APRA & Developments
in General Insurance
Robert Thomson
Monday 13 September 2004
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Today
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My Background
APRA – some history
APRA’s mission and role
New GI regime
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My Background
• Macquarie University
• Worked in life insurance field (Australia &
NZ) in variety of actuarial roles
• Joined regulator in 1998
• Mostly doing general insurance work now
• Also studying law
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APRA – some history
• Formed 1 July 1998
• Resulted from the recommendations of the
Wallis Inquiry
• Need for greater consistency of regulatory
approach
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Pre-APRA Supervision
• Reserve Bank of Australia (RBA)
– Banks
• Insurance & Superannuation Commission (ISC)
– Insurers (both life and general)
– Superannuation funds
• State government based regulators
– Credit unions, building societies
– Friendly societies
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Post-APRA Supervision
Parliament
Ministry
Reserve
Bank
APRA
RBA Board
APRA
Members

Monetary Policy

Systemic Stability

Payment Systems

Prudential Regulation
 deposit taking
 insurance
 superannuation
Australian
Securities &
Investments
Commission

Market integrity

Consumer protection

Corporations
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APRA’s Mission
• Establish and enforce prudential standards and
practices designed to ensure that:
- under all reasonable circumstances;
- financial promises made by institutions are met;
- within a stable, efficient and competitive financial
system
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APRA’s Role
• APRA is the prudential regulator for the
Australian financial system
• APRA covers around 85% of the assets in the
Australian financial system
• This is approximately $2,000,000,000,000!
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Prudential Regulation?
• Prudential regulation is basically the promotion of prudent
management of financial institutions:
- Aiming to ensure that institutions have high quality
systems for identifying, measuring and managing their
risks
- Setting standards (including capital requirements) with the
aim of maximising the likelihood that institutions will
remain financially sound and able to honour their
commitments
- Developing future policy for financial services
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General Insurance
• An industry where APRA has introduced
significant changes to the level of prudential
oversight:
- Governance
- Risk management
- Capital requirements
- Liability valuation methods
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New GI Actuarial Regime
• Commenced 1 July 2002
• Requires all general insurers (with some
exceptions) to have an Approved Actuary
• Provides a framework for consistent and realistic
valuations of liabilities, both:
- Outstanding Claims Liabilities
- Premium Liabilities
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New GI Actuarial Regime
• Area of increasing complexity
• Scope for significant research and theoretical
development work
• Growing demand for actuaries
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Outstanding Claims Liabs
• Amount required for claims that have already
occurred but are outstanding at the balance date:
- Known claims not yet paid
- Incurred but not reported claims (IBNR)
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Premium Liabilities
• Amount required for claims that will occur:
- After the balance date
- Under policies where the risk exposure has not yet
expired at the balance date
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Short Tail Classes
• Relatively quick notification of claims:
- Cars, homeowners
- Unpaid claims can be estimated with high degree
of accuracy
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Long Tail Classes
• Much slower notification of claims:
- Workers’ compensation, public liability,
professional indemnity
- Claims estimation much more uncertain, due to
additional factors of lack of data; superimposed
inflation; claims handling costs
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Calculation
• APRA’s Prudential Standard GPS210 requires
actuaries to use a two step methodology:
- Central estimate; plus
- Risk margin
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Central Estimate
• Reflects the mean of the range of likely outcomes
of the claims distribution for the class of business
• Probability of sufficiency of 50%
• Neither an optimistic nor a pessimistic estimate
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Risk Margin
• Additional amount added to the central estimate
• Safety margin to increase the probability of
sufficiency beyond 50%
• GPS210 requires a risk margin sufficient to
increase the probability of sufficiency to 75% (at
the total portfolio level, allowing for
diversification among lines of business)
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Factors affecting Risk Margin
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Robustness of claims models
Volume and reliability of data
Past experience (either insurer or industry)
Characteristics of the line of business
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Example
• Estimate the amount of money you will spend on
petrol next year
- What variables affect the result?
- What assumptions will you make?
- How do you estimate the probability of sufficiency
of your estimate?
- There can be many reasonable results, depending
upon the assumptions used
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APRA’s role?
• To assess the work of the Approved Actuary for
each insurer
• To monitor industry-wide practices relating to
central estimates and risk margins
• To carry out research on current and future
developments
• To liaise with other regulators
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