Document ID: chunk:federal_register_of_legislation:F2023C00194:body:0:p13
Version: federal_register_of_legislation:F2023C00194
Segment Type: other
Provision Reference: 
Character Range: 32603–35405

year of the end of the reporting period, where the amount of the expected future payments does not differ materially from the present value of those payments, insurers would not need to discount the expected future payments.

Central Estimate
5.1.4 In estimating the outstanding claims liability, a central estimate is adopted.  If all the possible values of the outstanding claims liability are expressed as a statistical distribution, the central estimate is the mean of that distribution.
5.1.5 In estimating the outstanding claims liability, an insurer may make use of case estimates of individual reported claims that remain unsettled at the end of the reporting period.  An insurer may base case estimates on the most likely claim costs.  Where the range in potential outcomes is small, the likely cost may be close to the mean cost.  However, where the potential range in outcomes is large and where the probability distribution may be highly skewed, the most likely cost, or the mode, could be below the mean and hence below the central estimate.  In this situation, the insurer would need to increase the case estimates accordingly to ensure that they represent the central estimate.

Risk Margin
5.1.6 The outstanding claims liability includes, in addition to the central estimate of the present value of the expected future payments, a risk margin that relates to the inherent uncertainty in the central estimate of the present value of the expected future payments.
5.1.7 Risk margins are determined on a basis that reflects the insurer's business.  Regard is had to the robustness of the valuation models, the reliability and volume of available data, past experience of the insurer and the industry and the characteristics of the classes of business written.
5.1.8 The risk margin is applied to the net outstanding claims for the entity as a whole.  The overall net uncertainty has regard to:
(a) the uncertainty in the gross outstanding claims liability;
(b) the effect of reinsurance on (a); and
(c) the uncertainty in reinsurance and other recoveries due.
5.1.9 In practice, however, outstanding claims liabilities are often estimated on a class-by-class basis, including an assessment of the uncertainty in each class and the determination of a risk margin by class of business.  When these estimates are combined for all classes, the central estimates are combined, however the risk margin for all classes when aggregated may be determined by some insurers to be less than the sum of the individual risk margins.  The extent of the difference that some insurers may decide to recognise is likely to depend upon the degree of diversification between the different classes and the degree of correlation between the experiences of these classes.
5.1.10 For the purposes of the liability