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APRA & Developments in General Insurance Robert Thomson Monday 13 September 2004

APRA & Developments in General Insurance Robert Thomson Monday 13 September 2004. Today. My Background APRA – some history APRA’s mission and role New GI regime. My Background. Macquarie University Worked in life insurance field (Australia & NZ) in variety of actuarial roles

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APRA & Developments in General Insurance Robert Thomson Monday 13 September 2004

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  1. APRA & Developments in General Insurance Robert Thomson Monday 13 September 2004

  2. Today • My Background • APRA – some history • APRA’s mission and role • New GI regime

  3. 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

  4. APRA – some history • Formed 1 July 1998 • Resulted from the recommendations of the Wallis Inquiry • Need for greater consistency of regulatory approach

  5. 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

  6. APRA Members RBA Board Post-APRA Supervision Parliament Ministry Australian Securities & Investments Commission Reserve Bank APRA • Monetary Policy • Systemic Stability • Payment Systems • Prudential Regulation • deposit taking • insurance • superannuation • Market integrity • Consumer protection • Corporations

  7. 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

  8. 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!

  9. 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

  10. General Insurance • An industry where APRA has introduced significant changes to the level of prudential oversight: • Governance • Risk management • Capital requirements • Liability valuation methods

  11. 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

  12. New GI Actuarial Regime • Area of increasing complexity • Scope for significant research and theoretical development work • Growing demand for actuaries

  13. 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)

  14. 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

  15. Short Tail Classes • Relatively quick notification of claims: • Cars, homeowners • Unpaid claims can be estimated with high degree of accuracy

  16. 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

  17. Calculation • APRA’s Prudential Standard GPS210 requires actuaries to use a two step methodology: • Central estimate; plus • Risk margin

  18. 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

  19. 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)

  20. Factors affecting Risk Margin • Robustness of claims models • Volume and reliability of data • Past experience (either insurer or industry) • Characteristics of the line of business

  21. 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

  22. 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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