Document ID: chunk:federal_register_of_legislation:F2023L00695:body:0:p4
Version: federal_register_of_legislation:F2023L00695
Segment Type: other
Provision Reference: 
Character Range: 8781–11742

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.
18.         The central estimate will be measured as the sum of the future expected payments. This estimate may be determined on a discounted basis in line with the requirements set out in paragraph 26 and 27 of this standard. 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)          claims handling expense and policy administration expenses; and
(b)          claims costs and associated risk equalisation impact.

The risk margin
19.         The risk margin is the component of the insurance liabilities that relates to the inherent uncertainty that outcomes are likely to 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 which is addressed in the Asset Risk Charge (HPS 114).
20.         Risk margins must be valued so that each insurance liability of each fund of the private health insurer is not less than the greater of a value that is:
(a)          determined on a basis that is intended to value the insurance liabilities  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.
21.         The risk margin must consider the differences in risk profiles between claims settled but not yet paid at the reporting date relative to other expected payments within the outstanding claims. When selecting the methodology and assumptions to be used in determining the risk margin for health insurance business and health-related insurance 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 private health insurer and the private health insurance industry;
(d)          the particular characteristics of each for each health insurance business and health-related insurance business; and
(e)          the risks of the current environment and the extent to which they are captured in valuation models and data.
22.         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