NEWSLETTER
Life Insurance
Actuarial Standards Board
Number 18 March 2002
NEW MEMBER OF THE LIASB
With effect 1 July 2001, the LIASB welcomed a new member – Carl Stevenson. Carl replaces Mike Hughes
who retired from the board after six years of service. The current members of the LIASB are:
Tim Jenkins, Chairman
Tom Karp, Government member
Bill Bartlett, non actuary member
Clive Aaron
Greg Martin
Graham Slater
Carl Stevenson
Carl Stevenson, a consultant with William M Mercer in Melbourne, brings an extensive experience of, and
insight into, the perspectives of the friendly society industry. Carl has been the appointed actuary for a number
of Victorian based friendly societies, and has been involved in the activities of the Institute of Actuaries of
Australia (IAAust) in relation to friendly society matters.
HARMONISATION OF ACTUARIAL
STANDARDS
consultation on harmonisation more broadly.
Background
Changes to the Standards arising from the
Exposure Draft Consultation Process
In October 2001, the LIASB issued exposure drafts
of actuarial standards from its project for the
Harmonisation of Actuarial Standards under the
Life Insurance Act.
The exposure drafts followed two earlier rounds of
consultation with industry on the harmonisation
process. The LIASB received 10 submissions on
the exposure drafts.
The purpose of this Newsletter is to provide
feedback to the industry on the significant matters
raised in the submissions and the position taken by
the LIASB in response to these matters.
Scope of the Harmonisation Project
It is important at the outset to re-iterate the scope of
the LIASB’s harmonisation project. The objectives
of the harmonisation exercise were predominantly
to harmonise the detailed provisions of the capital
requirements to achieve the objective of like capital
for like risks.
The harmonisation project was undertaken in the
context of the broader harmonisation agenda of
APRA – with a fuller review of the life insurance
industry legislation by APRA to progress over the
next 2-3 years, allowing due consideration and
Following consideration of the submissions on the
exposure drafts, the LIASB has made a number of
changes to the actuarial standards.
It is noted that the approval processes for the
capital standards (AS2.03, AS3.03 and AS6.02)
requires approval by the APRA Board. This
approval will be sought at the March APRA Board
meeting with release of the final standards expected
by the end of March.
To assist industry in its preparation for the
commencement of the new standards (applying
from 30 June 2002), an attachment to this
Newsletter provides a record of all LIASB
proposed changes from exposure draft to
final actuarial standard. The more significant
matters are discussed in the following sections.
AS1.03 – Service Agreements
The wording of section 6.8.1 of the standard will be
expanded to remove the unintended implication that
a look through approach should be adopted in
respect of all service agreements. Look through is
only required where, in the opinion of the actuary,
the service company fee structure does not reflect
an appropriate allocation of expenses for the
purposes of the standards.
AS 2.03/AS3.03 – Reinsurance Arrangements
Section 3.3.2 establishes requirements in respect of
the treatment of retrocessions by a specialist
reinsurer to its overseas parent for the purposes of
the capital standards. The requirements rely on a
concept of the investment grade rating of the parent
company.
In response to industry concerns with the lack of
definition of the concepts used, a more detailed
approach will be introduced to define the rating
grade of the parent entity. The basis adopted is
consistent with that recently introduced by APRA
in its standards for the general insurance industry.
AS2.03 – Disability Assumption
The limitations of the defined table in representing
the variety of product and experience in the
Australian disability market in practice, was
highlighted in industry submissions.
While the suggestion that greater reliance be placed
on best estimate assumptions will be accepted by
the LIASB, given the desire for a prescriptive basis
for the solvency standard, a minimum underpin will
also be prescribed. This minimum will be linked to
the defined table, but the prescribed percentage of
defined table will be made more responsive to a
particular company’s own experience in order to
better address the identified limitations.
AS6.02 – Expense Reserve
Harmonisation of the expense reserve component
of the capital standards presented some practical
difficulties given the different purposes which
underly the existing reserves in their respective
regimes. In the regime for life insurers other than
friendly societies, the expense reserve related to
acquisition expenses of the life business only. In a
friendly society the reserve was based on total
expenses, and those related to life business and
other business activities.
The exposure draft reflected an attempt to preserve
both purposes, with an objective of not reducing the
level of capital required of either industry sector
(refer section 7.2.2 in particular).
A practical consequence highlighted through the
consultations was to increase the capital
requirements of certain friendly societies (with no
associated increase in assessed risk) – a
consequence that was not intended.
Accordingly, the standard will be amended to
remove the minimum of 0.5 times actual servicing
expenses on the servicing expense reserve
component for friendly societies (section 7.2.2(b)).
While it is acknowledged that a reduced level of
capital may result for friendly societies (from
current standards), the level of capital is considered
appropriate to the risks. Importantly, the objective
of like capital for like risks which underpins the
harmonisation exercise will be preserved.
Issues Raised in the Exposure Draft
Consultation Process
The Dictionary
As part of the change in style of the standards,
introduced at the discussion draft stage, a
consolidated list of definitions was developed. The
global dictionary forms part of a general standard
and brings advantages of consistency of
terminology and definitions across all standards.
The general standard will have the same status as
other actuarial standards made under section 101 of
the Life Act and, therefore, the dictionary included
in that standard will have appropriate legislative
authority.
Legal advice was available to the LIASB to
confirm the authority of the LIASB to make the
general standard and the appropriate legal standing
of the instrument once made.
Valuing Liability Options
Explicit requirements for valuing liability options
were introduced in the exposure draft of AS1.03
and ASFS1.02.
In making these changes the LIASB had regard for
possible implications for the life insurance
accounting standard - AASB1038. It was
considered that the requirements (now made
explicit) could be read into both the current
valuation standard and the provisions of
AASB1038, and hence no implications arise.
The changes were supported in principle by
industry, but a common concern raised was the
practical implications of the requirements and the
timeframe for their introduction.
While the LIASB acknowledges the concerns of
industry, it is not considered that any delay in the
establishment of these requirements can be
afforded. It is considered important that the
valuation principle be established even if it is
acknowledged that industry best practice for
implementation of the provisions may take time to
fully develop.
In responding to the requirements, the LIASB and
APRA - as the administrator of the standards would expect industry to consider issues of
materiality in establishing appropriate valuation
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techniques. Identification of, and provision for,
material exposures would be seen as paramount.
Management Capital Standard
The LIASB sought legal advice in terms of its
authority to make capital standards on the non life
activities of a life company. That advice confirmed
what the LIASB saw as its responsibility – to
ensure that the life company as a whole is
adequately capitalised against the risks to which it
is exposed. Despite the greater security afforded
policy owners through the segregation of the life
business via statutory funds, the Life Act clearly
establishes requirements for the regulation of the
whole entity, including the activities of the
shareholders’ fund.
Given the potential impact on some life companies
of the management capital requirement (increased
capital or restructure implications), the suggestion
that adequate lead time or other transitional
measures be provided was considered to have
merit. The administration of the standard is a
matter for APRA. In discussions with APRA, the
LIASB understands that reasonable transitional
arrangements will be entertained by APRA, but that
these will be a matter for discussion between APRA
and the individual company concerned.
suggested. It is the LIASB’s view that the same
circumstances do not exist. Critical to the
provisions of section 10.2.2 (e) is the test of
financial and operational interdependence of the
associated or subsidiary entity. Where this test
cannot be met (and it is questionable that the
circumstances of section 10.3.2 would be able to be
satisfied), the inadmissible reserve should exist
regardless of the nature of the liabilities.
Further, consideration was sought for the extension
of the concessions afforded investment-linked
business to participating business. The LIASB
considered that a common characteristic of
participating business is the presence of an
underlying guarantee. The presence of a guarantee
makes it inappropriate to extend the investmentlinked concessions to participating business. In
practice, the provisions of the standards in respect
of discretions (used to reduce bonus rates under
adverse scenarios) are available, if appropriate, to
provide ‘relief’ from the inadmissible asset
reserves. Importantly, this mechanism for
participating business recognises the extent of any
guarantees underlying the liabilities, and hence
ensures the protection of policy owner entitlements.
LIASB /IAAust Liaison
Resilience Reserves
The new provisions of section 11.2 of AS2.03 (and
AS3.03) were generally well supported.
In terms of practical implementation, two
corollaries of the changes are amplified at the
suggestion of industry. Firstly, there is no need for
a company to alter its current practice of
determining resilience reserves on a statutory fund
basis. The changes allow, but do not require, a
company to undertake additional calculations to
determine if a reduction in the resilience reserve
may be available.
Secondly, where the more detailed approach is
adopted, each statutory fund must hold sufficient
capital (on a capital adequacy basis) in its own right
to cover the adverse scenario that is determined as
the worst possible scenario at the company level.
A number of comments were made in the
consultation process on the removal from the
standards of commentary and guidance material.
The LIASB believes that the change in style of the
standards is appropriate at this stage of their
development and the development of industry
practice. However, it is acknowledged that there is
a need for ongoing guidance and further
development of industry best practice. Whilst
APRA has an important role in this process, it is
considered that the IAAust also has an important
part to play.
The role of the IAAust in the provision of guidance
to members, and the relationship between the
IAAust and LIASB in this respect, will be pursued
in discussions with the IAAust over the next few
months.
Inadmissible Asset Requirements
The exposure draft introduced changes to the
inadmissible asset provisions in the particular
circumstances of an investment-linked fund
investing in associated or subsidiary entities (refer
section 10.3.2 of AS2.03 and similar changes in
AS3.03). These changes were well received.
In the context of these changes, the availability of
the same concession under section 10.2.2(e) was
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Attachment
Schedule of changes from exposure draft to actuarial standards
Section
Reference
Comment
AS1.03 – Valuation Standard
Section 6.8.1
Amended to clarify circumstances which require a look through of service
agreements in determining expense allocations for purposes of standards
ASFS1.02 – Valuation Standard
No change
AS2.03 – Solvency Standard
Section 3.3.2
Section 3.3.3
Section 3.4
Section 11.5
Section 11.7.3
Attachment 1
Attachment 2
More prescriptive approach to the determination of grade rating of overseas
parents of reinsurers.
Refers to Attachment 2 which sets out the detail for determining grade of an
entity by reference to the rating scales of major rating agencies.
Re-insert the word ‘Acquisition’ before expenses in the description of the
Expense Reserve. No change in the calculation detail.
Delete the word ‘systemic’ before ‘market changes’.
Replace the reference to the 50 Leaders Index with ASX100 Index.
Correct the numbering reference on Notes.
Amends the prescribed parameter for Disability Income, clarifies the base
to which prescribed margin applies and adds new Note 5 providing further
detail in relation to the prescribed parameter.
New attachment providing the detail of determination of grade rating of an
entity by reference to rating scales of major rating agencies.
AS3.03 – Capital Adequacy Standard
Section 3.2.2
Section 3.3.3
Section 11.6
Section 11.8.3
Attachment 1
More prescriptive approach to the determination of grade rating of overseas
parents of reinsurers.
Refers to Attachment 2 in AS2.03 which sets out the detail for determining
grade of an entity by reference to the rating scales of major rating agencies.
Delete the word ‘systemic’ before ‘market changes’.
Replace the reference to the 50 Leaders Index with ASX100 Index.
Clarify the base to which prescribed margin for Disability Income – Active
Lives is applied.
AS4.02 – Surrender Value Standard
No change
AS5.02 – Investment Performance Guarantee Standard
No change
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Section
Reference
Comment
AS6.02 – Management Capital Standard
Section 3.2.1
Section 7.2.1, 7.2.2
Section 8.4
Section 9.3
Clarification that the risks referred to are those described in section 3.1.
Amendment to the basis for determining the servicing expense reserve for
friendly societies:
 clarifying the management fees to be used in determining any expected
deficiency; and
 removing the 0.5 times actual servicing expenses minimum.
Clarification that interest on debt associated with assets merely held in the
general fund is not an expense for the purposes of the expense reserve.
Correction of cross reference.
AS7.01 - General Standard
Dictionary
Amendment to the definition of Approved Subordinated Debt, Other
Liability, Offset Statutory Capital and Statutory Capital.
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