Financial Sector (Collection of Data) (reporting standard) determination No. 13 of 2007 MRS 210.0 Outstanding Claims Liabilities (Cth)
Financial Sector (Collection of Data) (reporting standard) determination No. 13 of 2007
Reporting standard MRS 210.0 Outstanding Claims Liabilities
Financial Sector (Collection of Data) Act 2001
I, Charles Watts Littrell, a delegate of APRA, under paragraph 13(1)(a) of the Financial Sector (Collection of Data) Act 2001 and subsection 33(3) of the Acts Interpretation Act 1901:
REVOKE the Reporting Standard MRS 210.0: Outstanding Claims Liabilities; and
DETERMINE the Reporting Standard MRS 210.0 Outstanding Claims Liabilities in the form set out in the Schedule, which applies to the financial sector entities referred to in paragraph 1 of the reporting standard.
Under section 15 of the Act, I DECLARE that the reporting standard shall begin to apply to those financial sector entities on the later of 30 June 2007 and the date of registration on the Federal Register of Legislative Instruments.
Dated 29 June 2007
[Signed]
Charles Littrell
Executive General Manager
Policy, Research and Statistics
Interpretation
In this Determination
APRA means the Australian Prudential Regulation Authority.
Schedule
Reporting Standard MRS 210.0 Outstanding Claims Liabilities comprises 14 pages commencing on the following page.
Reporting Standard MRS 210.0
Outstanding Claims Liabilities
| Objective of this reporting standard This reporting standard is made under section 13 of the Financial Sector (Collection of Data) Act 2001. It requires medical defence organisations (‘MDOs’, as defined in paragraph 19) to report to APRA on a half-yearly basis in relation to their Outstanding Claims Liabilities. This reporting standard outlines the overall requirements for the provision of this information to APRA. It should be read in conjunction with reporting form MRF 210.0 Outstanding Claims Liabilities and the instructions to that form (each of which is attached and forms part of this reporting standard). |
Application
1. This reporting standard applies to all MDOs.
Information required
2. An MDO must, after the end of each reporting period, and in accordance with the instructions, duly complete the form in respect of the reporting period, and provide the completed form (the ‘report’) to APRA by the due date.
Method of submission
3. Reports must be given to APRA either:
(a)in electronic form, using one of the electronic submission mechanisms provided by the ‘Direct to APRA’ (also known as ‘D2A’) application;
(b)in Microsoft Excel format on a 3.5 inch diskette, which must be posted to APRA’s head office at Level 26, 400 George Street, Sydney, NSW 2000; or
(c)manually completed on paper, which must be faxed or mailed to APRA’s head office.
Note: the Direct to APRA application software and forms may be obtained from APRA but will not be available immediately upon commencement of this standard. Therefore, initially, only methods of submission (b) and (c) will be available.
Reporting periods
4. Subject to paragraphs 5 and 6, the reporting periods are the half-yearly period ending on 30 June 2007 and each successive half-yearly period (ending on 31 December or 30 June) after that.
5. APRA may, by notice in writing, change the reporting periods for a particular MDO so that it is required to report in respect of half-yearly reporting periods based upon the MDO’s own year of income.
Note: this will be relevant where the MDO’s year of income does not end on 30 June or 31 December.
6. APRA may, by notice in writing change the reporting periods for a particular MDO to require it to provide the information:
(a)more frequently (APRA may require this when, having regard to the particular circumstances of the MDO, APRA considers it necessary or desirable for the MDO to report more frequently for the purposes of monitoring the financial position of the MDO); or
(b)less frequently (APRA may do so when, having regard to the particular circumstances of the MDO and the extent to which its financial position requires monitoring, it is unnecessary to require it to report on a half-yearly basis).
Due dates
7. Reports under this standard must be provided to APRA no later than:
(a)in the case of a report in respect of a half-yearly period ending on the last day of the MDO’s year of income – 4 months after that day; and
(b)in the case of all other reports – 20 business days after the end of the reporting period.
8. APRA may, in writing, grant an MDO an extension of the due date for submission of a report, in which case the new due date will be the date on the notice of extension.
Audit and auditor’s certificate
9. Reports under this standard must be the product of processes and controls that have been reviewed and tested by a registered company auditor. This will require the auditor to review and test the systems, processes, and controls supporting the reporting of the information to ensure that they produce accurate data and are otherwise reliable. This review and testing must be done on an annual basis or more frequently if necessary to enable the approved auditor to form an opinion as to the accuracy and reliability of the data.
10. In relation to each year of income of an MDO (including a year of income ending on 30 June 2007), the MDO must provide APRA with an annual certificate, signed by a registered company auditor, which must either:
(a)state that in the auditor’s opinion the information provided to APRA under this standard in respect of the year of income is accurate and reliable; or
(b)state that in the auditor’s opinion the information provided to APRA under this standard in respect of the year of income is not accurate or reliable and specify the ways in which the information is not accurate or reliable and the grounds upon which the auditor has come to this conclusion.
A certificate under this paragraph must be provided to APRA no later than four months after the last day of the year of income to which it relates. It may be combined with certificates under corresponding paragraphs of other reporting standards (made under section 13 of the Financial Sector (Collection of Data) Act 2001) applying to the MDO.
Actuarial valuation and actuary’s report
11. Reports under this standard must, in stating an MDO’s outstanding claims liabilities, be in accordance with advice taken by the MDO from an eligible actuary.
12. In relation to each year of income of an MDO (including a year of income ending on 30 June 2007), the MDO must provide APRA with an annual report, signed by an eligible actuary, that sets out the valuation of an MDO’s outstanding claims liabilities. This report must be provided to APRA no later than four months after the last day of the year of income to which it relates.
Authorisation
13. Reports under this standard must also be subject to processes and controls developed by the MDO for the internal review and authorisation of that information. It is the responsibility of the board and senior management of the MDO to ensure that an appropriate set of policies and procedures for the authorisation of data submitted to APRA is in place.
14. If an MDO submits a report under this standard using the ‘Direct to APRA’ software, it will be necessary for an officer of the MDO to digitally sign, authorise and encrypt the relevant data. For this purpose APRA’s certificate authority will issue ‘digital certificates’, for use with the software, to officers of the insurer who have authority from the insurer to transmit the data to APRA.
15. If a report under this standard is completed in Microsoft Excel format and provided on diskette, the diskette must be sent to APRA with a letter signed by either the Principal Executive Officer or Chief Financial Officer of the MDO.
16. If a report under this standard is completed and provided in paper form, it must be signed by either the Principal Executive Officer or Chief Financial Officer of the MDO.
Minor alterations to forms and instructions
17. APRA may make minor variations to:
(a)the form, and the instructions to the form, to correct technical, programming or logical errors, inconsistencies or anomalies; or
(b)the instructions, to clarify their application to the form
without changing any substantive requirement in the form or instructions.
18. If APRA makes such a variation it must notify affected MDOs in writing.
Interpretation
19. In this standard:
APRA means the Australian Prudential Regulation Authority established under the Australian Prudential Regulation Authority Act 1998.
business day means an ordinary business day, excluding weekends and public holidays.
Chief Financial Officer means the person having the function of chief financial officer of the MDO, by whatever name called, and whether or not he or she is a member of the governing board of the MDO, and if there is no such person means a person who performs similar functions to those commonly performed by a chief financial officer.
due date means the relevant date under paragraph 7 or 8.
eligible actuary means a Fellow or Accredited Member of the Institute of Actuaries of Australia (the ‘Institute’), or an Associate of the Institute, or an actuary who has a professional qualification of another actuarial association that would be recognised by the Institute for the purpose of admission as an Accredited Member
form means the attached form.
instructions means the attached instructions.
MDO means a corporation to which section 5A of the Financial Sector (Collection of Data) Act 2001 applies (but, for the avoidance of doubt, does not include a general insurer within the meaning of the Insurance Act 1973).
Principal Executive Officer means the principal executive officer of the MDO for the time being, by whatever name called, and whether or not he or she is a member of the governing board of the MDO.
registered company auditor has the meaning in section 9 of the Corporations Act 2001.
Note: That section provides that registered company auditor:
(a) means a person registered as an auditor under Part 9.2 of the Corporations Act; and
(b) in relation to a body corporate that is not a company—includes a person qualified to act as the body's auditor under the law of the body's incorporation.
report has the meaning given in paragraph 2.
reporting period means the relevant period under paragraph 4, 5 or 6
year of income in relation to an MDO means the accounting period adopted by the MDO for the purposes of the Income Tax Assessment Act 1936 or for taxation purposes generally (whether or not that period is the same as the standard financial year beginning on 1 July and ending on 30 June).
Reporting Form MRF 210.0
Outstanding Claims Liabilities
Instruction Guide
Introduction
This form requires Medical Defence Organisations (MDOs) to report information about its outstanding claims liabilities (OCL). These are to be calculated in accordance with these instructions.
Audit Requirements
This form must be subject to audit review and testing on an annual basis or more frequently if necessary to enable the auditor to form an opinion on the accuracy and reliability of the data. The auditor must provide a certificate to the MDO specifying whether, in their opinion, the data provided by the MDO are reliable. The MDO must submit this certificate to APRA on an annual basis.
The scope and nature of audit testing required is outlined in the applicable Auditing and Assurance Guidance Statement issued by the Auditing and Assurance Standards Board
Actuarial requirements
MDOs are required to retain an actuary to calculate the MDO’s OCL in accordance with these instructions. The actuary must prepare a report (the liability valuation report) and this report must be submitted to APRA by the MDO on an annual basis. Half yearly actuarial reviews are not required to be conducted specifically for the purposes of completing this form.
Definitions
Definitions for data reporting items required by this form have been provided where possible in the instructions under the section headed ‘Specific Instructions’.
Reporting Obligations
MDOs are required to report on a half-yearly basis (that is, six monthly intervals), based on their financial year.
For annual reporting, MDOs must lodge a form within four months of the end of their financial year. The information required on an annual basis must be reported as at the last day of the reporting period on a financial year-to-date basis of the MDO.
For half-yearly reporting (that is, the half-year that does not correspond with the MDO’s financial year end), MDOs must lodge a form within 20 business days of the end of that six month period.
Unit of Measurement
This form is to be prepared in thousands of Australian dollars (AUD). Amounts denominated in a currency other than Australian currency are to be converted to AUD in accordance with AASB 121 The Effects of Changes in Foreign Exchange Rates (AASB 121).
Specific Instructions
OCL relate to all claims incurred prior to the calculation date, whether or not they have been reported. OCL are to be determined on a fully prospective basis; both net and gross of expected reinsurance and non-reinsurance recoveries.
The OCL is to be measured and reported in accordance with the instructions detailed below, that is, must be reported at the 75th percentile for the purpose of this form. As outlined above, MDOs are required to retain an actuary to calculate the MDO’s OCL in accordance with these instructions.
MDOs are free to provide for the OCL in MRF 300.0 Statement of Financial Position (MRF 300.0) at a level equal to or greater than the amount reported in this form (i.e. at a level above the 75th percentile).
Note: amounts in excess of the 75th percentile level reported in MRF 300.0 can be added back to Tier 1 capital in MRF 120.0 Capital Base (MRF 120.0).
Calculation of OCL
OCL relates to all claims incurred prior to the calculation date, whether or not they have been reported to the insurer. The value of the outstanding claims provision must include an amount in respect of the expenses that the insurer expects to incur in settling these claims. The value of outstanding claims provision must not include any Government charges imposed such as levies, duties and taxes. Also, a deferred acquisition cost must not be reported.
OCL are to be determined on a prospective basis; both net and gross of expected reinsurance and non reinsurance recoveries.
The valuation of OCL for each class of business must comprise:
a central estimate (refer below); and
a risk margin (refer below) that relates to the inherent uncertainty in each of these central estimates.
The valuation of insurance liabilities (i.e. OCL and premiums liabilities) reflects the individual circumstances of the MDO. In any event, the minimum value of insurance liabilities must be the greater of a value that is:
determined on a basis that is intended to value the insurance liabilities of the insurer at a 75 percent level of sufficiency; and
the central estimate plus one half of a standard deviation above the mean for the insurance liabilities of the MDO.
An MDO (after taking advice from its actuary) must determine a value for its OCL. In determining the value of the OCL, the actuary must ignore any discretions available to the MDO and assume that the MDO is contractually obliged to pay all members’ claims.
The OCL relates to all claims incurred prior to the 30th June 2003 (since MDOs ceased writing medical indemnity cover as at this date), whether or not they have been reported to the MDO. The value of the OCL must include an amount in respect of the internal expenses that the MDO expects to incur in settling these claims. The OCL is to be determined both net and gross of expected reinsurance recoveries.
The valuations of an MDO’s OCL must be realistic estimates, determined having regard to considerations of consistency with the basis for valuing assets, and the requirements of relevant Australian Accounting Standards.
The valuation of insurance liabilities must comprise:
a central estimate value of the OCL; and
risk margins that relate to the inherent uncertainty in the central estimate value.
The value of the OCL is the sum of the central estimate and the risk margin.
The valuation of OCL should reflect the individual circumstances of each MDO. Notwithstanding this, to ensure that valuation processes are consistent and sufficiently rigorous across all MDOs, the risk margin should be established on a basis that is intended to secure the OCL of the MDO at a given level of sufficiency – that level is
75 per cent.
Due to the highly skewed nature of some insurance distributions, the 75 per cent level of sufficiency may result in a value regarded as insufficient for prudent purposes. Therefore, the risk margin should not be less than one half of the coefficient of variation for the OCL of the MDO.
Risk margins should be shown separately in relation to the OCL.
Where the actuary thinks it appropriate, allowance for reinsurance should be made in determining the risk margin. The justification for and method of determining such reinsurance recoveries should be clearly documented and reported by the actuary.
The Central Estimate
The central estimate is intended to reflect the mean value in the range of possible values for the outcome (that is, the mean of the distribution of probabilistic outcomes). The determination of the central estimate should be based on assumptions as to future experience which reflect the experience and circumstances of the MDO and which are:
made using judgement and experience;
made having regard to reasonably available statistics and other information; and
neither deliberately overstated nor deliberately understated.
Where experience is highly volatile, model parameters estimated from the experience can also be volatile. The central estimate should therefore reflect as closely as possible the likely future experience of the insurer. Judgment may be required to limit the volatility of the assumed parameters to that which is justified in terms of the credibility of the experience data.
The central estimate will generally be measured as the present value of the future expected payments. This measurement process will involve prospective calculations and modelling techniques, and will require assumptions in respect of the expected future experience, taking into account all factors which are considered to be material to the calculation, including::
discount rates;
claims escalation;
claims and policy management expenses; and
the pattern of claims run-off.
The assumptions used should be consistent for the estimation of both outstanding claims provision and premiums liabilities. Where they are not, the reasons must be documented.
The Risk Margin
The risk margin is the component of the value of the OCL that relates to the inherent uncertainty that outcomes will differ from the central estimate. It is aimed at ensuring that the value of the OCL is established at an appropriate and sufficient level. The risk margin does not relate to the risk associated with the underlying assets, including asset-liability mismatch risk.
Risk margins must be determined, for each class of business, and in total, on a basis that reflects the experience of the MDO. In any event, the risk margin must be valued so that the insurance liabilities of the MDO, after any diversification benefit, are not less than the greater of a value that is:
determined on a basis that is intended to value the insurance liabilities of the insurer at a 75 per cent level of sufficiency; and
the central estimate plus one half of a standard deviation above the mean for the insurance liabilities of the MDO.
The risk margins must be determined having regard to the uncertainty of the net OCL and to any uncertainty related to the estimate of reinsurance and non-reinsurance recoveries that are deducted from the estimate of gross insurance liabilities.
The Discount Rate
The value of an MDO’s OCL is typically independent of the value of the underlying assets. For this reason, a discount rate that is observable, market-based and objective is most appropriate.
The rate to be used in discounting the expected future claims payments for a class of business is the gross redemption yield net of the applicable tax rate, as at the calculation date, of a portfolio of sovereign risk securities with a similar expected payment profile to the insurance liabilities for that class (e.g. Commonwealth Government securities for Australian dollar liabilities).
Where the expected payment profile of the liabilities cannot be matched - for example, because the duration is too long - a discount rate regarded as consistent with the intention of these Instructions should be assumed.
Reinsurance Recoveries
Reinsurance refers to arrangements where some part of individual or aggregate insurance risks are ceded to an insurer (or reinsurer) or insurers (or reinsurers). Reinsurance recoveries are amounts expected to be recovered under arrangements in relation to the OCL.
The valuation of net (of reinsurance) OCL is to be determined in accordance with the principles of these instructions. The principles of these instructions should be applied with similar robustness to the valuation of gross (of reinsurance) OCL.
In practice, the estimation of the value of the OCL may be either undertaken on a gross basis, with a separate estimate of the value of reinsurance recoveries, or on a net basis. Where the process is undertaken on a net basis, it is still necessary to value separately estimates of the gross liability and the recovery amounts.
In determining the estimate of reinsurance recoveries, the principles of these instructions must be complied with when valuing the OCL, the actuary should also consider the estimation of reinsurance recoveries. Actuarial judgement should be used in the application of the principles of these instructions in those circumstances.
Non Reinsurance Recoveries
Non-reinsurance recoveries are amounts that may be recovered under arrangements other than reinsurance arrangements, such as salvage, subrogation and sharing agreements.
For each line of business report the Non Reinsurance Recoveries associated with the OCL.
Claims Escalation
Appropriate allowance must be made for future claims escalation when determining the central estimates of the OCL. Future claims payments may increase over current levels as a result of either or both of:
wages or price increases (inflation); or
court awarded interest, other environmental or economic causes (superimposed inflation),
and appropriate allowance must be made in both respects. Claims payments include third party costs incurred in settling those claims such as investigation, medical and legal fees, etc.
Materiality
Particular values are considered material to the overall result of a calculation when their misstatement or omission would cause the result to be misleading to the users of the information. Materiality tests assess the significance of the particular value by relating it to the amount of the overall result (the base amount) to which it contributes.
Materiality will always be a matter requiring exercise of judgement. It should be recognised that the level at which a difference becomes material can be considerably lower than a statistically significant difference. In these circumstances, careful exercise
Reporting
As required by this Reporting Standard and instructions, an MDO is required to seek actuarial advice in respect of its OCL. The actuary is required to prepare a report on an annual basis in respect of the valuation of the OCL (the liability valuation report). The MDO is required to submit that report to APRA.
The liability valuation report must address the matters set out in these instructions. Specifically the report must address:
General matters
the name of the MDO in respect of which the report is being prepared;
the name of the actuary preparing the report;
the purpose of the report;
the extent of compliance with these instructions and reasons where the report does not comply;
definitions of terms and expressions used in the report that may be ambiguous or subject to wide interpretation;
the extent to which any information is obtained from, or work undertaken by, other parties must be disclosed.
OCL
the class/s of business for which a valuation has been undertaken;
nature, appropriateness, accuracy and interpretation of data;
analysis of policy and claims experience, highlighting significant aspects of recent experience;
valuation model or models and the claim experience assumptions adopted for the projection of the OCL. These models should be clearly described and the derivation of assumptions clearly explained with reference to the analysis of data. Any limitations should also be stated;
changes to the approach, model or models and claim experience since the previous report of this nature;
comparisons of actual experience with that expected under the assumptions of the previous report of this nature;
approach to the assessment of uncertainty, 75th percentile and/or coefficient of variation and derivation of the risk margin; and
results of the valuation that clearly identify:
- the central estimate of OCL by class of business;
- the coefficient of variation (if applicable) and risk margins by class of business; and
details of how the Maximum Event Retention (MER), if any, has been considered and applied in the calculation of the OCL (where this will be reported as Incurred but Not Reported Claims) and details of the scenarios upon which the MER has been based (for example, a single large loss or a series of losses arising from the one dependent cause where that cause is also detailed);
claims development; and
details of losses arising from both claims made covers and claims incurred covers.
Reinsurance recoveries
where reinsurance recoverables are due from a related entity, details of the reinsurance arrangements in place between the MDO and the related entity
0
0
0