Document ID: chunk:federal_register_of_legislation:F2023L00699:body:0:p4
Version: federal_register_of_legislation:F2023L00699
Segment Type: other
Provision Reference: 
Character Range: 8475–11481

gross and net insurance liabilities.

The central estimate
17.         The central estimate is intended to reflect the mean value in the range of possible values for the outcome (that is, the mean of the distribution of probabilistic outcomes). The determination of the central estimate must be based on assumptions as to future experience which reflect the experience and circumstances of the insurer and which are:
(a)          made using judgement and experience;
(b)          made having regard to available statistics and other information; and
(c)          neither deliberately overstated nor understated.
18.         Where experience is highly volatile, model parameters estimated from the experience can also be volatile. The central estimate must therefore reflect as closely as possible the likely future experience of the insurer. Judgement may be required to limit the volatility of the assumed parameters to that which is justified in terms of the credibility of the experience data.
19.         The central estimate will be measured as the present value of the future expected payments. This measurement process will involve prospective calculations and modelling techniques, and will require assumptions in respect of the expected future experience, taking into account all factors which are considered to be material to the calculation, including:
(a)          discount rates;
(b)          claims escalation;
(c)          claims handling expenses and policy administration expenses; and
(d)          claims run-off.
20.         In establishing the central estimate assumptions, regard must be given to the materiality of:
(a)          the class of business being considered; and
(b)          the effect of particular assumptions on the determined result.
21.         The assumptions used must be consistent for the estimation of both outstanding claims liabilities and premiums liabilities. Where they are not, the reasons must be documented.

The risk margin
22.         The risk margin is the component of the value of the insurance liabilities that relates to the inherent uncertainty that outcomes will differ from the central estimate. It is aimed at ensuring that the value of the insurance liabilities is established at an appropriate and sufficient level. The risk margin does not relate to the risk associated with the underlying assets, such as asset-liability mismatch risk.
23.         Risk margins must be determined, for each class of business and in total, on a basis that reflects the experience of the insurer. In any event, the risk margins must be valued so that the insurance liabilities of the insurer, after any diversification benefit, are not less than the greater of a value that is:
(a)          determined on a basis that is intended to value the insurance liabilities of the insurer at a 75 per cent level of sufficiency; and
(b)          the central estimate plus one half of a standard deviation above the mean for the insurance liabilities of the insurer.
24.