apra & developments in general insurance robert thomson monday 13 september 2004
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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 - PowerPoint PPT PresentationTRANSCRIPT
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APRA & Developments in General Insurance
Robert Thomson
Monday 13 September 2004
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Today
• 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
RBA Board APRA Members
APRAAustralian
Securities & Investments Commission
Monetary Policy
Systemic Stability
Payment Systems
Prudential Regulation deposit taking insurance superannuation
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
• 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