Premiums Liability Risk
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The capital charge for Premiums Liability Risk is in response to the risk that premiums relating to post calculation date exposures, including premiums written after the calculation date, will be insufficient to fund the liabilities arising from that business. The need for a capital charge which relates, in part, to new business arises because of the time delay between calculation date and the time at which APRA is able to process information and take any action which may be necessary.
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The value of the net premium liabilities, as determined under GPS 210, is taken as the base value for the liabilities upon which the capital charge for Premiums Liability Risk is calculated.
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For the purposes of the Prescribed Method, Premiums Liability Risk is considered to be broadly proportional to the value of the net Premiums Liabilities. As for Outstanding Claims Risk, the extent of Premiums Liability Risk will vary by class of business. However, in a stable portfolio, Premiums Liability Risk is likely to be greater than Outstanding Claims Risk for the same class of business. A separate capital charge for Premiums Liability Risk therefore needs to be calculated for each class of business.
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The capital charge for each class of business is calculated by multiplying the net premium liabilities for that class (as determined by GPS 210) by the relevant Premiums Liability Risk Capital Factor (using the same categories as for Outstanding Claims Risk – see Tables 1 and 2 below). Classes of business within the same category are regarded as having broadly similar levels of Premiums Liability Risk. The total capital charge for Premiums Liability Risk is the sum of the capital charges for Premiums Liability Risk for each class of business.
Business Covering Multiple Classes
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Where an insurer writes inwards reinsurance business and is unable to split this business into the classes and types listed below, they are to use the highest casualty factors on their outstanding claims liabilities and their premiums liabilities.
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Where an insurer writes inwards reinsurance which spans multiple classes and the insurer cannot readily split the contract between classes, APRA suggests that the contract should be allocated using one of 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.
An insurer that writes inwards reinsurance is free to choose which of the above methods it uses, or may use another appropriate method, provided the same method is used for all contracts and all subsequent periods.
Table 1: Direct Insurance
| Class of Business | OutstandingClaims RiskCapital Factor | Premiums Liability Risk Capital Factor |
|---|
| HouseholdersCommercial MotorDomestic MotorTravel | 9% | 13.5% |
| Fire and ISRMarine and AviationConsumer CreditMortgageOther AccidentOther | 11% | 16.5% |
| CTPPublic and Product LiabilityProfessional IndemnityEmployers’ Liability | 15% | 22.5% |
Table 2: Inwards Reinsurance
| Class of Business | OutstandingClaims RiskCapital Factor | Premiums Liability Risk Capital Factor |
|---|
| Property- Facultative Proportional- Treaty Proportional- Facultative Excess of Loss- Treaty Excess of Loss | 9.0%10.0%11.0%12.0% | 13.5%15.0%16.5%18.0% |
| Marine & Aviation- Facultative Proportional- Treaty Proportional- Facultative Excess of Loss- Treaty Excess of Loss | 11.0%12.0%13.0%14.0% | 16.5%18.0%19.5%21.0% |
| Casualty- Facultative Proportional- Treaty Proportional- Facultative Excess of Loss- Treaty Excess of Loss | 15.0%16.0%17.0%18.0% | 22.5%24.0%25.5%27.0% |