REVISED LIASB STANDARDS Exposure Drafts

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REVISED LIASB STANDARDSExposure Drafts
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• Tim Jenkins

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Outline

• LIASB and Process
• Purpose of Revised Standards
• Key Issues and Changes
• Next Steps
• Feedback and Questions

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LIASB - Background

• Life Insurance Actuarial Standards Board (LIASB)
• Responsible for setting actuarial standards for
  life insurers and friendly societies
• Established as an independent body under s100 of
  the Life Insurance Act 1995
• APRA represented on the LIASB
• Other members are industry practitioners

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Membership of the LIASB

• Tim Jenkins ChairTom Karp Government
  memberBill Bartlett Non-actuarial memberClive
  Aaron Other actuarial members Greg
  Martin Graham Slater Carl Stevenson

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LIASB Process to date

• Issues Paper (Nov 2004)
• Discussion Drafts excluding Resilience (May
  2005)
• Discussion Drafts including Resilience (June
  2005)
• Exposure Drafts (September 2005)

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Purpose of Revised Standards

• Address issues arising from Australian adoption
  of IFRS
• Minimise loophole interpretations
• Address matters that were previously flagged
• No intention to increase capital requirements,
  although increases may arise as a consequence of
  the above.

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Key Issues and Changes

• Principles
• Policy Liabilities, Investment Contracts and PRP
• Discount Rates
• Credit Risk
• Resilience
• Reinsurance and Asset Concentration
• Friendly Societies
• Other Changes to Capital Requirements
• APRA Reporting Requirements and Transitional
  Arrangements

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• Clive Aaron

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Principles - Sufficiency

• As a guide for additional risks, not alternative
  to prescribed rules for standard risks
• Actuary may assume that standards produce reserve
  sufficient to withstand 1/200 event for Solvency
  and 1/400 event for Cap Ad
• Equivalent to BBB (S P) for Solvency and A (S
  P) for Cap Ad
• Reserves for additional risks assessed
  accordingly
• Similar principles apply to additional resilience
  risks, but lower sufficiency level reflecting
  stand-alone risk

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Principles Transfer of Obligations

• Must meet obligations in circumstances likely to
  be chosen by judicial manager
• Prescribed rules presume that this is by way of
  transfer of obligations to 3rd party
• Must treat tax assets and reinsurance accordingly
• If assume that transfer is not appropriate then
  may need to establish additional reserves

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Policy Liabilities Measurement

• Investment contracts measured using accounting
  standards
• Concession for pre-existing investment contracts
  affected by deferral of up-front fees
• can continue existing MoS basis
• Liability adequacy test threshold increased for
  participating business
• Applies to liability excluding PRP
• PRP represents profit that has already been earned

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Investment Contracts under Solvency and Capital
Adequacy

• Projection approach presumed for solvency and
  capital adequacy liability
• Best estimate plus margins
• Methodology therefore same as for insurance
  contract best estimates under Parts B and C of AS
  1.04
• Policy Liability minimum under Solvency is still
  determined in accordance with Valuation Standard
• Use Part A

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Use of PRP to support other business

• Treatment of PRP in solvency and capital adequacy
  needs to reflect ultimate ownership of PRP and
  expectations as to its use, albeit that it is not
  a contractual liability
• In allowing for discretions in respect of PRP,
  standards now refer to provisions under Life Act
  which govern the role and purpose of PRP and
  distributions therefrom
• Expected treatment now allows for capital support
  available from value of expected future
  shareholder profits within the policy liability

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Discount Rates

• Valuation discount rate aligned with AASB 1038
• risk-free
• For consistency, adopted swap rate for solvency /
  capital adequacy now defined in General
  Standard
• Appropriate to maintain strength of Cap Ad
  relative to IFRS
• Some relief provided by 30 bp resilience change
• Investment expense and tax assumption consistent
  with asset profile
• IAAust to provide guidance on discounting
  negative liabilities

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• Greg Martin

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Credit Risk

• Implicit allowance for credit risk already
  included
• Credit risks associated with assets are
  independent of value of fixed benefit liabilities
  
• Allowance for credit risk consistent with Basel
  II (broadly produces 99 sufficiency for Cap Ad)
• Slight reduction in factors for grade 1 corporate
  debt
• Discretions may be applied to benefits post
  adjustment but no change to discount rate

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Resilience Reserves

• Explicit allowance for Credit Risk
• Fixed Interest shock for Cap Ad - downward shock
  reduced by 30 bps upward shock increased by 30
  bps
• Further consideration of mean reversion
  diversification deferred
• Consider all relevant shock scenarios and test 2
  specified
• Clarified other aspects of post-resilience
  liability calculations (e.g. discretions, tax
  assets, superannuation deficits, etc).

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Resilience look-through provisions

• Unlisted or controlled geared investments treated
  on look-through basis
• Non-controlled listed trusts not subject to
  look-through are to be treated as equity
• Equity, Property, Fixed Interest categories
  defined consistently

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Alignment of assets and liabilities

• Solvency and capital adequacy liability needs to
  align with net realisable market value of assets
• Corresponding difference between asset value in
  financial statements and net realisable market
  value of assets is part of inadmissible asset
  reserve
• Exposure drafts clarify that
• Asset adjustment is not to be applied to CTV
  minimum
• Overall Inadmissible Asset Reserve may be
  negative due to above
• Assets in General Fund that are not fair valued
  may be recognized at NTA

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Reinsurance

• Standards apply on gross of reinsurance basis
• Value and assess reinsurance consistent with
  approach adopted for net liabilities
• Including separate profit margins IAAust to
  provide guidance
• Treat reinsurance as asset under relevant
  Standard
• Allow accordingly for change in value under
  adverse circumstances
• Adjusted value subject to inadmissibility tests
• If draft or incomplete documentation (6 month
  grace period) then only admissible if lt 1 of
  assets

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Asset Concentration Limits

• Catch-all category limited to 1
• Clarified that 5 limit includes
• real estate
• other real property assets, provided income
  producing
• Retained limits on reinsurance assets
• New category added for premiums receivable by a
  reinsurer

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• Carl Stevenson

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Friendly Societies

• 1999 Life Act amended to extend its application
  to Friendly Societies
• 2002 Harmonisation of Friendly Society Standards
  with Life Standards but still with separate
  Valuation Standard
• 1 Jan 2005 ASIC rescinds Class Order that
  exempted Friendly Societies from general purpose
  financial reporting standards
• Appropriate to now align Valuation Standard for
  Friendly Societies with that applying to life
  companies
• Valuation Standard AS1.04 now applies to both
  Friendly Societies and Life Companies

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Implications for Friendly Societies

• MOS will apply to contracts classified as
  insurance
• Contracts issued in Benefit Funds with discretion
  to make distributions to policyholders will be
  valued under AS1.04 as if participating
• For expense allocations, treat Management Fund in
  same way as a service company

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Other Mortality Bases

• Solvency basis for annuitant mortality becoming
  out-of-date
• No detailed industry analysis
• Best achieved by best estimate underpin

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Other DB super funds

• Surpluses are inadmissible
• Deficits are included as Other Liabilities
• Clarified that surpluses and deficits are not
  subject to adverse experience and asset shocks

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Other - Tax

• MTV/CTV minimums are not tax-effected
• Treatment of FITBs under tax consolidation
  clarified

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• Tom Karp

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Other Associated and Subsidiary Entities

• Only admit net tangible assets of financial
  services subsidiaries
• Value admitted for others depends on extent of
  value reduction under adverse circumstances
• Financial Services Entity defined in General
  Standard
• Treasury shares permitted as admissible under
  certain conditions

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APRA Reporting Changes

• Changes to PR 35 also made to accommodate IFRS
  and LIASB changes
• Consistency with general purpose reporting is
  subordinate to the primary purpose of supporting
  the administration of the Life Act and the
  prudential supervision of the industry by APRA
• Existing APRA systems can only accommodate
  minimal change

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APRA Reporting Changes

• May now be some divergence between regulatory and
  general purpose reporting due to
• Assets not measured at fair value
• Movements in fair value reported straight to
  equity
• Retention of policy liability definition, with
  DAC as a liability offset
• Concessional treatment, where necessary, of
  initial fees and acquisition costs
• Also, some changes to accommodate
• Separate identification of life investment
  contracts and life insurance contracts
• Separate determination of profit margins for
  reinsured liabilities
• Changes in accounting for fee revenue

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APRA Reporting Changes

• More substantive changes to be made as part of
  larger system migration project
• Comments on Discussion Paper (separate from
  comments on LIASB Exposure Drafts) also due by 31
  October

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APRA Reporting Changes Contract Classification

• APRA Prudential rule to set out how contracts are
  classified like contracts treated in like
  manner
• Must unbundle contract if premiums and claims can
  already be split under AASB 1038
• Hybrid contracts must be unbundled as separate
  deposit components
• An option to make future investments into a
  discretionary investment option should not taint
  the classification of the existing deposit
  components
• Investment and insurance contracts that are
  unbundled must be included in separate RPGs

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Transitional Arrangements

• Transitional arrangements to address capital
  increases not incorporated in standards (except
  for impact of deferred fees)
• Where material, can be arranged on a case by case
  basis with APRA
• Reduced target surplus thresholds

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• Tim Jenkins

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Next Steps

• Submissions due by 31 October
• Final standards released by 31 December 2005
• Effective date has changed to 31 December 2005

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• Feedback and Questions