Life Insurance (actuarial standards) determination No. 1 of 2006
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority
Life Insurance Act 1995, subsection 101(1)
Acts Interpretation Act 1901, subsection 33(3)
1. Background
The Actuarial Standards were made by the Life Insurance Actuarial Standards Board (LIASB) on 5 December 2005. These standards, together with the Explanatory Statement and the Regulation Impact Statement were lodged and registered with the Federal Register of Legislative Instruments in both houses of Parliament on 22 December 2005.
Subsequent to their registration, certain technical errors were identified. The Life Insurance Actuarial Standards Board (‘LIASB’) has issued a Variation to:
- Actuarial Standard 2.04: Solvency Standard
- Actuarial Standard 3.04: Capital Adequacy Standard
- Actuarial Standard 7.02: General Standard.
The variation will correct errors and omissions to ensure that the actuarial standards are consistent with the LIASB’s intention when it made the original standards.
The variation is unlikely to change the expectations of any life companies or any policyholders of these companies. Given that the changes merely clarify the way in which both the industry and APRA would expect to apply the standards, there should be, in practice, no capital impact.
2. Changes made to the Life Insurance Actuarial Standards
The changes are essentially technical in nature, and are designed to correct unintended errors and omissions. Details of each of the changes are set out below.
2.1 Paragraph 11.6.2 of Actuarial Standard 2.04: Prescribed reduction in yield for interest bearing assets
The original version of Actuarial Standard 2.04 inadvertently omitted paragraph 11.6.2. This paragraph was however present in the Draft Final version that was exposed to the public. References to paragraph 11.6.2 are made in paragraphs 11.6.1 and 11.8.1 of the original standard. Paragraph 11.6.2 is therefore necessary in order for the standards to read as intended. Paragraph 11.6.2 has now been reinserted to reflect the publicly exposed drafts.
This paragraph places a ceiling on the reduction in the interest bearing yield (ie. 20% of the current Mid Swap Rate) for calculating resilience reserve requirements. The purpose of this ceiling is to ensure that the requirement does not become excessive in a low interest rate environment.
2.2 Attachment 1 of the General Standard
Incorrect references to ‘Attachment 2’ in Actuarial Standard 2.04 and Actuarial Standard 3.04 have been changed to refer instead to ‘Attachment 1 of the General Standard’.
The correct attachment was referred to in the Discussion Draft that was exposed. The error however arose when Exposure Drafts were released and Attachment 2 of the Solvency and Capital Standard was moved to become Attachment 1 of the General Standard. This change is necessary as there is no ‘Attachment 2’ in Actuarial Standard 2.04 or Actuarial Standard 3.04. It is clear that the LIASB’s intention was that the reference should be to the document that is now ‘Attachment 1 of the General Standard’.
This attachment sets out the appropriate counterparty grade to be applied to determine the corresponding credit risk shock in order to calculate the resilience reserve requirement.
2.3 Paragraph 10.5.7 of the Solvency and Capital Adequacy standards: Retrocession Arrangements
Paragraph 10.5.7 of the Solvency and Capital Adequacy standards introduced new minimum documentation requirements for reinsurance to be fully recognised as an admissible asset for solvency and capital adequacy purposes. The LIASB’s intention was that these requirements should apply to all reinsurance arrangements including retrocession arrangements.
To avoid any doubt and to ensure that these minimum documentation requirements are interpreted as also covering intra group retrocession arrangements, paragraph 10.5.7 of the Solvency and Capital Adequacy standards has been revised. The references to paragraph 10.5.1(f), (g),(h) or (i) (dealing with 3rd party reinsurance) have been extended to also refer to paragraph 10.5.2 (dealing with intra group retrocessions).
2.4 General Standard 7.02: Definition of Financial Services Entities
Health insurers were not specifically referred to in the definition of Financial Services Entities in the original version of General Standard 7.02, although that definition was inclusive and therefore there is a strong argument that it already captured them as intended. It is however desirable to clarify, for the avoidance of doubt, that the definition covers health insurers. This will ensure that a life company which has a health insurance subsidiary does not include the subsidiary’s goodwill as part of its capital resources, consistent with the requirement for any other subsidiary that is a financial services entity. (Refer to paragraph 5.1.3 of the solvency standard and paragraph 5.1.2 of the capital adequacy standard)
The definition of Financial Services Entities has therefore been revised to explicitly include health insurers.
3. Consultation Process
The first and second changes will mean that the actuarial standards as in force come into line with the draft versions upon which LIASB consulted in 2005. No additional consultation has been undertaken given the changes are designed to correct obvious errors and ensure that the standard reflects the original consultation drafts.
For the third change, the appointed actuaries of all registered reinsurers were contacted to ascertain their understanding of the requirements. All responses indicated that the proposed change is consistent with their interpretation, and that their current documentation arrangements were such that the requirement would have no impact in any case.
With respect to the last change, appointed actuaries of all life companies that are known to have health insurance subsidiaries were contacted to confirm that their understanding of the standards is as the LIASB intended. All responses indicated that the proposed clarification will not have any adverse capital impact that was not already anticipated.
4. Implementation
The variation to the standards will take effect from the date that the Instrument of Variation is registered.