series of discount rates taken from the corresponding yield curve.
Sovereign fixed interest securities are typically not available to exactly match projected payments. There are usually gaps in the maturity dates available and the longest dated such security may not be long enough. It is appropriate to smooth, interpolate and extrapolate from the observed yields in the sovereign bond market.
If the actuary applies a sequence of discount rates for future periods, the corresponding average discount rate should be calculated for each class of business and stated in the report. The discounted mean term for each class of business should also be stated in the report.
Where the value and timing of unclosed premiums have been projected, discounting should also be applied.
Discounting may be disregarded where the effect of discounting does not materially change the resulting central estimate.

- Claim Administration Expenses

An appropriate allowance should be made for the future costs of claim administration that are not allocated to individual claims and, therefore, not included in the data on which the claim experience assumptions were based. The allowance for claim administration expenses should be made after consideration of historical levels of claim administration expenses, organisational structure, internal and outsourced functions and future administrative developments. It should be noted that expenses are incurred in the making of gross payments as well as making recoveries. It should also be noted that expense levels are often higher for older, more complex claims. While this may be encompassed in an average rate for an active portfolio, allowance for escalating expenses may be needed for a closed portfolio. The complexity of the approach used to determine an appropriate allowance for claim administration expenses should be commensurate with its likely materiality.

- Central Estimate

The actuary is responsible for ensuring that the valuation calculations are carried out accurately. The actuary must also be satisfied that the overall valuation process and estimates are reasonable. The actuary should quantify the impact of any changes to the valuation basis since the previous actuarial valuation conducted for the purpose of compliance with GPS 210. Explanation of the impact of material changes should be included in the actuary’s report.
GPS 210 requires that a central estimate of the Outstanding Claim Liabilities be reported. For the purpose of GPS 210, this should be thought of as a requirement for the mean of a notional probability distribution of outcomes, without regard to whether the insurer has sufficient capital to meet all of the possible outcomes. Where the actuary is of the view that the estimate is not such a notional mean, the reasons for this should be explained in the report, and an alternative central estimate should be provided and explained. Such explanations will usually be in the context of the analysis of uncertainty. It should be noted that, in the context of general insurance, the mean is typically larger than either the median or the mode, so that reporting either the median or the mode is likely to result in underestimation. These differences are usually larger for gross than for net estimates.

Premium liabilities

The actuary is also required by GPS 210 to provide an opinion on the value of Premiums Liabilities. These are defined as insurance liabilities which relate to claim payments arising from future events insured under existing policies up until their next renewal.
The general procedures and principles described in the section above for valuing Outstanding Claim Liabilities also apply to valuing Premiums Liabilities. However, it is recognised that, as a full actuarial valuation of Premiums Liabilities is essentially a re-underwriting of the portfolio, it may not be appropriate or even possible to undertake as complete a valuation as is appropriate for Outstanding Claim Liabilities.
If the premiums charged are based on actuarial advice, it will normally be appropriate to base the central estimate of the Premiums Liability on that advice, modified as appropriate for subsequent information and with current inflation and discount rate assumptions.
For a reasonably homogeneous and stable portfolio, it will usually be possible to extend the outstanding claim valuation model on the basis of claim frequencies and numbers of policies, or some similar measure of exposure.
For a relatively stable portfolio, it will often be possible to apply an actuarial loss ratio, based on historical performance as revealed by the outstanding claim estimates, to the unexpired premium. If this, or the approach in paragraph 45 is taken, the actuary should investigate and, if appropriate, adjust the selected assumptions for any:

(a) differences in nature between the unexpired risk exposure and the exposure from which the models and claim experience assumptions developed for the valuation of outstanding claim liabilities were derived;

(b) changes in underwriting standards and premium rates or levels; and

In certain cases where premiums charged are not based on actuarial advice, it may not be possible to do more than assume that the premiums charged were appropriate to the risk. In such a case it may be necessary to assume a loss ratio based on subtracting reasonable expense and profit margins. These cases may include, but are not limited to those where:

(a) a large element of underwriting judgement is required in relation to unique risks;

(b) there is little past experience for the class; or

As a result of these investigations and considerations, the actuary should set out in the report for each class of insurance:

(a) the nature of the unexpired risk exposure relative to recent exposure;

(b) an explanation of the particular difficulties associated with a full valuation or re-underwriting of Premium Liabilities for material classes of business;

(d) a discussion of the limitations of the approach adopted versus undertaking a full valuation of Premiums Liabilities.

The complexity of the selected approach should have regard to the materiality and uncertainty of the Premiums Liabilities in the context of the total insurance liabilities for each particular class of business and the insurance liabilities for the company as a whole.
There should ideally be a high degree of continuity between the following as progressively more information becomes available:

(a) the estimation of Premiums Liabilities;

(b) the estimation of IBNR liabilities; and

Uncertainty

The value of insurance liabilities is uncertain. Sources of this uncertainty include, but are not limited, to the following:

(a) the valuation model or models adopted for analysis and projection are unable to fully capture the complexities of an actual claim process;

(b) fluctuations in observed claim experience result in uncertainty in selecting suitable assumptions for the valuation model;

(d) future economic and environmental factors that impact upon future claim payments are uncertain;

(e) projected payments relating to Premiums Liabilities relate to events that are yet to occur; and

(f) there is uncertainty in the projected payments, even if the true claim experience assumptions could be found for a perfect model.

Although the analogy is not exact, it is useful to think of the true value (which can only be known, in hindsight, after all claims are settled and, even then, only imperfectly) as a random variable, drawn from a probability distribution of possible outcomes. This notional probability distribution has an expected value and shape that can be quantified in terms of its second and higher moments. The aim of the actuarial estimation process is to arrive at an estimate of the notional expected value. It is also possible to think in terms of this estimate having a standard error, skewness, etc.
The actuary is required to quantify the uncertainty, which will generally require use of one or more of the following:

(a) statistical analysis;

(b) sensitivity analysis, changes to claim experience assumptions or the valuation models;

(d) analysis of scenarios; and

(e) judgement.

In this quantification, it may be useful to think in terms of two components of uncertainty, independent and systemic:

(a) Independent variation arises out of factors that have an isolated impact on individual policies or claims. If there is a sufficient body of data, it is susceptible to rigorous statistical analysis. It can be controlled by diversification and reinsurance. Its relative importance is inversely proportional to the square root of the size of the portfolio; and

(b) Systemic uncertainty arises out of factors that affect the portfolio as a whole. Because of the nature of many of these factors, it is not easily susceptible to statistical analysis, if at all. Even where a reasonable body of past data is available for analysis, it can often be argued that the conditions observed in the past are unlikely to continue unchanged in the future. Most assessments of systemic uncertainty rely heavily on actuarial judgement.

The above split is, of course, an oversimplification. Actual experience is driven by factors that range between these two extremes. Most real world variables are partially correlated, rather than perfectly correlated or perfectly independent. The split does, however, provide a useful framework for discussing and assessing overall uncertainty.
GPS 210 requires the actuary to estimate uncertainty in terms of the 75th percentile, and half the coefficient of variation, of the net insurance liability, excluding investment and operational risks, and assuming a matched portfolio of sovereign risk assets. The risk of reinsurance default should be included in this assessment (see paragraph 24).
Where classes of business are valued separately, uncertainty should be assessed for each class separately, as if that class stands alone. The actuary should initially assess the 75th percentile of the combined Outstanding Claim Liabilities and Premiums Liabilities. This should then be split between Outstanding Claim Liabilities and Premium Liabilities. In the absence of any better basis, it is acceptable to assume this split is in proportion to the respective central estimates. If the actuary is concerned that the distribution of the total liability is particularly skewed, the actuary should form a view as to whether the 75th percentile is less than half the coefficient of variation above the mean and substitute the higher value. For less extreme distributions, while it may be helpful, an explicit estimate of the coefficient of variation is not required.
While it may be helpful for the actuary to form a view as to the approximate shape of the notional probability distribution, this is not necessary. All that is required, is for the actuary to adopt a figure which is intended to be the higher of the 75th percentile and half the coefficient of variation more than the mean. Where the actuary does work in terms of a particular notional probability distribution, this should be described in the report, along with the reasons why it is considered appropriate. Where this is not done, the actuary should discuss the reasoning behind the figure chosen.
As it will be necessary to allow for the benefits of diversification across the company as a whole, the actuary should also discuss the way in which the uncertainties, of the class of business being valued, might interact with the other business of the company. This can be done in terms of a discussion of the independent and systemic components of the assessed uncertainty. Where this is not feasible or considered appropriate, the actuary should indicate the extent of uncertainty, as if the insurance liabilities for the class of business being assessed were of the size of the likely total insurance liabilities for the company as a whole.
The actuary should describe, in a qualitative fashion, the key drivers of uncertainty for the class of business or portfolio being valued. Material changes in these key drivers, or uncertainty generally, since the previous valuation, should be discussed and, if appropriate, quantified.

Risk margins

GPS 210 calls for a risk margin intended to give a 75% probability that an insurer’s insurance liabilities will prove adequate, but not less than half of the coefficient of variation of the combined central estimate. This margin must be reported separately for Premiums and Outstanding Claim Liabilities within each class of business, and where the actuary deems it appropriate, allowance for diversification and/or reinsurance should be made in determining the risk margin. Such an allowance will normally be appropriate. Where the actuary takes the view that it is not appropriate, the reasons for adopting this view should be given.
The derivation of the risk margins in the context of the assessed uncertainty, and how this complies with the requirements of GPS 210, should be described in the report. Normally, the risk margin, as a proportion of the central estimate, should not change greatly between valuations. Where there is a change, the reasons for the change should be explained.
The approach adopted by the actuary who adjusts the risk margins for diversification and reinsurance should be clearly documented. Normally, the actuary should consider the impact of the size of the insurance liabilities for the company as a whole and the extent of less than full correlation of potential outcomes between classes of business. As the uncertainties involved in assessing risk margins are even greater than those of central estimates, it will usually be appropriate for the actuary to base conclusions mainly on the extent of correlation between classes of business for the entire market, but regard should also be given to any observed correlations for the company.
The actuary should apportion the diversification benefit between classes of business. While this is an essentially arbitrary allocation that is performed for reporting purposes, the approach adopted should be documented. Approaches such as a proportional reduction to the amounts of risk margin or to the probability of adequacy by class of business would usually be considered suitable.

Involvement of more than one actuary

Larger insurers underwriting numerous and sizeable classes of business are likely to require the services of more than one actuary to assess the value of Outstanding Claim Liabilities and Premiums Liabilities as well as the risk margins. In these circumstances, the Approved Actuary has responsibility for coordinating the valuations and summarising the results into one opinion for delivery to the insurer’s Board and senior management.
In preparing the summary opinion for the insurance liabilities for the company, the Approved Actuary should be satisfied as to the suitability of central estimates, risk margins and diversification benefits prepared by other actuaries for inclusion in the opinion. Where the Approved Actuary is not satisfied as to the suitability of a particular item for inclusion in the opinion, then an alternative figure is to be provided. Justification for varying the figure from the original is to be included in the summary report.
While the assessment of central estimates for Outstanding Claim Liabilities and Premiums Liabilities, uncertainty and risk margins for various classes of business in isolation is a relatively independent exercise capable of delegation to separate actuaries, the assessment of diversification benefits for the company is unlikely to be. The Approved Actuary is responsible for ensuring that the diversification benefit is assessed on a holistic basis for the company.
Some forms of reinsurance may be dependent upon the aggregate claim experience of a number of classes of business. Where an actuary is undertaking the valuation of classes of business completely encompassed by such a reinsurance arrangement, then the impact of the reinsurance on the central estimate of Outstanding Claim Liabilities and risk margin should be considered and included as part of the report. Where separate actuaries are valuing classes of business within such a reinsurance arrangement, it is the responsibility of the Approved Actuary to ensure that the impact of the reinsurance arrangement on the central estimates and risk margins is appropriately assessed and documented.
In order to meet reporting deadlines for published accounts, it may be necessary to invert the natural sequence and determine diversification adjustments before the individual classes of business valuations are completed. It will normally be acceptable for individual portfolio reports to show risk margins based on analysis of diversification benefits at the most recent previous valuation. If this is done, the continued appropriateness of those adjustments should be discussed.

Reporting

Although referred to in the singular throughout this Guidance Note, it is likely that two styles of report may be required: an insurance liabilities report and a risk margin diversification report. This is particularly the case where more than one actuary is involved. The actuary should prepare, date and sign a written final report. For both styles of report, the actuary should include the following items:

(a) who commissioned the report and the addressee. Where other actuaries prepare separate reports, the addressee should be the Approved Actuary. At least a summary opinion is to be prepared by the Approved Actuary, addressed to the insurer’s Board. This report should disclose the actuaries who have undertaken the valuations by class of business;

(b) the name of the actuary and the capacity in which the actuary is acting;

(c) purpose of the report and terms of reference which, as a minimum, are to advise the values of Outstanding Claim Liabilities and Premiums Liabilities and the corresponding risk margins in compliance with GPS 210. It should be made clear that the report should not be used for purposes for which it is not suitable or intended;

(d) extent of compliance with this Guidance Note and reasons for not complying fully with it; and

(e) definition of terms and expressions used in the report that may be ambiguous or subject to wide interpretation.

The two styles of report are distinct. Each should deal with the items indicated below for the respective reports.

(a) Insurance liabilities report should include:

(i) classes of business for which a valuation has been undertaken;

(ii) nature, appropriateness, accuracy and interpretation of data;

(iii) analysis of policy and claim experience, highlighting significant aspects of recent experience;

(iv) valuation model or models and the claim experience assumptions adopted for the projection of the Outstanding Claim Liabilities and Premiums Liabilities;

(v) changes to the approach, model or models and claim experience since the previous report of this nature;

(vi) comparisons of actual experience, for both Outstanding Claim Liabilities and Premiums Liabilities with that expected under the assumptions of the previous report of this nature;

(vii) approach to the assessment of uncertainty, 75th percentile and/or coefficient of variation and derivation of the risk margin that complies with GPS 210; and

(viii) results of the valuation that clearly identify:

the central estimate of Outstanding Claim Liabilities by class of business;
the central estimate of Premiums Liabilities by class of business;
the coefficient of variation (if applicable) and risk margins (before diversification) by class of business, separately for Outstanding Claim Liabilities and Premiums Liabilities; and
if diversification adjustments based on a previous valuation have been applied, the adjusted risk margins.

(b) Risk margin diversification report should include:

(i) summary of Outstanding Claim Liabilities, Premiums Liabilities, 75th percentiles and/or coefficient of variation (where applicable) and risk margins by class of business for the entire company;

(ii) approach, model or models and assumptions, particularly with respect to correlations, for allowing for diversification across the classes of business within the company;

(iii) changes to the model or models and assumptions since the previous report of this nature;

(iv) results of the risk margin diversification report that clearly identifies the diversification benefit; and

(v) if diversification adjustments based on a previous valuation have been used in individual liability reports, the continued appropriateness of those adjustments.

In all cases, the approach and model or models adopted should be clearly described and the derivation of assumptions clearly explained with reference to the analysis of data. Any limitations should also be stated.
Where the principal requires the actuary to use specific assumptions or the actuary is relying on the interpretation of legislation, standards or rulings supplied by the principal or its other advisers, the actuary must clearly state the circumstances, discuss whether or not the assumptions are reasonable and consistent with this Guidance Note, GPS 210 and other relevant professional standards, and discuss the implications of any divergence from this Guidance Note, GPS 210 and professional standards.

Guidance Note GGN 210.1Guidance Note GGN 210.1

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