Insurance Facts and Figures 2011: What Would You Like To Grow?

whatwouldyouliketogrow.com.
au
Insurance Facts and Figures 2011

May 2011
What would you like to grow?
Editor:
Scott Fergusson
Publication Team:
Kudzaishe Tagwireyi Michelle Oliver Tony Kamberi
Contributors:
Angela Linus Alexandra Russ Martha Plum Damian Cooper Fiona Sidi Prasetija Roland Fan Nuala Houlihan Andrew Smith Samuel Lee Peter Kennedy Scott Hadfield Tony Cook Praveena Karunaharan Bayne Carpenter Sarah Long Jen Chung Lee Hudson Jin Huegin Andrew McPhail Amy Ellison Billy Bennett Roisin Sherlock Kate Tankey Mitchell Kemmis Sarah Hespe (Research Assist)
This publication is designed to provide an overview of the accounting, tax and regulatory environment relating to insurance in Australia. Information contained in this booklet is based on the law and Government announcements as at 21 April 2011. The information presented in this publication should be used as a guide only and does not represent advice. Before acting on any information provided in this publication, readers should consider their own circumstances and their need for advice on the subject. PricewaterhouseCoopers insurance experts will be pleased to assist please contact your usual PwC contact or one of the experts listed at the end of this publication.
Insurance Facts & Figures 2011

2011 PricewaterhouseCoopers. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers a partnership formed in Australia, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services for public and private clients. More than 163,000 people in 151 countries connect their thinking, experience and solutions to build public trust and enhance value for clients and their stakeholders. (PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.) WL 179777
Insurance Facts and Figures 2011
Foreword Scott Fergusson

Insurance in Australia is a fascinating sector. Insurers of all types are in increasingly intense competition for profitability and market share in an environment of uncertainty. Of course uncertainty is the reason insurance exists, but in 2010/11, this has been exacerbated by a significant run of terrible natural disasters, by political debate, market consolidation, economic factors and regulatory changes. Its not easy for insurers these factors have been posing significant management challenges whilst the goalposts for operating in the insurance market continue to shift.
Those insurers and intermediaries best managing such changes are the ones who continue to find opportunity in change. They tend to maintain focus on engaging loyal customers with valuable products or services, they have agile processes and systems, effective risk management as a positive part of culture, and a clear strategy. They are also the ones with motivated people who are able to bring these attributes to life. We have prepared this publication as an annual reference guide for those in the sector and those looking into the sector from outside. While it summarises the goalposts for insurers and intermediaries in terms of the applicable regulation, accounting and tax rules, it also provides an overview of the sector, recent developments impacting it, and some insights into relevant hot topics which may help insurers compete more effectively in a challenging, but rewarding market. PwC Australia has over 150 people currently providing valued insurance clients with assurance, tax and advisory services. Many of the team have contributed to this publication. I thank all those who contributed and on behalf of the entire PwC Insurance team I am delighted to welcome you to our Insurance Facts & Figures 2011.
Scott Fergusson
PwC Australia Insurance Leader Assurance Services
2 PwC
Insurance Facts and Figures 2011 3
Contents
02
Foreword
06
Insurance Insights
32
General Insurance
Life Insurance
78
116
Health Insurance
Insurance Intermediaries
136 158
146
Policyholder Protection
156
Abbreviations
PwC Insurance Experts
Insurance Insights
a selection of PwC thought pieces on various hot topics for the insurance industry over the past 12 months
A moments insight is sometimes worth a lifes experience

Oliver Wendell Holmes
6 PwC
1
1.1 APRAs Insurance Capital Review 1.2 Insurance contract accounting Exposure Draft 1.3 Attracting and retaining top finance talent 1.4 Data is the life blood of business decisions are you in control? 1.5 Unclaimed monies 1.6 Maximising GST efficiencies in general insurance claims 1.7 TOFA: What should I consider to make the right decision? 8 14 17 20 24 27 30
APRAs Insurance Capital Review

Overview
Over the course of the last 12 months there has been extensive consultation between the insurance industry, interested stakeholders and APRA in regards to the evolving regulatory regime in Australia. The proposals are entering a new round of consultation and the impacts on insurers will vary. In this section, we recap the facts, as well as provide our thoughts on the hot topics. In May 2010, APRA released a discussion paper outlining a proposal to review the capital standards for life and general insurers. The review process which began in 2009, intends to make its capital requirements more risk-sensitive and to improve the alignment of its capital standards across the industries1. The aim is to maintain a broadly consistent approach to the determination of capital for general insurers and authorised deposit-taking institutions as well as to achieve harmonisation of the regulatory framework between life and general insurers. At the time of this publication APRA has:
1.1
released a discussion paper outlining the proposed changes (May 2010) and three technical papers outlining in greater detail certain aspects of the proposed changes (July September 2010) invited insurers to participate in a Quantitative Impact Study (QIS) of the proposed changes (August October 2010) released a response paper with further updates to the proposals in response to submissions and outcomes of the QIS (March 2011) The majority of insurers participated on the voluntary QIS, the results of which indicated that overall there would be substantial increases in the capital requirements across both industries. Key themes that emerged from the responses were the complexity of the proposals, the pro-cyclicality of some of the capital charges and the overall level of the proposed capital requirements. In light of these responses, APRA have revised a number of proposals and will be inviting insurers to participate in a second round QIS in mid 2011, before a further response paper and the release draft prudential standards. Final prudential standards are expected to be developed and released in 2012, with the effective date of new standards aiming to begin at 1 January 2013.
1 APRA discussion paper, Review of capital standards for general insurers and life insurers 13 May 2010
8 PwC
Current prudential standards that deal with the measurement of an insurers capital adequacy are presented in the insurance sector chapters in this publication. The sections below detail the proposed changes to the capital standards.
Influence of international developments

APRA has noted in the discussion paper (May 2010) that this review also takes into account international regulatory developments. Consideration of international standards and guidance has the benefit of improved harmonisation and comparability with other regimes, in particular for companies that are subsidiaries or branches of foreign-owned insurers. Some areas which APRA has reviewed include: standards and guidance adopted by the International Association of Insurance Supervisors (IAIS) developments in the Basel Committee for Banking Supervision (BCBS), in particular Basel III proposals for quality of capital the development of Solvency II in Europe There exists a wide diversity of international insurance markets and as such there is no single international reference point for detailed insurance capital standards. It is APRAs intention to continue monitoring international developments, with a view to maintaining broad consistency with the direction of these developments.
Impacts for General Insurers

The proposed capital requirements for general insurers remain relatively unchanged from the current framework for calculating required capital. However, there have been some significant changes to the methods used to determine some of the components of required capital.
Key developments
Focus on more risk sensitive approach
The factor based investment risk capital charge has been replaced with an asset risk capital charge, based on subjecting the balance sheet to a series of stress tests and assessing the required capital under the different scenarios. Stress tests would be carried out under various modules including real interest rates and inflation assumptions. The stress tests will require more complex calculations and will have implications on the balance sheet compilation. The modules and stress tests have been refined after responses from the first QIS, with the revised proposals being simpler and specifying lower stresses.
2 APRA Response to Submissions Review of capital standards for general insurers and life insurers 31 March 2011
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.
The intention is for insurers to explicitly take a more comprehensive approach to capital management, addressing: Board and management oversight; Comprehensive assessment of risks; Development of target capital policy; and Monitoring, reporting and review. As part of the proposals, not only will insurers be required to maintain a prudential capital requirement, the regulatory minimum amount of capital to be held, APRA also expects that an insurers own target capital policy be set as part of the ICAAP.
Challenges for determining optimal investment strategy

Insurers may wish to consider whether there is a need to revisit their optimal investment strategy in light of the proposed changes to the required capital component arising from the asset capital charge. The risk appetite for the insurer and return objectives of their investments will need to be balanced against the impact on regulatory capital. Furthermore, there will be a need to consider separate investment strategies for surplus assets versus those held to support liabilities, as well as the benefits of holding a diversified portfolio of assets compared to a simple portfolio. Other considerations in light of the proposals include: Insurers will need to consider how well investments match the liability profile, both in currency and duration. There is now a capital cost for holding long duration assets where they exceed the average duration of the liabilities. The investment strategy will need to be flexible in responding to changes in market conditions. The investment policy which minimises regulatory capital in good times when yields are high will not necessarily be the optimal position in times of low yields. The calculation of the asset risk charge will be more complex, and result in the need for systems which enable informative decision making and communication of the implications of various investment strategies at the senior executive level. Scenario testing under varying market conditions will be necessary when considering forward projections of capital positions.
12 PwC
Next steps
APRA will open a second round of QIS and this represents a final opportunity for insurers to assess the impact of the proposed changes on the required capital before final proposals and draft prudential standards are released. It is expected that the change to the new capital framework will impact each insurer differently. It is therefore important that each insurer takes the appropriate measures to understand the impact that the proposals will have on their capital requirements and their overall strategy in the new environment. These changes will mean calculating capital requirements will be more complex but will aim to be more risk sensitive. APRA does not intend to increase overall capital requirements, but as a result of these changes there will be some winners and losers.
PwC Contacts
Andrew Smith
t: 02 8266 4928 e: andrew.james.smith@au.pwc.com
Lee Hudson
t: 02 8266 2161 e: lee.hudson@au.pwc.com
Insurance contract accounting Exposure Draft

State of Play
1.2
The International Accounting Standards Board (IASB) released the long awaited exposure draft (ED) on Insurance Contracts on 30 July 2010 culminating several years of debate between themselves and the FASB. The worldwide insurance market has now had time to digest the content of the standard, and as expected the scale of the proposed changes has prompted much debate. The comment period ended on 30 November 2010, and the insurance sector has certainly been busy putting pen to paper to have its voice heard with some 248 submissions to the IASB. The IASB has worked hard to digest the responses and is currently moving forward at a rapid pace, essentially meeting fortnightly to consider the issues and resolve them where appropriate. In recent weeks we have seen tentative approval of significant changes to the ED proposals which arguably gives a good indication of the IASBs passion to issue a final standard. There are challenges though as evidenced by the divide on certain topics between the FASB and IASB, and between the participants themselves. This, with the known changes in the IASBs composition from 1 July mean that there remains a significant risk that the revised deadline of 31 December 2011 will not be met.
What are the current key issues?

The main issues arising out of the ED and the IASBs recent activity are set out below.
1. Contract Boundary
The EDs wording which required re-pricing at the individual contract level has prompted strong responses from the Life, GI and Health insurers alike. This is a result of products such as CTP in the Australian GI space and many health products which may need to be modeled over the policyholders expected lifetimes rather than the current annual practice. In reconsidering this issue the IASB has relaxed the definition such that in certain circumstances the contract boundary will be when a product can be fully re-priced at the portfolio level. This is a positive step for Australia, but the detailed application guidance will need to be reviewed carefully to ensure that all the expected benefits are realised.
14 PwC
2. Risk Margin
There is a very clear split between the US and the rest of the world on the risk margin debate. The US responses show strong opposition to the identification of a separate risk adjustment and residual margin, and support the composite margin approach as favored by the FASB. That said, many US companies do not consider either alternative to be an enhancement to the current insurance accounting model and so have shown little support for change of any form. The Australian market clearly favours both a risk adjustment and residual margin as this is most similar to the current accounting under AASB 1023. There is broad opposition, especially from Life insurance participants, to the locking of the residual margin thus preventing any re-measurement for future changes in assumptions and expected cash flows. There remains however concern as to the comparability, consistency and reliability that can be achieved in determining a risk adjustment. In response to the feedback the IASB has held education sessions and will be revisiting the approach in coming months.
3. Level of measurement
There are three key concerns emerging in relation to the unit of account. Diversification: The majority of comment letters, especially from Australia, argue that diversification should be allowed at the entity level since to not allow for diversification distorts the reality of insurance which ultimately rests upon making profits from diversifying risks. LAT Testing: There is strong opposition certainly among the Australian market that to require this at the portfolio level by date of inception as this fails to recognise how insurers price risk in practice, and moreover will create heavy strain on resources and time to track policies in such a manner. Multiple levels of account: There is general consensus that the level of account for different aspects of the standard should be aligned as currently the myriad of levels at which different adjustments, and tests must be applied are inappropriate in certain aspects and over burdensome with little benefit in others.
4. Short Duration contracts

The most critical issue raised is the definition of short duration in the ED which uses approximately 12 months to determine what fits into this bucket. It is considered by the wider industry that the IASBs intention was to capture GI risks which are generally considered short term contracts however the current definition is too prescriptive to achieve this goal.
5. Presentation & Disclosure

Overall the presentation and disclosure requirements are viewed by the wider industry as being arduous, burdensome and will likely cause significant resource and time constraints for questionable benefit for users of the accounts. In addition there was general dislike for the proposed summarised margin presentation of the income statement with most preferring the inclusion of more volume based disclosures in this primary statement.
6. Acquisition Costs
The Life insurance industry is most vocal as expected on the issue of acquisition costs given the potential for significant upfront expensing of costs which are neither incremental at the contract level nor considered direct in nature. In recent deliberations on this topic, the IASB has moved to determine such costs at the portfolio level. A change that shows the IASB is listening and one that has been generally welcomed by the industry.
7. Transition
Many participants and nearly all of the Australian market are not supportive of the current proposals which will essentially remove all future profits out of the in force book, distort current and future earnings and potentially disadvantage the industry from a capital markets perspective. Most companies who have responded to the IASB has requested the option to apply the new standard retrospectively in some way and thereby estimate the appropriate residual margin for the in force book. Overall, it is clear that the ED refocused the minds of the industry and stimulated great debate in all corners of the globe. Significantly different points of view and preferred positions exist and bringing these to a workable common ground will be a great challenge. But, it is clear that the IASB are committed to the program and with some of the recent changes, it is also clear that they are listening to the feedback. With so much at stake with the program and much work yet to be completed, it is too early to tell what the exact impacts will be on the Australian insurers. What is clear is that the journey to the revised 31 December 2011 deadline will be interesting and one that those with a vested interest should be following closely.
PwC Contacts
Scott Hadfield
t: 02 8266 1977 e: scott.hadfield@au.pwc.com
Christopher Verhaeghe
t: 02 8266 8368 e: christopher.verhaeghe@au.pwc.com
16 PwC
Attracting and retaining top finance talent

Talent management is a major industry issue
1.3
The war for talent continues, as shown by recent PwC global survey findings that CEOs recognise their current strategies for managing talent no longer fit: 83% of CEOs say they will make a change to their talent strategy and a majority of CEOs (66%) fear talent shortages will constrain their organisations growth. One of the most pressing issues the insurance industry faces is a serious skills shortage. The average age of insurance industry workers is higher than other industries and the oldest of the baby boomer generation are turning 65. Compounding this issue is widespread employee disengagement and an increasing number of employees actively seeking work outside their current employer and industry in the post-GFC environment1. In fact, research shows that companies that have downsized by 10 per cent will subsequently experience voluntary turnover rates of more than 50 per cent2. We have heard from our clients in the insurance industry that talent management is a key priority for their business. A recent PwC survey and discussion forum with a number of Insurance CFOs raised a series of talent management issues that are challenging for both the insurance industry as a whole and individual businesses. This paper highlights some of the key challenges and asks some questions that may help insurers navigate their way through them.
1 2
Chandler Macleod Group (2010) Post GFC Candidate Study Report. Colin Beames (2009) Transforming Organisational Human Capital: How to Emerge Stronger from the GFC.
Key challenges
Insurance industry brand
The sense among the forum participants was that the reputation of insurance companies as employers of choice trails behind other sectors including the banks, that it is not a top destination for university graduates, and that the insurance industry does not do enough to promote itself as a desirable career destination. The industrys brand is also affected by the negative perception of the industrys response to their customers following recent natural disasters. For these reasons, participants felt that there is a need to focus on the employee value proposition as an industry as much as on an individual organisation basis.
The challenges of promoting diversity

Whilst participants cited some strong examples of individual initiatives that their organisations had implemented there was still wide debate about the lack of progress in ensuring appropriate representation and diversity at the different levels of the organisation. Recent public debate about the potential for quotas (around gender diversity) to be introduced was much discussed with some practical reservations highlighted. Not withstanding these reservations, there was consensus on the need to think differently if the industry is to optimise on the talent available.
Career paths and development opportunities

A challenge particularly for the smaller insurance companies is creating career paths and on-the-job development opportunities in lean structures and with limited budgets. This is a view held by 50% of participants3 who face the challenge of developing the right capabilities in the organisation to deliver for customers. Whilst the larger companies have more resources to invest in their people and the ability to provide lateral transfers and secondments, there remains a need for more thought on how to bring talent on and create a genuine learning environment.
Bring in versus growing

Most companies are seen by their employees to favour external hires into key roles over promoting their own from within (as agreed by 65% of participants3). Whilst the injection of talent from outside has benefits for all, developing a pipeline of talent internally is a cost-effective way to engage employees and leverage the experience and knowledge that the organisation has invested in through existing employees. Achieving a balance between the two strategies, and ensuring appropriate communication are critical considerations.
Balancing strong performers with promoting new talent

Another significant challenge, particularly in smaller organisations, is the need to balance retaining strong performers who do not wish to progress beyond their current role with ensuring that this does not block the progress of emerging talent. There is a clear trade off here and the difficulty of this balancing act was widely recognised.
PwC Insurance CFO Survey (March 2011)
18 PwC
How insurers can succeed

Every insurance business is different and there is no one solution that fits all when it comes to optimising talent management. However, many of the challenges faced by insurers in this space are also common to other industries. From our experience, below are a few key considerations for insurers who want to improve their outcomes from managing their talent.
1. Differentiate to attract quality

The ability to be differentiated in attracting quality people is more challenging than ever, given different generational motivations. The success of an employee value proposition rests on being responsive to the various motivations and needs of changing workforce demographics. Therefore, insurers should reach beyond the traditional approach of articulating the unique offerings of their organisation, and incorporate the strengths that the Insurance industry brand offers. This would involve insurance organisations working together to devise an industry strategy to attract top talent. Key considerations include career development, global mobility and flexible work arrangements.
2. Invest time in understanding your employees

Understanding what makes your people tick is key to maintaining employee engagement. When it comes to motivation, research shows that financial incentives may not always be the most effective. Instead, career development opportunities has come to be amongst one of the most important factors for employees. A key question is: How do we as insurance organisation develop talent and create a genuine learning environment? One effective approach is to develop collaborative networks at the industry level to provide development opportunities across organisations e.g. graduate programs, middle-manager industry-wide projects, and Executive-sponsored mentoring for high potentials. However, the programs would need to be carefully managed to ensure shared outcomes were achieved, with control over competition to attract talent to specific organisations.
3. Identify and retain your key talent

Like professional services firms, insurance companies are knowledge worker organisations that need to focus on attracting and retaining talent. However, too often companies focus on retaining star performers or leadership talent, overlooking pivotal roles that is, jobs that have an outsized ability to create (or destroy) the value customers expect. As agreed by the majority of participants, there are benefits in engaging pivotal roles to ensure they are motivated enough to deliver consistent performance, while also improving overall business performance. To achieve this, insurers can identify pivotal roles in the business in which to place stars by analysing how much impact each role has on customer and shareholder value. Targeted development strategies can then be developed to ensure the right people are recruited and retained across different roles.
PwC Contacts
Jon Williams
t: 02 8266 2402 e: jon.williams@au.pwc.com
Keith Land
t: 02 8266 3752 e: keith.land@au.pwc.com
Data is the life blood of business decisions are you in control?
1.4
Data in all its aspects forms the life blood of insurance. Whether that data be qualitative or numerical, primary or derivative, internally or externally sourced, its availability, accuracy, completeness, maintenance and smooth, secure flow is essential for: meeting customer promises, such as pricing and discounts; supporting pricing decision-making; underpinning product development and maintenance; ensuring value is achieved out of new system initiatives; supporting actuarial valuations and capital management; and measuring business performance against strategy, objectives and key performance indicators. However, the many processes, systems and data flows in the information chain add complexity. So too do the different stakeholders, as customer and financial data passes from the point of origin to its ultimate use in decision-making, often via many organisational and functional/ team boundaries. Each stakeholder is likely to have their own sets of processes, systems and data repositories, with the weakest link in the chain determining the data quality outcome.
A tightening Australian regulatory environment

Scrutiny from regulators continues to increase, with tighter regulations for corporate governance and risk management. APRA continues to evolve its data collection and reporting requirements for authorised general and life insurers and for general insurance intermediaries that are AFSL holders. While these arrangements do not impose audit requirements in relation to the data, organisations are expected to have adequate risk management systems to ensure their data is sufficiently complete, reliable and verifiable. Evidence from other industries and jurisdictions, in particular the US and UK superannuation andpension industry, demonstrates the significant impact data quality issues can have on business operations. Also, when we consider the rigour that ADIs are required to apply over data quality in developing, managing and reporting their regulatory and economic capital frameworks, it becomes obvious that different industry sectors are approaching data quality in different ways. Perhaps this is a portent of things to come. 20 PwC
Figure 1: Maturity model

High Level 5 Optimised Level 4 Managed
Data quality management maturity
Level 3 Proactive Level 2 Reactive
Level 1 Aware
There is awareness that problems exist but the organisation has taken little action regarding data quality
Awareness and action occur in response to issues. Action is either systems or department specific
Data quality is part of the Business and/or IT charter and enterprise management processes exist. Some data quality measurement and reporting is performed.
Data quality is a strategic initiative, issues are either prevented or Information managed corrected at the source, and best as enterprise asset class solution or and well developed data quality processes architecture is implemented. Focus and organisation is on continuous structure exists. Improvement. Understanding and measurement of full range of data quality risks facing business though Reinforcement though HR mechanisms and training.
Low
Data quality and organisational confidence
High
The benefits of being in control

Being in control of data produces a combination of benefits:
Current value Protecting current value and reputational risk by ensuring that customer and financial data is subject to appropriate governance, risk management and control, all supported by clear accountabilities. In addition, insurance organisations are continuing to invest in data mining and business intelligence solutions. If the investment in these tools is to be maximised, their use must be encouraged, which in turn requires organisations to build trust in the quality of the data involved. Any data issues, whether real or anecdotal, will raise questions about the state of data quality and potentially undermine confidence in those tools. Improved business performance Supporting effective management and optimised performance by ensuring the integrity of the data used to monitor and manage business performance as well as that used to make key business decisions. Future value Helping to deliver future value in the context of the data used to develop the business strategy.
Managing data quality through a data quality control framework

Because of the complex and multi-participant nature of the industry, issues with data will continue to arise unless a systematic, proactive and sustainable solution is established. A simple structure that sets out the internal controls necessary to manage data quality, across the end-to-end data lifecycle, offers such a solution. A suggested structure is outlined in the framework in Figure 2.
How do you compare?

The diagram in Figure 1 sets out the characteristics associated with different levels of maturity in terms of an effective data quality management capability. A target state of at least managed is recommended, and can be achieved by adopting a pragmatic control framework. Given this complexity, can you be sure that you are in control of the quality of your data? Are you comfortable with your responses to the questions below?
Critical data
What is the key data that your business relies on? What would be the impact, both quantitative and qualitative, of poor data quality on the organisations (or business units) objectives and strategy? Do you understand the path your most important data travels through, the transformations that occur and the key risks and controls along that path? Have the volumes of your data flows or the complexities of data structures and rules increased? Do you depend on other parties for data to support and manage your business? If so, do you have a data provider governance model that serves to ensure a desired level of quality? Are there numerous underwriting and claims processes and IT systems as a result of past mergers or acquisitions? Is data collected from many different IT systems? Do data responsibilities cross organisational and functional/team boundaries? Are roles, responsibilities and accountabilities clearly defined?
Status of data quality

What are the key risks relating to your data quality? Do you have the right controls in place to mitigate those risks? Are you confident of the current state of those controls? How do your data quality controls compare with good practice? Do you understand the profile of your data and where anomalies and issues might lie? Do you have mechanisms to detect anomalies in the data?
22 PwC
Have you assessed the efficiency and cost-effectiveness of your current data and systems architecture and processing? Do you have a way to measure and report on data quality as well as to identify, investigate and remediate data quality issues? Do you actively monitor and independently assess the effectiveness of your data quality controls? Do you place reliance for data quality on controls in the actuarial process?
Figure 2: A framework for managing data quality
Identify the key data used by the business understand all stages of the data life cycle Identiy and assess relevant risksinternal and external. What is the key data the business relies on and what risks is that data exposed to?
Data lineage
Continuous Improvement and change
Provide organisational commitment Design and implement quality controls to mitigate the key risks Assign accountabilities for data quality activities Link data quality controls to KPIs and measure KPIs and measure performance.
Prevention strategies
Have you implemented the right procedures and controls to help mitigate these risks?
Undertake routine data profiling activities to look for unexpected/unusual data Ongoing measurement and reporting of the status of data quality to report trend and key areas for focus.
Detection strategies
Do you have mechanisms to detect anomalies in the data?
Culture Change management Stakeholder engagement Metrics and measurement Continuous monitoring Independent assessments.
Establish mechanisms to identify and manage data quality issues, incidents and responses Establish change control measures Conduct regular independent valuations.
Improvement
Do you have a way to track progress, manage change as well as identify, investigate and remediate data quality issues?
es
Pe
oc
op
Pr
Governance
le
Conclusion
Data is the lifeblood of an insurance organisation, but there are many challenges and risks in getting the data right. Typically many parties, processes, systems and data flows exist, with the weakest link in the chain determining the ultimate data quality. Being in control of your data will help you protect current value and reputational risk, support the improved performance of the business, and deliver future value. Issues with data will continue to arise unless a solution is adopted which establishes the right governance, risk management and controls over the key data used by the business.
PwC Contacts
Robin Low
t: +61 (2) 8266 2977 e: robin.low@au.pwc.com
Sheetal Patole
t: +61 (2) 8266 3977 e: sheetal.patole@au.pwc.com
Unclaimed monies
Know your obligations and be prepared
1.5
The State Revenue Offices have recently ramped up their investigations into the compliance by businesses with the unclaimed monies legislation. This focus has included insurance companies. Knowing your obligations and setting up appropriate compliance procedures prior to an audit will reduce the risk of penalties and interest arising from failing to properly administer unclaimed monies held by your organisation. Key questions
What are unclaimed monies?
Key findings
The definition of unclaimed monies varies from jurisdiction to jurisdiction and there is no uniformity in the unclaimed monies legislation. Broadly, unclaimed monies refer to any amount of money (which could include principal, interest, dividends, bonuses, profit, salaries, wages, etc) that are legally payable to a person and that remains unpaid for a specified period of time. The specified period varies in each jurisdiction but can be as short 12 months. Each State and Territory has legislation which imposes an obligation on businesses to remit any unclaimed monies to the State or Territory government. The unclaimed monies legislation is administered in each State or Territory by either the Public Trustee, State Treasury or the Revenue Offices. While the specific requirements in each jurisdiction differ, the unclaimed monies legislation in each State or Territory generally requires businesses to: Prepare and maintain a register of unclaimed monies held by the business; Make the register available for viewing by the general public and/or publish the register in the Government gazette (on an annual basis); Lodge the register with the relevant administration body for publication in the Government Gazette or Government website (on an annual basis); and Prepare a return and remit any unclaimed monies held by the business (on an annual basis) to the administration body.
Who administers the relevant unclaimed monies legislation?
What are your obligations?
24 PwC
Key questions
What are consequences for the failure tocomply?
Key findings
Penalties and interest can be imposed for failure to meet the obligations under the relevant unclaimed monies legislation. For example, penalties can apply for failing to keep, advertise, or refuse inspection of a register, failure to remit unclaimed monies to the relevant administration body, failure to amend or update a register, etc. Penalties for each offence can be as high as $100,000.
What are some of the practical issues?

Key questions
Obligations in multiple states relating to the same unclaimed monies
Key findings
As there is no uniformity of legislation, practical issues may arise in complying with the relevant obligations in each Australian jurisdiction, particularly where a business operates in more than one Australian jurisdiction. Due to the definition of unclaimed monies, a single amount of unclaimed monies held by a business may be required to be remitted in several different jurisdictions. If the business operates in multiple jurisdictions, there will also be a requirement to: publish the register in each relevant jurisdiction; and make the register in each jurisdiction available for inspection by the administration body and the general public. This will add to the administrative and compliance costs for the business. These costs, can be reduced depending on the specific nature of the unclaimed monies held and the operations of the business.
Obligation to keep a register in each relevant State or Territory
Conclusion
Knowing your obligations and being prepared will assist you in ensuring that you comply with your obligations and reduce the risk of potential penalties being imposed as a result of an investigation or audit by the relevant administration bodies. With the relevant analysis and consideration, an efficient and practical compliance program can be developed to meet your unclaimed monies obligations in all relevant Australian jurisdictions.
What are the potential opportunities for insurers?

In our experience many entities, particularly insurance entities, may have monies owed to them due to the miscalculation of indirect taxes. That is, as errors in systems, processes and data entry coding are unavoidable in many large organisations, significant unrealised cash savings may exist in areas such as GST, Stamp Duty and Fire Service Levy. Typically such opportunities are overlooked as insignificant, however, when multiple years of transactions are considered, the potential prize can grow significantly. Generally the window of opportunity on most taxes is at least the last four years of transactions, and therefore, this opportunity should not be dismissed lightly. In order not to miss out on any cash savings available to you, please contact your PwC insurance specialist to arrange for our dedicated insurance indirect tax specialists to help you explore this opportunity.
PwC Contacts
Jon Williams
t: 02 8266 2402 e: jon.williams@au.pwc.com
Chris Greenwood
t: 02 8266 0694 e: chris.j.greenwood@au.pwc.com
26 PwC
Maximising GST efficiencies in general insurance claims

Recognising the effect of GST inefficiencies on your bottom line
1.6
GST compliance is a real issue at the claims payment level. It has an identifiable and potentially significant cost that can and should be monitored. However, most claims review processes fail to actively consider GST compliance matters. Consequentially, we typically observe avoidable errors and inefficiencies that remain unrecognised year on year. The set and forget approach to GST compliance adopted by most organisations does not adequately recognise the complexity of the GST law for the insurance industry. It is difficult to systemise the GST rules for all claims payment scenarios. Nuances in the law or slight changes in fact scenarios can lead to different GST outcomes. Through further attention to a number of key considerations, GST compliance processes can be significantly improved to increase efficiencies and reduce the risk of unfavourable audit activity by the Australian Taxation Office (ATO).
GST and insurance claims processes Best practice
Key questions
Have you considered How insurance Claims processes impact GST compliance?
Key findings
Claims managers spend significant time and resources on improving systems and processes to gain operational efficiencies and reduce overall claims costs. These improvements are generally achieved through changing elements within a claims process. Where systems or processes are changed and new steps introduced/deleted, there is the potential to significantly impact GST compliance. For example, failures to have in place or adhere to claims lodgement scripting in a call centre can result in significant GST compliance risks that are often unidentified. Similarly, another example is where changes are made to the emergency repairs criteria. This is particularly evident after extreme weather events, and other periods of high claims activity. Resources are placed under significant levels of stress and standard processes may be abandoned in favour of higher claims processing volumes or better customer experience. Whether it be introducing a new process, system changes or changes to arrangements, etc insurance claims managers must maintain robust systems and processes. This will ensure the GST implications of its claimsand recoveries are appropriately realised.
Have you realised all the indirect tax savings in your insurance claims function?
In addition to the very real risk of GST compliance errors, in our experience, claims environments usually contain opportunities to realise GST savings. While considerable effort is usually made to reduce claims costs resulting in special project teams being established, base line monitoring performed, etc, little ongoing effort usually occurs in relation to identifying GST savings. This is despite the fact that a 10% GST component exists on most claims costs. Investing time to review the GST efficiency of existing claims processes should be actively considered by most insurers as there are usuallyuntapped opportunities available.
Did you know the GST treatment of premiums can impact the claims system and processes?
The ability to claim GST credits (input tax credits (ITCs) or decreasing adjustments (DAs)) in respect of insurance payments is reliant on the GST treatment of the insurance premium paid by the customer. Accordingly, where insurers use separate underwriting and claims systems it is important to ensure the systems are configured to properly interface from a a GST perspective. That is, it is crucial to identify the correct GST treatment of each insurance policy, not only for underwriting purposes, but also to ensure compliance can be maintained in the event of a claim. A particular example of this is where a policy such as travel insurance may cover both on-shore and offshore risks. Correct classification of the policy will be crucial to ensuring the correct GST treatment is applied to the policy.
28 PwC
Key questions
Are you paying too much GST on recoveries?
Key findings
Whilst GST applies to most insurance recoveries made on Personal Insurance claims, there are a number of circumstances where this is not the case. Equally, there are limited situations where GST is payable on recoveries on Commercial Insurance claims. Do you know if your systems get this right? In our experience, systems and processes in recoveries departments are rightly focused on operational efficiencies Such as the number of open files. Another transaction based risk such as GST, receives little or no attention on the assumption that existing processes are accurate.
Do your claims leakage reviews or reinsurance recovery reviews consider GST issues?
Claims leakage reviews and reinsurance recovery reviews are crucial to operational effectiveness in the way they monitor and manage the cost of claims. However, it is important for insurers to be aware that the overall cost of insurance claims is reliant on the way they are treated for GST purposes. In our experience, few insurers maximise the opportunity to leverage from these existing review processes to address GST compliance matters. In the same way that fraudulent claims or inefficient reinsurance arrangements are direct costs that have an immediate impact on the bottom line, GST errors can have a significant effect on the cost efficiency of the overall claims process. Therefore, given there are significant resources being spent to address claims leakage, in our view it is appropriate to consider if these existing processes can or should include a GST component.
Conclusion
Proper attention to staff training and adequate system rules are necessary to ensure GST is not under or over paid. However, to rely on these controls alone is fraught with danger. After all, how do you know if staff training is being followed? The answer lies in ensuring the insurance claims function has in place a tailored GST compliance monitoring framework that leverages existing claims review processes and realises GST opportunities as they arise.
PwC Contacts
Peter Kennedy
t: 02 8266 3100 e: peter.kennedy@au.pwc.com
Michael Flanderka
t: 07 3257 8335 e: michael.flanderka@au.pwc.com
TOFA: What should I consider to make the right decision?

TOFA: what decisions do I need to make?
1.7
A key consideration for general insurers is whether they should make the fair value election to align the tax treatment with the accounting treatment. The new Taxation of Financial Arrangement regime (TOFA) applies from 1 July 2010 for 30 June balancing taxpayers or from 1 January 2011 for 31 December balancing taxpayers, provided certain threshold financial requirements are met. Broadly, TOFA impacts the tax timing of financial arrangements. The way it does this depends on the choices that are made by the insurer. The choices include the following: a. Whether to early adopt TOFA (ie from 1 July 2009 for June balancing companies or from 1 January 2010 for 31 December balancing companies) b. hether to make the transitional election (ie bring pre-TOFA financial arrangements W into TOFA) c. Whether to make any of the tax timing elections (ie Fair Value, Financia Reports, Foreign Exchange, and Hedging elections). If none of the elective methods are adopted, the default methods will apply (ie compounding accruals or realisation).
What is the fair value election?

Broadly, in order to make the fair value election: Y ou must prepare a financial report in accordance with the accounting standards (or comparable accounting standards under a foreign law); T he financial report is audited in accordance with the auditing standards (or comparable auditing standards made under a foreign law); and U nder the accounting standards the financial arrangements are fair valued through the income statement. The fair value election allows insurers to align the accounting treatment with the tax treatment in respect of applicable financial arrangements.
30 PwC
What kind of things should I consider?

Making the election will bring unrealised gains/losses to tax. What is the impact on cash flows, tax payments and franking? Is there a correlation between market value movements in investments and movements in claims reserves which may reduce volatility? Is there an impact on the capital requirements of the insurer? What (if any) system changes will be required? A re compliance benefits meaningful? (Consider the benefits of aligning tax and accounting treatments, and maintaining one consistent tax treatment for financial arrangements.) s there a timing benefit of making the fair value election and the transitional election? I Is there still some uncertainty in the law? For example, it is unclear whether the eligibility criteria can be met by branches of foreign insurers. What is the impact on the financial statements? How does this election compare with the default methods? Does it make it more difficult to influence the effective tax rate? Is the impact on tax planning, such as choosing which investments to realise before year end, a concern?
Conclusion
The decision whether to make a fair value election will depend on the circumstances of each insurer. Where for example, the volatility on tax payments and cash flows can be mitigated, there may be some attractiveness in aligning tax with accounts. However, it is important to bear in mind that the elective timing methods are irrevocable, so the decision to elect should be carefully considered. Even if the tax timing election is not made in the first applicable income year, the decision to make the election is still open in future years should it become more attractive.
PwC Contacts
Peter Kennedy
t: +61 (2) 8266 3100 e: peter.kennedy@au.pwc.com
Samuel Lee
t: +61 (2) 8266 9218 e: samuel.g.lee@au.pwc.com
General Insurance
32 PwC
2
Introduction Scott Hadfield 2.1 Statistics 2.2 Key developments in 2010/11 2.3 Regulation and supervision 2.4 Solvency and capital adequacy 2.5 Management of risk and reinsurance 2.6 Governance and assurance 2.7 Financial and regulatory reporting 2.8 General insurance taxation 34 36 42 46 52 58 63 66 72
Introduction Scott Hadfield

The past 15 month period has seen an unprecedented level of catastrophic events in Australia and the wider Asia-Pacific region. The Melbourne and Perth hailstorms proved to be the start of a sequence of weather related events with the Queensland Floods and Cyclone Yasi proving to be some of the most expensive losses in Australian history.
Outside of Australia, the New Zealand and Japanese earthquakes have dominated press coverage with these tragedies creating a monumental human, environmental and economic impact. The general insurance sector has emerged from this period shaken but largely unscathed with adequate reinsurance absorbing a substantial amount of the larger losses. These events are expected to have a significant impact on the short and medium term operating environment. Market sentiment indicates that the extended period of a soft reinsurance cycle may now be over and there is a general expectation of rate rises across key classes as excess capacity dries up and the reinsurers reassess their views on the region. In addition to the challenges these events have put on claims handling departments, insurers will have to tread carefully through the public and political pressure to address flood insurance in the coming months. 2011 has also been a busy year on the regulatory and reporting front. Changes made by APRA to align their reporting requirements with Australian Accounting Standards were positively received by the industry due to the obvious simplification benefits provided. APRA also released their proposed amendments to the capital standards. The initial proposals were met with concern by the industry due to a perceived unilateral increase in capital required. APRA has listened and responded to the feedback from the market and the evidence provided by the empirical data but the extent of the changes will only emerge when the second QIS is completed. The Insurance Contracts Project has received a substantial amount of focus from the IASB with regular meetings aimed at ensuring a standard is released by the target date of 30 June 2011. The level of debate on significant matters remains high and with a number of key decisions still remaining, the final shape of the standard is still an unknown commodity. The variety of factors impacting the industry is arguably unprecedented and continues to demand the attention of the best and the brightest. As ever, how each player reacts to these changes will determine their success in the future.
34 PwC
Statistics Top 15 general insurers
2.1
Ranking Measure: Net earned premium Entity 1 2 3 4 5 6 7 8 9 QBE Insurance Group Insurance Australia Group Suncorp Allianz Australia Wesfarmers
1
Performance: Underwriting result % Change 2% -2% 6% 11% 3% 3% -8% -4% -27% 18% 12% 8% 6% 6% 5% 18% Current $m 1,276 (61) 3 91 59 (46) 80 151 161 11 105 20 65 43 55 n/a Prior $m 1,262 (265) (270) 326 10 56 134 249 150 (20) 110 (1) 70 36 6 n/a Investment result Current $m 483 774 796 286 n/a 112 100 102 169 9 56 59 59 19 28 n/a Prior $m 1,237 739 862 96 n/a 95 23 47 109 14 32 (10) 59 15 17 n/a
Year end 12/10 06/10 06/10 12/10 06/10 12/10 12/10 12/10 12/10 06/10 09/10 12/10 12/10 06/10 12/10 12/10
Current Current $m Rank 12,416 7,065 6,310 2,295 1,089 805 803 398 358 344 335 286 264 251 201 1,397 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 NR
Prior $m 12,149 7,233 5,980 2,071 1,061 780 877 414 490 292 299 265 249 237 191 1,182
Prior Rank 1 2 3 4 5 7 6 9 8 11 10 12 13 14 15 NR
Zurich Australian Insurance Munich Reinsurance Company Australia Swiss Re Genworth Financial Mortgage Insurance
10 Commonwealth Insurance 11 Westpac Insurance 12 Chubb Insurance 13 Chartis (formerly AHA) 14 RAC Insurance 15 ACE Insurance NR Lloyd's2
Source: Published annual financial statements or APRA annual returns, including segment reporting for organisations with significant non-general insurance activities Notes: World wide premium is included for those companies/groups based in Australia, while only premium under the control of the Australian operations are included for those with overseas parents. Where a group has significant non-general insurance operations, only performance and position information relating to general insurance is disclosed (subject to availability). In some instances this involves estimating a notional tax charge for the result after tax. Outstanding claims are net of all reinsurance recoveries. Where applicable, comparatives have been updated to be in line with updated comparatives in current year financial reports.
36 PwC
Performance: Result after tax Current $m 1,396 190 557 302 85 35 207 160 191 10 112 55 35 18 60 n/a Prior $m 1,970 247 416 335 64 106 67 175 152 (7) 100 (8) 49 16 16 n/a Outstanding claims Current $m 14,673 7,182 6,335 4,365 502 1,061 1,255 1,073 260 105 89 472 411 48 204 1,536 Prior $m 14,350 6,406 6,161 4,452 513 1,010 1,166 1,264 282 88 71 490 305 39 223 920
Financial Position: Investment securities Current $m 23,012 11,734 11,151 4,277 1,065 1,668 1,999 1,606 2,929 208 1,126 938 1,360 194 395 2,016 Prior $m 23,420 10,563 9,482 4,362 1,003 1,643 1,525 2,039 2,790 163 682 868 1,193 196 349 1,162 Net assets Current $m 10,155 4,656 8,376 1,833 1,377 611 765 595 1,799 107 771 415 446 234 262 n/a Prior $m 10,298 4,836 8,357 1,808 1,371 643 531 808 1,987 98 824 359 420 216 199 n/a Total assets Current $m 41,222 20,446 21,891 8,210 3,641 3,404 2,928 2,725 3,275 561 1,561 1,294 2,925 572 1,137 2,016 Prior $m 40,964 19,360 21,009 7,986 3,561 3,024 2,922 2,830 3,170 521 1,554 1,219 2,589 430 1,154 1,612
1 2
Disclosure of investment result from insurance operations was not available in Wesfarmers financial statements Lloyds Underwriters are authorised in Australia under special provisions contained in the Insurance Act 1973. Because of the unique structure of the Lloyds market Lloyds reports to APRA on a different basis from Australian general insurers. Lloyds is required to maintain onshore assets in trust funds and as at 31 December 2010 its Australian assets comprised of $2,014m in trust funds and a statutory deposit of $2m.
Top 10 government insurers
Ranking Measure: Net earned premium Entity 1 2 3 4 5 6 7 8 9 WorkCover NSW Victorian WorkCover Authority (Work Safe Victoria) Transport Accident Commission (Vic) WorkCover Queensland NSW Self Insurance Corporation* WorkCover Corporation (SA) Motor Accident Commission (SA) (MAC) Insurance Commission of WA Comcare (Cwlth)* Year end 06/10 06/10 06/10 06/10 06/10 06/10 06/10 06/10 06/10 06/10 Current $m 2,395 1,712 1,257 959 804 610 471 406 213 139 Current Rank 1 2 3 4 5 6 7 8 9 10 Prior $m 2,572 1,608 1,195 950 773 646 430 381 207 121 Prior Rank 1 2 3 4 5 6 7 8 9 10 % Change -7% 6% 5% 1% 4% -6% 10% 7% 3% 15%
Performance: Underwriting Current 000 -584 -502 -817 -651 -158 -18 -44 -79 -88 -43 Prior 000 -665 -257 -592 -624 -108 122 -199 -98 -32 -136
10 Victorian Managed Insurance Authority (VMIA)
Source: Published annual financial statements Notes: * Outstanding claims are net of recoveries. Underwriting result has not been disclosed in financial statements and has been recalculated as net earned premium less net claims incurred
38 PwC
Performance: Investment Current $m 1,080 984 696 280 483 138 212 228 16 101 Prior $m -798 -1,330 -803 -265 -121 -138 -10 -224 20 -141 Result after tax Current $m -101 176 -81 -259 -42 77 169 127 8 52 Prior $m -2,107 -1,254 -971 -567 -187 -75 -208 -161 14 -283 Outstanding claims Current $m 12,662 8,768 7,313 2,506 5,081 2,497 1,920 1,451 2,236 1,101 Prior $m 11,508 8,154 6,429 2,166 4,612 2,286 1,811 1,426 1,601 1,039
Financial Position: Investments Current $m 10,719 8,840 6,678 2,305 4,987 1,389 2,334 2,176 160 948 Prior $m 9,480 7,999 5,859 2,341 3,799 1,182 2,060 1,948 186 847 Net assets Current $m -1,583 990 -419 385 66 -982 239 833 6 -46 Prior $m -1,482 814 -338 648 108 -1,059 70 704 199 -114 Total assets Current $m 12,464 10,171 7,987 3,081 5,535 1,571 2,381 2,706 2,308 1,536 Prior $m 11,596 9,300 7,100 2,982 5,199 1,390 2,104 2,516 2,475 1,343
Major Australian catastrophes

Original cost adjusted to June 2006 CPI
2010 Queensland Floods, 2010 - 2011, $2310m Melbourne Storm, 2010, $1044m Perth Storm, 2010, $153m* Tropical Cyclone Tasha, 2010, $2100m*** 2009 2008* 2007* 2006* 2005 2003 2001 1999 1998 Victorian Bushfires, Victoria, 2009, $1200m** Floods, South East Queensland: QLD, 2009, $48m* Flash flooding: Mackay QLD, 2008, $342m Flooding: North Coast, NSW, 2008, $15m NSW east coast storm and flood event, 2007, $1378m Severe Hailstorm Sydney, 2007, $205m Tropical Cyclone Larry, QLD, 2006, $367m Crop damage: Goulburn Valley, VIC, 2006, $71m Hailstorms Gold Coast, 2005, $62m Hail, Storm, Winds NSW, TAS, VIC, 2005, $220m Hail, storm Melbourne metro, 2003, $132m Bushfires Canberra, 2003, $373m Bushfires Sydney and NSW, 2001, $78m Hailstorms Sydney, 1999, $2093m Hailstorms, Brisbane, $95m Floods (excl. Cyclone Les) NT, 1998, $87m Cyclone "Sid" and floods QLD, 1998, $88m 1996 1994 1992 1991 1990 Hailstorms Singleton NSW, 1996, $62m Hailstorms Armidale/Tamworth NSW, 1996, $131m Bushfires NSW, 1994, $79m Storms Sydney, 1992, $166m Storms Sydney, 1991, $321m Flood and wind from Cyclone Joy Qld, 1990/1, $110m Cyclone Nancy, Qld/NSW, 1990/1, $62m Hailstorms Sydney, 1990, $564m 1989 1986 Earthquake Newcastle, 1989, $1364m Hailstorms Western Sydney, 1986, $207m Storms and floods Sydney, 1986, $70m Cyclone Winifred, QLD, 1986, $80m 1985 1984 1983 1981 1978 1977 1976 1975 1974 Hailstorms Brisbane, 1985, $389m Bushfires NSW, 1984/5, $58m Floods NSW, 1984, $184m Ash Wednesday Bushfires SA & VIC, 1983, $421m Storms and floods Dalby QLD, 1981, $59m Storms Eastern NSW, 1978, $58m Thunderstorms NSW, 1977, $63m Cyclone Ted Qld, 1976, $71m Hailstorms NSW, 1976, $189m Cyclone Joan, WA, 1975, $106m Floods, Sydney, 1975, $80m Cyclone Tracy, Darwin, 1974, $1240m Cyclone Wanda, Brisbane, 1974, $421m 3000 2500 2000 1500 1000 500 0
AUD ($m)
Source: * Source: ** Source: *** Source:
Insurance Disaster Response Organisation, Major disaster event list since June 1967. Revised to March 2006. Emergency Management Australia, EMA Disasters Database. Figure not supplied by EMA. Figure comes from Swiss Re, Natural catastrophes and man-made disasters in 2009: catastrophes claim fewer victims, insured losses fall, No 1/2010 Figure not supplied by EMA. Figure comes from Swiss Re, Natural catastrophes and man-made disasters in 2010, No 1/2011.
40 PwC
World catastrophes
2010 Earthquake, over 200 after shocks, Chile, $8.0bn Earthquake, over 300 after shocks, New Zealand, $4.5bn Winter storm Xynthia, France, Germany, Belgium $2.8bn 2009 2008 Winter storm Klaus, France & Spain, $3.7bn Hurricane Ike, US & Caribbean et al, $28.5bn Hurricane Gustav, US & Caribbean et al, $5.7bn Tornadoes, US, $1.9bn 2007 Winter storm Kyrill, Europe, $6.1bn Floods caused by heavy rain, UK, $4.5bn 2005 Hurricane Wilma; torrential rain, floods, US, $13.0bn Hurricane Rita; floods, damage to oil rigs, US, $10.4bn Hurricane Katrina, US, $66.3bn 2004 Seaquake; tsunamis in Indian Ocean, $2.1bn Hurricane Jeanne; floods, landslides, US & Carribean, $4.0bn Typhoon Songda, Japan & Sth Korea, $3.8bn Hurricane Ivan; damage to oil rigs, US, $13.7bn Hurricane Frances, US & Bahamas, $5.5bn 2003 Hurricane Charley, US & Carribean, $8.6bn Hurricane Isabel, US, $2.3bn Thunderstorms, tornadoes, hail, US, $3.5bn Severe floods across Europe, Europe, $2.6bn Terrorist attacks on WTC, Pentagon etc, US, $21.4bn Tropical storm Allison; rain, floods, US, $4.1bn 1999 Hail, floods & tornados, US, $2.5bn Winter storm Martin, France & Spain, $2.9bn Winter storm Lothar over Western Europe, $7.0bn Winterstorm Anatol, Western/Northern Europe, $2.3bn Typhoon Bart, South Japan, $4.9bn 1998 1997 1996 1995 Hurricane Floyd, Eastern US, Bahamas & Caribbean, $3.4bn Hurricane Georges, US, Carribean, $4.4bn Floods after heavy rain in Central Europe, $2.0bn Hurricane Fran, US, $2.3bn Hurricane Opal, US, $3.3bn Rain, floods and landslides $2.1 bn 1994 1993 1992 Great Hanshin earthquake in Kobe, Japan, $3.3bn Northridge earthquake, US, $19.0bn Blizzards, tornadoes, US, $2.7bn Hurricane Iniki, US, $2.3bn 1991 Hurricane Andrew, US, $23.0bn Forest fires which spread to urban areas, drought, US, $2.5bn 1990 Typhoon Mireille, Japan, $8.4bn Winter storm Vivian, Europe, $4.9bn 1989 Winter storm Daria, Europe, $7.2bn Explosion in a petrochemical factory, US, $2.2bn 1988 1987 1979 1974 Hurricane Hugo, Puerto Rico, $7.4bn Explosion on the Piper Alpha oil rig, UK, $3.4bn Storms and floods in Europe, $5.5bn Hurricane Frederic, US, $2.2bn Tropical cyclone Fifi, Honduras, $2.0bn 80 70 60 50 40 30 20 10 0
2002 2001
USD ($bn)
Source:
Swiss Re, Natural catastrophes and man-made disasters. 1970 2005, Sigma no.2/2006; Natural catastrophes and man-made disasters in 2007, Sigma 1/2008; National catastrophes and man-made disasters in 2008: North America and Asia suffer heavy losses Swiss Re No. 2/2009; National catastrophes and man-made disasters in 2010, Sigma 1/2011.
Key developments in 2010/11

Key development
The Queensland floods Commission of Inquiry
2.2
Summary of issue
The substantial rainfall across most of Queensland from December 2010 to January 2011 resulted in three catastrophic insurance events. These catastrophes have raised the profile and level of debate on the definition of what constitutes a flood and also how to provide affordable protection for those properties that lie in flood prone regions. The Queensland Floods Commission of Inquiry was launched on 17 January 2011 to examine the chain of events that lead to the floods and the response by relevant parties to the aftermath including the performance of private insurers in meeting their claims responsibilities. Compounded by other flood events in Victoria, Tasmania and Western Australia this item remains a market and political hot topic. To address the financial impact faced by Queensland and in particular those property owners without adequate insurance cover the Federal Government has imposed a one-off levy to help fund the recovery. The impact of such intervention by the government further complicates the ability of the private market to adequately price risks in flood prone areas and may lead to a greater incentive for under-insurance in the future. It was announced in March 2011 that there would be a review into natural disaster insurance in Australia and in April, a consultation paper was released by the Treasury titled Reforming Flood Insurance: Clearing the Waters. This set out proposals for standard definitions relating to floods in insurance policies and makes references to other initiatives such as a flood mapping development framework. There are many key factors being considered by the industry including the current availability, affordability and reliability of flood mapping across both urban and rural areas and the heightened risk of adverse selection for providers of insurance cover in flood prone regions. The outcomes of these enquiries have the potential to impact the nature of insurance cover for flood related damages in the general insurance market.
42 PwC
Key development
Changes to General Insurance Prudential reporting
Summary of issue
Following a consultation process with the industry, APRA released amendments to a number of the Prudential Standards to align prudential reporting more closely with statutory reporting for general insurers, while maintaining the current capital framework. The changes are intended to deliver three important benefits: simplify reporting by general insurers to APRA; provide APRA with more effective information for assessing insurer performance; and enhance the dialogue between APRA and individual insurers on their performance. The changes came into effect for reporting periods after 1 July 2010.
APRAs expectations regarding post reporting date events
In early 2011 APRA issued two guidance letters to clarify their expectations for the impact of post reporting date events on the calculation of premium liabilities for prudential reporting purposes. It is APRAs expectation that an insurer includes the impact of relevant post reporting date information on its solvency position in quarterly and annual reporting to APRA to the extent it is practical to do so. In calculating premium liabilities a general insurer must make allowance in their Quarterly APRA return for all post reporting date events up to submission of the return. For the Annual APRA return the Prudential Standards require insurers to include updated information on only those events that were included in the Quarterly APRA return. New events subsequent to the submission of the Quarterly APRA return are not required to be included in the Annual APRA return calculations.
Key development
Fire Services Levy
Summary of issue
Based on the findings of the review conducted by the Bushfires Royal Commission the Victorian government has abolished its Fire Services Levy. With effect from 1 July 2012 fire services will be financed through a levy based on property rates. The change in financing method will help to address the inequities inherent in the previous system whereby those who are insured subsidise the cost of fire fighting for those who arent insured. For the industry the move is seen as a positive tax reform as removing the levy reduces both the GST and stamp duty on premiums with no impact on the level of cover provided. New South Wales and Tasmania are now the only states that maintain the levies on insurance premiums.
Catastrophic events
2010 and early 2011 has seen a large number of severe catastrophe events in the Australasian and Asia-Pac regions. The significant weather events in Australia and the earthquakes in New Zealand and Japan have again challenged the assumptions used by insurers and reinsurers as they factor in extreme weather events for their product pricing and modelling of catastrophic losses. These events have also lead to a dramatic increase in the volume of claims reported to many general insurers and this has increased pressure on their day to day operations. The combination of catastrophe losses in the region may well be a catalyst for a period of price strengthening in reinsurance and property and casualty lines in particular. The upcoming 1 July reinsurance renewal period will be an area of particular interest for the market.
Risk Appetite
In speeches to the industry in early 2011, Ian Laughlin has outlined APRAs perspectives on risk appetite and its approach for assessing the board and managements adoption and implementation of risk appetite in execution of strategy. This is likely to be an area of focus in APRA supervising reviews of insurers in 2011. Effective 1 July 2010, Ian Laughlin replaced John Trowbridge as the APRA member responsible for the insurance sector. Ian Lauglin is a qualified actuary with extensive experience in the financial services industry, particularly in the insurance industry. John Trowbridge is currently chairing the National Disaster Insurance Review, which is a review into disaster insurance in Australia.
Change of APRA member
44 PwC
Key development
National Injury Insurance Scheme
Summary of issue
The National Injury Insurance Scheme (NIIS) has been proposed by the Productivity Commission and would comprise a system of premium funded, nationally consistent minimum care and support arrangements for people suffering catastrophic injury. This no fault system would be structured as a federation of separate, state-based injury insurance schemes and has obvious interactions with other compensation schemes currently in place (e.g. Workers compensation). It is foreseeable that there could be a transfer of such claims into the NIIS, which would have implications on the nature of claims and associated costs on existing schemes. It is intended that the scheme will ultimately cover all causes of catastrophic injuries, including motor vehicle accidents, medical treatment and general accidents occurring within the community or at home. Funding for the NIIS would come mainly from existing insurance premium sources but additional funding may come through state and territory governments.
APRA capital standards Insurance contracts exposure draft Level 3 Groups
Refer to Chapter 1 for details of the key developments and a summary of the potential impacts for general insurers. Refer to section Chapter 1 for details of the key developments and a summary of the potential impacts for general insurers. In March 2011 APRA issued its discussion paper on the proposed Level 3 supervision framework. The framework aims to ensure that prudential supervision adequately captures the risks to which APRA-regulated entities within a conglomerate group are exposed. APRA will determine on a case-by-case basis which groups will be subject to Level 3 supervision. APRA is proposing two methods for the measurement of eligible capital at Level 3. A top-down approach based on the consolidated accounts of the Group and a building block approach using the sum of eligible capital of blocks within the Level 3 Group. Responses on the discussion paper should be submitted by 18 June 2011.
Regulation and Supervision

The Australian Prudential Regulation Authority (APRA)
2.3
APRA is the single Commonwealth authority responsible for licensing and prudential regulation of all deposit-taking institutions, life and general insurance companies, superannuation funds and friendly societies. APRA is also empowered to appoint an administrator to provide investor or consumer protection in the event of financial difficulties experienced by life or general insurance companies. APRAs powers to regulate and collect data from the general insurance industry stem principally from the following acts: Insurance Act 1973 (the Insurance Act); Financial Sector (Collection of Data) Act 2001; Financial Sector (Shareholdings) Act 1998; Insurance (Acquisitions and Takeovers) Act 1991; and Insurance Regulations 2002. While licences to write most classes of insurance business are provided by APRA, state and territory governments issue licences to write certain compulsory classes of business, such as Workers compensation and Compulsory Third Party (CTP). The status of these lines of business varies between states. As supervisor of general insurance companies, APRA administers the Insurance Act. APRAs stated objective in respect of general insurance is to protect the interest of insurance policyholders, in particular, through the development of a well managed, competitive and financially sound general insurance industry. APRA is responsible for the prudential regulation of insurers. APRAs aim is to apply similar principles across all prudential regulation and to ensure that similar financial risks are treated in a consistent manner whenever possible. It is not responsible for product disclosure standards, customer complaints or licensing of financial service providers (including authorised representatives and insurance brokers) as these responsibilities fall to the Australian Securities and Investments Commission (ASIC) under its Australian Financial Services Licence (AFSL) regime.
46 PwC
APRA co-operates with other regulators where responsibilities overlap. In particular, APRA works closely with ASIC and the Reserve Bank of Australia. It also liaises, when necessary, with the Federal Department of Treasury, the Australian Competition and Consumer Commission (ACCC) and the Australian Stock Exchange (ASX).
Probability and Impact Rating System

APRAs primary objective is to minimise the probability of regulated institutions failing and to ensure a stable, efficient and competitive financial system. APRA uses its Probability and Impact Rating System (PAIRS) to classify regulated financial institutions in two key areas: The probability that the institution may be unable to honour its financial promises to beneficiaries depositors, policyholders and superannuation fund members; and The impact on the Australian financial system should the institution fail. As part of its role as a prudential regulator, APRA uses PAIRS to assess risk and to determine where to focus supervisory effort, determine the appropriate supervisory actions to take with each regulated entity, define each supervisors obligation to report on regulated entities to APRAs executive committee, board, and, in some circumstances, to the relevant government minister, and to ensure regulated entities are aware of how APRA determines the nature and intensity of their supervisory relationships. The PAIRS Supervisory Attention Index rises as the probability of failure and the potential impact of failure increase, ranging from Low to Extreme. These ratings are not publicly available, and are used only to identify potential issues and seek remediation before serious problems develop.
Supervisory Oversight and Response System

Supervisory Oversight and Response System (SOARS) is used to determine how supervisory concerns based on PAIRS risk assessments should be acted upon. It is intended to ensure that supervisory interventions are targeted and timely. All APRA-regulated entities that are subject to PAIRS assessment are assigned a SOARS stance. Supervisory strategies vary according to an entitys supervision stance. The supervision stance of a regulated entity is derived from the combination of the Probability Rating and Impact Rating of the PAIRS process, as illustrated in figure 1.1 on the following page.
Figure 1.1 PAIRS and SOARS

Probability Rating
Low Lower Medium Upper Medium High Extreme
Impact Rating
Extreme High Medium Low
SOARS Stance
Normal Oversight Mandated Improvement Restructure
Regulatory framework
The General Insurance Reform Act 2001 (amendment to the Insurance Act) created a three-tier regulatory system for general insurers: Tier 1 The Insurance Act contains the high-level principles necessary for prudential regulation; Tier 2 Prudential standards detail compliance requirements for companies authorised under the Insurance Act. This has been updated to include more high-level and principles-based requirements. Tier 3 Guidance notes accompany each prudential standard, providing details of how APRA expects them to be interpreted in practice. This has been updated to provide non-binding guidance on prudential good practice and on how best to meet the requirements of the new standards.
48 PwC
Categories of general insurer

The different categories of insurers referred to in the GI Prudential Standards are defined in GPS 001 Definitions as follows: Category
A
Description Insurers incorporated in Australia, excluding all insurers falling within any other categories below. Wholly owned subsidiaries of corporate groups that are not insurance groups fall into this category where they do not already fall into another category below.
Insurers incorporated in Australia and a subsidiary of a local or foreign insurance group. An insurance group captive is not a Category B insurer. A foreign insurer operating as a foreign branch in Australia; could be a branch of a foreign mutual or shareholder company. Often referred to as association captives; an insurer incorporated in Australia that: is owned by an industry or a professional association, or by the members of the industry or professional association or a combination of both; and only underwrites business risks of the members of the association or those who are eligible, under the articles of the association or constitution of the association, to become members of the association; but is not a medical indemnity insurer as defined under the Medical Indemnity Act 2002.
C D
Often referred to as sole parent captives; an insurer incorporated in Australia that is a corporate captive or partnership captive.
Licensing
Private sector general insurance companies may conduct insurance business in Australia only if authorised under the Insurance Act. APRA can impose and vary licence conditions of an insurer under Section 13 and exempt an insurer from complying with all or part of the Insurance Act under Section 7. In addition to requiring compliance with prudential standards, APRA may request additional information as it sees fit. The information expected to be provided includes: Details of the ownership structure, board and management (including resumes and the companys constitution); Applications for the proposed appointed auditor and actuary; A three-year business plan with financial and capital adequacy projections, including sensitivity analysis; Systems and controls documentation (risk management strategy, reinsurance management strategy, business continuity plan and details of accounting and reporting systems);
Details of subsidiaries and associates and any proposed relationships; An auditors certificate verifying the level of capital and capital ratios of the applicant; Written undertakings to comply with prudential standards at all times, consult and be guided by APRA on prudential matters and new business initiatives and provide; relevant information required for the prudential supervision of the applicant; and For foreign-owned insurers, approval of foreign parents home supervisor and details of the foreign parents operations and an acknowledgement that APRA may discuss the conduct of the applicant with its head office and home supervisor. In order to underwrite workers compensation or CTP insurance, additional approval from state and territory government regulators is required under the relevant state or territory legislation.
Restructure of operations
The Insurance Act provides for the restructuring of insurance operations. Sections 17A to 17I of the Act allow for the assignment of insurance liabilities between insurers subject to the satisfaction of several steps, including approval of APRA, informing affected policyholders; and obtaining confirmation of the assignment from the Federal Court of Australia. GPS 410 Transfer and Amalgamation of Insurance Business for General Insurers sets out more detailed information on the requirements for transferring insurance portfolios between registered insurers. In the event of revocation of an insurers authorisation, APRA can stipulate the assignment of liabilities immediately prior to the revocation. It should be noted that APRA can revoke a licence only with the Federal Treasurers approval, unless it is a request from an insurer with no remaining Australian insurance liabilities. Section 116 addresses the issue of winding up an insurer and stipulates that assets in Australia can be applied only to settle liabilities in Australia (unless these are nil). For the purpose of this and the Section 28 solvency requirement, a reinsurance receivable from an overseas party is considered to be an asset in Australia if: the reinsurance contract relates to Australian liabilities; and reinsurance payments are made in Australia. The definition of liability in Australia is complex, but in general terms it is if the risk is in Australia or if the insurer has undertaken to satisfy the liability in Australia.
Prudential Standards
APRAs supervision currently spans two levels: Level 1 applicable to individual APRA-authorised general insurers on a stand-alone basis. Level 2 applicable to consolidated general insurance groups incorporating all general insurers (both domestic and international within the group. The group may be headed by an APRA-authorised insurer or an APRA authorised non-operating holding company). Level 3 supervision is currently being developed by APRA and will be intended to cover the supervision of conglomerates, spanning more than one APRA regulated industry. The Prudential Standards are discussed in more detail in the sections below.
50 PwC
Australian Securities and Investments Commission

ASIC is the single Commonwealth regulator responsible for market integrity and consumer protection functions across the financial system. It is responsible for: Corporate regulation, securities and futures markets; Market integrity and consumer protection in connection with life and general insurance and superannuation products, including the licensing of financial service providers; and Consumer protection functions for the finance sector. Most insurers require an AFSL, and as such, a dual licensing system exists with overlapping requirements under both ASIC and APRA.
Australian Financial Services Licence

The Corporations Act requires all sellers of insurance products to retail clients, including registered insurers and brokers, to obtain an Australian Financial Services Licence (AFSL). Insurers that are regulated by APRA are exempted from the financial obligations of an AFSL as their financial position is separately monitored by APRA.
Ownership restrictions
The Financial Sector (Shareholdings) Act limits shareholdings to 15 per cent of an insurer, unless otherwise approved by the Federal Treasurer. The Insurance (Acquisitions and Takeovers) Act complements this legislation by requiring government approval for offers to buy more than 15 per cent of an insurer.
Solvency and capital adequacy

Overview
2.4
Under Section 28 of the Insurance Act, authorised insurers are required to hold eligible assets in Australia that exceed liabilities in Australia, unless otherwise approved by APRA. Section 116A of the Insurance Act and GPS 120 Assets in Australia provide further details of excluded assets and liabilities. The prudential standards aim to ensure the security of policyholder obligations of all insurers is established at an appropriate level by requiring that each insurer maintains at least a minimum amount of capital. The following sections give an overview of the various Prudential Standards for Capital Adequacy and Assets in Australia. APRA is undertaking a process to review the prudential framework around capital requirements. The proposals from this review are intended to improve risk sensitivity in capital requirements and align standards across APRA regulated industries. These changes are likely to present new challenges for insurers and these are discussed in more detail in Chapter 1.
Capital adequacy standards

GPS 110 to GPS 116 form part of a comprehensive set of prudential standards that deal with the measurement of a general insurers capital adequacy. These standards were updated in July 2010 to better align APRA reporting with Australian Accounting Standards (AAS). Two further Prudential Standards (GPS 120 Assets in Australia and GPS 310 Audit and Actuarial Reporting and Valuation) were also updated as part of this process and are discussed below.
Capital adequacy
GPS 110 Capital Adequacy aims to ensure that the general insurers maintain adequate capital to act as buffer against the risk associated with their activities and sets out the overall framework adopted by APRA to assess the capital adequacy of a general insurer.
52 PwC
The key requirements of this Prudential Standard are that a general insurer must: maintain minimum levels of capital determined according to the Internal Model Based Method or the Prescribed Method; determine its Minimum Capital Requirement having regard to a range of risk factors (discussed below) that may threaten its ability to meet policyholder obligations; make certain public disclosures about its capital adequacy position; and seek APRAs consent for reductions in capital.
Capital base and MCR

GPS 110 specifies that the capital base for Category A to C insurers must exceed the greater of $5 million and the MCR. In case of Category D or Category E insurer the MCR cannot be less than $2 million. Where APRA is not satisfied as to the margin by which the capital base exceeds the minimum capital requirement, it can require the insurer to submit a capital plan detailing the proposed actions to improve solvency. By the nature of its Australian balance sheet, a Category C insurer will not typically have capital instruments of the type specified in GPS 112 Capital Adequacy: Measurement of Capital. Category C insurers are nevertheless required to meet a variant of the MCR. Specifically, Category C insurers are required to maintain assets in Australia (where the assets are the ones that are recognised by GPS 120 as assets in Australia) that exceed their liabilities in Australia (less technical provisions in excess of those required by Prudential Standard GPS 310 Audit and Actuarial Reporting and Valuation) by an amount that is greater than the MCR determined by this Prudential Standard. The capital base is calculated by measuring available capital taking into account the quality of the support provided by various types of capital instruments and the extent to which each instrument: provides a permanent and unrestricted commitment of funds; is freely available to absorb losses; does not impose unavoidable servicing charges against earnings; or ranks behind policyholders and creditors in the event of wind-up. The MCR represents an allowance for the following risks: Insurance risk The possibility that the actual value of premium and claims liabilities will be greater than the value determined under prudential standards (GPS 310); Investment risk The risk that on-balance sheet assets and off-balance exposures will be realised at a different value to their reported amounts; and Concentration risk The largest loss to which an insurer will be exposed (taking into account the probability of that loss) due to the concentration of policies, after netting out any reinsurance recoveries and allowing for the cost of one reinstatement premium for the insurers catastrophe reinsurance.
Capital buffer
Capital buffer is the excess capital provided to cater for the possibility of unusual or extreme economic shocks that would otherwise damage policyholder interests. The following table gives the capital buffer by the category/type of the insurer.
Table 1.3 Capital buffer requirement
Category / Type of Insurer

A, B & C D&E D&E D&E Medical Indemnity
Source: APRA, GPG 110
Capital buffer
20% of MCR 50% of MCR at least $6m (after deductions) 20% of MCR 50% of MCR
where MCR is
not specified MCR < $4m $4m < MCR < $5m MCR > $5m not specified
Capital adequacy: measurement of capital

GPS 112 Capital Adequacy: Measurement of Capital sets out the essential characteristics that an instrument must have to qualify as Tier 1 or Tier 2 capital for inclusion in the capital base that is used to assess the capital adequacy of an insurer. Tier 1 capital comprises the highest quality capital components. Tier 2 capital includes those instruments which fall short of the quality of Tier 1 capital but nonetheless contribute to the overall strength of an institution as a going concern. The key requirements of this standard are that a general insurer must: include only eligible capital as a component of capital for regulatory capital purposes; make certain deductions from capital; and meet certain limitations with respect to Tier 1 capital and Tier 2 capital.
54 PwC
Capital adequacy: internal model-based method

GPS 113 Capital Adequacy: Internal Model-based method sets out the requirements that a general insurer or an insurance group must follow in order to use the Internal Modelbased method to calculate their MCR. A general insurer using the Internal Model-based method is expected to include the three risks covered in the Prescribed Method (insurance, investment and concentration risks) as well as other relevant risk factors, within its method of calculation. The key requirements to obtain and maintain approval for the use of an Internal Model-based method are: the insurer or insurance group must have an advanced approach to risk management and capital management which includes an appropriate Economic Capital Model (ECM); governance arrangements for the development and use of the ECM must be suitable; the ECM must be used by the insurer or insurance group for its own purposes or the purposes of the group and be embedded in management, operations and decision making processes; and the ECM must be technically sufficient to produce a reliable estimate of the capital required by the insurer or insurance group.
Capital adequacy: investment risk capital charge

GPS 114 Capital Adequacy: Investment Risk Capital Charge sets out the calculation of Investment Risk Capital Charge under the Prescribed Method of calculating the MCR. Credit risk, market or mismatch risk and liquidity risk may all cause adverse movements in the value of assets recorded by a general insurer. The investment risk capital charge is calculated by classifying each asset according to its quality and multiplying it by an investment capital factor as determined by APRA. Adjustments are made for off-balance sheet exposures and assets subject to charges or guarantees. Where a significant exposure to a single asset (e.g. property) or counterparty (e.g. single reinsurer) exists, the insurer may have to hold additional capital depending on the credit rating of the counterparty. The higher the risk of the investment, the higher the investment capital factor that needs to be applied, essentially recognising the need for a higher level of capital to support the business. Investment capital factors also exist for reinsurance recoverables. Those with poorer counterparty grades (higher counterparty risk and thus lower ratings from ratings agencies) attract a higher investment capital factor. Wholly owned subsidiaries that meet certain requirements may be consolidated in determining the investment risk capital charge.
Capital adequacy: insurance risk capital charge

GPS 115 sets out the calculation of the Insurance Risk Capital Charge under the Prescribed Method of calculating MCR. Insurance risk comprises two components: outstanding claims risk and premium liability risk. Both must be valued to allow for a margin that results in a 75 per cent probability of sufficiency. The method for valuing liabilities is detailed in GPS 310 Audit and Actuarial Reporting and Valuation. It should be noted that premium liabilities are not brought to account for financial statements purposes and that it is possible for directors to decide that a different outstanding claims liability is more appropriate for statutory reporting purposes. For capital adequacy purposes, any excess risk margin over the 75 per cent sufficiency level, net of tax, can be included as part of the capital base. The actual capital charge is calculated using different capital factors for each class of business and for direct and inwards reinsurance business. For direct insurance, long-tailed insurance classes such as CTP are subject to greater uncertainty and therefore attract a higher insurance risk capital factor than short-tailed classes such as Domestic Motor. For inwards reinsurance, non-proportional reinsurance treaties attract a higher risk capital factor than proportional treaties.
Capital adequacy: concentration risk capital charge

The concentration risk capital charge takes into account the highest aggregation risk of an insurer. GPS 116 Capital Adequacy: Concentration Risk Capital Charge sets out the calculation of the concentration risk capital charge under the Prescribed Method of calculating MCR to a General Insurer. It is calculated as the insurers Maximum Event Retention after taking into account acceptable reinsurance arrangements, plus the cost of one reinstatement of those reinsurance arrangements. This Prudential Standard sets out issues that affect an insurers Maximum Event Retention that must be taken into account in the calculation of the Maximum Event Retention and therefore the Concentration Risk Capital Charge. There are specific requirements for this calculation for lenders mortgage insurers (LMI), due to the nature of the risks which gives rise to insurance claims. Attachment A of GPS116 sets out the method of calculating MER for LMIs.
Capital adequacy: Level 2 Insurance Groups

Under GPS111 Capital Adequacy: Level 2 Insurance Groups, the MCR and capital base of the group is determined on a consolidated group basis using requirements similar to those that apply to Level 1 general insurers. The Board of the group is responsible for capital management of the group and of non-consolidated subsidiaries. The impact of intra-group transactions is assessed at the group level and may result in eligible capital instruments of entities within the group being excluded from the capital base of the group as a whole.
56 PwC
The value of non-consolidated subsidiaries is deducted from the groups capital base and thus any deficiency in an undercapitalised non-consolidated subsidiary may result in a reduction in the groups eligible capita. The following also apply to the capital requirements of the group: Level 1 insurers within the group are required to meet the MCR on an individual basis; The concentration risk capital charge is to be calculated in a manner consistent with the requirements for Level 1 insurers; The MER calculation may take into account inwards reinstatement premiums if the group has contractually binding netting arrangements in place; APRA will not prescribe where the surplus capital of the group can be held; and APRAs assessment of capital instruments will not affect any foreign subsidiaries that have issued capital instruments.
Assets in Australia
GPS 120 Assets in Australia, effective 1 July 2010, sets out requirements applying to general insurers in relation to when assets are eligible to be counted as assets in Australia. Section 28 of the Insurance Act requires that all insurers are to maintain assets in Australia of a value that equals or exceeds the total amount of the general insurers liabilities in Australia. The list of assets that cannot be included as assets in Australia includes: Goodwill; Other intangible assets; Net deferred tax assets; and Assets under charge or mortgage (to the extent of the indebtedness).
Investment policy
There are no absolute restrictions on investments that may be held by insurance companies except the trust account requirements of the Financial Services Reform (FSR) Act 2001. Under Section 1017E of the FSR Act where monies received cannot be applied to the issue of a product within one business day of receipt (i.e. unmatched cash), the monies must be held in a trust account. However, in calculating the minimum capital requirement of an insurer under GPS 110, the capital charge assigned to each asset type is given a different weighting, taking into account its nature and the credit rating of any counterparties. Significant individual exposures may require an additional capital charge. APRA also has the power under Section 49N to direct an insurer to record an asset at a specified value, subject to approval of the Federal Treasurer.
Management of risk and reinsurance

Risk management
2.5
GPS 220 Risk Management aims to ensure that a general insurer has systems for identifying, assessing, mitigating and monitoring the risks that may affect its ability to meet its obligations to policyholders. These systems together with the structures, processes, policies and roles supporting them are referred to as a general insurers risk management framework. The prudential standard requires that a general insurer: includes a documented Risk Management Strategy (RMS) in its risk management framework; has sound risk management policies and procedures and clearly defined managerial responsibilities and controls; submits its RMS to APRA when any material changes are made; has a dedicated risk management function (or role) responsible for assisting in the development and maintenance of the risk management framework; submits a three-year rolling Business Plan to APRA and re-submits after each annual review or when any material changes are made; submits a Risk Management Declaration (RMD) to APRA on an annual basis; and submits a Financial Information Declaration (FID) to APRA on an annual basis.
Risk Management Framework

The risk management framework of a general insurer should consider, at a minimum, the following risks: Balance sheet and market risk; Credit risk; Operational risk; Insurance risk; Reinsurance risk; Concentration risk; and Risks arising from the business plan.
58 PwC
The framework should also cover other elements such as the interaction between the risk management role and the board; the processes used to identify, monitor and mitigate risks; and the mechanisms for monitoring the minimum capital requirements (MCR). The general insurer is also required to have this risk management framework reviewed by operationally independent, appropriately trained and competent members of staff. The frequency and scope of this review will depend on the size, business mix, complexity of the insurers operations and the extent of any change in the business mix or risk profile. The review must cover the RMS, the risk management role and the system of internal control. To assist general insurers in developing their own risk management framework, APRA released non-binding prudential practice guides GPG200 GPG520.
Risk Management Strategy (RMS)

An insurers RMS must set out the following (among other requirements): The risk governance relationship between the Board, Board committees and senior management; The insurers risk appetite; Describe processes for identifying, assessing, mitigating, controlling, monitoring and reporting risk issues; The roles and responsibilities of the persons with managerial responsibility for the risk management framework; and An overview of mechanisms for ensuring continued compliance with the minimum capital requirements and all other prudential requirements.
Risk Management: Level 2 Insurance Groups

The prudential standard GPS 221 Risk Management: Level 2 insurance Groups, sets out the risk management requirements for Level 2 general insurance groups. The requirements of GPS 221 are based on the principles applying to Level 1 general insurers. The group is required to maintain a group-wide risk management framework, including the following: a documented, group-wide Reinsurance Management Strategy, setting out sound reinsurance management policies and procedures and clearly defined managerial responsibilities and controls; policies relating to outsourcing arrangements for material business activities, setting out appropriate procedures for due diligence, approval and on-going monitoring of such arrangements; and business continuity management appropriate to the nature and scale of the operations.
The requirements for documentation of reinsurance arrangements do not apply to foreign entities within the group, however APRA must be provided with details of the effects of any limited risk transfer arrangements entered into by foreign entities within the group. Level 1 insurers within the group do not have to comply with risk management requirements on an individual basis if the Level 2 group can satisfy these requirements in relation to each Level 1 insurer within the group. The group must submit the following to APRA on an annual basis: Risk Management Declaration; Financial Information Declaration; and Reinsurance Arrangements Statement.
Business continuity management

The prudential standard GPS 222 Business Continuity Management and associated guidance note on business continuity management (BCM) GGN 222.1 Risk Assessment and Business Continuity Management, aim to ensure that general insurers have a holistic approach to BCM. It is intended that BCM will increase resilience to business disruption arising from internal and external events and reduce the impact on the insurers business operations, reputation, profitability, policyholders and stakeholders. Key requirements of the prudential standards include: The board of directors and senior management of a general insurer must consider business continuity risks and controls as part of the companys overall risk management systems when completing Board Declaration submitted to APRA annually; A general insurer must identify critical business functions, resources and infrastructure which, if disrupted, would have a material impact on the companys business operations, reputation or profitability; A general insurer must assess the impact of plausible disruption scenarios on critical business functions, resources and infrastructure and have in place appropriate recovery strategies to ensure all necessary resources are readily available to withstand the impact of the disruption; A general insurer must develop, implement and maintain through review and testing procedures, a Business Continuity Plan (BCP) that documents procedures and information which enable the company to respond to disruptions and recover critical business functions; The BCP must be reviewed at least annually by responsible senior management and periodically through insurers internal audit function or an external expert; and An insurer must notify APRA as soon as possible and no later than 24 hours after experiencing a major disruption that has the potential to materially impact policy holders.
60 PwC
Reinsurance Management
GPS 230 Reinsurance Management aims to ensure that a general insurer, as part of its overall risk management framework, has a specific reinsurance management framework to manage the selection, implementation, monitoring, review, control and documentation of reinsurance arrangements. There must be a clear link between the insurers risk management framework and the insurers Reinsurance Management Strategy (REMS), clearly defining management responsibilities and controls, policies and procedures to manage the reinsurance arrangements of the general insurer, including the risk appetite of the general insurer. This REMS should be approved by the Board. The general insurer is also required to have the reinsurance management framework reviewed by operationally independent, appropriately trained and competent members of staff. The frequency and scope of this review will depend on the size, business mix, complexity of the insurers operations and the extent of any change in the reinsurance program or risk appetite. As with the risk management strategy, the REMS is subject to an annual review by the Appointed Auditor, providing limited assurance to APRA that the insurer has complied with the REMS at all times during the reporting period. In summary, GPS 230 requires that a general insurer: has in its reinsurance management framework a documented REMS, sound reinsurance management policies and procedures and clearly defined managerial responsibilities and controls; submits its REMS to APRA when any material changes are made; submits a Reinsurance Arrangements Statement (RAS) detailing its reinsurance arrangements to APRA at least annually; and makes an annual reinsurance declaration (RD) based on the two-month rule and six-month rule specified in the standard and submits the declaration to APRA.
Outsourcing
GPS 231 Outsourcing aims to ensure that all outsourcing arrangements involving material business activities entered into by a general insurer are subject to appropriate due diligence, approval and on-going monitoring. The key requirements of the standard are: A general insurer must have a policy relating to outsourcing of material business activities; A general insurer must have sufficient monitoring processes in place to manage the outsourcing of material business activities; A general insurer must have a legally binding agreement in place for all material outsourcing arrangements with third parties, unless otherwise agreed by APRA; A general insurer must consult with APRA prior to entering agreements to outsource material business activities to service providers who conduct their activities outside Australia; and A general insurer must notify APRA after entering into agreements to outsource material business activities.
Transfer and amalgamation of insurance business for general insurers

GPS 410 Transfer and Amalgamation of Insurance Business for General Insurers aims to ensure that affected policyholders, and other interested members of the public, are informed and given accurate information about the transfer or amalgamation of an insurers insurance business. The key requirements of GPS 410 are as follows: Prior to making an application to the Court for a transfer or amalgamation of its insurance business, an insurer must: provide a copy of the scheme and any relevant actuarial reports to APRA; publish a notice of intention to make the application in the Government Gazette and relevant newspapers; and send a summary of the scheme (approved by APRA) to every affected policyholder and make a copy available for public inspection. After gaining Court approval, the insurer must give APRA a statement of the nature and terms of the transfer or amalgamation, and the Court order confirming the scheme.
62 PwC
Governance and assurance
2.6
Audit and Actuarial Reporting and Valuation

GPS 310 outlines the roles and responsibilities of a general insurers Appointed Auditor and Appointed Actuary. It also outlines the obligations of a general insurer to make arrangements to enable its Appointed Auditor and Appointed Actuary to fulfill their responsibilities. In addition, the Prudential Standard establishes a set of principles and practices for the consistent measurement and reporting of insurance liabilities for all general insurers. The key requirements of GPS 310 Audit and Actuarial Reporting and Valuation are: an insurer must make arrangements to enable its Appointed Auditor and Appointed Actuary to undertake their roles and responsibilities; an insurer is exempt from the requirement to have an Appointed Actuary in certain circumstances; the Appointed Auditor must audit, and provide an opinion to the board on, the yearly APRA statutory accounts of the general insurer; the Appointed Auditor must review other aspects of the general insurers operations on an annual basis and prepare a report on these matters to the board; the Appointed Auditor may also be required to undertake other functions, such as a special purpose review (see APRA targeted reviews below); the Appointed Actuary must prepare a Financial Condition Report (FCR) and an Insurance Liability Valuation Report (ILVR) and provide these reports to the board; the Appointed Actuary must apply GPS 310 when valuing the general insurance liabilities for the purposes of GPS 110 Capital Adequacy for General Insurers and for the purpose of reporting requirements under the Financial Sector (Collection of Data) Act; a general insurer must arrange to have the ILVR of its Appointed Actuary peer-reviewed by another actuary; and a general insurer must submit all certificates and reports required to be prepared by its Appointed Auditor and Appointed Actuary to APRA.
Audit and Actuarial Reporting and Valuation: Level 2 Insurance groups

The prudential standard GPS 311 Audit and Actuarial Reporting and Valuation: Level 2 Insurance groups requires a Level 2 insurance group to: appoint a Group Auditor and Group Actuary; make arrangements to enable its Group Auditor and Group Actuary to undertake their roles and responsibilities; ensure that on an annual basis its Group Auditor conducts a limited assurance review of the annual accounts of the group and reviews other aspects of the groups operations; ensure that its Group Actuary prepares an Insurance Liability Valuation Report annually which is addressed to the Board of the parent entity of the group; ensure that its Group Auditor and Group Actuary undertake other functions such as special purpose reviews where required; for the purposes of the capital standards and reporting requirements under the Financial Sector (Collection of Data) Act 2001, ensure that the groups insurance liabilities are valued in accordance with this Prudential Standard; and submit to APRA all reports required under this Prudential Standard prepared by its Group Auditor and Group Actuary.
APRA targeted reviews

Both the Insurance Act and the prudential standards stipulate that the Appointed Auditor (or Appointed Actuary) may be required to undertake other functions specified by APRA in consultation with the general insurer. APRA periodically carries out targeted reviews of general insurers. These reviews highlight a particular area that APRA is interested in and require the general insurer to engage the Appointed Auditor to prepare a report in respect of that selected area of operation. Apart from highlighting areas where further improvement could be sought, these reviews provide APRA with an industry snapshot that helps to identify and promote best practices.
64 PwC
Governance
GPS 510 Governance sets out what APRA consider being the minimum requirements which must be met to achieve good governance. A sound governance framework is important in helping maintain public confidence in regulated entities. The actual governance arrangement in place will vary from entity to entity depending on the size complexity and risk profile of each entity. The key requirements stipulated in GPS 510 are: specific requirements with respect to Board size and composition; the chairperson of the Board must be an independent director; a Board Audit Committee must be established; regulated institutions must have a dedicated internal audit function; certain provisions dealing with independence requirements for auditors consistent with those in the Corporations Act 2001; the Board must have a Remuneration Policy that aligns remuneration and risk management; a Board Remuneration Committee must be established; and the Board must have a policy on Board renewal and procedures for assessing Board performance. All insurers, except Category C insurers, have to comply with this prudential standard in its entirety. Category C insurers only have to comply with those provisions of this Prudential Standard specific to Category C insurers.
Fit and proper

GPS 520 Fit and Proper applies to all general insurers and authorised non-operating holding companies and sets out minimum requirements for those institutions in determining the fitness and propriety of individuals to hold positions of responsibility. The key requirements of this standard are that: an institution must have and implement a written fit and proper policy that meets the requirements of the standard; the fitness and propriety of a responsible person must generally be assessed prior to their initial appointment and then re-assessed annually (or as close to annually as practicable); an institution must take all prudent steps to ensure that a person is not appointed to, or does not continue to hold, a responsible person position for which they are not fit and proper; and information must be provided to APRA regarding responsible persons and the institutions assessment of their fitness and propriety. The standard stipulates who are regarded as responsible people at different types of institutions and sets out additional restrictions on the Appointed Actuary and Appointed Auditor roles. However, it leaves the determination of what is an appropriate fit and proper policy in the hands of the general insurer.
Financial reporting
Accounting standards
2.7
Australian general insurers are required to prepare financial statements that comply with Australian Accounting Standards (AASB). Specific AASBs relevant to general insurance include: AASB 4 Insurance Contracts defines what constitutes an insurance contract. AASB 1023 General Insurance Contracts defines a general insurance contract (i.e. an insurance contract that is not a life insurance contract as defined in the Life Act), and a non-insurance contract (a contract regulated by the Insurance Act that does not meet the AASB 4 Insurance Contracts definition of insurance). AASB 1023 prescribes accounting treatment for: General insurance contracts (including reinsurance contracts) that a general insurer issues and to reinsurance contracts that it holds; Certain assets backing general insurance liabilities; Financial liabilities and financial assets that arise under non-insurance contracts; and Certain assets backing financial liabilities that arise under non-insurance contracts. The treatment of the remaining balances, transactions and operations of a general insurer are prescribed by the AASB applicable to these transactions or balances. The International Accounting Standards Board (IASB) released exposure draft ED/2010/8 (ED) on accounting for insurance contracts in July 2010. The draft covers life, health and general insurance as well as reinsurance. Once finalised and adopted by the AASB, it will replace AASB 1023. Refer to Chapter 1 for further information.
Definition of an insurance contract

An insurance contract is defined as a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.
Definition of insurance risk

Insurance risk is risk other than financial risk transferred from the holder of a contract to the issuer. Financial risk is defined as the risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract.
66 PwC
Insurance risk is significant if, and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance. A contract that transfers financial risk alone, or only insignificant amounts of insurance risk, is accounted for under AASB 139, to the extent that it gives rise to a financial asset or financial liability.
Definition of premium revenue and earning pattern

Premium revenue comprises premiums from direct business and premiums from reinsurance. Premium revenue is intended to cover actual and anticipated claims, reinsurance premiums, administrative, acquisition and other costs, and a profit component. Premium revenue includes fire service levies collected from policyholders as there is no direct nexus between fire brigade charges and the levy that insurers charge policyholders. The fire brigade expense is brought to account in accordance with the earning of the premium to which it relates. In contrast, stamp duty and Goods and Services Tax (GST) in relation to premium revenue effectively represent the collection of tax on behalf of the government and are therefore not included as revenue of the insurer. Premium revenue is recognised from the risk attachment date in accordance with the pattern of the incidence of risk. AASB 1023 provides additional guidance on how the pattern of the incidence of risk is determined. Premiums received in advance are recognised as part of the unearned premium liability. Unclosed business is estimated and the premium relating to unclosed business is included in premium revenue. Premium revenue is only recognised as income when it has been earned, which is in proportion to the incidence of the risk covered over the life of the insurance contract. Measuring premium revenue involves: estimating the total amount of premium revenue; estimating when claims are expected to occur, and hence estimating the pattern of risk exposure, which provides the earning pattern; and recognising the premium when it is earned. For most contracts the period of the contract is one year and the exposure pattern of the incidence of the risk will be linear. For some reinsurance contracts written on a risk attaching basis, a 12 month contract may result in up to 24 months of exposure. The insurer must also recognise a liability item on the balance sheet for the unearned premium, where this exists.
Measurement of outstanding claims

AASB 1023 requires that the liability for outstanding claims shall be measured as the central estimate of the present value of expected future payments for claims incurred with an additional risk margin to allow for the inherent uncertainty in the central estimate. Expected future payments include amounts related to: Unpaid reported claims; Claims incurred but not reported (IBNR); Adjustments in light of the most recently available information for claims development and claims incurred but not enough reported (IBNER); and Claims handling costs. The liability for outstanding claims reflects the amount that, if set aside at balance date, would be sufficient to enable an insurer to pay claims as they fall due. The standard requires that outstanding claims should be discounted to net present value unless the claims are to be settled within a year and the discounting would not have a material impact. While it does require outstanding claims in all classes of business to be discounted, it recognises that such discounting will have significant application to long tail classes of business (mainly liability, compulsory third party and workers compensation) where a high proportion of such claims are settled outside a 12 month period. Discount rates selected are required to be risk-free rates that are based on current observable, objective rates that relate to the nature, structure and term of the outstanding claims liabilities typically government bond rates. Expected future payments must account for future claim cost escalation created by inflation and superimposed inflation. Superimposed inflation is defined as the level of inflation in excess of normal economic inflation indices. The disclosure of superimposed inflation assumptions differs between companies. Some companies make explicit disclosures while others include superimposed inflation within composite inflation assumptions.
Explicit risk margins

An additional explicit risk margin is required to be included as part of the outstanding claims liability. The margins are set with regard to the robustness of the valuation models, available data, past experience and the characteristics of the classes of business written. The risk margin should also allow for uncertainty in reinsurance and other recoveries due. Similar to the APRA requirements, risk margins can allow for diversification. The risk margin for the entire company can then be allocated to individual classes of business.
Assets backing general insurance liabilities

The fair value approach is used to measure assets backing general insurance liabilities or financial liabilities that arise under non-insurance contracts as required by AASB 1023. Where assets are not backing general insurance liabilities or financial liabilities that arise under non-insurance contracts, the applicable accounting standards should be applied by general insurers.
68 PwC
Under AASB 139 Financial Instruments: Recognition and Measurement, financial investments may only be designated as at fair value through profit and loss when doing so results in more relevant information. General Insurers apply fair value through profit or loss because the financial instruments typically form part of a group of financial assets that are managed on a fair value basis in accordance with a documented risk management or investment strategy and information about the group is provided internally on that basis to the entitys key management personnel.
Deferral of acquisition costs and liability adequacy testing for unearned premium
Acquisition costs, including commission and brokerage paid, incurred in obtaining and recording insurance policies shall be deferred and recognised as an asset if it is probable that they will give rise to premium revenue that will be recognised in the income statement in subsequent reporting periods. AASB 1023 also requires the application of a liability adequacy test (LAT) to the unearned premium liability. If the present value of the expected future cash flows relating to future claims arising from the current contracts plus an additional risk margin exceeds the unearned premium liability less related intangible assets and related deferred acquisition costs (DAC), then the entire deficiency shall be recognised, first by writing down any intangible assets, then the associated DAC, and then by recognizing a separate unexpired risk liability. In applying the LAT, general insurers are permitted to use a probability of adequacy that is different to that to be used for outstanding claims, provided that the reasons for using a different rate are disclosed. The LAT shall be performed at the level of a portfolio of contracts that are subject to broadly similar risks and are managed together as a single portfolio.
Accounting for inwards reinsurance

Inwards reinsurance business should be accounted for in line with the general principles established for direct business. AASB 1023 requires companies underwriting inwards reinsurance to estimate and bring to account unclosed premiums and to recognise such premiums as earned, having regard to the spread of risk of underlying policies ceded under inwards reinsurance treaties. On the claims side, the standard requires inwards reinsurance business to be accounted for in a similar manner to direct business. Outstanding claims should have regard to IBNRs and future claims development, and also be discounted to their net present value. The standard allows reinsurers some latitude. It requires compliance only when the information received is reasonably reliable.
Non-insurance contracts
Contracts that are regulated under the Insurance Act that fail to meet the definition of insurance risk are referred to as non-insurance contracts. These contracts are accounted for under AASB 139 to the extent that they give rise to financial assets and financial liabilities. The financial assets and the financial liabilities that arise under these contracts are designated as at fair value through profit or loss where this is permitted.
Financial Statement disclosure principles and requirements

AASB 1023 incorporates extensive disclosure requirements in respect of the accounting policies, balances, sensitivities to key assumptions, risk exposures and risk management associated with the insurers insurance contracts. GPS 110 Capital Adequacy for General Insurers also requires additional disclosure to be made in the financial statements in respect of the capital base, minimum capital requirements (MCR) of the insurer and its capital adequacy.
Regulatory Reporting
In addition to the compliance declarations and statements described above, the general insurer must also provide APRA with: a set of annual statutory accounts prepared in accordance with APRA General Insurance Reporting Standards and forms (GRSs and GRFs); a financial information declaration (FID); the Appointed Auditors opinion on the annual statutory accounts; the Appointed Actuarys Insurance Liability Valuation Report (ILVR); the Appointed Actuarys financial condition report (FCR); and quarterly statistical and financial returns. The general insurer must also arrange for an independent peer review of the Appointed Actuarys ILVR.
External peer review

Under GPS 310, the general insurer must arrange for an independent external peer review of the Appointed Actuarys ILVR. This peer review must provide an assessment of the reasonableness of the Appointed Actuarys investigations and reports including the results contained within. Copies of the report must be provided to the Appointed Actuary, the Appointed Auditor, the board and the management of the insurer before the yearly lodgment of statutory accounts. The review report is not required to be provided to APRA, but must be made available to APRA upon request. IAA Professional Standard 100 External Peer Review for General Insurance and Life Insurance details the responsibilities of the reviewing actuary and the reviewing requirements.
70 PwC
Key dates
Corporations Act 2001
Audited annual financial statements Within four months of the year-end.
Financial Sector (Collection of Data) Act 2001

Annual APRA statutory accounts Within four months of the year-end. Quarterly forms (GRF 110.0 310.3) Within 20 business days of the end of each quarter. Directors certification in respect of the Risk Management Strategy (RMS) or Reinsurance Management Strategy (REMS), FID, Appointed Actuarys ILVR and FCR, Appointed Auditors certificate on the annual statutory accounts and APRA prudential compliance review report Within four months of the year-end. Business plan Annually (when appointed by the Board) and when material changes are made. Changes in reinsurance and risk management strategies Within 10 days of board approval. The revised REMS must be submitted to APRA. Changes to details in original application for licence, including appointment of senior staff, appointed actuary and Appointed Auditor Must be approved by APRA prior to the change taking effect. National Claims and Policies Database data (GRF 800.1 800.3 and LOLRF 800.1 800.3) Within two months from the end of the half year.
National Claims and Policies Database

The National Claims and Policies Database requires insurers to submit claims and policies at three different levels of aggregation and analysis. Classes covered by this database include public and product liability and professional indemnity. This database, managed by APRA, supplements databases on CTP and workers compensation in several states and aims to provide transparency in the industry. The data may also help to reduce the volatility through the insurance cycle, as insurers will have access to more information to assess the risks more precisely.
General insurance taxation

General developments
2.8
As in the previous income year, the Government has continued with numerous initiatives for significant tax reform across a wide range of topics from corporate tax rates to controlled foreign company rules. Some other key tax developments during the year relevant to general insurance activities are summarised below. In the past year, the Australian Taxation Office has continued to be very active in the general insurance sector, undertaking both risk reviews and full audits. Areas of focus include: Extent of claims reserve prudential margins, including documentation supporting the setting of these; Adjustments for prudential margins built into internal claims handling reserves; Adjustments for liability adequacy testing; Reinsurance with non-residents; Security arrangements relating to reinsurance (such as loans) Transfer pricing; Restructures; Increases in debt levels; and Acquisitions and divestments. A rewrite of the existing general insurance provisions within Schedule 2J of the Income Tax Assessment Act 1936 has been enacted, by repealing the existing provisions and reproducing its effect in Division 321 of the Income Tax Assessment Act 1997. Treasury has confirmed that the policy intentions of the previous provisions will remain the same in the new legislation. The Taxation of Financial Arrangements (TOFA) measures which provide a comprehensive regime for the tax treatment of gains and losses arising from financial arrangements now apply to eligible taxpayers for the income year beginning on or after 1 July 2010. Taxpayers have a choice as to how TOFA will apply to their financial arrangements. Additionally, the ATO continues to work through the extensive list of issues raised in connection with the practical application of the legislation to various arrangements, such as swaps and hedges, as well as grapple with some base level issues relevant to the application of the tax-timing methods.
72 PwC
From 1 July 2010 GST rulings are included in the general rulings regime. This has resulted in rulings obtained by industry associations and the Insurance Industry Partnership issues register, (both which are extensively relied upon by insurers), no longer having the status of a ruling in many cases. As a result, insurers no longer have tax certainty for those issues on the former issues register that have not been confirmed by the ATO unless they have obtained a private ruling.
Taxation of general insurers

In Australia, general insurance companies are assessed under Division 321 of the Income Tax Assessment Act (ITAA) 1936. Tax is payable on the profits of a general insurer at the corporate tax rate, currently 30 per cent.
Premium income
Division 321 of the ITAA legislates the manner in which premium income is earned by an insurer for taxation purposes. An insurance premium has a number of components. The gross premium, including components referable to fire services levies, stamp duty and other statutory charges must be included as assessable income. Insurers must recognise premium income from the date of attachment of risk. As a result, unclosed business will be brought to account in calculating tax liability. Subject to the following comments on unearned premium reserve, all premiums received or receivable in that year are included in assessable income.
Unearned premium reserve

Where part of the premium relates to risk in a future year, an unearned premium reserve (UPR) is established. When the UPR is greater at year-end than it was at the beginning, a deduction is allowed for the increase. Where it decreases over the year, the decrease is included in assessable income. The legislation prescribes the way UPR is to be calculated. In particular, expenses relating to the issuing of policies, as well as reinsurance, reduce the amount of the UPR.
Liability adequacy testing

Under the accounting standards, an insurer is required to assess at each reporting date whether its UPR is adequate, by considering current estimates of future cash flows under its insurance contracts. If the assessment shows that the carrying amount of its UPR is inadequate, the entire deficiency must be recognised in profit or loss by first writing off related intangibles and deferred acquisition costs and then recognising an unexpired risk liability. This process is known as Liability Adequacy Testing or LAT. For tax purposes, the LAT adjustment is not deductible and generates a temporary difference.
Apportionable issue costs (acquisition costs)

Costs incurred in obtaining and recording premiums are allowable deductions in the year of income in which they are incurred. These costs include commissions and brokerage fees, processing costs, risk assessment fees, fire brigade charges, stamp duty and other government charges and levies (excluding GST). The benefit of an immediate deduction for apportionable issue costs incurred during a year of income is effectively restricted, as these costs are taken into account in the determination of the unearned premium reserve. This is achieved by determining the UPR based on premiums net of apportionable issue costs.
Prepayments
The prepayment legislation would normally apply to apportionable issue costs and reinsurance expense. However, as the methodology for calculating the unearned premium reserve includes a reduction component for these expenses, the legislation excludes these expenses from the prepayment rules. Treaty non-proportional reinsurance, which is not taken into account in determining the UPR, remains subject to the prepayment rules.
Outstanding claims
A deduction is allowed for any increase in the outstanding claims reserve during the year, while decreases in the outstanding claims reserve are assessable. In addition, claims paid during the year are deductible. This effectively mandates a balance sheet approach for determining the claims expense for the year, and with the exception of indirect claims settlement costs, should align with the current accounting treatment of claims. This means that a deduction is allowed for the estimated cost of settling reported claims and claims incurred but not reported (IBNR) during the year of income. The deduction is based on the costs of claims incurred and paid during the year of income, an estimate of costs to be paid in respect of claims incurred during the year and a revision of previously estimated costs of claims incurred in prior years. These estimates must be soundly based but may take prudential margins into account. The following factors may be taken into account in determining the quantum of the allowable deduction for outstanding claims and IBNR provisions: direct policy costs; claims investigation and assessment costs; direct claims settlement expenses; estimated increased costs of litigation and other factors, such as superimposed inflation; and recoverables, including reinsurances, excesses and salvage and subrogation.
74 PwC
These factors allow for the effects of inflation. However, only the present value (i.e. the value after discounting) of costs associated with long-term claims is an allowable deduction. A deduction is not allowed for estimated indirect claims settlement costs (e.g. future claims department costs), until those expenses are paid.
Profits or losses on realisation of investments

The purchase and sale of investments are regarded as part of the income-producing activities of a general insurer. As a consequence, profits or losses on the sale of investments are generally considered to be of a revenue nature. Profits will be assessable as ordinary income, while losses will be allowable deductions. However, a profit or loss arising on the sale of a capital asset that is not part of the insurance business may be treated as a capital gain or loss. It is generally accepted that a building used as a head office or permanent place of business by an insurer is a capital asset. Unrealised profits and losses on investments are not currently brought to account as assessable income or allowable deductions for tax purposes. However, this may change where a general insurer makes certain elections under the TOFA regime.
Reinsurance
Generally, a premium paid for reinsurance will be an allowable deduction in the year in which the premium is incurred. Because such premiums (other than treaty non-proportional reinsurance premiums) reduce gross premiums in calculating the unearned premium reserve, the benefit of the deduction allowed in any year is effectively limited to the proportion of risk covered by the premium that has expired during the year. Reinsurance recoveries are assessable income and future recoveries must be taken into account in determining outstanding claims reserves (unless the reinsurance is with a nonresident and a section 148(2) election has not been made).
Reinsurance with non-residents

Where a general insurer reinsures the whole or part of any risk with a non-resident, a deduction will not be allowed in the first instance in respect of those premiums. These reinsurance premiums will not reduce gross premiums in calculating the unearned premium reserve and reinsurance recoveries will not be assessable. However, an insurer may elect that this principle does not apply in determining its taxable income (section 148(2) election), in which case the insurer becomes liable to furnish returns and to pay tax at the relevant rate (30 per cent) on 10 per cent of the gross premiums paid or credited to these non-resident reinsurers during the year. Where the election has been made, these reinsurance premiums should be included in the calculation of UPR, and recoveries under those reinsurance policies included in the calculation of the outstanding claims reserve.
Financial reinsurance
The ATO considers (in TR96/2) that financial insurance and financial reinsurance arrangements should be treated as the provision and repayment of loans. In determining whether an arrangement constitutes financial insurance or reinsurance, reference is made to two criteria: The degree of insurance risk assumed; and The possibility of the insurer/reinsurer incurring a significant loss under the arrangement. An insurer needs to prove both of these to support a claim for a deduction of a reinsurance premium.
Goods and Services Tax

Under the Australian GST legislation, some classes of insurance are treated differently, leading to different implications for insurers and insured parties. The provision of general insurance is, in most cases, a taxable supply. Insurers are required to account for GST of one-eleventh of the premium income collected (excluding stamp duty). In most cases, they are also entitled to claim input tax credits for the GST included in the price of expenses they incur that relate to making supplies of general insurance (with certain exclusions which apply to all businesses). It should be noted that the GST classification of general insurance will be different if a supply is made in relation to a risk located outside of Australia, in which case the supply of these policies may be GST-free (known as zero rated supplies in other jurisdictions). The GST legislation contains complex provisions in respect of general insurance businesses. The effect of the main provisions is summarised below. GST, where applicable, is chargeable on the stamp duty-exclusive amount of the premium. As GST forms part of the price of a supply, it constitutes one-eleventh of the price paid for the premium (based on the prevailing GST rate of 10 per cent). Stamp duty will be calculated on the GST-inclusive amount of the premium. At or before the time a claim on the policy is made, the insured must notify the insurer as to the extent of the input tax credit they are entitled to claim on the policy. Failure to do so could adversely affect the GST position for both the insurer and the insured. An insurer will not have to account for GST on supplies made in the course of settling a claim if it has received notification from the insured entity of its entitlement to claim input tax credits on the premium paid for the insurance. Furthermore, it can generally claim input tax credits when acquiring goods and services that are to be supplied in settlement of a claim, provided the policy was not initially a GST-free supply. Where the insured was not entitled to claim an input tax credit in respect of the premium, the insurer is entitled to make a decreasing adjustment mechanism (DAM) in respect of any settlement amount (in the form of cash and/or goods or services) paid out under that policy. Where the insured was entitled to claim a full input tax credit for GST included in the premium, there is no entitlement to a DAM for the insurer when they make a settlement under the policy.
76 PwC
If the insured is entitled to partial input tax credits on the premium, the insurer is entitled to a partial DAM. The receipt of an excess payment can trigger a GST liability as an increasing adjustment for the insurer. The actual liability is based on a specific formula contained in the GST law. Special rules also exist for a range of common insurance scenarios such as, excesses, insurance settlements and subrogated recoveries. In most cases, the rules and the practical impact on business systems and processes can be complicated. Further, there are special GST rules dealing with the various state and territory-based compulsory third party (CTP) insurance schemes. These laws are complicated and generally require careful consideration.
Stamp duty
Stamp duty is generally chargeable on the amount of the premium paid in relation to an insurance policy (including any fire service levy where applicable). The amount of GST or reimbursement for GST is also generally included in the amount on which duty is calculated. The rates of general insurance duty vary in each state and territory and in some states, by class of insurance. The liability for duty on general insurance policies usually falls on the general insurer.
Other levies and taxes

Fire services levy
Fire services levies are imposed on various classes of general insurance in New South Wales, Victoria and Tasmania to fund the cost of providing fire and emergency services (in August 2010 the Victorian government announced the abolishment of the levy with an effective date of 1 July 2012). The levies vary in each state with different rates applying to various classes of insurance.
Insurance protection tax (NSW)

The Insurance Protection Tax Act (NSW) 2001 imposes a tax on the total annual amount of general insurance premiums received by insurers in New South Wales. The tax was introduced to establish a fund to assist builders warranty and compulsory third-party policyholders affected by the collapse of HIH Insurance Limited. The tax is apportioned among general insurers according to their share of the total premium pool for the year.
General Insurance Levy

This annual levy is based on a percentage of the value of assets of a general insurance company at a specified date. The unrestricted and restricted levy percentage, the specified date, and the minimum and maximum restricted levy amount for each financial year are determined by the Federal Treasurer (2010/2011: unrestricted levy of 0.007776 per cent of assets; restricted levy of 0.02023 per cent of assets; minimum restricted levy: $4,700; maximum restricted levy: $835,000).
Life Insurance
78 PwC
3
Introduction Tony Cook 3.1 Statistics 3.2 Key developments in 2010/11 3.3 Regulation and supervision 3.4 Solvency and capital adequacy 3.5 Management of risk and reinsurance 3.6 Governance and assurance 3.7 Accounting Standards 3.8 Life insurance taxation 80 82 84 86 92 94 97 100 108
Introduction Tony Cook

This year, the life insurance industry has seen strong growth in new business sales, particularly with group and direct business, volatile mortality and morbidity experience and more emphasis on risk management than ever before.
The group market is competitive and concentrated with just a few significant insurance players and continued super fund consolidation, resulting in fewer, larger, groups. As super schemes are increasingly offering their members additional life and TPD protection, the size of the insurance prize is increasing significantly, resulting in intense competition for these groups and a further squeeze on margins. Successful companies in the group market are offering slick and integrated back office processes, tailored tools, and comprehensive services to their clients. Given these developments, players in the group market should consider whether their risk management practices for this business are keeping pace with the growing pricing, operational and strategic risks. The direct insurance business is experiencing high growth rates, attractive profits, an increasing number of players and products, and increased competition. This business is in general quite young with lapse rates still developing and the associated risks such as operational, reputational and strategic, consequently growing. Technological innovation is a key differentiator in the direct market with increasing use of e-underwriting, smart phone apps, and tele-underwriting. Life insurers are still clearly focused on the value of excellent claims management and active retention management to bottom line results and the value of inforce. Claims management is using increasingly scientific tools and strategies to improve claims outcomes and customer experience. Retention management is getting more air time as the long term impact of retention on results is better understood, with a number of life insurers dedicating funding and resources to tackle this complex issue. The retail market continues to experience strong growth in sales. Companies are looking at their distribution channels in light of potential changes on the back of FOFA as well as addressing the changes in customer purchasing habits and attitudes. For example, the use of mobile technology such as social networking sites and mobile apps to attract and connect with new customers in the retail market is an emerging trend with interesting potential. Australia had funds under management (FUM) of $1.8 trillion at the end of 2010, up $500 billion from $1.3 trillion in 2005. During this same period FUM with life insurers decreased marginally from $238 billion to $233 billion, and market share decreased from 18% to 13%. The long running trend for life insurers to be increasingly focused on risk business continues.
80 PwC
Statistics Top 15 life insurers
3.1
Ranking Measure: Net Insurance Prem Rev Entity 1 2 3 4 5 6 7 8 9 MLC (NAB) AMP Life The Colonial Mutual Life Assurance Society (CBA) The National Mutual Life Association of Australasia (AXA) OnePath Life (formerly ING Life) (ANZ) TOWER Australia AIA Australia Suncorp life companies Swiss Re Life & Health Australia Current Year end $m 09/10 12/10 06/10 12/10 09/10 09/10 11/10 06/10 12/10 12/10 09/10 12/10 12/10 12/10 12/10 1,230 1,003 979 884 652 597 590 483 467 461 340 310 284 228 166 Current Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Prior $m 812 969 955 847 875 529 514 460 423 420 316 264 289 207 142 Prior Rank 5 1 2 4 3 6 7 8 9 10 11 13 12 14 % Change 51% 4% 3% 4% -25% 13% 15% 5% 10% 10% 8% 17% -2% 10% 17%
Performance: Investment Revenue Current $m 2,261 3,157 1,514 779 419 107 70 640 53 36 348 36 36 51 12 Prior $m 908 6,835 (1,009) 1,333 3,681 80 69 454 42 20 292 33 29 24 7 Result after tax Current $m 355 576 388 147 116 112 42 190 22 35 170 16 48 28 13 Prior $m 184 521 202 164 231 81 43 56 87 47 134 4 59 33 7
RGA Reinsurance 10 Company of Australia 11 Westpac life companies Munich Reinsurance 12 Company of Australasia 13 MetLife Insurance 14 Hannover Life Re of Australasia 15 General Reinsurance Life Australia
Source: Published annual financial statements or APRA annual returns for Australian life insurance operations. Where applicable, comparatives have been updated to be in line with updated comparatives in current year financial reports.
82 PwC
Performance: Net Policy Liabilities Current $m 53,964 66,342 13,161 12,587 28,682 1,826 640 5,424 843 345 10,244 296 137 642 191 Prior $m 46,899 65,619 14,256 12,995 28,827 1,960 563 5,382 704 302 10,332 263 116 595 176 Solvency Ratio Current 1.8 1.7 2.2 2.0 1.6 2.6 1.5 2.4 2.5 1.9 3.6 5.0 3.8 3.2 10.5 Prior 1.6 1.8 2.1 1.9 2.3 2.5 1.7 2.7 3.0 2.4 2.7 1.8 5.4 2.8 15.4
Financial Position: Financial Assets Held at FV Current $m 55,491 66,215 14,523 12,855 26,968 2,481 886 6,357 1,048 697 11,012 699 422 831 283 Prior $m 47,952 65,865 15,340 12,863 26,666 2,285 815 4,359 1,038 611 10,944 596 380 766 249 Net assets Current $m 2,839 2,944 1,406 1,318 1,874 709 305 1,364 297 332 850 198 354 252 91 Prior $m 2,016 2,743 1,394 1,345 1,965 572 273 328 302 302 789 161 338 225 81 Total assets Current $m 57,187 71,450 15,097 14,890 31,499 3,221 1,359 7,337 1,246 1,197 11,390 1,042 676 1,035 345 Prior $m 48,875 70,868 16,106 15,647 31,481 3,067 1,174 4,652 1,133 1087 11,452 942 644 978 316
Notes:
1. The MLC group of companies comprises MLC Limited, MLC Lifetime Limited and Norwich Union Life Australia Limited. Norwich Union was acquired by the National Australia Bank on 1 October 2009. Comparative figures for MLC do not include Norwich Union. 2. AXA was acquired by AMP on 8 March 2011. As the acquisition was subsequent to the latest reported year ends, the results of AMP and AXA are presented separately. 3. During the year, ING Life changed its name to OnePath Life. Following its acquisition by the ANZ Bank, OnePath Life has reported a 9 month period to 30 September 2010 to align with the year end of its parent. The 9 month results are reported for the current period in the table above versus the 12 months results reported as its comparative.

Topic
Future of Financial Advice (FOFA)
3.2
Summary of development/nature of impact

FOFA reform proposals are expected to be issued shortly with pending legislation being introduced in the Spring 2011 sitting of Parliament. While risk commissions on group insurance are likely to be banned, commissions on retail life insurance products will likely not be. A review similar to FOFA was conducted in the UK (Retail Distribution Review (RDR)) resulting in a new framework for the retail investment market with effect from the end of 2012. The RDR will result in commissions on investment products and pension being banned. The review decided against banning commissions on pure risk sales on the grounds that such commissions dont represent a conflict of interest. FOFA reforms could result in independent financial advisors (IFAs) gravitating to insurers with automated and/or telephone underwriting in place as the increased efficiency in using these channels should reduce the IFAs operating costs.
APRA capital changes (LAGIC) APRA focus on risk appetite
A discussion of APRAs proposed changes and the current status of LAGIC and ICAAP is included in chapter 1. While risk appetite has been an issue of interest for APRA for some time, a recent speech by Ian Laughlin set out APRAs views and expectations of insurance companies, and in particular its expectations of the Boards of those companies. In this regard. APRA expects companies to comply with its risk appetite requirements with effect from 2012. APRA expects Boards of insurers to be more actively involved in the development and monitoring of risk appetite and how this is being embedded within the business from an operational perspective. This is likely to raise some debate on where Board and management responsibilities start and end. Effective implementation and monitoring of risk appetite is not merely a tick the box compliance exercise, but should involve effective communication of risk appetite, related tolerances and the living out of the strategy in business behaviours, processes, systems and controls.
84 PwC
Topic Insurance contracts exposure draft Prudential framework enhancements
Summary of development/nature of impact

A discussion of the impact of the insurance contracts exposure draft is included in section Chapter 1. Four revised life prudential standards came into effect from 1 July 2010: LPS 310 Audit and Related Matters LPS 320 Actuarial and Related Matters LPS 510 Governance LPS 520 Fit and Proper The old LPS 310 was restructured into LPS 310 and LPS 320. The changes were implemented to more effectively align the requirements for life insurers with those of general insurers and ADIs. The scope of LPS 510 and LPS 520 was extended to include registered NOHCs of life insurance companies. The changes were aimed at providing better protection to life insurance policyholders by ensuring adequate governance procedures and that persons in positions of responsibility are fit and proper.
Regulation and supervision
3.3
Australian Prudential Regulation Authority

APRA is the single Commonwealth authority responsible for licensing and prudential regulation for all deposit-taking institutions, life and general insurance companies, superannuation funds and friendly societies. APRA is also empowered to appoint an administrator to provide investor or consumer protection in the event of financial difficulties experienced by life or general insurance companies. APRAs powers to regulate and collect data from the life insurance industry stem principally from the following acts: Life Insurance Act 1995 (the Life Act); Financial Sector (Collection of Data) Act 2001; Financial Sector (Shareholdings) Act 1998; Insurance (Acquisitions and Takeovers) Act 1991; and Financial Sector (Transfers of Business) Act 1999 As supervisor of life insurance companies, APRA administers the Life Act. The objective of the Life Act is to protect policy owners and promote financial systems by encouraging a viable and competitive Australian life insurance industry with financially sound participants and fair trading practices. APRA supervises life insurance companies authorised under the Life Act with a view to maximising the likelihood that these companies will be able to meet their obligations to policyholders. Prudential requirements for life insurance companies are set out in prudential standards and in prudential rules. An entity can not issue life insurance products without being authorised by APRA and only incorporated entities can be authorised under the Life Act. The Life Act does not apply to Eligible Foreign Life Insurance Companies (EFLIC), as defined under the Life Act, in relation to life insurance business carried on outside Australia. The prime responsibility for oversight of the Australian operations of an EFLIC rests with its local management and Compliance Committee. While a foreign life companys home regulators will play a role in supervising the EFLIC, to protect the interests of Australian policyholders, an EFLIC is required to maintain statutory funds in relation to its life insurance business in Australia and have its local operations subject to APRAs prudential supervision.
86 PwC
The requirements on the composition, operation and duties and responsibilities of an EFLIC are set out in Attachment B of Prudential Standard LPS 510 Governance. There are no special restrictions on the number, size or mix of operations of foreign-owned subsidiaries or EFLICs operating in the Australian market. Although APRA is responsible for the prudential regulation of insurers, it is not responsible for product disclosure standards, customer complaints or licensing of financial service providers (including authorised representatives and insurance brokers) as these responsibilities fall to the Australian Securities and Investments Commission (ASIC) under its Australian Financial Services Licence (AFSL) regime. Most insurers require an AFSL, and as such, a dual licensing system exists with overlapping requirements under both ASIC and APRA. Since its establishment in 1998, APRA has been working to harmonise the regulatory framework of regulated institutions. The aim is to apply similar principles across all prudential regulation and to ensure that similar financial risks are treated in a consistent manner whenever possible.
Regulatory framework
Similar to the general insurance regulatory framework, there is a three-tier regulatory system for life insurers: Tier 1 The Life Act contains the high-level principles necessary for prudential regulation; Tier 2 Prudential standards detail compliance requirements for companies authorised under the Life Act; and Tier 3 Prudential Practice Guides accompany most prudential standards, providing details of how APRA expects them to be interpreted in practice.
Probability and Impact Rating System

Since October 2002, APRA has been applying risk assessment and supervisory response tools known as the Probability and Impact Rating System (PAIRS) and the Supervisory Oversight and Response System (SOARS). These supervisory tools are the centrepiece of APRAs risk-based approach to supervision and assist APRA in: making better risk judgments; quickly and consistently taking supervisory action where necessary; strengthening the ability of supervisors to take effective action; and improving oversight and reporting on problem entities. APRA uses the Probability and Impact Rating System (PAIRS) risk assessment process to: determine APRAs assessment of the Probability that a regulated entity will fail; and measure the impact of the potential consequences of that failure.
Australian Securities and Investments Commission (ASIC)

ASIC is the single Commonwealth regulator responsible for market integrity and consumer protection functions across the financial system. It is responsible for: Corporate regulation, securities and futures markets; Market integrity and consumer protection in connection with life and general insurance and superannuation products, including the licensing of financial service providers; and Consumer protection functions for the finance sector.
Australian Financial Services Licence (AFSL)

The Corporations Act requires all sellers of insurance products to retail clients, including registered insurers and brokers, to obtain an AFSL. To obtain a licence, the applicant must meet the obligations under Section 912A and demonstrate that they will provide financial services efficiently, honestly and fairly. Insurers that are regulated by APRA are exempted from the financial obligations of an AFSL as their financial position is separately monitored by APRA through quarterly statistical reporting.
Ownership restrictions
The Financial Sector (Shareholdings) Act limits shareholdings to 15 per cent of an insurer, unless otherwise approved by the Federal Treasurer. The Insurance (Acquisitions and Takeovers) Act complements this legislation by requiring government approval for offers to buy more than 15 per cent of an insurer.
Supervision and compliance

APRAs supervisory objectives are met in two main ways: maintaining a regulatory framework within which insurance companies must operate requiring the submission of financial and other returns, insurer declarations and independent reports, so that APRA can monitor the financial position of the insurer and its ability to meet policyholder claims as they fall due. In addition to companies reporting and other obligations, the Life Act grants powers to APRA to monitor and investigate life insurance companies, including the power to appoint a judicial manager. A judicial manager acts in a similar manner to the administrator of a financially troubled company and, in accordance with Section 175 of the Life Act, is appointed by a judge to whom he or she must report the recommended course of action for the insurer. The financial and other returns are described later in this chapter. The main features of the prudential standards which set out the mandatory elements of the regulatory framework are outlined below.
88 PwC
Table 2.1 Life insurance prudential standards
Prudential standard
PS 3 Prudential Capital Requirement
Explanation
See section 3.4
LPS 1.04 Valuation of Policy Liabilities LPS 2.04 Solvency Standard LPS 3.04 Capital Adequacy Standard LPS 4.02 Minimum Surrender Values and Paid-up Values LPS 5.02 Cost of Investment Performance Guarantees LPS 6.03 Management Capital Standard LPS 7.02 General Standard LPS 220 Risk Management LPS 230 Reinsurance LPS 231 Outsourcing LPS 232 Business Continuity Management LPS 310 Audit and Related Matters LPS 320 Actuarial and Related Matters LPS 350 Contract Classification for the Purpose of Regulatory Reporting LPS 510 Governance LPS 520 Fit and Proper LPS 600 Statutory Funds LPS 700 Friendly Society Benefit Funds LPS 900 Consolidation of Prudential Rules No. 15, 18, 22, 27 and 28 LPS 902 Approved Benefit Fund Requirements
Discussed below See section 3.4 See section 3.4 Discussed below Discussed below See section 3.4 Discussed below See section 3.5 See section 3.5 See section 3.5 See section 3.5 See section 3.6 See section 3.6 Discussed below See section 3.6 See section 3.6 Discussed below Discussed below Discussed below Discussed below
Valuation of policy liabilities (LPS 1.04)

This standard prescribes a set of principles and associated actuarial methodology for the valuation of policy liabilities for life insurance contracts. The valuation of policy liabilities for life investment contracts is presented to generally comply with the requirements of the relevant accounting standards.
Minimum surrender values and paid-up values (LPS 4.02)

This standard prescribes a set of principles and an actuarial methodology for the calculation of minimum surrender values and paid-up values for the purpose of the solvency standard, and for payment on actual surrender at the policy owners request. The objective of this prudential standard is to protect the interests of surrendering policy owners when terminating life insurance policies and to protect the interests of remaining policy owners.
Cost of investment performance guarantees (LPS 5.02)

This standard prescribes the principles and methodology for calculating the cost of investment performance guarantees where they are provided in association with investment-linked contracts. As prescribed in the Life Act, the cost of investment performance guarantees must not exceed 5% of the policy liabilities of the fund in which the business is written.
General standard (LPS 7.02)

The General Standard covers: Introduction of the prudential standards 1.04 to 6.03; Application of the standards to friendly societies; Instruction on how to use the prudential standards; History of the development of the prudential standards; Dictionary for the terminology used in the prudential standards 1.04 to 6.03; and Counterparty grade for investment assets, for the purposes of the solvency and capital adequacy standards.
Contract classification for the purpose of regulatory reporting (LPS 350)

This standard stipulates the basis on which contracts written by life companies are to be classified for the purpose of regulatory reporting to APRA and for the valuation of contracts in accordance with the prudential standards relating to actuarial matters. The purposes of LPS 350 are: to distinguish between those contracts that meet the definition of a life insurance contract under Australian Accounting Standard AASB 1038 Life Insurance Contracts and those that do not; to identify key components of contracts written by life companies (insurance component, financial instrument, service component, discretionary participation feature and embedded derivatives); and to stipulate the circumstances in which such components must be unbundled for regulatory reporting purposes and for the valuation of contracts in accordance with Prudential Standard LPS 1.04 Valuation of Policy Liabilities.
Statutory Funds and Friendly Society Benefit Funds (LPS 600 and LPS 700)
These standards aim to ensure that the operations of statutory and benefit funds are restructured to be fair and equitable for policy owners and members. The requirements outlined in LPS 600 include the operations of statutory funds and the restructure of statutory funds. LPS 700 broadly covers the rules and operation of benefit funds and the restructure and termination of benefit funds.
90 PwC
Consolidation of Prudential Rules No. 15, 18, 22, 27 and 28 (LPS 900)
LPS 900 consolidates the following Prudential Rules: Prudential Rules No. 15 Consequences of Transfer of Policy Between Statutory Funds (s 55(2)&(3)); Prudential Rules No. 18 Single Bank Account for Statutory Funds (s 34(4)); Prudential Rules No. 22 Non-Participating Benefit (s 15(3)); Prudential Rules No. 27 Starting Amount (s 61(1)); and Prudential Rules No. 28 Distribution of Shareholders Retained Profits (Australian Participating) (s 62(5)).
Approved benefit fund requirements (LPS 902)

This standard is designed to ensure that the establishment, structure, and operation of an approved benefit fund by a friendly society are fair and equitable for its members.
3.4
We note that APRA are currently reviewing the capital standards for life and general insurers with a view to issuing revised draft prudential standards in late 2011. Further discussion on the proposed standards can be found in Chapter 1.
Overview of current prudential standards

APRA prudential standards establish a two-tier capital requirement for the statutory funds of life companies: Tier 1 (Solvency Requirement) requires a minimum capital requirement to ensure that under a range of adverse circumstances, the company would be able to meet obligations to policyholders and other creditors in the context of a fund closed to new business which is either operating in a run-off situation or is to be transferred to another insurer; and Tier 2 (Capital Adequacy Requirement) is intended to secure the financial strength of the company to ensure that the obligations to, and reasonable expectations of, policyholders and creditors are able to be met under a range of adverse circumstances in the context of a viable ongoing operation. The key elements of the prudential standards that prescribe these capital requirements are outlined below.
Solvency (LPS 2.04)

The Solvency standard broadly comprises the following components: Solvency liability A calculation of the value of the guaranteed policy liabilities applying assumptions that are generally more conservative than best estimate assumptions; Other liabilities The value of the liabilities of the statutory fund to other creditors but excluding subordinated debt arrangements; Expense reserve To provide for the loss of contribution from non-commission acquisition charges, which occurs upon closing a statutory fund to new business; Resilience reserve To allow for adverse movements in investment markets and obligor defaults to the extent they will not be matched by corresponding movements in the liabilities; and Inadmissible assets reserve To cover risks associated with holdings in associated financial entities and concentrated asset exposures.
92 PwC
Capital adequacy (LPS 3.04)

The Capital Adequacy standard broadly comprises: Capital adequacy liability A calculation of the value of liabilities on the basis of assumptions that are generally more conservative than the solvency liability assumptions; Other liabilities The value of the liabilities of the statutory fund to other creditors but excluding subordinated debt arrangements; Resilience reserve Similar to the solvency requirements, except movements are more adverse; Inadmissible assets reserve As per the solvency requirements, except it does not apply to otherwise sound assets that depend on the continuation of the business; and New business reserve To provide for a fund to continue meeting its solvency requirement assuming the planned level of new business over the next three years.
Management capital (LPS 6.03)

The Management Capital standard prescribes the minimum capital requirement to be held outside the statutory funds to ensure that under adverse circumstances the company would be able to meet its trading commitments and adequately service its policyholders.
Prudential capital requirement (PS 3)

The Prudential Capital Requirement standard complements LPS 6.03. The standard indicates that the minimum capital value is $10 million for life insurers (nil for friendly societies). This capital must be maintained as excess assets and at least 50 per cent must be in the form of eligible assets. A life insurance company will need to independently comply with the requirements of the Prudential Standard PS 3 and the Prudential Standard LPS 6.03; however the two requirements are not additive.
Management of risk and reinsurance

Risk Management
3.5
This standard aims to ensure that a life company maintains a risk management framework and strategy that is appropriate to the nature and scale of its operations. A life companys systems, processes, structures, policies and people involved in identifying, assessing, mitigating and monitoring risks are referred to as a life companys risk management framework. The key requirements of LPS 220 include: maintaining a risk management framework that identifies, assesses, monitors, reports on and mitigates all material risks faced by the company; having a written 3 year business plan approved by the board; Maintaining a risk management strategy which outlines the companys risk appetite and its strategy for managing risk; having its risk management framework subject to review by persons independent to the operation of the company; and supplying APRA with an annual declaration on risk management approved by the board.
Risk management framework

The risk management framework must include: a Risk Management Strategy (RMS); risk management policies, controls and procedures which identify, assess, monitor report on and mitigate all material financial and non-financial risks; a written business plan (which must be reviewed annually); clearly defined managerial responsibilities and controls for the framework; and a review process to ensure the framework remains effective. APRA has also released a prudential practice guide LPG 200 Risk Management, to assist life companies in complying with those requirements under LPS 220, and more generally, to outline prudent practices in relation to risk management frameworks. Additionally, prudential practice guide LPG 240 Life Insurance Risk and Life Reinsurance Management provides guidance with the requirements of LPS 220 in relation to insurance risk and reinsurance management.
94 PwC
Outsourcing
This prudential standard, along with Prudential Practice Guide PPG 231 Outsourcing, aims to ensure that all outsourcing arrangements involving material business activities entered into by a life company are subject to appropriate due diligence, approval and on-going monitoring. The key requirements of LPS 231 include: having a policy relating to outsourcing of material business activity; internal audit must review any proposed outsourcing of a material business activity and regularly review and report to the Board or Board Audit Committee on compliance with the life companys outsourcing policy; having sufficient monitoring processes in place to manage the outsourcing of material business activities; having a legally binding agreement in place for all material business activities with third parties, unless otherwise agreed by APRA; consulting with APRA prior to entering into agreements to outsource material business activities to service providers who conduct their activities outside Australia; and notifying APRA after entering into agreements to outsource material business activities.
Business continuity management

This prudential standard aims to ensure that each life company implements a whole of business approach to business continuity management, appropriate to the nature and scale of its operation. The key requirements of LPS 232 include: developing and maintaining a business continuity management policy; conducting a business impact analysis; maintaining a business continuity plan and testing it at least annually; and notifying APRA of any major disruptions to business operation.
Reinsurance
This standard aims to ensure that reinsurance arrangements of a life company are subject to minimum standards of independent oversight. It addresses the regular reporting of reinsurance arrangements to APRA, and APRAs oversight of financial reinsurance contracts. The key requirements of LPS 230 are: a life company must give APRA a report on its reinsurance arrangements for a financial year within 3 months after the end of each financial year; and a life company must not enter into reinsurance arrangements of a certain type unless approval has been granted by APRA. These are primarily contracts that contain elements of financial reinsurance. Such contracts and details surrounding the application for approval are outlined in attachment B of LPS 230. The reinsurance report must set out the particulars of each reinsurance contract or group of reinsurance contracts in force between the company and a reinsurer during the financial year. The report must also set out the opinion of the companys appointed actuary on the adequacy, effectiveness and regulatory accounting of the companys reinsurance arrangements.
96 PwC

Audit and actuarial requirements
3.6
These standards were made effective on 1 July 2010. The two standards clarify APRAs audit and actuarial requirements and have aligned them more closely with those for ADIs and general insurers. The key requirements of LPS 310 include: a life company must make arrangements to enable its Auditor to undertake his or her role and responsibilities; the Auditor must audit certain returns of the life company to APRA and provide a report to the Board of the life company; the Auditor must review other aspects of the life companys operations on an annual basis and provide a report to the Board of the life company; the Auditor may also be required to undertake other functions, such as a special purpose review; and a life company must submit to APRA all reports required to be prepared by its Auditor under the standard. The key requirements of LPS 320 include: a life company must make arrangements to enable its Appointed Actuary to undertake his or her role and responsibilities; the Appointed Actuary must provide an assessment of the overall financial condition of the life company and advise on the valuation of its policy liabilities on an annual basis. In particular, the Appointed Actuary must prepare a Financial Condition Report and provide this report to the company; a life company must submit the Financial Condition Report to APRA; the Appointed Actuary may also be required to provide advice to the life company on certain life policies; and the Appointed Actuary may be required to conduct a special purpose review and provide a report to APRA and the life company. Both LPS 310 and LPS 320 aim to ensure that the Board and the senior management of a life company are provided with impartial advice in relation to the life companys operations, financial condition and internal controls.
Governance
APRA has undertaken a further review of the prudential framework around risk appetite, which is expected to impact the level of Board involvement in this area at life insurance companies. Further discussion is provided in the Key Developments section of this chapter and Chapter 1. In this standard APRA sets out the minimum foundations for good governance of regulated institutions (comprising life companies and registered NOHCs). It aims to ensure that regulated institutions are managed in a sound and prudent manner by a competent Board of directors, which is capable of making reasonable and impartial business judgements in the best interests of the regulated institution and which gives due consideration to the impact of its decisions on policyholders. The key requirements of this standard include: specific requirements with respect to Board size and composition; requiring the chairperson of the Board to be an independent director; requiring that a Board Audit Committee be established; requiring regulated institutions to have a dedicated internal audit function; certain provisions dealing with independence requirements for auditors consistent with those in the Corporations Act 2001; requiring the Board to have a Remuneration policy that aligns remuneration and risk management; requiring that a Board Remuneration Committee must be established; and requiring the Board to have a policy on Board renewal and procedures for assessing Board performance. In November 2009, APRA released its prudential requirements on remuneration for life insurance companies, specifically relating to the alignment of remuneration with risk management. The requirements were incorporated into the existing prudential standard LPS 510 and came into effect on 1 April 2010. APRAs prudential requirements on remuneration for life insurance companies were incorporated into the existing prudential standard LPS 510 and came into effect on 1 April 2010. APRAs key requirements on remuneration include: a regulated institution (including eligible foreign life insurance companies (EFLIC)) must establish and maintain a written Remuneration Policy; the Remuneration Policy must outline the remuneration objectives and the structure of the remuneration arrangements, including but not limited to the performance-based remuneration components;
98 PwC
the Remuneration Policy must be approved by the Board, or for an EFLIC, by the Compliance Committee with delegated authority from the Board; the Remuneration Policy must form part of a regulated institutions risk management framework required under Prudential Standard LPS 220 Risk Management; the Remuneration Policy must be provided to APRA on request; a regulated institution (other than an EFLIC) must, unless otherwise approved in writing by APRA, have a Board Remuneration Committee that complies with the requirements of LPS 510; the Board Remuneration Committee must conduct regular reviews of, and make recommendations to the Board on, the Remuneration Policy; make annual recommendations to the Board on the remuneration of the CEO, direct reports of the CEO, other persons whose activities affect the financial soundness of the regulated institution, other person specified by APRA and any other categories of persons covered by the Remuneration Policy; and the members of the Board Remuneration Committee must be available to meet with APRA on request.
Fit and proper

This standard sets out minimum requirements for the regulated institutions (comprising life companies and registered NOHCs) in determining the fitness and propriety of individuals to hold positions of responsibility. The key requirements of this standard are that: a regulated institution must have and implement a written fit and proper policy that meets the requirements of the standard; the fitness and propriety of a responsible person must generally be assessed prior to initial appointment and then re-assessment annually (or as close to annually as practicable); a regulated institution must take all prudent steps to ensure that a person is not appointed to, or does not continue to hold, a responsible person position for which they are not fit and proper; additional requirements must be met for the Appointed Auditor and the Appointed Actuary; and information must be provided to APRA regarding responsible persons and the regulated institutions assessment of their fitness and propriety.
Accounting Standards
3.7
AASB 1038 Life Insurance Contracts prescribes the accounting treatment for life insurance contracts. It also mandates the use of certain options available in other accounting standards. AASB 1038 applies to life insurance companies and friendly societies that issue life insurance contracts (life insurers). There have been no significant changes relating to AASB 1038 during the year, however there are a number of developments within the General Reporting Framework which will affect insurance companies. Life insurers should discuss these general developments with their accounting advisers and auditors where required. The IASB is aiming to release a revised insurance contract accounting standard during 2011 which will impact life insurers in future periods. Refer to Chapter 1 for further details. The following table outlines the key current accounting standards specifically impacting life insurers: Accounting Standard
AASB 4 Insurance Contracts (Last updated October 2010) AASB 1038 Life Insurance Contracts (Last updated October 2010)
Application
Prescribes the accounting methods to be used for reporting on: Life insurance contracts; Certain aspects of life investment contracts; Assets backing life insurance liabilities or life investment contract liabilities; and Disclosures about life insurance contracts and certain aspects of life investment contracts.
AASB 7 Financial Instruments: Disclosures (Last updated June 2010) AASB 132 Financial Instruments: Presentation (Last updated October 2010) AASB 139 Financial Instruments: Recognition and Measurement (Last updated October 2010)
Applies to the financial instrument component of life investment contracts Prescribes the accounting methods to be used in recognising, measuring, presenting and disclosing financial assets and financial liabilities.
100 PwC
Definitions and Key Principles

Life Insurance contract
An insurance contract is defined as a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. Under AASB 1038, a life insurance contract is an insurance contract, or a financial instrument with a discretionary participation feature, regulated under the Life Insurance Act 1995 (Life Act), and similar contracts issued by entities operating outside Australia. AASB 1038 addresses key accounting issues by requiring: Profits to be recognised appropriately over the life of an insurance contract in line with the services provided; Calculation of best estimate policy liabilities; and Application of fair value principles. Key principles of accounting for life insurance contracts: Principle
Basis for valuing policy liabilities
Requirement
Policy liabilities are calculated as the present value of the best estimate of expected future net cash flows, plus future profit margins Investments are valued at fair value through profit or loss where permitted Controlled entities are valued in accordance with AASB 127 Consolidated and Separate Financial Statements, at cost or fair value All acquisition costs are deferred and amortised over the period of expected benefit. DACs are to be deducted from policy liabilities
Basis for valuing investments backing life insurance contract liabilities Basis for valuing controlled entities
Deferral of acquisition costs (DACs)
Life investment contract

A life investment contract is a contract which is regulated under the Life Act but which does not meet the above definition of a life insurance contract. Key principles of accounting for life investment contracts: Principle
Basis for valuing policy liabilities
Requirement
Valued at fair value in accordance with AASB 139. In practice, this will likely be on an accumulation basis, but may be adjusted to take account of demand deposit features Investments are valued at fair value through profit or loss where permitted Only those costs which are incremental and directly attributable to securing the life investment contract can be deferred. DACs are recognised as a separate asset and are tested for impairment at each balance date
Basis for valuing investments backing life investment contract liabilities Deferral of acquisition costs (DACs)
AASB 1038 Applications

The key applications of AASB 1038 to life insurance financial reporting are summarised in the following paragraphs.
Profit recognition Life insurance contracts

Planned profit margins and life insurance contract liabilities (referred to as policy liabilities) are calculated separately for each related product group using best estimate assumptions at each reporting date. Profit margins are released over the financial year during which services are provided and revenues relating to those services are received. The balance of the planned profits is deferred by including the amount in the value of policy liabilities. AASB 1038 requires the use of the prospective method (projection basis) to value policy liabilities (including planned profit margins and other components) at each reporting date unless, using the retrospective method (accumulation basis), the results are not materially different. To ensure planned margins are recognised during the financial year in which the relevant services are provided, policy liabilities include a component relating to those margins.
102 PwC
This methodology, which is commonly known as the margin-on-services method, results in reported shareholders profits comprising: the release of planned profit margins on policies in force at the beginning of the year; the release of planned profit margins on new business written during the year; the impact of differences between assumed and actual experience during the year including mortality, disability, expenses, lapses, inflation, taxation, reinsurance and investment returns; loss recognition (or reversal of past recognised losses) as appropriate; and investment earnings on shareholders capital and retained profits. Changes in the assumptions underlying the policy liabilities are spread over future years during which the services to policyholders are rendered, except those for related products groups on which future losses are expected. A record of cumulative losses is kept for each related product group and profit margins are maintained at zero until cumulative losses are fully reversed. The effect of a change to assumed discount rates caused by changes in investment market conditions or where calculation errors occur results in a revenue or expense being recognised in the current financial year. The income statement includes all premium and policy-related revenue, investment revenues, fair value gains and losses, all claims (including surrenders), and all expenses and taxes, whether they relate to policyholders or shareholders. The change in the value of policy liabilities (including the change of unvested policyholder benefits and discretionary additions/bonuses vested in policyholders during the financial year) is shown as an expense before arriving at the shareholder profit. Profits or losses may emerge on acquisition depending on whether establishment fees are more or less than the related expenses. Losses may also emerge if expected future income is not considered adequate to cover acquisition expenses.
Valuation of life insurance policy liabilities

Under AASB 1038 the best estimate liability is calculated as the present value of expected future benefit payments, plus expenses, less future receipts. The following factors are generally considered to be material to the calculations: Discount and inflation rates Profit carriers; Inflation; Taxation; Expenses; Mortality and morbidity; and Policy discontinuance.
The best estimate liability will normally be determined using projection methods, and the value of future profits calculated as the present value of future profit margins. A profit margin is determined using a profit carrier, which is a financially measurable indicator of either the expected cost of the services provided to the policyholder or the expected income relating to the services. Profit carriers are selected and profit margins determined at policy commencement to enable an appropriate emergence of profit over the term of the benefits or services provided. The selection of a profit carrier is critical in determining the timing of profits released. More than one profit carrier may be selected for a product, although the practical implications of selecting multiple carriers should be considered relative to the materiality of the results. Typical profit carriers are identified below: Product
Yearly renewable term Level premium term Group life Disability income Immediate annuities Traditional non-participating Traditional participating
Typical profit carrier

Premiums or claims Claims Premiums or claims Claims Annuity payments Death claims Value of bonuses
Revenue recognition Life investment contracts

Revenue from investment contracts arises either from explicit fees charged to investment contract holders or from the earning of the management services element (MSE) inherent in the valuation of the investment contract liability. Explicit fees are measured as the fair value of the consideration received or receivable and are earned in the income statement as the services are provided to the contract holder. This would normally be on a straight line basis over the life of the investment contract but other earning patterns may be more appropriate if they better reflect the provision of services. An MSE arises when the sum of consideration received or receivable exceeds the fair value of the investment contract liability upon initial recognition. This deferred revenue is recognised as a liability on the balance sheet and earned as the management services are provided, as per the explicit fees above. Incremental costs that are directly attributable to the acquisition of an investment contract are deferred and recognised as an asset if they can be identified separately, measured reliably, and if it is probable that they will be recovered. An incremental cost is one that would not have been incurred if the life insurer had not acquired the life investment contract. The asset represents the insurers contractual right to benefit from providing ongoing services, and is amortised as the insurer recognises the related revenue.
104 PwC
Valuation of investment contract liabilities

Investment contract liabilities are valued at fair value in accordance with AASB 139. As there is generally no active market for investment contract liabilities, these should be valued using an appropriate valuation technique which would normally involve a discounted future cash flow analysis. For investment contracts with a demand feature, or surrender value, AASB 139 stipulates that the fair value of the liability cannot be less than the current surrender value.
Accounting for investments

AASB 1038 requires life insurers to measure all assets backing life insurance and life investment contracts at fair value through profit or loss as at the reporting date where this option is available. Changes in the fair value must be recognised in the income statement as either income or expense in the financial year in which the changes occur. Where there are choices available in other standards for the measurement of assets, AASB 1038 requires the following to be applied to those assets determined as backing life insurance and life investment contracts. Type of asset
Financial assets
Measurement basis
Fair value through profit or loss in accordance with AASB 139 Fair value using the fair value model under AASB 140 Investment Property Revaluation model under AASB 116 Property, Plant and Equipment, being fair value less any subsequent accumulated depreciation and subsequent accumulated impairment losses (revaluation movements through equity)
Investment property
Property, plant and equipment (including owner-occupied property)
Statutory Funds
AASB 1038 requires life insurers to recognise in its financial report all of the assets, liabilities, and expenses of each statutory fund. It recognises that the interests of policyholders and shareholders are intertwined and form the basis of a single entity. Where a parent entity controls a life insurance subsidiary, the parent in turn controls the assets and liabilities of the statutory funds and the policyholders interests. Benefit funds of friendly societies are treated in the same way as life insurance company statutory funds.
Acquired life insurance contracts

When purchasing a life insurance company or a portfolio of life insurance contracts, a life insurer must value the insurance assets and insurance liabilities assumed at fair value. They are permitted, but not required, to split the fair value into two components: i. a liability measured in accordance with the insurers accounting policies for life insurance contracts; and
ii. an intangible asset, representing the difference between the fair value of the insurance contracts acquired and the liability recognised in (i). The intangible asset is exempt from the recognition and measurement requirements of both AASB 138 Intangible Assets and AASB 136 Impairment of Assets. It is not exempt from the disclosure requirements. The subsequent measurement has to be consistent with the measurement of the related liability, i.e. it will be amortised over the life of the liabilities, consistent with the profit recognition on those contracts.
Disclosure requirements
AASB 1038 incorporates extensive disclosure requirements in respect of the accounting policies, balances, sensitivities to key assumptions, risk exposures and risk management associated with the insurers insurance contracts.
Annual and quarterly reporting

In general, a public company must file its annual shareholder accounts (financial statements) with ASIC within four months of year-end (within three months for disclosing entities or registered schemes). Small proprietary companies are normally exempted. The financial statements prepared under the Corporations Act 2001 must be independently audited by an Australian registered auditor. Life insurance companies and friendly societies are required to submit quarterly returns (LRF 100 LRF 340.2) and annual returns (LRF 100 LRF 430) to APRA under the Financial Sector (Collection of Data) Act 2001. The returns should be submitted using the online Direct to APRA (D2A) software, or on paper where this is not possible. The quarterly returns are due 20 business days after the end of the reporting period. The annual returns are due four months after year-end. The reporting requirements for the returns are broadly consistent with the requirements for financial statements under the accounting standards issued by AASB. Areas of potential difference are outlined in LPS 350 Contract Classification for the Purpose of Regulatory Reporting to APRA, and relate to discretionary participation features and participating benefits, and the unbundling of contracts into insurance, investment and service components. In addition, a life insurer which holds an AFSL is required to submit the forms FS 70 (completed by the insurer) and FS 71 (completed by the appointed auditor) annually to ASIC.
106 PwC
Other reports due to APRA

i. Annual Reporting by Appointed Auditor The annual returns must be submitted in conjunction with the annual auditors report, as required under Prudential Standard LPS 310 Audit and Related Matters. The Appointed Auditor provides an audit opinion (reasonable assurance) over annual returns LRF 100 to LRF 340.2. In addition, the Appointed Auditor provides a separate review report (limited assurance) over prudential compliance and systems, processes and controls relating to APRA financial reporting during the year. ii. Financial Condition Report LPS 310 requires life companies and friendly societies to give to APRA a copy of a financial condition report prepared by the appointed actuary within 3 months of the end of the reporting period. iii. Reinsurance Report LPS 230 Reinsurance requires each life company to give APRA a reinsurance report within 3 months of the end of the reporting period. iv. Risk Management Declaration LPS 220 Risk Management requires the Board to provide APRA with a Risk Management Declaration relating to each financial year of the life company. The Risk Management Declaration must be signed by two directors and submitted to APRA on, or before, the due date of the annual returns.
Life insurance taxation

General developments
3.8
As in the previous income year, the Government has continued with numerous initiatives for significant tax reform across a wide range of topics from corporate tax rates to controlled foreign company rules. Some key tax developments during the year relevant to life insurance are summarised below. The new consolidation measures proposed in February 2010 have been enacted by Tax Laws Amendment (2010 Measures No 1) Bill 2010 (TLAM No 1 2010). Many amendments apply retrospectively, some as early as 1 July 2002, and may change previous tax positions of consolidated groups, presenting both an opportunity and a risk. All consolidated and multiple entry consolidated (MEC) groups should be examining whether there is scope to benefit from the key opportunities emanating from the new measures, which include a deduction for the tax cost setting amount (TCSA) of certain rights to future income. Many life insurers have found they may be eligible to claim substantial benefits under these rules, and these benefits generally relate to acquisitions. However, the Government announced in 30 March 2011 that the rules are to be reviewed, with the possibility of them being narrowed in application. Under the current rules, any amended assessments for old years need to be processed by the ATO by 30 June 2012. Superannuation rollover rules (facilitating restructures of life company superannuation business), are set to expire on 30 June 2011. The industry continues to lobby to have the expiration date deferred. The Taxation of Financial Arrangements (TOFA) measures which provide a comprehensive regime for the tax treatment of gains and losses arising from financial arrangements now apply to eligible taxpayers for the income year beginning on or after 1 July 2010. Taxpayers have a choice as to how TOFA will apply to their financial arrangements. Additionally, the ATO continues to work through the extensive list of issues raised in connection with the practical application of the legislation to various arrangements, such as swaps and hedges, as well as grapple with some base level issues relevant to the application of the tax-timing methods. The Foreign Account Tax Compliance Act (FATCA) has been enacted and will apply to payments made after 1 January 2013. FATCA is designed to stop US tax avoidance known as round tripping, where US persons invest offshore and then into onshore US investments, reducing US tax. FATCA will apply to Foreign Financial Institutions (FFIs) and Non Financial Foreign Entities (NFFEs). Both are very broad terms and
108 PwC
include providers of vanilla investment products, e.g. trustees of certain but not all superannuation funds and unit trusts, and these products will fall within the meaning of a foreign account. These US rules impact Australian life insurers investing in the US. The International Dealings Schedule Financial Services (IDS-FS) is the ATOs proposed tax return schedule for large financial services taxpayers to replace the Schedule 25A and Thin Capitalisation Schedule and provide additional information in relation to financial arrangements. Amongst other things, the schedule requires disclosure of certain international dealings with unrelated parties. All general and life insurers are required to lodge the IDS-FS 2011 in replacement of the previous Schedule 25A and Thin Capitalisation schedule.
Taxation of life insurers

The rules governing how life companies are taxed are contained in Division 320 of the Income Tax Assessment Act 1997 (ITAA97). Broadly, these rules seek to tax most underwriting profits and fee income at the normal corporate rate, whereas investment income is taxed at varying rates, zero percent for income from assets backing pension portfolio amounts, 15% for assets backing superannuation amounts in accumulation phase and 30% for other investment income.
Classes of income
The income of a life insurance company is effectively divided into three classes: the Ordinary Class, the Complying Superannuation Class or First Home Saver Account (FHSA) Class (both being taxable) and a Segregated Exempt Assets (SEA) Class. The complying superannuation/FHSA class, formerly known as the Virtual Pooled Superannuation Trust (VPST) class, is established for the companys complying superannuation policies. Life insurance companies must establish a segregated asset pool for their immediate annuity policy liabilities, which is the SEA Class. All other classes of policies and any shareholder capital will form part of the Ordinary Class. The classification of income and gains among the various classes of income (assessable and exempt) is not determined by reference to statutory funds and the mix of policy liabilities (in the case of mixed statutory funds). Rather, the life insurance company must segregate its assets by allocating these as supporting certain (tax) classes of policies it has issued. Life insurance companies pay tax on income derived in the Ordinary Class at the rate of 30 per cent and are ordinarily taxed at a rate of 15 per cent on income derived from complying superannuation/FHSA assets. Any income derived from the SEA Class is exempt from tax. A life insurance company remains a single entity for taxation purposes. However, the effect of the rules outlined above is that for taxation purposes, the company is effectively divided into three pools, with each segment representing a particular class of business. A life insurance company can also form part of a tax consolidated group, in which case the head company will be deemed to be a life insurance company.
Assessable income
The assessable income of a life insurer includes fee income and underwriting profits of a life insurer as well as its investment income and realised gains on the disposal of assets. Assessable income also specifically includes life insurance premiums paid to the company, reinsurance amounts received, refunds of reinsurance paid under a contract of reinsurance and amounts received under a profit-sharing arrangement under a contract of reinsurance. In an Interpretative Decision, the ATO states that premium income should be recognised on an accruals basis. Amounts representing a decrease in the value of the net risk components of risk policy liabilities and taxable contributions transferred from complying super funds or approved deposit funds (ADFs) are also included in assessable income. Specified rollover amounts, fees and charges imposed in respect of life insurance policies but not otherwise included in assessable income and taxable contributions made to retirement savings accounts provided by that company also form part of the life companys assessable income. Furthermore, most transfers of assets from one class to another will have a tax consequence. It is therefore necessary to carefully review and record each transfer to ensure its appropriate tax treatment.
Disposal of investments
Whether a profit or gain realised on the disposal or transfer of an investment is liable to tax (and the rate of tax) depends on the class of income to which it relates. Gains and losses realised on certain complying superannuation/FHSA assets are determined by reference to the general capital gains tax provisions (which is consistent with the treatment of disposals of investments by superannuation funds). The legislation also provides that a deemed disposal will arise where there is a transfer between the asset pools of an asset other than money. For tax purposes, an assessable gain may arise for the transferor asset pool. A different rule, being a deferral mechanism, applies where an asset transfer results in a loss for tax purposes. Similar to the tax treatment for general insurers, investments in the Ordinary Class are usually held on revenue rather than on capital account. Accordingly, profits on the disposal of such investments would be included in assessable income as ordinary income. However, this treatment may be modified under the TOFA rules. Profits and losses on the disposal of investments held in the SEA Class are not taxable or deductible. Each year, a life company is required to carry out a valuation of its complying superannuation/ FHSA liabilities and SEA liabilities. Where the valuation of the corresponding asset pool exceeds the respective value of these liabilities (plus a reasonable provision for tax), the company must transfer the excess out of that asset pool. Where the valuation indicates a shortfall, the company may transfer assets into the pool. Such transfers will have the taxation consequences outlined above.
110 PwC
Management fee income

Where a life insurance company imposes fees and charges on policies included in the asset pools representing the complying superannuation/FHSA and SEA classes, it is required to transfer an amount equal to those fees and charges out of these pools. This will give rise to an assessable amount in the Ordinary Class, as well as a deduction in the complying superannuation/FHSA Class, but no deduction in the SEA Class. This requirement ensures that any fees and charges imposed by the life insurance company are taxed at the prevailing corporate tax rate.
Investment income
A life insurer is required to separately calculate the investment income from each of its asset pools. This means adequate accounting records must be maintained to separately identify each of these pools, which will differ from the normal statutory fund basis of asset allocation.
Allowable deductions
The current tax provisions are based on the principle that a deduction is allowed for expenses of a revenue nature to the extent they are incurred in gaining or producing assessable income. A life insurance company is allowed certain specific deductions. These include certain components of life insurance premiums (see below), the risk component of claims paid under life insurance policies, the increase in the value of risk policy liabilities, certain reinsurance premiums and amounts transferred to the SEA Class. Premiums are fully deductible if they are transferred to the SEA Class, or if they are for policies providing participating or discretionary benefits. Part of the premium may be deductible if they are transferred to the complying superannuation/FHSA Class. The deductible component of premiums in respect of ordinary non-participating investment policies would normally be determined by an actuary. In relation to risk-only policies, such as term insurance policies, deductions will be allowed for the increase in the value of those policy liabilities over the financial year (conversely, decreases will be assessable). An actuary would generally assist in calculating these assessable and deductible amounts.
Allocation and utilisation of losses

A life insurance company remains a single entity for tax purposes but in effect will be divided into three separate taxpayers, each representing a separate class of business. The idea of notional separate taxpayers for each class of business limits the way in which tax losses and capital losses can be used by a life company. Capital losses from complying superannuation/FHSA assets can be applied only to reduce capital gains from complying superannuation/FHSA assets or carried forward to be used in a later year against capital gains derived in the complying superannuation/FHSA Class. Similarly, capital losses from Ordinary Class assets can be applied only to reduce capital gains from Ordinary Class assets or carried forward to be used in a later year against future capital gains generated by that class.
Ordinary Class revenue losses can only be applied against Ordinary Class assessable income. Similarly, complying superannuation/FHSA revenue losses can only be applied against complying superannuation/FHSA assessable income. No assessable gains or deductible losses (including capital gains and losses) will arise from the SEA pool. Certain types of income, including SEA income and income from the disposal of units in a pooled superannuation trust, are classified as non-assessable non-exempt income. As a result, tax losses incurred by a life insurance company will not be wasted against these non-assessable non-exempt income amounts before being offset against assessable income.
Imputation credits
A life insurance company is entitled to franking credits in its franking account for the payment of tax on income and/or the receipt of franked dividends attributable to Ordinary Class business. This means that no franking credits are recorded in a life insurance companys franking account for tax paid on income from assets held in the complying superannuation/FHSA Class and SEA Class or franked dividends received from assets held in those classes. In this way, the imputation rules for life insurers are consistent with other non-life corporate taxpayers. A life insurance company is generally entitled to a tax offset for imputation credits attached to dividends received from assets held in the Ordinary Class and complying superannuation/FHSA Class. Excess imputation credits are refundable to the complying superannuation/FHSA Class. As the SEA Class does not generate taxable income, any imputation credits generated by the assets in this class are also refundable. There are special rules for life insurance companies which enable the offset of a franking deficit tax liability against the income tax liability attributable to shareholders business in the Ordinary Class. These rules complement the normal franking deficit provisions which apply to all companies.
Reinsurance with non-residents

Where a life insurance company reinsures all or part of any risk associated with disability policies with a non-resident, a deduction will not be allowed in respect of those premiums and an amount will not be assessable in respect of any recoveries. The companys net risk liabilities include so much of the risk component as is reinsured with the non-resident reinsurer. However, a life insurance company may elect that this principle does not apply in determining its taxable income, in which case the insurer becomes liable to furnish returns and to pay tax at the relevant rate (30 per cent) on 10 per cent of the gross premiums paid or credited to these non-resident reinsurers during the year. Where the election has been made, the companys net risk liabilities do not include the risk component which is reinsured with the non-resident reinsurer.
112 PwC

Under the Australian GST legislation, some classes of insurance are treated differently, leading to different implications for insurers and insured parties. The provision of life insurance is usually an input taxed supply (known as exempt supplies in other jurisdictions), as the supply of an interest in certain life insurance businesses is defined to be a financial supply which, in turn, is input taxed for GST purposes. As a result, while life insurers are not required to account for GST on premium income derived from life insurance businesses, they are usually denied full input tax credits on the expenses incurred in making supplies of life insurance. However, life insurers may be entitled to recover a reduced input tax credit on certain specified expenses. These are known as reduced credit acquisitions and are specifically listed in the GST Regulations. The current rate of reduced input tax credits is set at 75 per cent of the GST included in the price of particular expenses. GST classification of life insurance will be different if the supply is made in relation to a risk located outside of Australia, in which case the supply of these policies may be GST-free. Such a scenario will also result in a need to closely examine the expenses related to the life insurance operation to determine the extent to which input tax credits are available. It is common for life insurance entities to develop and apply a GST apportionment methodology in order to calculate their entitlement to input tax credits incurred. The meaning of life insurance from a GST perspective is linked to certain provisions of the Life Insurance Act 1995. The GST regulations also stipulate that a supply that is incidental to another financial supply will itself be input taxed, subject to certain criteria being met. Certain products can be declared by APRA to be life insurance, and others will qualify as life insurance due to being related businesses (e.g. certain disability insurance). In summary, as noted above, the consequence of input taxed classification is that input tax credits are not available for expenditure incurred in connection with making input taxed supplies of life insurance. However, the GST law also contains provisions which allow financial supply providers to claim reduced input tax credits on certain acquisitions.
Investment activities
Investment activities are, like life insurance businesses, input taxed in many cases, as they are classified as financial supplies for GST purposes. While GST will not be payable on the supplies made, not all of the GST incurred as part of the price paid for expenses associated with investment activities will be recoverable unless one of the following exceptions applies: The expense relates directly to the purchase or sale of securities or other investments in an overseas market. The expenses incurred by the insurer for the purpose of making input taxed financial supplies do not exceed the financial acquisitions threshold (which is a de minimus test to ensure that entities that do not usually make financial supplies are not denied input tax credits on making financial supplies that are not a significant part of their principal commercial activities).
The financial supply is a borrowing and the borrowing relates to supplies which are not input taxed. Where the above exceptions apply, the insurer retains the entitlement to fully recover the GST incurred on related costs. However, where the exceptions do not apply, the insurer will have to use an appropriate apportionment methodology to determine the extent to which it is entitled to recover GST incurred on general costs. It should be noted that where acquisitions made by an insurer for the purpose of its investment activities are reduced credit acquisitions, the insurer is entitled to claim a reduced input tax credit equal to 75 percent of the GST included in the price of the expense.
Stamp duty
Stamp duty on life insurance (other than term life) is generally calculated on the sum insured. The rates of duty vary in each state and territory. Generally, temporary or term life insurance is subject to duty at the rate of 5 per cent of the first years premium. Western Australia no longer imposes stamp duty on life insurance policies entered into after 1 July 2004. Policies entered into prior to this date continue to be subject to life insurance duty at the same rate as New South Wales, Queensland, Tasmania, Australian Capital Territory and Northern Territory. However, life insurance riders which are categorised as a separate policy of general insurance will continue to be subject to duty at general insurance rates in Western Australia.
Life insurance riders

A life insurance rider is dutiable in all states and territories. In New South Wales and the Australian Capital Territory, the amount of duty payable on a life insurance rider is five per cent of the first years premium paid for the rider. In Queensland, a life insurance rider is treated as Class 2 general insurance and duty at the rate of five per cent of the premium to the extent that the premium paid for the rider is payable. In Victoria, Western Australia, Tasmania and the Northern Territory, a life insurance rider will be subject to the applicable life insurance rate unless the rider is characterised as a separate policy of general insurance, in which case duty is payable at the general insurance rate applying in the relevant jurisdiction (see table below). As at March 2011
VIC, WA, NT TAS
Class
Life Insurance Rider Life Insurance Rider
Rate
10% 8 %
114 PwC
Health Insurance
116 PwC
4
Introduction Andrew McPhail 4.1 Statistics 4.2 Key developments in 2010/11 4.3 Regulation and supervision 4.4 Solvency and capital adequacy 4.5 Governance and assurance 4.6 Financial and regulatory reporting 4.7 Taxation of health insurers 118 120 122 124 127 130 131 135
Introduction Andrew McPhail

The private health insurance industry is an integral part of the Australian health care system and provides hospital treatment insurance coverage for 44.6 per cent of the Australian population. This is the highest level of coverage since the introduction of Life Time Health Cover in 2000/2001.
There are currently 35 private health insurers registered in Australia. Among this total are 10 for-profit insurers accounting for 70.4% of total market share at 30 June 2010. Whilst there has been minimal consolidation in the industry in the past 12 months there have been acquisition attempts made and fund mergers have occurred resulting from acquisitions made in recent years. As the economic environment becomes more settled the prospect of further industry consolidation remains very real. The market for private health insurance in Australia remains very competitive with insurers competing for new members and to attract members of other insurers. The competition by insurers to attract younger members is intense, particularly in light of the ever increasing volume and cost of claims in recent times. Insurers also seek to attract members through quality service, brand loyalty and broader value recognition of the private health insurance product. Government policy continues to play a significant role in shaping private health insurance in Australia. Government policies affect industry demand by influencing the cost of private health insurance to the policyholder via the mandated approval of rate rises and the tax rules. In light of the change in the balance of power in the Senate from 1 July 2011 the industry is closely monitoring the ongoing government debate surrounding the following areas: proposed means testing of the private health insurance rebate; proposed increases to the Medicare levy surcharge for those who do not purchase private cover; the National Health and Hospitals Reform Commission report; and the National Health and Hospitals Network. Despite the continued challenging environment in which Government policy continues to play a significant role the outlook for the private health insurance industry remains positive.
118 PwC
Statistics
4.1
Ranking Measure: Contributions Entity 1 2 3 4 5 6 7 8 9 Medibank Private Ltd (including AHMG) BUPA Australia Health Pty Ltd (Including MBF) HCF (including MUA) HBF NIB Australian Unity Health Ltd Teachers Federation Health Defence Health Ltd GMHBA Ltd Current $m 4,268 4,050 1,526 933 901 423 299 224 217 205 102 96 91 82 79 Prior $m 3,959 3,781 1,421 854 829 459 265 201 191 180 90 87 78 75 72 Current Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Membership Prior % Current Rank Change 000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 8% 7% 7% 9% 9% -8% 13% 11% 14% 14% 13% 10% 17% 9% 10% 1,738 1,503 571 424 407 168 98 85 91 70 44 36 38 23 27 Prior 000 1,703 1,473 557 413 384 180 94 80 86 67 41 35 35 22 27
Performance: Other revenue Current $m 161 133 57 72 31 14 12 12 7 6 7 7 5 2 7 Result after tax Prior $m 104 174 27 (115) 43 14 10 6 8 9 3 (2) 11 3 -7
Prior Current $m $m (26) 115 (3) (129) 19 (4) 4 (3) 3 3 1 (1) 7 1 -12 300 237 75 98 55 32 25 22 6 10 7 8 8 6 15
10 CBHS Health Fund Ltd 11 Westfund Ltd 12 Health Partners 13 Latrobe Health Services Inc 14 Queensland Teachers' Union Health Fund Ltd 15 Healthguard Health Benefits Fund
Source: The statistics are in respect of registered health benefit organisations as reported in the PHIAC annual statistics as at 30 June 2010 and 30 June 2009. Notes: Membership is based on the number of policies in force. Other revenue comprises mainly of investment income. Benefits ratio is benefits paid as a proportion of contributions. Where there are more than one entity within the group, a weighted average based on net assets is used to estimate the overall solvency ratio, and a weighted average based on contributions is used to estimate overall net margin.
120 PwC
Financial Position: Outstanding claims Investment securities Current $m 397 499 118 87 62 37 33 28 17 20 8 5 8 7 8 Prior $m 476 489 119 75 56 41 29 24 15 16 7 6 7 6 8 Current $m 2,063 1,405 559 596 187 76 183 174 142 109 89 54 111 42 65 Prior $m 1,779 1,287 473 484 164 91 153 147 130 93 77 46 99 35 50 Net assets Current $m 1,925 978 714 494 226 84 143 138 97 86 73 57 102 62 58 Prior $m 1,642 1,024 641 396 205 98 118 114 91 75 65 49 94 56 43 Total assets Current $m 3,060 1,685 1,105 796 424 242 217 196 165 123 100 72 124 78 79 Prior $m 2,714 1,841 1,001 674 380 268 183 166 153 107 87 65 113 70 63 Solvency Current % 3.02 2.97 3.11 3.17 2.98 2.35 6.68 9.32 6.15 9.08 7.44 6.87 9.50 7.39 8.11 Prior % 2.45 3.29 2.11 2.77 2.79 2.21 6.95 8.88 6.64 8.55 8.10 5.86 10.26 6.45 5.57
Ratios: Benefits Current % 85% 83% 88% 88% 83% 82% 86% 88% 90% 91% 88% 91% 87% 85% 80% Prior % 86% 85% 86% 88% 83% 83% 88% 88% 88% 90% 86% 93% 85% 85% 82% Net margin Current % 3.8% 5.7% 3.2% 2.8% 5.2% 8.1% 4.5% 5.6% -0.3% 2.0% 0.4% 0.6% 3.0% 5.4% 10.1% Prior % 3.3% 2.6% 2.2% 1.7% 4.8% 8.0% 2.3% 4.5% 2.5% 3.1% 1.8% -2.3% 5.0% 2.9% 7.8%
4.2
Participation rates in the private health insurance industry continue to grow with the take up of private health insurance more than keeping pace with the overall growth in the population. Premium revenue increased by 8.4% from 2008/09 to 2009/10 whilst at the same time benefits paid increased by 7.7%. Overall, the industry recorded a profit after tax of $953 million for 2009/10 compared with $324 million for 2008/09. Key development
Annual premium rate increase approved by government
Overview
The Minister for Health and Ageing approved an increase in private health insurance premiums by an average of 5.57% effective 1 April 2011 (2010: 5.78%) which is lower than the 2010 customer prince index increase in hospital and medical services of 6%. The Disclosure Standard is set out in Schedule 3 of the Private Health Insurance (Insurer Obligations) Amendment Rules 2010 (No. 1) which amend the Private Health Insurance (Insurer Obligation) Rules 2009. The Disclosure standard requires insurers to provide information to PHIAC, which will facilitate the ongoing risk assessment of insurers and early detection of prudential issues. PHIAC continues to work on a range of prudential standards.
The Disclosure Standard newest of the prudential standards issued by PHIAC commenced from 1 January 2011
Medicare Levy Surcharge increase 1 July 2010
For the 2010/11 taxation year the Medicare Levy Surcharge (MLS) threshold for singles is $77,000 (2009/10 $73,000) and for couples and families, the threshold is $154,000 (2009/10 $146,000). In the last year the health insurance industry has seen minimal movement amongst its key players. The only consolidation in the industry was the 1 July 2010 mergers by BUPA of all policies into one registered health insurer as opposed to three. This merger decreased the number of private health insurers operating in Australia from 37 to 35.
Number of registered health insurers reduced from 37 to 35
122 PwC
As a heavily regulated industry, the Private Health insurance industry continues to be shaped by federal government health policy. The federal government has a significant reform agenda for health and while these reforms are in the development phase, the government is seeking to make changes to rates which may well impact private health insurance business. Some of these proposals are summarised below. Topic Emerging issues Summary of development / nature of impact
Proposed changes to the Medicare Levy Surcharge In the 2009-10 Budget, the Government put forward a proposal to increase the Medicare Levy Surcharge (MLS) rates for higher income earners but was unable to win Senate approval. There is currently a proposal before Parliament to increase the MLS in tiers, as per the health insurance rebate tiers. For example: For income between $75,001 $90,000, the MLS will remain at 1% For income between $90,001 = $120,000, the MLS will increase to 1.25% (from 1%) For income over $120,001, the MLS will increase to 1.5% (from 1%) There is a similar proposal being considered for couples and families. Government pushing to means test the 30% private health insurance rebate After failing to secure a full means test of the private health insurance rebate the Government is currently considering a watered down means test proposal whereby singles earning more than $75,000 and families earning more than $150,000 would have their tax rebate for health insurance cut from 30 to 20%. Singles earning more than $90,000 and families earning more than $180,000 would have their rebate cut from 30 to 10%.
IFRS for Insurance Contracts The Private Health insurance industry has made submissions Exposure Draft to the International Accounting Standards Board (IASB) with respect to the Insurance Contracts Exposure Draft due to its implication that health insurance contracts would move from being short duration to being long duration contracts due to the definition of the contract boundary. This issue and others arising due to the exposure draft are discussed in detail in Chapter 1 of this publication.
Regulation and supervision

Private Health Insurance Administration Council (PHIAC)
4.3
The private health insurance industry is regulated by the Australian Government Department of Health and Ageing (DoHA) in conjunction with its private health insurance portfolio agency the PHIAC. The DoHA sets down private health insurance policy in addition to fulfilling other functions such as managing the annual rate review process. PHIAC is an independent statutory authority which was established as a body corporate under section 82B of the National Health Act 1953 in 1989. PHIAC continues in existence by force of section 264-1 of the Private Health Insurance Act 2007 (the Act) which came into effect from 1 April 2007. Section 264-5 of the Act sets out PHIACs broad objectives which are to: foster an efficient and competitive health insurance industry; protect the interests of consumers; and ensure the prudential safety of individual private health insurers. PHIAC monitors and regulates the private health insurance industry and the provision of private health insurance related information to the Government and other stakeholders. PHIACs functions are: to administer the registration of private health insurers; to administer the Risk Equalisation Trust Fund; to oversee information collection, compliance, enforcement, public information, agency cooperation; and to advise the Minister about the financial operations and affairs of private health insurers. PHIAC supervisory objectives are met in the following ways: reviewing compliance with solvency and capital adequacy standards; examining from time to time the financial affairs of the private health insurers and conducting site visits of insurers; reviewing the value of assets and liabilities of each health benefit fund by carrying out independent actuarial assessments;
124 PwC
the collection and review of audited financial and other returns so that PHIAC can monitor the financial position of individual private health insurers and its ability to meet their outstanding claims as they fall due; and the collection of signed statements and declarations from the private health insurers and their approved auditors that provide PHIAC with assurance that systems and procedures to meet regulatory requirements are in place, are adequate and have been independently tested. As at 1 July 2010 PHIAC was supervising 35 private health insurers operating in Australia, which provide private hospital treatment insurance coverage for 44.6 per cent of the Australian population. Of these 35 insurers 13 were restricted access and 22 were open access insurers, with 10 operating on a for-profit basis. The market share of the for-profit insurers increased from 42.3% at 30 June 2009 to 70.4% at 30 June 2010, mainly driven by the conversion of Medibank Private Limited to for-profit from 1 October 2009.
PHIAC and the Australian Prudential Regulation Authority (APRA)

PHIAC and the Australian Prudential Regulation Authority (APRA) have a memorandum of understanding (MOU) setting out a framework for co-operation in areas of common interest. The MOU recognises the importance of close co-ordination and co-operation between the two organisations. An updated MOU came into effect on the 6 January 2011. In particular, the refreshed document focuses more on information sharing and policy development and is designed to facilitate a uniform regulatory approach.
Authorisation
PHIAC has the power, on application, to register as private health insurers, bodies that are registered bodies for the purposes of the Corporations Act 2001. PHIAC will take into account the ability of the applicant to comply with the obligations imposed by the Act. Registration is granted by PHIAC subject to terms and conditions as it sees fit. Private health insurers must gain approval from the Minister for Health and Ageing for any fund rule changes, including rate changes.
Appointed Actuaries
All private health insurers are required to have an actuary appointed by the insurer. Under section 160-30 of the Act the appointed actuary is obliged to report both to the insurer and PHIAC. Schedule 2 of the Private Health Insurance (Insurers Obligations) Rules 2009 specifies the duties of the appointed actuary and defines the notifiable circumstances of which private health insurers are obliged to keep the appointed actuary informed.
Community rating principle and risk equalisation

Private health insurers do not typically carry reinsurance. However, private health insurers participate in the risk equalisation arrangements administered by the PHIAC. The principle of community rating prevents private health insurers from discriminating between people on the basis of their health status, age, race, sex, sexuality, the frequency that a person needs treatment, or claims history. The risk equalisation arrangements scheme supports the principle of community rating as it averages the cost of hospital treatment across the industry. The scheme transfers money from private health insurers with younger healthier members with lower average benefits payments to those private health insurers with an older and less healthy membership profiles and which therefore have higher average benefits payments. This redistributes the burden of high cost claims across the industry to avoid the financial strain of the costs being borne by individual private health insurers. The redistribution is calculated based on the average benefit paid by Australian private health insurers (per state) to customers in their aged-based pool (over 55 years old) and the high costs claimants pool (claims exceeding $50,000 each). The arrangement operates by private health insurers paying / receiving a levy into / from the Health Benefits Risk Equalisation Trust Fund. Private health insurers prepare and submit membership and benefit data to PHIAC on a quarterly basis through the PHIAC 1 returns. Effectively, a health insurer that paid more risk equalised benefits than the state average will have an amount receivable from the Risk Equalisation Trust Fund, whereas a health insurer that paid less will have an amount payable to Risk Equalisation Trust Fund.
Medicare Levy Surcharge (MLS)

The MLS is levied on Australian taxpayers who do not have private hospital cover and who earn above a certain income. The surcharge aims to encourage individuals to take out private hospital cover, and where possible, to use the private system to reduce the demand on the public system. The surcharge is calculated at the rate of 1% of taxable income. When the Federal Government amended the MLS thresholds in 2008, they also required that they be indexed annually to Average Weekly Earnings. That means that every year on 1 July, a revised threshold level will take effect in line with that index.
126 PwC
4.4
Authorised health insurers are subject to solvency and capital adequacy requirements under Schedule 2 and 3 respectively of the Private Health Insurance (Health Benefits Fund Administration) Rules 2007. These requirements were legislated under Divisions 140 and 143 of the Act. PHIAC has been undertaking a review of the capital adequacy and solvency standards since their issue in 2007. A date for implementation of the revised standards is not yet known as PHIAC are still to conclude following consultation and comment from stakeholders. The standards place rigorous reporting requirement on funds. They need to demonstrate the soundness of their financial position, considering both their existing balance sheet position and the profitability of future business. The Act specifies a two-tier capital requirement for health insurers, with each tier considering the capital requirements of a different set of circumstances. The Solvency Standard is a short-term test that prescribes the minimum capital requirements of a health insurer to ensure that under a wide range of circumstances it would be in a position to meet its obligations to members and creditors. The solvency standard is to ensure, as far as practicable, that at any time the financial position of the health benefits fund conducted by a private health insurer is such that the insurer will be able, out of the funds assets, to meet all liabilities that are referable to a fund as those liabilities become due. The solvency standard is essentially based on a run-off view of the fund. The health insurer must demonstrate that it can reliably meet its accrued liabilities and obligations in the event of a wind-up. It should be noted that there is a difference between meeting the solvency standard and being solvent in terms of the Corporations Act 2001. A fund meeting the solvency standard is required to hold reserves to meet its obligations to members and staff, such that it should be in a position to avoid insolvency as defined under the Corporations Act 2001. The Capital Adequacy Standard is a medium-term test that prescribes the capital requirement of a health insurer to ensure that its obligations to, and reasonable expectations of, contributors and creditors can be met under a range of adverse circumstances. The capital adequacy requirement is thus based on an ongoing view that requires a fund to show that it has sufficient capital to implement its business plans, accept new business, absorb short-term adverse events from time to time and remain solvent. The solvency and capital adequacy standards are based on the concepts of liability risk, asset risk and other risks.
Liability risk
The liability risk requirement can be considered as the amount required to meet existing liabilities (solvency and capital adequacy standard) plus an amount to meet the liability associated with continuing to write business (capital adequacy standard). The amount required to meet existing liabilities is set as the sum of the: Net claims liability; Risk equalisation accrued liability; and Other liabilities. The net claims liability is outstanding claims net of risk equalisation on outstanding claims and the liability in respect of unexpired risk (determined as the premiums paid in advance multiplied by a specified loss ratio). Each item includes a margin and includes associated claims handling expenses. The margin is prescribed at 10 per cent for the solvency calculation, while the capital adequacy margin is determined by the board of directors of each private health insurer (subject to a prescribed minimum of 12.5 per cent) based on a qualitative risk assessment of the health insurers membership base and the volatility of claims. For both the solvency and capital adequacy standards, the net claims liability should not be less than the reported liability. The risk equalisation accrued liability is the amount due/payable from the risk equalisation trust fund in the coming period in respect of members covered and benefits paid from prior periods. The liability is thus the risk equalisation levy for members covered in the preceding quarter, less benefit payments that can be recovered from the risk equalisation trust fund. A margin is added to the risk equalisation levy (currently 10 per cent). The capital adequacy standard is also concerned with the additional capital required to continue to cover members future benefits (referred to as the renewal options reserve) and to fund business plans (referred to as the business funding reserve). The renewal options reserve takes into account the risks and potential costs associated with providing members with the right to renew membership. The reserve is based on a bestestimate projection of the net earned contribution income less incurred payments and costs, with suitable conservative margins added to the cash outflows in the projection. The business funding reserve is intended to ensure capital adequacy over the projected period. It requires an insurer to hold sufficient reserves to meet the demands of any planned increase in membership and of other business development strategies.
128 PwC
Asset risk
The asset risk is the risk to the value of assets supporting the liabilities. The asset risk requirement can be considered in two parts: Inadmissible assets; and Resilience reserve. Inadmissible assets include assets in associated entities and risks from asset contagion, asset concentration and general asset credit or liquidity. The factors considered in calculating the inadmissible asset reserve are as follows: a reserve must be maintained if the value of a business assets in a run-off situation is less than the value of the assets in an ongoing situation; if the health insurer has investments in an associate or subsidiary that is prudentially regulated, a reserve must be maintained that represents the prudentially regulated capital within the value of the associate or subsidiary in the financial statements of the health insurer; and a reserve is required to be held against the adverse impact of concentration of investments in a particular asset with a particular counterparty or related party. The capital adequacy standard prescribes certain limits and weightings depending on the asset type. The resilience reserve is based on an assessment of the health insurers ability to sustain shocks that are likely to result in adverse movements in the value of its assets relative to its liabilities. The reserve is calculated with reference to the admissible assets of the health insurer and by applying a calculated diversification factor (based on each health insurers asset exposure) to a prescribed movement in returns per investment class. The resilience reserve is intended to provide protection against adverse movement in the value of assets. The reserve considers the fall in value of assets by the investment sector under adverse conditions, assuming greater adversity in the capital adequacy test. An offset is allowed for diversification of assets.
Other risks
The standards also require an allowance for management capital and, in the solvency test, for an expense reserve. The management capital reserve is designed to ensure that private health insurers maintain a minimum dollar level of capital. In practice, this test applies only to small private health insurers. The expense reserve, in the run-off test, allows for unavoidable expenses expected to be incurred as a health insurer adjusts to a run-off status. The solvency standard calculates the expense reserve as 40 per cent of total non-claim expenses.
Investment Policy
There is no restriction on investments that may be held by health insurers. However, in calculating the solvency requirement and the capital adequacy requirement under the respective standards, the level of capital required varies with the risk profile of the investment portfolio. This is addressed through the calculation of an inadmissible assets reserve and a resilience reserve.

Current prudential standards on issue are: the Capital Adequacy standard the Solvency standard the Appointed Actuary standard the Governance standard the Disclosure standard
4.5
Since 2007, PHIAC has had the authority to issue prudential standards compliance with which is mandatory for all private health insurers.
For further discussion of the Capital Adequacy and Solvency standards refer to section 4.4. The Appointed Actuary standard is set out in Schedule 2 of the Private Health Insurance (Insurer Obligations) Rules 2009. The standard articulates the requirements of an appointed actuary of a private health insurer and commenced on the 31 March 2007. The Disclosure standard is set out in Schedule 3 of the Private Health Insurance (Insurer Obligations) Amendment Rules 2010 (No. 1) which amend the Private Health Insurance (Insurer Obligation) Rules 2009. The Disclosure standard requires insurers to provide information to Council, which will facilitate the ongoing risk assessment of insurers and early detection of prudential issues. This is the newest of the prudential standards and commenced from 1 January 2011. The Governance standard is set out in Schedule 1 of the Private Health Insurance (Insurer Obligations) Rules 2009 and commenced on 1 January 2010. PHIACs objectives in relation to governance are to ensure that insurers are managed in a sound and prudent manner by a competent board of directors which is capable of making reasonable and impartial business judgements in the best interest of the insurer and which gives due consideration to the impact of its decisions on policyholders.
130 PwC
Financial and regulatory reporting
4.6
Private health insurers are required to prepare financial statements that comply with Australian Accounting Standards, in particular AASB 1023 General Insurance Contracts (AASB 1023). The key principles and disclosure requirements of AASB 1023 are set out in the General Insurance section of this publication. The International Accounting Standards Board (IASB) released the long awaited exposure draft on Insurance Contract accounting on 30 July 2010 following extensive preparation with the US Financial Accounting Standards Board (FASB). The proposal in the exposure draft is for a comprehensive standard to address recognition, measurement, presentation and disclosure for insurance contracts. Refer to Chapter 1 for further details.
Australian Health Insurance Association guidance notes

In order to ensure a consistent approach by private health insurers in interpreting the requirements of AASB 1023, the Australian Health Insurance Association (AHIA) has developed guidance notes to assist private health insurers in applying AASB 1023. The key issues addressed by the AHIA guidance notes are summarised below.
Premium revenue
Under AASB 1023, premium revenue is recognised from the date on which the insurer accepts insurance risk (attachment date) over the period of the contract in accordance with the pattern of the incidence of risk expected. Unlike most other forms of insurance contract, a health insurance contract does not typically stipulate a fixed period of cover as contracts typically require payment in advance and include an option for the policyholder to renew. In practice, private health insurers recognise premiums from the date cash is received over the period covered by the payment. It should be noted that under AASB 1023, private health insurers are legally obliged to continue cover (but not pay benefits for the period in arrears) for 63 days if a policyholders premiums are in arrears. Private health insurers will therefore need to consider past experience to determine whether it is appropriate to accrue for premiums in arrears.
Measurement of outstanding claims

Matters of particular importance to private health insurers are set out below. Central estimates A central estimate of claims incurred is the mean of all possible values of outstanding claims liabilities as at the reporting date. The central estimate, therefore, has a 50 per cent probability of adequacy (i.e. there is a 50 per cent chance that the central estimate will be adequate to meet all future claims payments). Risk margin AASB 1023 requires that the outstanding claims liability includes a risk margin to reflect the inherent uncertainty in the central estimate of the present value of the expected future payments. It does not specifically prescribe a fixed risk margin or probability of adequacy. The risk margin for a given level of probability of adequacy will be specific to each insurer, taking into account the variability of claims processing, the availability of claims data and the features of the claims being provided for at the reporting date. Discounting AASB 1023 requires the liability for outstanding claims to be discounted to reflect the time value of money. As health insurance claims are generally settled within one year, private health insurers may be able to demonstrate that no discounting of claims is required as the difference between the future and present value of claims payments is not material.
Deferred acquisition costs

When acquisition costs meet certain criteria they must be deferred, recognised as assets and amortised systematically. Private health insurers need to establish procedures to identify relevant costs to be deferred.
Unearned premium liability

Typically private health insurers have referred to the unearned premium liability as contributions in advance. These are determined in accordance with AASB 1023.
Liability adequacy test

AASB 1023 requires a liability adequacy test to be performed by the private health insurer at the level of a portfolio of contracts that are subject to broadly similar risks and are managed together as a single portfolio. The AHIA guidance note suggests that private health insurers should dissect portfolios into at least two classes of business: hospital and ancillary. A private health insurer may determine further disaggregation of portfolios depending on its particular portfolio of products. The liability adequacy test typically incorporates an analysis based on the unearned premiums at reporting date and the constructive obligation in relation to projected premiums up to the subsequent 1 April rate review.
132 PwC
Annual accounts
Audited annual Corporations Act financial statements must be lodged with ASIC in line with the requirements of the Corporations Act, i.e. within three months for a disclosing entity and four months for a non-disclosing entity. Private health insurers are required to lodge annual audited financial statements with PHIAC on, or just after, 30 September each year.
Other returns
All private health insurers must provide a number of other returns under various legislative requirements. These include: PHIAC 1 Returns Quarterly state and territory-based returns must be prepared for all states under the Private Health Insurance Act 2007. The returns must be prepared in accordance with the guidelines established in PHIAC circulars and contain granular data on each health insurers membership and benefit payment composition. Each quarterly return is audited by the health insurers external auditor at the end of the financial year. PHIAC 2 Returns This is the main reporting requirement under the solvency and capital adequacy standards. Quarterly unaudited returns are lodged with PHIAC and the annual return is audited by the health insurers external auditor. The annual return includes an unaudited certification by directors in relation to the capital adequacy margin, loss ratio and risk management procedures. PHIAC 3 Returns These quarterly returns contain prostheses reports and are not required to be audited. PHIAC 4 Returns Specialty gap cover data is required to be provided quarterly to PHIAC. The totals reported on this quarterly PHIAC 4 medical gap report should be consistent with data reported in the quarterly PHIAC 1 return. The returns are not required to be audited. Rebate Returns Private health insurers are required to lodge a monthly application on or before the seventh day of the following month for the rebate with the Medicare Australia CEO in line with the requirements of the Private Health Insurance Act 2007 in order to receive the rebate. Under subsection 279-50(6) Medicare Australia may require a health fund to give Medicare Australia an Auditors Certificate regarding the health insurers participation in the Premium Reduction Scheme. Second Tier Benefits Returns The Private Health Insurance Benefit Requirement Rules are amended regularly by the Department of Health and Ageing. Under schedule 5 of these requirements, if a health facility is accredited with a Commonwealth provider number and it does not have Hospital Purchaser Provider Agreements (HPPA) or a similar agreement with a particular health insurer, it may approach the health insurer for its second tier benefits rates. The private health insurers are required to calculate 85 per cent of the average HPPA rates, effective at 1 August, for procedures that are included in the majority of their HPPAs. The audited second tier benefits return must be lodged with both the Department of Health and Ageing and PHIAC by 30 September each year.
Key lodgement dates Private Health Insurance Administration Council

Unaudited Quarterly PHIAC 1, 2, 3 and 4 returns Within four weeks after the end of the quarter to which it relates. Annual audited quarterly PHIAC 1 returns All four quarters returns within 3 months of the end of the financial year, or such time as approved by the Commissioner. Annual audited PHIAC 2 return and a statement by the directors in relation to the capital adequacy margin, loss ratio and risk management procedures Within 3 months of the end of the financial year or such time as approved by the Commissioner. Annual audited financial statements of the health insurer On, or just after, 30 September each year. Unaudited financial condition report prepared by the insurers appointed actuary On, or just after, 30 September each year.
Risk Equalisation Trust Fund

Letters advising of the distributions to / from the fund are sent out quarterly following the processing of PHIAC 1 returns. Approximately eight weeks from each quarter end.
Annual levy
Annual levy is based on health insurer membership numbers. Payment is due quarterly, within two weeks of the request for payment.
Medicare Australia
Lodgement of returns
Audited annual statement regarding the health insurers participation in the Federal Governments 30% Rebate on Private Health Insurance Premium Reduction Scheme. Within 20 days from the end of the year (approximately).
Federal Department of Health and Ageing

Un-audited Second Tier Default Benefit rates. By 31 August each year (where applicable). Audited Second Tier Default Benefits rates. By 30 September each year (where applicable).
134 PwC
Taxation of health insurers
4.7
An organisation which is a registered health benefits organisation for the purposes of the Private Health Insurance Act 2007, and which is not in business for the purposes of profit or gain for its individual members, is exempt from income tax. The fact that a health fund may offer rebates and/or discounts to members has not been construed as the distribution of profits or gains to members. Accordingly, the scope of this exemption will depend generally on the type of activities carried out by the organisation insofar as they do not disqualify it from registration under the Act. Registered health benefit organisations that operate for the purposes of profit or gain are taxed like normal corporates. Although Division 321of the Income Tax Assessment Act 1936 (taxation of general insurers) does not apply to health insurers, taxable health insurers generally apply broadly equivalent principles to Division 321.

Under the Australian GST legislation, some classes of insurance are treated differently, leading to different implications for insurers and insured parties. In relation to Health Insurance, special provisions result in most forms of health insurance to be treated as GST free (known as zero-rated supplies in other jurisdictions). This means that health insurers are not required to account for GST on premium income derived from their businesses. In addition, special rules relate to the expenses incurred by GST-free Health Insurers such that they are only entitled to recover input tax credits on the expenses incurred running the business and managing claims. No entitlement to input tax credits will arise for expenses incurred in settling a claim under an insurance policy which is GST-free. Where an insurance policy may be treated as either GST-free, taxable or input taxed, the GST-free treatment will prevail. In relation to the investment activities of an insurance entity, it is important to consider if the Financial Acqusitions Threshold test in the GST law applies and if so whether or not the Threshold has been exceeded by the insurer due to the quantum of expenses incurred in relation to their investing activities.
Stamp duty
Health insurance policies are exempt from stamp duty in all Australian states and territories provided the policies are issued by an organisation registered under Part VI of the National Health Act 1953 or a private health insurer (as defined in the Private Health Insurance Act 2007 (Commonwealth) Schedule 1) for the Western Australian duty legislation).
Insurance Intermediaries
136 PwC
5
Introduction Billy Bennett 5.1 Key developments in 2010/11 5.2 Regulation and Supervision 5.3 Solvency and capital adequacy 5.4 Financial reporting 5.5 Taxation 138 140 140 142 143 144
Introduction Billy Bennett

Insurance intermediaries are an important part of the insurance value chain and continue to play a vital role in the purchase of insurance and risk products for both the policyholder and the insurer. Intermediaries comprise brokers, managing agents and a variety of other forms of agencies. The nature of intermediaries ranges from being fully independent to being a subsidiary of an insurer.
The life insurance intermediary industry is subject to significant changes including the upcoming FOFA (Future of Financial Advice) reforms, the objective of which is to address conflicts of interest that have undermined the financial advice provided to investors. These reforms are changing the way financial planners view their income streams resulting in: Potential changes to their financial planners business models; Significant modifications to remuneration structures; Increased compliance and administration costs These reforms are likely to impact the selling and distribution of life insurance products. Meanwhile, in the non-life insurance intermediary industry, there continues to be significant competition among intermediaries in an environment where rates are soft but may harden as a result of the string of catastrophe events in the region in 2010 and 2011. This has resulted in a number of key trends including: A war for talent: Wages are a major expense for intermediaries given the service based nature of the industry. Intermediaries employ a highly qualified and experienced workforce and pay them above average wages to ensure high levels of staff retention; A reduction in broking margins: To maintain profitability when faced with reduced margins and increased competitor activity, intermediaries will need to deliver on cost containment; A need for technological advancement to compete with direct distribution by insured; A focus on the provision of consulting type services: In recent years, the offerings of the intermediary have expanded into various other services such as such as consulting, risk management, claims management, due diligence audits and advisory services. As competition erodes profitability there will be an increased focus on providing such high margin services. To maintain their competitive edge, the role of the intermediary has moved from a mere proponent of insurance to that of a value-added business partner for insurers. Intermediaries cannot afford to sit still they must ensure they deliver their core services while increasing the value they add to their customers, with a real focus on strategic differentiation.
138 PwC

Recent / Upcoming key development
New ASIC & APRA Data Collection and Reporting Obligations from 1 May 2010
5.1
Summary of issue
On 16 December 2009, Corporations Amendment Regulations 2009 (No.11) was passed requiring intermediaries who are AFS licencees an APRA licenced general insurer, Lloyds underwriter, or an unauthorised foreign insurer (UFI) to submit certain data to APRA on a bi-annual basis. The data is in a prescribed form, Form 701, and is to be submitted in respect of premiums invoiced from 1 May 2010. The objective is to assist APRA to better understand the role of UFIs and Lloyd's in the Australian market and to assess the extent of reliance on the exemptions to the prohibition on placement of insurance with direct offshore foreign insurers (DOFI exemptions) by Australian insurance brokers. APRA will collect this data on behalf of ASIC.
Regulation and Supervision

Australian Securities and Investment Commission
5.2
In Australia, all brokers are required to be licensed by Australian Securities and Investment Commission (ASIC). ASIC administers a number of laws relevant to brokers including the Corporations Act 2001; the Insurance (Agents and Brokers) Act; the Insurance Contracts Act 1984 and the Superannuation (Resolution of Complaints) Act 1993. The Brokers and Agents Administration System (BAS) and Life Unclaimed Monies System are also administered by ASIC.
Australian Financial Services Licence

The Corporations Act 2001 requires brokers to either hold an Australian Financial Services Licence (AFSL) or become an authorised representative of a separate licensee. To obtain a licence, the applicant must meet the obligations under Section 912A and demonstrate that they will provide financial services efficiently, honestly and fairly. The general obligations relate to the insurance brokers responsibilities in the areas of compliance, internal systems, people and resources. 140 PwC
Specific provisions under the Corporations Act require that financial services licensees have in place the following: arrangements for managing conflicts of interest a framework to ensure compliance with conditions on the licence and with financial services laws adequate resources (financial, technological and human) to provide services covered by the licence adequate risk management systems existence of internal and external dispute resolution procedures (where dealing with retail clients); arrangements to ensure that the competencies of representatives to provide the financial services (as specified on the licence) are maintained and that the representatives are adequately trained to provide those financial services. Holders of an AFSL are subject to ongoing financial requirements which are described in ASIC RG 166. These requirements include: Positive net assets and solvency Sufficient cash resources to cover next three months expenses with adequate cover for contingencies Licence holders are required to meet ongoing notification obligations, which include requirements to notify ASIC about: Breaches and events; Changes in particulars (form F205 for change of name of corporate entities, form FS20 for all others); Authorised representatives (forms FS30, FS31, FS32); Financial statements and audit (forms FS70 and FS71); and Appointment/removal of auditor (forms FS06, FS07, FS08 and FS09). Section 989B of the Corporations Act also outlines ongoing financial reporting and audit obligations. ASIC has released Class Order 06/68 which grants relief to local branches of foreign licensees from preparing and lodging accounts in accordance with Section 989B of the Corporations Act. This relief is only available where the foreign licensee lodges accounts, prepared and audited in accordance with the requirements of its local financial reporting jurisdiction with ASIC once every calendar year. In addition to annual financial reporting requirements, under Section 912E of the Corporations Act, ASIC can undertake surveillance checks of AFS licence holders. ASIC has the power to vary licence conditions, as well as issue banning orders that prohibit a person from providing financial services.
Other regulations and related matters affecting Insurance Brokers

Under the Corporations Act 2001, insurance brokers and authorised representatives are prohibited from dealing in general insurance products unless they are from an authorised insurer, a Lloyds underwriter or if an exemption is applied. Under these regulations, insurance brokers are required to maintain records of business placed with direct offshore foreign insurers (DOFIs) and report their dealings on a regular basis to ASIC. Insurance brokers are subject to the Anti-Money Laundering and Counter-Terrorism Financing Act (AML/CTF Act). Under the AML/CTF Act, the impact on insurance brokers (if providing a designated service), is meeting their statutory obligations in relation to customer verification, customer due diligence and compliance reporting requirements. Insurance brokers are also subject to codes of practice including the Life Insurance Code of Practice and the General Insurance Code of Practice which set standards and responsibilities. The Insurance Brokers Dispute Facility, overseen by the Insurance Brokers Compliance Council, is a national scheme designed to quickly resolve disputes between insurance brokers and their clients. The facility handles general insurance matters up to $10,000 and life insurance matters up to $50,000.

The minimum solvency requirements under the AFSL regime are: Positive net assets;
5.3
Sufficient cash resources to cover the next three months expenses with adequate cover for contingencies; and Surplus liquid funds of greater than $50,000 where the licensee holds client assets of more than $100,000. Further conditions may be set out under the AFSL itself. Compliance with these requirements is tested through audits undertaken by the licensees auditor both annually and at the request of ASIC.
Investment Policy
Authorised representatives and insurance brokers are required to hold monies in a trust account with an ADI, cash management trust or an ASIC-approved foreign deposit-taking institution. The authorised representative or insurance broker is required to disclose to the insured that they intend to keep any interest earned and must deposit the monies into such an account on the day it is received or on the next business day. Funds held in a trust account can be invested in a broad range of investments, but this in practice is rare and the rules relating to this are complex.
142 PwC
Financial reporting
Annual accounts
5.4
As AFSL holders, authorised representatives and insurance brokers are required to lodge forms FS 70 (profit and loss statement and balance sheet) and FS 71 (audit report). Note that it is possible to apply to ASIC under Section 989D (3) for an extension of time for lodging the forms. For AFSL holders that are not regulated by APRA, and there are audit requirements in respect of compliance with the licence conditions, including: Ability to pay all debts as and when they become due and payable; The minimum solvency requirements as described above Tiered requirement to hold $50,000 to $10 million of adjusted surplus liquid funds for licensees that have more than $100,000 of liabilities from transacting with clients as a principal Compliance frameworks and systems of control In addition, Section 990(K) contains whistle-blowing provisions that obligate auditors to report to ASIC within seven days if they become aware of a situation that may adversely affect the ability of the licensee to meet its obligations and that may result in a breach of either: the conditions of the licence; or the requirements pertaining to trust accounts, financial records or financial statements.
Other returns
Bodies other than ASIC may also require some form of reporting from Brokers (similar to General Insurers). Brokers may be required to submit the following returns if applicable: Fire Brigade Returns; Workers Compensation; Tax returns such as Fringe Benefits Tax (FBT), Stamp Duty, Business Activity Statements (BAS) etc.; and Insurance Protection Tax.
Taxation
Taxation of insurance intermediaries
5.5
Tax legislation does not contain specific provisions relating to the taxation of authorised representatives and insurance intermediaries. One of the important tax issues confronting authorised representatives and insurance intermediaries is the timing of recognition of commission and brokerage income, as this income is often taxed at a later point in time than it is recognised for accounting purposes. The ATO has issued Taxation Ruling IT2626 to provide guidance on this issue. The terms of the contract or arrangement between the insurer and the authorised representative or insurance broker will be of major importance in determining when commission and brokerage income is derived. An authorised representative or insurance broker is able to recognise an amount of commission or brokerage as income for tax purposes at different points of time. Examples include: When that amount has become a recoverable debt and the authorised representative or insurance broker is not obliged to take any further steps before becoming entitled to payment. When the insurance broker can first withdraw that amount from an insurance broking account. When that amount has actually been received from the insurer in those situations where the gross premium has been forwarded by the insured directly to the insurer, provided that the receipt by the authorised representative or insurance broker of that amount had not been deferred unreasonably. When that amount has been withheld by the authorised representative or insurance broker from the net premiums passed onto the insurer. Which of these different scenarios is most relevant in any particular situation will be influenced by the terms of the contract between the authorised representative or insurance broker and the relevant insurer. The authorised representative or insurance broker will be allowed a deduction in the year in which brokerage and commission is refunded where that amount had previously been included in the assessable income of the authorised representative or insurance broker.
144 PwC
Goods and services tax

Under the Australian GST legislation, some classes of insurance are treated differently, leading to different implications for insurers and insured parties. Brokerage and fee income earned by insurance intermediaries will generally be subject to GST, regardless of the type of insurance policy involved, however, some exceptions apply such as brokerage in relation to the arranging of international transport. We note that changes are currently being proposed to the GST legislation that applies to cross-border transport supplies. In the event these changes are passed by parliament, it is likely that they will apply from 1 July 2012. Based on current drafting, the proposed changes are likely to alter the extent to which international transport activities are GST-free or subject to GST and in turn, this will alter the GST treatment of insurance broker services connected to these international transport activities. For GST purposes, intermediaries are treated as agents of the insurer in relation to issuing tax invoices even though they act on behalf of the prospective policyholder. As a result, the general GST rules regarding agents have application and should be considered. It is common place for intermediaries and insurers to use Recipient Created Tax Invoices (RCTIs) in the process of documenting brokerage due for insurance sales. Particular GST rules exist in relation to RCTIs and in 2009 a new Determination (RCTI 2009/1) was released allowing RCTI agreements to be embedded in RCTIs. This development was aimed at reducing the administration required to comply with the legislative requirements regarding RCTIs.
Stamp duty
Insurance intermediaries (i.e. brokers) are not liable to pay stamp duty on insurance policies, as the liability to pay duty falls on the registered insurer. Where the insurance is provided by an unregistered insurer (e.g. overseas insurer), the insured is the person who is liable to remit any duty payable in the relevant jurisdictions. However, if the broker has remitted the duty on behalf of the insured, the insured will generally be deemed to have complied with the relevant stamp duty requirements.
Policyholder Protection
146 PwC
6
6.1 Key developments in 2010/11 6.2 Regulatory Framework for the Insurance Industry 6.3 Product disclosure, insurance business and insurance contracts 6.4 Sales practice regulation 6.5 Ability to pay claims 6.6 Sources of redress 148 151 153 154 155 155

Key development
The Future of Financial Advice Reforms
6.1
Summary of issue
On 26 April 2010, the Federal Governments proposals regarding the provision of financial advice were announced, to improve trust and confidence in the financial planning sector. The Governments Future of Financial Advice (FoFA) reforms are designed to tackle the conflicts of interest that may have threatened the quality of financial advice provided to investors, leading to the mis-selling of financial products that culminated in the high profile corporate collapses of Storm Financial, Opes Prime and MFS. The FoFA reforms represent the Governments response to the recommendations from the 2009 Ripoll Inquiry into financial products and services in Australia. The FoFA package includes: A proposed ban on conflicted remuneration structures regarding the distribution and provision of advice for retail investment products including managed investments, superannuation and margin loans. This includes commissions and volume based payments in relation to these products. Commissions on risk insurance both within group and individual superannuation will be banned from 1 July 2013. A proposed introduction of a statutory fiduciary duty for advisors towards their clients. The duty will oblige advisers to act in the best interests of their clients and to place these ahead of their own when providing personal advice to retail clients subject to a reasonable steps qualification. A proposed introduction of Advisor charging disclosure requirements to improve the transparency and flexibility of payments for financial advice. Advisers will be required to agree their fees directly with clients and disclose the charging structure to clients in a transparent manner. A renewal notice will also be introduced where the adviser is required to send a bi-annual notice to the client when providing ongoing service, where if the client opts out, the adviser will not be able to continue charging the client. The legislation to implement the majority of the FoFA reforms, including the prospective ban on conflicted remuneration structures, statutory fiduciary duty and adviser charging regime will commence from 1 July 2012.
148 PwC
Key development
Privacy law
Summary of issue
On 24 June 2010 the Senate referred the Exposure Drafts of Australian Privacy Amendment Legislation to the Senate Finance and Public Administration Legislation Committee (the Committee) for inquiry and report by 1 July 2011. The exposure draft consists of 2 parts: Part 1 Australian Privacy Principles The exposure draft of the new Australian Privacy Principles (APP) will form a key part of the proposed amendments to the Privacy Act, replacing the current Information Privacy Principles (for the Commonwealth public sector) and the National Privacy Principles (for the private sector). There are 13 new Principles set out in the exposure draft which address how organisations collect, retain and disclose personal information. Further reforms to the Privacy Act will be released for public consultation in stages. Part 2 Credit Reporting In January 2011, draft comprehensive credit reporting provisions were provided to the Committee for review and tabling. This exposure draft contains new provisions relating to collection, use and disclosure of credit reporting information and aims to simplify existing laws. The new scheme will be underpinned by a new industry-agreed Credit Reporting Code of Conduct (the Code) which will be subject to approval by the Australian Information Commissioner. Public submissions on the topic concluded in late March 2011, with tabling date yet to be advised at the time of this publication.
Key development
Other Regulator and Government developments
Summary of issue
In the last 12 months, there have been a number of regulatory and legislative developments which may affect the insurance industry from a policyholder protection perspective. These include: APRA Life and General Insurance Capital project the Australian Prudential Regulation Authority (APRA) provided a brief industry update in December 2010 on its insurance capital project (LAGIC). Refer to Chapter 1 for detail. Basel minimum capital requirements APRA announced in January 2011 that the Basel Committee on Banking Supervision issued minimum requirements to ensure that all classes of capital instruments fully absorb losses at the point of non-viability before taxpayers are exposed to loss. APRA has also advised general insurers that aspects of these reforms will be considered by APRA in its general insurance capital requirements. ASIC Compensation and Insurance Arrangements The Australian Securities and Investments Commission (ASIC) released an updated version of Regulatory Guide 126 Compensation and Insurance Arrangements for Australian Financial Services licensees in January 2011. The update sets out ASICs policy on the mandatory compensation requirements for AFS licensees, including minimum requirements for adequate professional indemnity insurance. Definition of flood insurance A standard definition of flood for the purpose of flood insurance has been determined by the Government, in close consultation with the Insurance Council of Australia and consumer groups in April 2011. Other natural disaster questions are being examined by the Natural Disasters Insurance Review, which is due to report back to the Government by 30 September 2011. The inquiry looks into the availability and affordability of insurance for flood and other natural disasters.
150 PwC
Regulatory Framework for the Insurance Industry
6.2
The Australian regulatory framework is designed to provide comprehensive supervision over the insurance industry and effective customer protection through the following elements: Solvency of insurance providers maintaining a competitive and viable insurance industry within Australia Policyholder protection protecting the overall interests of policyholders through product disclosure, insurance business requirements and contracts Sales practice regulation providing sales advice and customer service of the highest possible standard Ability to pay claims maintaining sufficient capital and resources to pay claims as they fall due Sources of redress offering adequate sources of redress in the event of policyholder dissatisfaction. The framework is administered by the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commissions (ASIC) and the Australian Competition and Consumer Commission (ACCC). The Insurance Council of Australia has also developed an Industry Code of Practice which aims to: to promote better, more informed relations between insurers and their customers; to improve customer confidence in the general insurance industry; to provide better mechanisms for the resolution of complaints and disputes between insurers and their customers; and to commit insurers and the professionals they rely upon to high standards of customer service. An outline of the areas of regulatory supervision, responsible regulatory authority and corresponding Commonwealth legislation is outlined in the following table.
152 PwC
Industry Supervision
Insurance Contracts Act Privacy Act Financial Services Reform Act ASIC PHIAC PHIO PHIAC National Health Act Lifetime Health Cover ASIC ACCC ACCC/ ASIC Privacy Commissioner Trade Practices Act Price Surveillance Act Medical Indemnity Act Medicare Australia / APRA General Code of Practice Insurance Act APRA FOS 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
Table 6.1 Policyholder protection An overview
Commonwealth Legislation
Corporations Act
Life Act
Regulatory Body
Licence APRA requirements
Pre Sale
Product and Insurance Business/ contracts
Pricing and competition
Sale
Sales practice regulation
Ability to pay claims
Claim
Sources of redress
Use of personal information
Product disclosure, insurance business and insurance contracts
6.3
Consumers need clear and relevant product information that is directly comparable to information on other products in the insurance market. The Corporations Act requires insurers to give product documentation to consumers before they purchase an insurance product. Product disclosure documentation includes the provision of a Financial Services Guide (FSG), the Statement of Advice (SoA) and the Product Disclosure Statement (PDS). In addition to the standard product disclosure documentation, the Insurance Contracts Act places the following requirements on general insurers: detailed information pertaining to policy and claim limitations and disclosures must be provided to policy holders; when renewing policies, the insured has a duty of disclosure as to matters that would increase the risk of the insurer; the insurer must advise the intention and rate of renewal at least 14 days prior to expiry of existing policy, otherwise the policy is automatically renewed with no premium; an unpaid instalment can prevent claim payment only if this is made clear to the insured and it is overdue by at least 14 days; the insured must be informed if liability cover is on a claims-made basis; and insurers must disclose averaging provisions clearly and in writing.
Sales practice regulation
6.4
The Corporations Act aims to ensure policy holders receive quality sales advice and service by requiring advisers to possess appropriate skills and knowledge and adhere to prescribed conduct and disclosure standards. In order to demonstrate that sales representatives have appropriate skills and knowledge, insurers are required to: have documented procedures to monitor and supervise the activities of representatives to ensure they comply with financial services laws; ensure all representatives who provide financial services are competent to provide those services as outlined in ASICs Regulatory Guide 146; meet ongoing educational requirements; maintain records of all training undertaken; and ensure responsible officers meet ASIC standards for knowledge and skills. Insurance providers must also adhere to the following procedural requirements as part of their sales practices: Confirm, electronically or in writing, the issue, renewal, redemption or variation of policies within a reasonable time frame. Offer a 14-day cooling-off period during which customers have the right of return. For risk insurance products, the amount refunded can be reduced in proportion to the period that has passed before the right of return is exercised. Consumers must be given the option to register a no contact, no call request, similar to marketing consents required under the Privacy Act 1988.
154 PwC
Ability to pay claims
6.5
The Financial Claims Scheme (FCS) enables eligible general insurance policy holders to claim under a dedicated compensation scheme for valid claims against a failed general insurer, instead of having to pursue claims in the normal liquidation process. Eligible general insurance policyholders are individuals insured with an APRA-regulated general insurer, small businesses (annual turnover less than $2million) and not-for-profit organisations. The FCS also allows the appointment of judicial managers to failing general insurers with powers to advance the interests of policy holders and the stability of the financial system.
Sources of redress
6.6
The Corporations Act requires all insurance companies to have clearly documented internal dispute resolution procedures for retail clients, and to belong to an external dispute resolution scheme which meets ASIC-approved standards. Health insurance complaints are handled by the Private Health Insurance Ombudsman (PHIO), as authorised by the Government. It also deals with complaints from health funds, private hospitals or medical practitioners regarding health insurance arrangements.
Abbreviations
AASB AASBs ACCC ADI AFSL AHIA AML APRA ARPC ASIC ASX ATO AUASB AUSTRAC BCM CEO CFO CPI CTF CTP DAC DAM DOFI ECS FASB FATF FCR FID FOFA FOS FSR GAAP GST HCCS HPPA IAA IASB IBNER IBNR ICA Australian Accounting Standards Board AASB Standards Australian Competition and Consumer Commission Authorised Deposit-Taking Institution Australian Financial Services Licence Australian Health Insurance Association Anti-Money Laundering Australian Prudential Regulation Authority Australian Reinsurance Pool Corporation Australian Securities and Investments Commission Australian Securities Exchange Australian Taxation Office Auditing and Assurance Standards Board Australian Transaction Reports and Analysis Centre Business Continuity Management Chief Executive Officer Chief Financial Officer Consumer Price Index Counter-Terrorism Financing Compulsory Third Party Deferred Acquisition Costs Decreasing Adjustment Mechanism Direct Offshore Foreign Insurer Exceptional Claims Scheme Financial Accounting Standard Board Financial Action Task Force Financial Condition Report Financial Information Declaration Future of Financial Advice Financial Ombudsman Service Financial Services Reform Generally Accepted Accounting Principles Goods and Services Tax High Cost Claims Scheme Hospital Purchaser Provider Agreements Institute of Actuaries of Australia International Accounting Standards Board Incurred But Not Enough Reported Incurred But Not Reported Insurance Council of Australia
156 PwC
ICAAP IFRS ILVR KYC LAGIC LAT LMI LVR MAA MCR MDO MER MII MOU MSE NIBA NOHC OCR PAIRS PDS PHIAC PHIO PML PST RAS RD RE REMS RHBO RMD RMS ROCS SEA SO SPV Stage 2 TOFA UPR VPST
Internal Capital Adequacy Assessment Program International Financial Reporting Standards Insurance Liability Valuation Report Know Your Customer Life and General Insurance Capital Liability Adequacy Test Lenders Mortgage Insurance Loan-to-Value Ratio Motor Accidents Authority Minimum Capital Requirement Medical Defence Organisation Maximum Event Retention Medical Indemnity Insurer Memorandum of Understanding Management Services Element National Insurance Brokers Association Non-Operating Holding Company Outstanding Claims Reserve Probability and Impact Rating System Product Disclosure Statement Private Health Insurance Administration Council Private Health Insurance Ombudsman Probable Maximum Loss Pooled Superannuation Trust Reinsurance Arrangement Statement Reinsurance Declaration Responsible Entity Reinsurance Management Strategy Registered Health Benefits Organisation Risk Management Declaration Risk Management Strategy Run-off Cover Scheme Segregated Exempt Assets Senior Officer from Outside Australia Special Purpose Vehicle Stage 2 of APRAs general insurance reforms Taxation of Financial Arrangements Unearned Premium Reserve Virtual Pooled Superannuation Trust
PwC Australian offices and insurance industry experts

Australian Insurance Leader: Kim Smith Sydney
201 Sussex Street Tel: (02) 8266 0000 Fax: (02) 8266 9999
Melbourne
2 Southbank Boulevard Tel: (03) 8603 1000 Fax: (03) 8613 5555
Brisbane
123 Eagle Street Tel: (07) 3257 5000 Fax: (07) 3257 5999
Assurance
Billy Bennett Ian Hammond Joanne Gorton Richard Deutsch Rod Balding Scott Fergusson Scott Hadfield Voula Papageorgiou
Assurance
Andrew McPhail Chris Lewis Dale McKee David Coogan Simon Gray
Assurance
Andrew Weeden Tim Allman
Tax
Michael Flanderka
Actuarial
Jason Slade Lisa Simpson
Perth
250 St Georges Terrace Tel: (08) 9238 3000 Fax: (08) 9238 3999
Actuarial
Andrew Smith Chris Latham Christa Marjoribanks John Walsh Michael Playford Noeline Woof Tony Cook
Advisory
Darren Honan Peter Wheeler Sean Colvin Steve Billingham
Assurance
Nick Henry
Actuarial
Peter Lurie
Corporate Finance and Recovery

Greg Keys James Garde
Adelaide
91 King William Street Tel: (08) 8218 7000 Fax: (08) 8218 7999
Advisory
Anthony James Keith Land Martin Green
Risk Management
Mike Bridge
Assurance
Derek Clark
Corporate Finance
David Denny Stuart Goddard
Tax
Jeff May Mark Laurie
Tax
Jim McMillan
Transaction Services
Charles Humphrey Sean Gregory
Newcastle
26 Honeysuckle Drive Tel: (02) 4925 1100 Fax: (02) 4925 1199
Risk Management
Cassandra Michie Nicole Salimbeni Praveena Karunaharan Richard Mirabello Richard Gossage Robin Low
Assurance
John Campion Shaun Mahony Darren Turner
Tax
Brian Lawrence Ken Woo Peter Kennedy Samuel Lee
158 PwC
Notes
Notes
pwc.com.au
2011 PricewaterhouseCoopers. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers a partnership formed in Australia, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

Insurance Facts and Figures 2011: What Would You Like To Grow?

Caricato da

Informazioni sul documento

Descrizione originale:

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Insurance Facts and Figures 2011: What Would You Like To Grow?

Caricato da

Copyright:

Formati disponibili

whatwouldyouliketogrow.com.

Insurance Facts and Figures 2011

What would you like to grow?

Insurance Facts & Figures 2011

Insurance Facts and Figures 2011

Foreword Scott Fergusson

PwC Australia Insurance Leader Assurance Services

Insurance Facts and Figures 2011 3

PwC Insurance Experts

Insurance Facts and Figures 2011 5

A moments insight is sometimes worth a lifes experience

Insurance Facts and Figures 2011 7

APRAs Insurance Capital Review

Influence of international developments

Impacts for General Insurers

Insurance Facts and Figures 2011 9

Limits on asset exposures

New capital charge for operational risk

Explicit recognition of diversification

Significant changes to charges for catastrophe risk

Impacts for Life Insurers

Change to risk free discount rate

Capital charge linked to operational risk

Individual asset risk assessments and a standardised correlation matrix

Challenges for insurers

Internal Capital Adequacy Assessment Program (ICAAP)

Insurance Facts and Figures 2011 11

Challenges for determining optimal investment strategy

Insurance Facts and Figures 2011 13

Insurance contract accounting Exposure Draft

What are the current key issues?

4. Short Duration contracts

Insurance Facts and Figures 2011 15

5. Presentation & Disclosure

Attracting and retaining top finance talent

Insurance Facts and Figures 2011 17

The challenges of promoting diversity

Career paths and development opportunities

Bring in versus growing

Balancing strong performers with promoting new talent

PwC Insurance CFO Survey (March 2011)

How insurers can succeed

1. Differentiate to attract quality

2. Invest time in understanding your employees

3. Identify and retain your key talent

Insurance Facts and Figures 2011 19

Data is the life blood of business decisions are you in control?

A tightening Australian regulatory environment

Figure 1: Maturity model

Level 3 Proactive Level 2 Reactive

Data quality and organisational confidence

The benefits of being in control

Insurance Facts and Figures 2011 21

Managing data quality through a data quality control framework

How do you compare?

Status of data quality

Continuous Improvement and change

Do you have mechanisms to detect anomalies in the data?

Insurance Facts and Figures 2011 23

Who administers the relevant unclaimed monies legislation?

What are your obligations?

What are some of the practical issues?

Source: * Source: Source: * Source: