Posted: 29 Mar. 2021 5 min. read

AASB 17 and Prudential Financial Reporting

General Insurers’ activities and opportunities

With APRA’s engagement with industry around AASB 17 ramping up, the 2021 calendar year will be key for insurers and reinsurers to shape how AASB 17 requirements will interact with APRA’s financial reporting and LAGIC solvency calculations.  This period presents an opportunity for the industry to consult APRA on areas that reduce operational impacts of the change.

AASB 17 is mandatory for annual reporting periods beginning on or after 1 January 2023, introducing new recognition and measurement concepts for insurance contracts and changing the way in which entities present their financial results. Following on from our October 2020 blog which discussed implications for general insurers as APRA adapts its prudential framework for AASB 17, this blog outlines the key changes to financial reporting and data requirements and considers implications for General Insurers.

Below are the top 5 financial reporting proposed changes that general insurers need to be aware of:

1. Expense basis in insurance liabilities

It is proposed that the Prudential Standard GPS 340 Insurance Liability Valuation liabilities (GPS 340) aligns the treatment of expense items to that of Life Insurers. This could be a change for General Insurers depending on how current expenses on a range of general BAU activities and projects are treated. General Insurers will continue to separately identify claims handling costs, policy administration costs and acquisition expenses (such as commission or brokerage and advertising expenses paid in process of obtaining business). Applying AASB 17, insurers will need to identify expenses directly attributable to fulfilling insurance contracts, this may result in some overheads or corporate costs being excluded from the determination of the insurance service result. However, all expenses, unless one-off, need to be included in the GPS 340 liabilities including, potentially additional costs that have not been accounted for but may be required to satisfy the broader criteria for cash flows expected in GPS 340.

General insurers will need to: 

  • Assess the impact of these changes on their insurance liabilities, covering both direct and indirect claims expenses and consult with APRA on key issues emerging.
  • Be comfortable that the changes to the outstanding claims and premium liabilities are suitable to meet GPS 340 proposed requirements given the variety of ongoing strategic and operational activities and initiatives that may be impacting the expense base.

2. Default stress

APRA is proposing that the Reinsurance default risk item required to be included in the estimates of future cash flows in accordance with AASB 17 paragraph 63 be moved out of AASB 17 liabilities for APRA reporting to avoid duplication with the APRA Asset Risk Charge (ARC).  Consequently, APRA is also proposing that the ARC component relating to reinsurance recovery default risk be included in the GPS 340 insurance liabilities.

These proposed changes are intended to align to LAGIC’s principle of risk-based capital and to maintaining a capital neutral proposition in relation to changeover to AASB 17.  General insurers will need to consider how this change will impact their GPS 340 liabilities and actuarial reserving processes that determine these liabilities.

3. Introduction of two new GI product groupings (D&O and Cyber)

For General Insurers, the introduction of Directors & Officer (D&O) and Cyber product groupings in the APRA product list will mean further granularity in product reporting to enable better prudential monitoring of these products.

The inclusion of separate financial and product performance metrics on these products into APRA’s statistics will enable General Insurers to supplement their existing pricing and underwriting frameworks and analyses with industry-wide information for reserving and pricing purposes.

To the extent that this data is not separately captured by the insurer, it will need to be allocated from insurer’s existing product groupings e.g. D&O from within Professional Indemnity.

For this and any other pre-existing unbundling for APRA reporting purposes, APRA is providing some guiding principles around allocation and separation of components with a view to ensuring transparency of the results and consistency over time.

APRA is also seeking industry views on how to define Cyber product. General insurers will need to consider how these product offerings will be identified and reported on separately, specifically for business pack covers and implications this has on front-end and data systems, as well as on portfolio segmentation for business monitoring, actuarial reserving and ultimately financial reporting.

4. Allocation principles have been provided

AASB 17 identifies portfolios and groups of insurance contracts. These may not align with APRA product groups. APRA has issued proposed allocation principles so that insurers can systematically allocate the results and balances sheet items of AASB 17 portfolios and groups to APRA product groups to ensure consistency and reliability of reported data.

General Insurers can take this opportunity to consult with APRA on their proposed allocation principles to ensure that way in which the insurer manages their portfolio and performs any allocations is appropriately aligned to APRA’s expectations.  For transparency and ease of regulatory dialogue, general insurers may consider developing internal policies for adopting this process that could be shared with APRA that will ensure consistency of views between the insurer and APRA and integrity of the allocations and resulting reported numbers overtime.

5. Risk margins

Risk adjustment required for AASB 17 and risk margin for APRA’s LAGIC are considered to be two different concepts. APRA proposes that General Insurers continue to apply the existing GPS 340 risk margin requirements and more specifically, APRA proposes the following are taken into account in determining the risk margin for GPS 340 reporting:

  • Make appropriate allowance for all risks related to the inherent uncertainties of the values of the GPS 340 liabilities, covering both financial risks and non-financial risks (e.g. model and data risks); and
  • APRA proposes risk margins to be derived from the inherent uncertainties of the values of the GPS 340 liabilities gross and net of reinsurance and non-reinsurance recoveries.

Whilst this essentially means no change is proposed for the current risk margin practices adopted by General Insurers, it does clarify that for diversified insurance groups (whether across different entities in Australia and/or worldwide), the risk margin levels should not account for diversification levels outside of that entity.

More about the authors

Kaise Stephan

Kaise Stephan

Partner, Consulting

Kaise is a Partner in Consulting and advises general insurers and reinsurers on a range of matters covering Board and Management insurance reserving advice, corporate strategy, reinsurance programs, claims and capital management, pricing advice on large/complex deals and Appointed Actuary and External Peer Reviewing roles. Kaise’s international experience covers the Australian, New Zealand, South East Asian and European insurance markets.

Anne Driver

Anne Driver

Global IFRS 17 General Insurance Leader

Anne has worked in the General Insurance Industry in Australia and the UK for more than 30 years and joined Deloitte in 2020 as Partner and Global IFRS 17 General Insurance Leader. Anne is a member of the International Accounting Standards Board Transition Resource Group (TRG), appointed in November 2017, and is Chair of the Australian Accounting Standards Board TRG, actively driving discussion and debate to support Australian implementation of IFRS 17. Anne has experience leading a global IFRS 17 implementation project through impact assessment, deep dive analysis of critical issues, policy development, practical application and design and managing senior stakeholders through this process. With a foundation in global financial reporting processes and delivery, establishing and running a global finance policy function and developing a robust finance control environment for a multinational national insurance company, Anne has a track record of implementing, streamlining and enhancing business systems and supporting reporting processes. Based in Australia, Anne is working with clients globally to deal with the challenge of implementing IFRS 17.