Questions and Answers: CHANGES TO GENERAL INSURANCE PRUDENTIAL
REPORTING
Please note:
This document was updated on 15 October 2010 at question 35.
Introduction
This document is intended to clarify aspects of the final response package released on 23
June 2010 and the reporting framework released on 30 July 2010.
The following Q and A addresses questions raised by industry participants and may be
relevant to all general insurers. All other questions should be forwarded to
GIPR@apra.gov.au.
1. When are the returns due and when is the ‘transitional return’ for 30 June 2010 due
to APRA?
The first return on the new basis is a ‘parallel run’ done through a transitional return as at
30 June 2010. It is due by 30 September 2010 (refer section 6 of Reporting Standard GRS
900.0 Transitional Arrangements 2010 (GRS 900.0)).
On page 19 of APRA’s ‘Response to Submissions’ dated 23 June 2010 the date was
incorrectly stated as 20 business days after 30 September 2010. The PDF of the response
paper on the APRA website has been corrected.
The reason for choosing 30 September 2010 was to allow all insurers the maximum time to
complete the transitional return before they start to work on the September quarterly
return on the new basis.
Attachment A to this Q&A shows a detailed time schedule for APRA returns that must be
submitted under the current basis and new basis during the transition period. It sets out
the relevant timing depending on the financial year end date of the insurer.
2. Will there be separate transitional forms (900.0 & 900.1) for branch insurers? How
should 900.0(L) item 25 (Retained profits) be reported for a Branch insurer?
There is not a separate transitional form for Branch insurers. Both Branch and Licensed
insurers must complete GRF 900.0. For Branch insurers the closing balance of retained
profits should include the adjustment to opening retained profits and other year-to-date
movements through the retained profits account (including head office transfers etc.).
This is outlined in the instructions to GRF 310.0.
3. In previous returns, I have only completed the ‘Total Amount’ column as I have no
assets outside Australia. What I am required to do now?
If an insurer has no assets outside Australia, they should report the same number for both
the ‘Inside Australia’ column and the ‘Total Amount’ column.
1
4. Please clarify the instructions regarding the opening retained profits. Draft GRF 310.0
page 22 states that 'For the first year of reporting on the APRA forms, use the retained
profits figure as per the insurer's statutory accounts prepared in accordance with the
Australian accounting standards'. But 'statutory accounts' under the Insurance Act are
defined as APRA accounts, hence this item would be taken to include APRA account
opening retained profits?
Notwithstanding the definition in the Insurance Act, in this context, statutory accounts
should be taken to be those prepared as required under the Corporations Act 2001 (i.e.
AIFRS accounts).
5. I do not prepare AIFRS accounts. What is expected in this case?
For a Branch insurer that is not required to prepare AIFRS accounts, the revised opening
retained profits will be calculated at the last balance date of the company (31 December
2009 for most branches of European and North American insurers). APRA envisages that
this process will require creation of a balance sheet at that date which complies with
AASB1023.
Since quarterly returns to APRA are on a ‘year-to-date’ basis, the transitional return would
cover (in this example) the six months to 30 June 2010, starting with the revised opening
balance.
Unless the insurer balances on 30 June 2010, a similar issue will arise for the subsequent
quarterly returns for September and December 2010. In Form GRF 310.0, there is an item
‘Adjustments to retained profits due to change in accounting policies/standards’. This line
item should be used for the change in the opening retained profits so that the reported
‘Retained Profits at beginning of year’ matches the closing item from the previous year.
6. What is the capital treatment of premiums liabilities? In particular, why is there no
provision for adjustment in the AASB 1023 net assets to measure solvency.
Premiums liabilities will need to be calculated to correspond with the unearned premium
and related items (deferred acquisition costs, deferred reinsurance expense and the like)
in the AASB 1023 balance sheet. In calculating the available capital there is an
adjustment to account for the difference between the premiums liabilities and the AASB
1023 figures.
In determining the relevant component of the MCR, the risk charge factor for premiums
liabilities is applied to the amount of premiums liabilities (as per above) plus any net
unbooked premium for unbooked business (formerly BBNI).
The capital that an insurer must hold for ‘unbooked business’ is calculated as follows as
directed in the instructions to GRF 210.1:
• Gross unbooked premium (i.e. that described in GPS 310 paragraph 77 and 78); less
•
levies that are included in the Gross Premium and would be payable on the
business (in particular FSL); less
•
reinsurance costs that would arise in respect of the unbooked premium and would
be payable under treaty arrangements to protect the business; less
•
commission that would be payable to secure the business once it is written (such as
brokerage or reinsurance exchange commission).
2
7. As a reinsurer, my liability valuation is conducted on an underwriting year basis. How
do I calculate ‘current year incurred claims’ as required
APRA's purpose in requiring the reporting of 'current year incurred claims' was to obtain
some more meaningful indication of current performance of the insurer, noting that the
overall incurred claims amount can be influenced by many different factors such as a
change in the discount rate or prior year movements.
APRA is willing to consider a proposal from an insurer and the Appointed Actuary for a
method to determine the 'current year incurred claims' amount that is both practical to
calculate on a quarterly basis and satisfies APRA's purpose.
If APRA considers the proposed method to be acceptable, the insurer may adopt the
method provided it does so consistently. If there are several insurers in the same
situation, they may like to form a small working group with their respective actuaries and
put a combined proposal to APRA.
8. Fire Service Levies – this is a new line on GRF310.0. Is it additional to the premium
revenue figure above it, or included in that premium revenue? Is it the amount
charged to policyholders or the amount due to the governments?
The new line on GRF310.0, Fire Service Levies (FSL), is the amount of fire service levy
included in the gross premium revenue which is due to the government. Insurers should
first report premium revenue net of FSL, then FSL, then Total premium revenue which is
the sum of the two items.
9. Regarding the role of the Appointed Actuary, would I expect the scope of the liability
valuation report to change as a result of these changes to prudential reporting? What
about any impacts on the Financial Condition Report?
For most insurers the scope of the insurance liabilities valuation report (ILVR) will change
because of:
• the removal of ‘bound but not incepted’ that has been replaced with APRA’s new
approach to ‘unbooked premium’; and
• APRA’s approach to the recognition of reinsurance expense detailed in Attachment
A of the Response Paper.
This is not an exhaustive list.
It would be prudent to consult at an early stage with the Appointed Actuary to ensure that
the scope of the ILVR appropriately matches the revised balance sheet to be submitted to
APRA.
Changes in the Financial Condition Report will reflect the revisions in GPS 310. Insurers
should ensure they bring to the attention of the Appointed Actuary the changes to GPS 310
released on 23 June 2010 located at [http://www.apra.gov.au/Policy/Proposed-changesto-general-insurance-prudential-reporting-June-2010.cfm].
3
10. Will I need any actuarial calculations at the last balance date in order to do the
opening balances?
Insurers are likely to need revised opening balance actuarial figures to calculate the
opening balances. For licensed insurers, this should be the items reported in their AASB
1023 accounts. For Branch insurers who do not have AASB 1023 accounts, it is expected
that the insurance liabilities would be the same for APRA reporting as they are for balance
sheet reporting. The actuarial valuations for the last balance date may need to be revised
to align with the removal of ‘bound but not incepted’ business (that has been replaced
with APRA’s new approach to ‘unbooked premium’) and the revised recognition of
reinsurance expense detailed in Attachment A to the Response Paper.
11. Is the deferred tax asset which is deducted from the capital base, the AASB deferred
tax asset? Or does it include adjustments made in determining the capital base?
This deferred tax asset should include any adjustments in the capital base not already
included in the insurance liabilities adjustment. In other words, make the adjustments to
insurance liabilities, then make any further adjustments to the deferred tax asset before
deducting it from the capital base.
12. Should GRF 120.0, Item 1.4 ‘Expected Dividends’ also refer to expected transfers
to/from head office?
Yes, expected dividends should be taken to include expected transfers to/from head
office. However, this form is not required to be completed by Branch insurers, therefore,
expected transfers to/from head office would not be reported on this form. Branch
insurers would report expected transfers to/from head office on GRF 110.0 (B).
13. Will the investment risk charges change now that GRF 300 is showing AASB items?
The charges as outlined in GPS 114 have not changed. However now that an AASB balance
sheet is used for APRA reporting, the results may differ.
APRA expects that the majority of items from the balance sheet, which are risk charged,
will not have changed materially. This is consistent with the analysis undertaken in the
QIS.
The relevant items on the balance sheet would include cash, receivables, property, plant
and equipment, investments in subsidiaries, etc.
Items which have changed on the balance sheet, such as insurance assets and liabilities,
are risk charged separately in different forms (i.e. GRF 210.0, GRF 210.1 and GRF 301).
APRA has maintained the previous position when risk charging these items by risk charging
premiums liabilities and outstanding claims according to the principles of GPS 310. The
two exceptions to this are:
• deferred reinsurance expense (DRE) (which is risk charged as a proxy for expected
reinsurance recoveries (ERR)); and
• unbooked premiums which are included in the capital requirements via a simplified
adjustment.
Items reported on GRF 140 series, GRF 130 series, GRF 160, GRF 170 are not expected to
have changed materially or at all.
4
14. GPS 001 appears to have changed the classes of business, with reinsurance now
appearing as a subset of direct business.
This is a formatting error and will be corrected with the next release of GPS 001. The
prevailing legislative instrument for the classes of business as they apply to the reporting
forms is the reporting standard, which correctly shows the classes of business.
15. Can you please provide more guidance in the instructions as to the inclusion of "other
underwriting expenses"? Also, "other operating expenses" are included on GRF 310.3
but they appear in GRF 310.0 after the underwriting result and as part of the noninsurance result. Should "other operating expenses" form part of the insurance result
as included on GRF 310.0?
Other underwriting expenses would include any expense that the insurer includes in their
‘underwriting expenses’ but has not been explicitly allowed for already in one of the line
items on GRF 310.0. APRA believes that most of the underwriting expenses have been
specifically allowed for on GRF 310.0, but has allowed the “other” category for additional
expenses that an insurer may wish to include.
Other operating expenses, as reported on GRF 310.0, should be equal to the Operating
Expenses, from GRF 310.3. That is, the total of interest expenses (excluding those
relating to assets backing insurance liabilities) personnel expenses, occupancy and
equipment expenses, impairment expenses, fees for auditors, consultants, actuaries and
so on. Generally these items are not considered part of the underwriting result. If these
items can be directly attributed to the acquisition of business or to the underwriting of
the business, then they will be part of the acquisition and underwriting costs and thus part
of the underwriting result. Otherwise, these items should be part of “Other operating
expenses” and fall below the underwriting result line.
16. Is the liability adequacy test (LAT) required to be performed at an APRA class of
business level?
No, the LAT should be performed as it is performed for the purposes of AASB 1023. It is
expected that all insurers will sensibly apportion the results of the LAT by APRA class of
business.
17. It is stated in APRA’s ‘Response to Submissions’ dated 23 June 2010 that ‘To maintain
the integrity of the capital base, total DRE needs to be removed from net assets’. Can
you please clarify this statement?
To maintain the integrity of the capital base, APRA requires that an adjustment be made
to the net assets calculated under the AASB 1023 basis.
That is, unearned premium, deferred acquisition costs (DAC), DRE and any other unexpired
risks need to be removed from the net assets under AASB 1023 basis and replaced with the
appropriate net insurance liabilities calculated under GPS 310. This forms the net assets
and thus capital base required for APRA reporting.
18. If DRE is removed from the capital base then why is it still risk charged?
Determination of the capital base and the MCR are distinct calculations. In determining
the capital base the DRE is removed and replaced by the prospective premium liability
valuation components.
In determining the MCR one of the risk factors that generates risk charges is the
recoverability of reinsurance, which is calculated based on the reinsurer grading and the
5
total reinsurance asset. The most practical method for determining the reinsurance asset
is to add all the balance sheet items, such as reinsurance recoveries on outstanding claims
and the deferred reinsurance expense. Reinsurance asset is defined accordingly in GPS
001.
19. In the mark up version of GPS 112 para 7(e), reference to earnings being based on
Australian Accounting Standards has been deleted and the GPS states that earnings are
those disclosed to APRA under prudential reporting. Does this mean that dividends are
based on the 'old basis’ APRA earnings.
No. As this standard is effective from 1 July 2010, it encompasses the revised reporting
framework. Retained earnings under the APRA prudential reporting framework refer to
those determined on the basis of AASB 1023, but prepared within the reporting forms in
the broader framework of the Financial Statement (Collection of Data) Act 2001.
Thus the earnings as disclosed to APRA will be the same as the earnings determined under
Australian Accounting Standards.
20. What is the purpose of items:
•
•
13.3 ‘OCP surplus / (deficit), inside Australia per form GRF 300.0: Statement of
Financial Position (B)’ in GRF 110.0 for Branch Insurers; and
13.4 ‘Total premium liabilities surplus / (deficit), inside Australia per form GRF
300.0: Statement of Financial Position (B)’ in GRF 110.0 for Branch Insurers?1
How are outstanding claims liabilities surplus/deficit and premiums liabilities
surplus/deficit calculated in the forms?
The purpose of item 13.3 and 13.4 in GRF 110.0 for Branch Insurers (or 1.1.4 and 1.1.5 for
Licensed insurers) is to reinstate the GPS 310 net premium liabilities (on a prospective
basis) and remove the AASB 1023 net premium liabilities from the capital base.
This is done through GRF 210.0 and GRF 210.1. The mechanism for each is demonstrated
below.
GRF 210.0:
AASB liabilities
Outstanding claims
per AASB 1023 less
reinsurance
recoveries and non
reinsurance
recoveries (all as
reported on GRF
300.0)
1
Less
APRA liabilities
Equals
Outstanding claims
per GPS 310 less
reinsurance
recoveries and non
reinsurance
recoveries (all as
reported on GRF
210.0)
Outstanding claims
liabilities surplus / deficit
Part three of the form which
feeds through to Item 1.1.4
(on GRF 120.0) or 13.3 (on
GRF 110.0 B)
Branches will need to further
split this into inside and
outside Australia amounts for
the purposes of their
solvency calculation. This is
reported through item 29 on
GRF 300.0 but will need to
be separately calculated by
branch insurers.
Items 1.1.4 and 1.1.5 in GRF 120.0 for Licensed Insurers.
6
GRF 210.1:
AASB liabilities
Unearned
premium, less
deferred
acquisition costs,
less deferred
reinsurance
expense, plus any
unexpired risk,
plus/minus any
other items that
may be relevant.
These should all
come from GRF
300.0. That is,
they should be
‘booked'.
Less
APRA liabilities
Equals
Premiums liabilities
under GPS 310 less
expected reinsurance
and non-reinsurance
recoveries (all as
reported on GRF
210.0)
Premium liabilities surplus
deficit
Part 3C of the form which
feeds into Item 1.1.4 (on GRF
120.0 L) or Item 13.3 (on GRF
110.0 B).
Branches will need to further
split this into inside and
outside Australia amounts for
the purposes of their
solvency calculation. This is
reported through item 29 on
GRF 300.0 but will need to be
separately calculated by
branch insurers.
21. Should the amounts reported in GRF 210.1 parts 1C and 2C be included in total
premiums liabilities?
No, these amounts are not part of premium liabilities. The intention in relation to
unbooked premium is that companies are to include any unbooked amount in Parts 1C and
2C of form 210.1. Insurers will apply the premium liabilities risk charge to this amount,
and it will be included in the Minimum Capital requirement.
22. Are instructions available for the Transitional Returns GRF 900 to confirm the
definitions of the individual line items?
There are no specific instructions for the transitional return. The items are defined the
same as the new forms on which they are based, i.e. 300, 310.0-310.3. Those instructions
may be of assistance to you and are located on APRA’s website at
http://www.apra.gov.au/Statistics/GI-Reporting-Requirements-2010.cfm.
23. In GRF 900.0 there is a line item for "Net claims expense which is: Non-recurring items
that are part of net claims expense". Could you please clarify the line item?
As stated in the above answer, there are no specific instructions related to the
Transitional Forms. In this case, the instructions relating to ‘Non recurring and current
period net claims expense’ are covered in the instructions for GRF310.0:
http://www.apra.gov.au/Statistics/upload/GRF-310-0-Instructions-July-2010.pdf.
24. I have received a validation warning ‘Please explain why Financial Performance –
Other operating expenses does not equal Operating Expenses – Total Operation
Expenses’. I do not agree with this statement. What should I do?
The validation rule is wrong, please ignore the message.
7
25. I note that there are D2A Validation Rules at http://www.apra.gov.au/Statistics/GIReporting-Requirements-2010.cfm. Is there a new instruction guide for the new
format of the return and the validation rules?
We are currently investigating what validations beyond those already listed on the APRA
website will apply to the new forms. When we have completed this work, a new
instruction guide will be released on the website.
26. For GRF 900.0 at 2. ‘Investment Income’, there is not a line item for ‘shareholders
funds’, only ‘policyholders’ is included on the form. Is this correct?
A separate line item for shareholders’ income is not required. Shareholders’ and
policyholders’ investment income is to be included in the ‘Total Investment Income’ line
item.
The line item, policyholders’ income can be used to calculate shareholders’ income as,
the Total Investment Income less policyholders’ income.
27. On GRF 900 should ‘Outstanding Claims Liability’ and ‘Unearned Premium Liability’ be
disclosed gross or net? If they are to be disclosed gross, what line should the
reinsurance be disclosed on?
The items ‘Outstanding Claims Liability’ and ‘Unearned Premium Liability’ are to be
reported on a gross basis. The reinsurance receivables should be reported in 2.4 ‘Total
Receivables’.
28. Should ‘Premium Revenue’ be disclosed on a written or earned basis?
The Premium Revenue is to be reported on an earned basis.
29. The new GRF 310.0 (and therefore GRF 900.0) ask for the results of LAT to be split
between current and prior years. The instruction guide states that the results of prior
years should be a positive figure. When doing this can it be assumed that the results
of prior year are reversing last years' number and hence are negative?
There are a number of related items in the underwriting expense section of GRF 310.0
that are impacted by the Liability Adequacy Test (LAT).
In line with the instructions, “Acquisition costs (excluding the results of the liability
adequacy tests)” reflects the underlying acquisition costs on an amortised or “earned”
basis and should not be adjusted for any LAT failures, ie it should be shown as if the
adequacy of the unearned premium liability had never been tested.
The “Results of liability adequacy tests (prior years)” contains the impact on the current
year-to-date underwriting expense from applying the LAT at the end of the prior year. For
example, one impact is reduced amortisation expense in the current period due to the
write down of DAC at the end of the previous period. Because this reduces the current
period underwriting expense, it should be entered as a negative figure (not a positive as
stated in the instructions).
8
The “Results of liability adequacy tests (current year)” contains the impact on the Profit
and Loss of any LAT failure in the current year-to-date. The “Results of liability adequacy
tests (current year)” therefore consists of two components:
1. LAT assessment on unearned premium written during the current year-to-date; and
2. Changes to the LAT assessment of unearned premium written in previous years,
after allowing for the flow through effects of the liability adequacy test results
contained within “Results of liability adequacy tests (prior years)” above.
If LAT is not re-assessed during the period it is reasonable to estimate the likely LAT
outcome. If the LAT outcome is unchanged from end of the prior year, then the “Results
of liability adequacy tests (current year)” will exactly offset the “Results of liability
adequacy tests (prior years)”.
The total underwriting expense in GRF 310.0 should match the results reported under
AASB1023, even if this implies “writing back” current year DAC in the APRA form so that
APRA and AASB results are aligned.
30. What is the treatment and reporting of the dividends, expected, declared or paid on
GRF 310.0.
Form GRF 310 Statement of Financial Performance requires the reporting of ‘Dividends /
head office transfers declared or paid’. The instructions for GRF 310 at page 4 state:
Unless specified otherwise, 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.
In particular, for the line item, ‘Dividends / head office transfers declared or paid’ the
instructions state:
A dividend is the amount paid out of a company’s profits to its shareholders (interim
and final dividend). The annual dividend equals the final dividend plus the interim
dividend if declared. Accordingly, report dividends which are declared or paid by the
insurer. Branches should report any head office transfers declared or paid at this item
that are not reported in “Aggregate of amounts transferred from / to parent entity
(Branches)‟ below.
The reporting of ‘expected dividends’ seeks to capture the dividends that have not been
declared or paid but are expected to be paid. Under the new reporting requirements,
‘expected dividends’ are not reported on GRF 310. There is now a specific deduction
applied to the capital base to deduct ‘expected dividends’ (or head office transfers for
branch insurers). GRF 120 Determination of Capital Base at item 1.4.11 ‘Expected
dividends’, provides for this deduction from Tier 1 capital. The instructions at page 10 for
GRF 120 state ‘Report the amount of dividends which are expected, but not declared or
paid.’
The changes to the reporting of ‘expected dividends’ are reflected in GPS 112 at page 6
paragraph 16 (iv) where ‘expected dividends’ are no longer deducted from the current
year’s earnings. A balancing amendment is made on page 10 paragraph 25 (n) where
‘expected dividends’ are recorded as a deduction from Tier 1 capital.
APRA clarified in the response paper that when assessing whether an insurer could pay
dividends, the previous four quarters profits per the APRA returns would be used. Because
the income statement is now prepared on an Australian accounting standards basis, this
would vary the basis on which the dividend payments are calculated.
9
A dividend expected to be declared after the close of the quarter will need to be reported
as an “expected dividend” and deducted from Tier 1 capital in GRF 120 line item 1.4.11 in
the prior quarterly return. Once declared, it will be shown as a dividend declared in
GRF310.0 in the subsequent quarterly return, and will be removed from “expected
dividends” if previously reported there.
31. Should 'Reinsurance Expense' on GRF 900.1 reflect the 'Full cost of reinsurance
entered into in the period' as required in item 8 of GRF 310.1 or 'Outwards
Reinsurance Expense relating to current and prior year covers' on GRF 900.0?
The Reinsurance Expense should be reported as per GRF 310.1 instructions for ‘Full cost of
reinsurance entered into in the period’.
32. There are typically a number of adjustments to the figures lodged in the 30 June
quarterly arising from the audit process applied to the 30 June annual returns. Should
such adjustments be reflected in the 30 June transitional return on the new reporting
basis or the 30 September return on the new reporting basis?
Adjustments should be made to the transitional form so that the September quarter on the
new basis reflects the actual experience of that quarter rather than adjustments which
belong to the previous financial year.
33. Item 9.2 in GRF 300.0(B) Statement of Financial Position requires branches to report
the amount of any liability adequacy test write-down that relates to item 9.1.
Branches of foreign insurers are not required to prepare financial statements in
accordance with the Australian Accounting Standards, however, in most cases the
accounting system is compliant with the requirements of the Australian Accounting
Standards and in particular AASB 1023. One area where this is not always the case is
in performing a LAT and booking a write down of DAC or an unexpired risk liability.
Are branches required to perform a LAT?
APRA requires that all Category C insurers complete GRF 300_0_B ‘Statement of Financial
Position’ in accordance with the Australian Accounting Standards in particular AASB 1023.
Accordingly, the completion of a LAT that meets the requirements of AASB 1023 is
required in order to complete GRF 300.0(B).
This is necessary because the assessment of LAT which is incorporated into GRF 300_0_B,
impacts on the measure of profitability of the branch insurer in GRF 310_0_B, which will in
turn influence the amount of the repatriation of earnings to the parent. Utilising the
premiums liabilities (including risk margin) would be one way of assessing the adequacy of
the liabilities.
34. The reporting instructions regarding investment management fees for form 900.0, GRF
310.0 say that "Other operating expenses" must tie to GRF 310.3 - Investment and
operating income and expense. There is no way I can reconcile the totals? Please
clarify.
Please adopt the following approach. We will update the reporting instructions in due
course.
All investment management fees should be included in the "Total Operating Expenses"
shown on GFR 310.3. However the "Other operating expenses" on GRF 310.0 will not
include investment management expenses relating to assets backing insurance liabilities
(which are reported earlier in GRF310.0). Therefore the “Total Operating Expenses” on
10
GRF 310.3 is now not required to equal the subtotal “Other operating expense” on GRF
310.0.
35. Can you please clarify how net claims expense is to be split between current and nonrecurring? Is it correct that movement in outstanding claims (undiscounted and
without risk margins) that relates to claims incurred in the current accident year is to
be reported as “current”, and movement in outstanding claims relating to prior
accident years is to reported as “non-recurring?”
This is correct. The amount reported as “current” should only include claims incurred in
the current accident year. For this purpose the current accident year should be aligned to
the insurer’s current financial year, which is the year ending on the insurer’s annual
balance date.
This means that this item will include both net payments made in the financial year to
date on claims arising from accidents in the current financial year, and net outstanding
estimates (undiscounted and without risk margins) at the end of the financial year to date
on claims arising from accidents in the current financial year. The “current” amount will
therefore implicitly include any movements in claims incurred in the current financial year
claims over the course of the current financial year.
Movements in claims costs for claims incurred in accident years before the current year,
as well as the impact of discounting and risk margins, should be reported as “nonrecurring”. This means that the “current” claims expense is on an undiscounted central
estimate basis and the ‘non-recurring’ claims expense is the balancing item.
Insurers issuing “claims made” policies should classify as “current” any claims reported in
the financial year to date.
Reinsurers that manage their business on an underwriting period basis (and so are unable
to assess current accident period outcomes) should refer to Q36 for a proxy approach to
estimating current year incurred claims.
36. In question 7 above, we sought input from reinsurers for a method to determine the
“current year incurred claims” amount that is both practical to calculate on a
quarterly basis and satisfies APRA's purpose. We now provide the following in response
to the submissions that we have received from reinsurers.
Reinsurers manage their business on an underwriting period basis, not an accident
period basis. How should I complete the split of the net claims expense on form
GRF310.2 into current period and non-recurring amounts?
The following proxy should be used. Claims expense in the current financial year to date
attributable to each of the current and immediately prior underwriting years should be
adopted as the “Current period net claims expense”. As with direct insurers, the
“Current period net claims expense” for reinsurers should be reported on an undiscounted
basis with no risk margins, net of all recoverables and including claims handling expense.
The “Non-recurring items that are part of total net claims expense” is a balancing item
such that in total they equal to the “Net claims expense”.
This can be illustrated by way of an example, for contracts incepting at the start of an
underwriting year. The first diagram shows the way that each underwriting period
(parallelograms) incurs claims in two accident periods (squares).
11
Pattern of underwriting vs accident years
uw 2009
acc 2009
uw 2009
acc 2010
2009
uw 2010
acc 2010
uw 2010
acc 2011
2010
2011
If the reinsurer is trying to calculate the current period net claims expense for each
quarter in 2010, the first requirement is the claims expense for the 2009 underwriting year
as at the end of 2009.
End of 2009
Future periods
100
2009
2010
2011
In this example, the claims expense for the 2009 underwriting year assessed at the end of
2009 is $100.
Quarter 1 2010
30
Future periods
100
5
2009
2010
2011
At the end of quarter one, the claims expense for the 2009 underwriting year is assessed
to be $130. $100 of this (assessed at the end of 2009) is allocated to 2009 and the
remaining $30 is allocated to the 2010 accident periods. There is also an additional $5
claims expense resulting from the 2010 underwriting year. Therefore the total “Current
period net claims expense” is $30+$5=$35.
Quarter 2 2010
55
Future periods
100
15
2009
2010
2011
12
At the end of quarter two, the claims expense for the 2009 underwriting year is assessed
to be $155. $100 of this (assessed at the end of 2009) is allocated to 2009 and the
remaining $55 is allocated to the 2010 accident periods. There is also an additional $15
claims expense resulting from the 2010 underwriting year. Therefore the total “Current
period net claims expense” is $55+$15=$70.
Quarter 3 2010
75
Future periods
100
50
2009
2010
2011
At the end of quarter three, the claims expense for the 2009 underwriting year is assessed
to be $175. $100 of this (assessed at the end of 2009) is allocated to 2009 and the
remaining $75 is allocated to the 2010 accident periods. There is also an additional $50
claims expense resulting from the 2010 underwriting year. Therefore the total “Current
period net claims expense” is $75+$50=$125.
Quarter 4 2010
80
Future periods
100
2009
90
2010
2011
At the end of quarter four, the claims expense for the 2009 underwriting year is assessed
to be $180. $100 of this (assessed at the end of 2009) is allocated to 2009 and the
remaining $80 is allocated to the 2010 accident period. There is also an additional $90
claims expense resulting from the 2010 underwriting year. Therefore the total “Current
period net claims expense” is $80+$90=$170.
A similar assessment will then be undertaken during 2011, starting with the $90 claims
expense for 2010 underwriting year assessed at the end of 2010.
APRA’s preference is for the calculation of “current period net claims expense” to be
calculated as set out in question 35 on the basis of the accident year of claims. However,
the above method is provided as a practical proxy by which relatively similar results can
be achieved where accident year information is not available.
Continue reading overleaf.
13
Attachment A – Timing of reporting
Submission date
30 September year‐end
30‐Sep‐09 31‐Dec‐09 31‐Mar‐10 30‐Jun‐10
Current basis YTD
30‐Sep‐10 31‐Dec‐10 31‐Mar‐11
New basis YTD
Transitional
reporting
New basis YTD
New basis annual
New basis YTD
31 December year‐end
31‐Dec‐09 31‐Mar‐10 30‐Jun‐10
Current basis YTD
30‐Sep‐10 31‐Dec‐10 31‐Mar‐11 30‐Jun‐11
New basis YTD
Transitional
reporting
New basis YTD
New basis YTD
New basis annual
31 March year‐end
31‐Mar‐10
30‐Jun‐10
30‐Sep‐10 31‐Dec‐10 31‐Mar‐11 30‐Jun‐11 30‐Sep‐11
Current basis YTD
New basis YTD
Transitional
reporting
New basis YTD
New basis YTD
New basis annual
30 June year‐end
30‐Jun‐09 30‐Sep‐09
31‐Dec‐09 31‐Mar‐10
Current basis YTD
30‐Jun‐10
30‐Sep‐10 31‐Dec‐10 31‐Mar‐11
Current basis annual
New basis YTD
Transitional
reporting
New basis YTD
New basis YTD
14
30 September year-end
Basis
June quarterly
Old
return
Transitional return New
Reporting Period
1 October 2009 to 30 June 2010
Due Date
20 business days after 30 June 2010
1 October 2009 to 30 June 2010
30 September 2010
September
quarterly return
New
1 October 2009 to 30 September
2010
20 business days after 30 September
2010
First annual return
New
1 October 2009 to 30 September
2010
31 January 2011
Reporting Period
1 January 2010 to 30 June 2010
Due Date
20 business days after 30 June 2010
1 January 2010 to 30 June 2010
30 September 2010
31 December year-end
Basis
June quarterly
Old
return
Transitional return New
September
quarterly return
New
1 January 2010 to 30 September
2010
20 business days after 30 September
2010
First annual return
New
1 January 2010 to 31 December
2010
30 April 2011
Basis
Old
Reporting Period
1 April 2010 to 30 June 2010
Due Date
20 business days after 30 June 2010
New
1 April 2010 to 30 June 2010
30 September 2010
September
quarterly return
New
1 April 2010 to 30 September
2010
20 business days after 30 September
2010
First annual return
New
1 April 2010 to 31 March 2011
31 July 2011
Basis
Old
Reporting Period
1 July 2009 to 30 June 2010
Due Date
20 business days after 30 June 2010
Old
1 July 2009 to 30 June 2010
31 October 2010
Transitional return
New
1 July 2009 to 30 June 2010
30 September 2010
September
quarterly return
New
1 July 2010 to 30 September
2010
20 business days after 30 September
2010
First annual return
New
1 July 2010 to 30 June 2011
31 October 2011
31 March year-end
June quarterly
return
Transitional return
30 June year-end
June quarterly
return
Annual return
15