Document ID: chunk:federal_register_of_legislation:F2023L00699:body:0:p5
Version: federal_register_of_legislation:F2023L00699
Segment Type: other
Provision Reference: 
Character Range: 11243–14213

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.         When selecting the methodology and assumptions to be used in determining the risk margin for a class of business, consideration should be given to a range of factors, including:
(a)          the robustness of the valuation models;
(b)          the reliability and volume of the available data and other information;
(c)          past experience of the insurer and the general insurance industry; and
(d)          the particular characteristics of each class of business.
25.         Estimation of a standard deviation above the mean may present technical difficulties when components of the uncertainty in the central estimate do not permit statistical analysis to be undertaken. Estimation of a standard deviation above the mean will generally require both the exercise of judgement and technical analysis.
26.         The risk margin must not be used as a tool for smoothing the effect of changes in assumptions or valuation methods.
27.         From year to year, risk margins would generally be a similar percentage of the central estimate for each class of business, unless there has been a material change in uncertainty. Changes in uncertainty may derive from changes in a number of elements such as reinsurance arrangements and recoveries, the insurer's risk profile or volume of business, or external factors (for example, legislative requirements). The Appointed Actuary must document any material changes.
28.         The risk margin may include an allowance for diversification. The reporting standards made under the Collection of Data Act require the insurer to report a stand-alone risk margin and a diversified risk margin for each of the insurer's classes of business. The stand-alone risk margin refers to the risk margin that would be applied to a class of business where no allowance for diversification with other classes of business has been allowed. The diversified risk margin refers to the risk margin that has been applied to the class of business after allowance for diversification across the whole insurance portfolio. The Appointed Actuary must clearly document the justification for and method of determining such diversification allowance (which must be assessed on a holistic basis for the insurer).
29.         The allowance for diversification for an insurer must only reflect the insurance portfolio within the insurer. The allowance for diversification for a Level 2 insurance group must only reflect the various insurance portfolios within the group.

Discount Rates
30.         The rates to be used in discounting the expected future claims payments of insurance liabilities denominated in Australian currency for a class of business are derived from yields of Commonwealth Government