Document ID: chunk:federal_register_of_legislation:F2023L00699:body:0:p7
Version: federal_register_of_legislation:F2023L00699
Segment Type: other
Provision Reference: 
Character Range: 16688–19987

and
(b)          the Appointed Actuary.

Claims escalation
35.         Appropriate allowance must be made for future claims escalation when determining the central estimates of both outstanding claims liabilities and premiums liabilities. Future claims payments may increase over current levels as a result of wages or price increases (inflation) and/or court-awarded interest, other environmental or economic causes (superimposed inflation). Claims payments include third party costs incurred in settling those claims, for example, investigation, medical and legal fees.

Estimation of reinsurance recoverables
36.         The estimation of the value of the insurance liabilities may be undertaken on a gross basis, with a separate estimate of the value of reinsurance recoveries (that is, amounts expected to be recovered under the insurer's reinsurance arrangements), or on a net basis. In either case, the principles of this Prudential Standard must be applied. Where the process is undertaken on a net basis, it is still necessary to value separately the estimates of the gross insurance liabilities and the reinsurance recoverables and expected reinsurance recoveries.[3]

Documentation of reinsurance arrangements
37.         For the purpose of calculating an insurer's insurance liabilities, it must be assumed initially that:
(a)          reinsurance arrangements are fully documented;
       (b)          reinsurance arrangements are 100 per cent placed, that is, there are no gaps in the insurer's reinsurance arrangements; and

(c)          reinsurance recoverables and expected reinsurance recoveries will be received in full.[4]
    Where reinsurance arrangements are not fully documented or are not fully placed, or there is a material risk that reinsurance recoverables and expected reinsurance recoveries will not be received from a reinsurer, the insurer will either not be able to recognise the reinsurance recoverables and expected reinsurance recoveries or will be required to hold capital against these risks.[5]

Assessment and comment by the Appointed Actuary
38.         The Appointed Actuary[6] must make a specific assessment of and comment on the recoverability of reinsurance recoverables and expected reinsurance recoveries from non-APRA authorised reinsurers. The Appointed Actuary must consider all relevant matters, including:
(a)          quality of information and data available on potential reinsurance recoverables;
(b)          credit risk;
(c)          willingness to pay;
(d)          documentation and placement of contracts; and
(e)          any legal or other issues that may create an impediment to the insurer realising the reinsurance asset.
39.         Aggregate reinsurance recoverables and expected reinsurance recoveries must be separated into subsets which identify those that derive from documented and non-documented reinsurance arrangements, those that derive from reinsurance arrangements that are fully placed and not fully placed, and those likely to be recoverable and those not likely to be recoverable from reinsurers. In providing this advice, the Appointed Actuary must consider the materiality of reinsurance recoverables and expected reinsurance recoveries. If they are material, the Appointed Actuary must assess the potential range