Insurance - PricewaterhouseCoopers

material impact. While it does require outstanding claims in all classes of business
to be discounted, it recognises that such discounting will have significant application
to “long tail” classes of business (mainly liability, Compulsory Third Party (CTP) and
workers compensation) where a high proportion of such claims are settled outside a
12-month period.
AASB 1023 requires that the discount rate or rates selected should be “risk- free
rates that are based on current observable, objective rates that relate to the nature,
structure and term of the outstanding claims liabilities … typically government
bond rates”.
The standard requires that expected future payments should account for future
claim cost escalation created by inflation and superimposed inflation. Superimposed
inflation is defined as the level of inflation in excess of normal economic inflation
indices. The disclosure of superimposed inflation assumptions differs between
companies. Some companies make explicit disclosures while others include
superimposed inflation within composite inflation assumptions.
Regulatory valuation
GPS 310 sets out the requirements for the valuation of the insurance liabilities for
regulatory reporting. Where an insurer’s board decides not to accept the appointed
actuary’s valuation of insurance liabilities or to adopt a valuation (higher or lower) not
in accordance with the principles of this standard, details should be included in the
insurer’s published annual financial report.
For the main differences in treatment between financial reporting and APRA
regulatory reporting, see Table 1.9.
Explicit risk margins
As noted above, an additional explicit risk margin is required to be included as part
of the outstanding claims liability. The margins are set with regard to the robustness
of the valuation models, available data, past experience and the characteristics of the
classes of business written. For outstanding claims, since the risk margin is applied
to the net liability, the risk margin should also allow for uncertainty in reinsurance and
other recoveries due.
Similar to the APRA requirements, risk margins can allow for diversification. The risk
margin for the entire company can then be allocated to individual classes of business.
Assets backing general insurance liabilities
The initial AASB 139 Financial Instruments: Recognition and Measurement
(issued July 2004) included a free choice option to designate any reliably
measurable financial asset at fair value through profit or loss.
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