PwC Insurance Facts and Figures 2011 - PricewaterhouseCoopers

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Limits on asset exposures • Proposed changes to limits on exposures to single counterparties or groups of counterparties. • Responses raised concerns over exposure to big four banks and APRA has made bank exposure limits more generous in the revised proposals. However, consideration will still need to be made about exposure to banks and as a result, insurers may need to diversify bank exposures and limit exposures to parents. New capital charge for operational risk • Introduction of an explicit capital charge for operational risk has increased capital requirements. The calculation of this capital charge, based on the size of the insurer, has been modified in the revised proposals but still remains a relatively blunt measure. Explicit recognition of diversification • Recognition of diversification benefits across asset and insurance risk through the introduction of the “aggregation benefit”. This may add extra complexity in the calculation of the prescribed capital amount. • APRA has indicated that it will not place limits on the diversification benefits implicit in risk margins, although it will be closely monitoring levels adopted by insurers. Significant changes to charges for catastrophe risk • Proposal to move to a 1 in 200 year whole of portfolio loss for vertical reinsurance cover. • New capital requirement to address the risk of multiple events in a year. • Requirement for one full reinstatement of catastrophe covers to be prepaid or contractually agreed at the commencement of the treaty year. Impacts for Life Insurers The proposed changes will have significant impacts on the overall approach for the calculation of capital for life insurers. Key developments Significant change to the capital framework • The previous dual requirements of solvency and capital adequacy will now be replaced with a single measure, more consistent with the requirements for general insurers. • Prudential Capital Requirement (PCR) will now consist of a prescribed capital amount (quantitative measure) and a supervisory adjustment determined by APRA. • Prescribed capital to cover insurance risk, insurance concentration risk, asset risk, asset concentration risk and operational risk. • Insurance risk to include a specific allowance for losses from extreme events, such as a pandemic. 10 PwC
Change to risk free discount rate • The risk free discount rate will now be consistent across all insurers and will be set to the spot yield curve for Commonwealth Government Securities. • This will have implications for the value of policyholder liabilities for those insurers currently using alternative measures in their capital reporting. • This definition may also be amended for financial statement reporting. Capital charge linked to operational risk • The effective management of operational risk will be considered by APRA in determining any supervisory adjustment. • This will provide an incentive for insurers to strengthen their operational risk management and there may be lessons to be learned from ADIs. • Operational risk capital charge will be calculated as some function of the size of the life insurer. Individual asset risk assessments and a standardised correlation matrix • Surplus capital will now be exposed to asset risk capital charges. • Separate asset stress tests may uncover correlations and offsets previously hidden in the resilience reserve calculation, providing greater transparency. • A standardised correlation matrix may result in a substantial difference from the current resilience reserve. Challenges for insurers Whilst APRA has responded to the concerns raised by insurers as part of the first QIS, the proposed changes will still introduce additional complexities in the calculation of required capital. The proposed changes will require insurers to revisit optimisation of capital including consideration of optimal reinsurance programmes and investment mandates. Internal Capital Adequacy Assessment Program (ICAAP) APRA has proposed to adopt a three pillar supervisory approach, consisting of: • Pillar 1 – quantitative calculations for capital requirements • Pillar 2 – the supervisory review process • Pillar 3 – disclosure requirements In particular, Pillar 2 also proposes the requirement for an insurer to develop and maintain an Internal Capital Adequacy Assessment Program (ICAAP). This would involve each insurer having a process for assessing its overall capital adequacy and having a strategy for maintaining capital levels, which would be reviewed by APRA. Insurance Facts and Figures 2011 11
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Page 26 and 27: Unclaimed monies 1.5 Know your obli
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Page 36 and 37: Introduction Scott Hadfield The pas
Page 38 and 39: Statistics Top 15 general insurers
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The requirements for documentation
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Transfer and amalgamation of insura
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Audit and Actuarial Reporting and V
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Financial reporting 2.7 Accounting
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Measurement of outstanding claims A
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Financial Statement disclosure prin
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General insurance taxation 2.8 Gene
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Apportionable issue costs (acquisit
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Financial reinsurance The ATO consi
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Life Insurance 78 PwC
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Introduction Tony Cook This year, t
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Statistics Top 15 life insurers 3.1
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Key developments in 2010/11 3.2 Top
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Regulation and supervision 3.3 Aust
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Australian Securities and Investmen
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Cost of investment performance guar
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Solvency and capital adequacy 3.4 W
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Management of risk and reinsurance
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Reinsurance This standard aims to e
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Governance APRA has undertaken a fu
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Accounting Standards 3.7 AASB 1038
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Life investment contract A life inv
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The best estimate liability will no
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Acquired life insurance contracts W
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Life insurance taxation 3.8 General
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Assessable income The assessable in
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Ordinary Class revenue losses can o
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• The financial supply is a borro
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4 Introduction - Andrew McPhail 118
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Insurance Facts and Figures 2011 11
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Financial Position: Outstanding cla
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As a heavily regulated industry, th
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• the collection and review of au
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Solvency and capital adequacy 4.4 A
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Asset risk The asset risk is the ri
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Financial and regulatory reporting
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Annual accounts Audited annual Corp
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Taxation of health insurers 4.7 An
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5 Introduction - Billy Bennett 138
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Insurance Facts and Figures 2011 13
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Specific provisions under the Corpo
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Financial reporting 5.4 Annual acco
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Goods and services tax Under the Au
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6 6.1 Key developments in 2010/11 1
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Key development Privacy law Summary
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Regulatory Framework for the Insura
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Product disclosure, insurance busin
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Ability to pay claims 6.5 The Finan
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ICAAP IFRS ILVR KYC LAGIC LAT LMI L
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Notes
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