Do Schemes need an Approved Actuary

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					          Do Schemes need an Approved
                   Actuary?

                               Prepared by Lisa Simpson



                          Presented to the Institute of Actuaries of Australia
                         XIth Accident Compensation Seminar 1-4 April 2007
                                  Grand Hyatt Melbourne, Australia




This paper has been prepared for the Institute of Actuaries of Australia’s (Institute) XIth Accident Compensation Seminar
                                                           2007.
      The Institute Council wishes it to be understood that opinions put forward herein are not necessarily those of the
                               Institute and the Council is not responsible for those opinions.




                                  copyright Lisa Simpson

   The Institute will ensure that all reproductions of the paper acknowledge the Author/s
                 as the author/s, and include the above copyright statement:



                                          The Institute of Actuaries of Australia
                                          Level 7 Challis House 4 Martin Place
                                             Sydney NSW Australia 2000
                               Telephone: +61 2 9233 3466 Facsimile: +61 2 9233 3446
                           Email: actuaries@actuaries.asn.au Website: www.actuaries.asn.au
            Do Schemes need an Approved
                     Actuary?
                      Author: Lisa Simpson, FIAA
                                           Abstract

     This paper reviews the current level of actuarial involvement in accident compensation
    schemes and asks the question whether schemes would benefit from having an Approved
      Actuary. How do the needs of APRA regulated insurers differ from those of accident
     compensation schemes in relation to actuarial advice? What elements of the Approved
     Actuary role might be useful for Schemes to consider? Is there a compelling reason for
                                             change?


      Keywords: Lisa Simpson, Approved Actuary, accident compensation scheme, APRA,
    financial condition report, insurance liability valuation report, scheme condition report


1        Preface

Whilst researching the history of actuaries in accident compensation, I came across two
interesting texts from previous IAAust seminars. The first was the opening address at the
very first Accident Compensation Seminar in May 1988, delivered by the then President of
the New Zealand Law Commission, T.R.H. Sir Owen Woodhouse.


Sir Owen commented that he “discovered with some shock in 1973 how much better it was to
have a work accident at Albury than a mile away at Wodonga. And the rather striking
difference between the value of a husband lost at Mt Isa rather than Broken Hill or at Port
Adelaide rather than at Perth. Each state seemed to be jealously and carefully guarding its
own peculiar ability to find exactly the right level of benefit in the field of Workers
Compensation legislation… If better information and wise advice will lead to a more equal,
more efficient and more just result for this country, I am sure the Institute of Actuaries of
Australia will provide that wise advice.”1


Have actuaries in Australia provided the “wise advice” charged of us by Sir Owen almost
twenty years ago? Do accident compensation schemes consider actuaries to be integral to
their operations?


         The second was a debate reported in the 1985 General Insurance Seminar
         proceedings, which addressed the topic, “The Services of Actuaries are essential to
         the well being of general insurance.” The then Deputy Manager for NRMA
         Insurance Limited contributed the view that actuaries, “are like poets – the human
         race produces them, they are a phenomenon – sometimes of an astonishing and
         amusing kind – but they should not be allowed to interfere in business. .”2




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The key issue here for this paper is the question of the relevance of the profession. What
contribution have actuaries made with our involvement in accident compensation to date, and do
we deserve a greater role? APRA’s view is clearly that actuaries have an important role to play in
general insurance. However, the same Deputy Manager for NRMA posed the question, “Does
regulation produce actuaries or do actuaries produce regulation?”


This paper explores the current role and contribution of actuaries in accident compensation and
whether a statutory role of approved actuary would enhance that contribution.



2       Introduction and Background


2.1     History of Approved Actuary


APRA introduced the requirement for an Approved Actuary in July 2002, as part of a package of
general insurance prudential reforms following a three year consultation period with industry.
APRA reported in their submission to the HIH Royal Commission, that the creation of the
Approved Actuary role was one of the more controversial aspects of the reform process.iii There
was considerable opposition to the role, with concern that the Approved Actuary would usurp the
role of the Board and management.


There was also concern expressed about the capacity of actuaries to perform the role being given
to them at the time. However, APRA remained firmly of the view that independent actuarial
advice was an important source of information for an insurance company Board, and that it was
appropriate for it to be mandatory for the Board to receive this advice. Further reforms have
expended the role of the Approved Actuary such that the Board also now receives a financial
condition report, with the result that the Approved Actuary role for general insurers is closely
aligned with the Appointed Actuary role in life insurance.


2.2     Overview

This change has led to an increase in the number of actuaries working in general insurance.
Surveys conducted by the Institute of Actuaries of Australia indicate an increase in the proportion
of Fellows and Associates practicing in general insurance from 18% to 22% in the three years to
September 2006. .iv

APRA regulated entities reported gross premium revenue of $9.6Bn for the 2005/06 financial
year, and $33.6Bn of gross outstanding claims. I have estimated from annual reports that
accident compensation schemes, excluding privately underwritten ones, had approximately
$8.1Bn of premiums in the same period, and gross liabilities of $34Bn. Therefore, the non-
APRA regulated sector is approximately the same size as the APRA regulated sector.




                                                                                              2
This paper outlines the role of the approved actuary and investigates whether this role is
applicable to accident compensation schemes (“schemes”). It examines the nature of schemes
versus APRA regulated general insurers and proposes a model of, “Scheme approved actuary”
(“SAA”). The paper then discusses whether having such a role would assist actuaries in
continuing to improve the relevance of the profession to accident compensation schemes, and
whether the role needs to be defined statutorily.


2.2     Definition of scheme


For the purposes of this paper, I have confined the discussion to accident compensation schemes
which are statute based with oversight of a statutory body. For clarity, I have not included
medical malpractice or public liability insurance in the scope of this paper, even though these
classes are subject to specific legislation.


In some instances, insurers operating in schemes are regulated by both APRA and a separate
regulatory body. The following table lists such schemes:


State                                      Scheme
NSW, ACT, QLD                              CTP
ACT, NT, WA, TAS, some SA                  Workers’ compensation
Source: APRA Half yearly GI bulletin, June 2006 Table 10


For such Schemes, each authorised insurer has an approved actuary, who fulfils APRA’s statutory
reporting requirements. However, there is no appointment of an approved actuary for the scheme
as a whole. Therefore, I define the role of approved actuary to that role being created for the
entire scheme.



3       What do Actuaries Currently Do for Schemes?


3.1     Overview

In Appendix D, I have summarised the statutorily defined role of actuaries in schemes, according
to the relevant legislation.


It is evident from publicly available information such as annual reports, website information and
published reports, that there is a significant amount of work carried out by actuaries for schemes.
Most commonly, estimates of insurance liabilities and premium rates are prepared, as certified in
most scheme’s annual reports. Schemes also regularly commission actuaries to prepare analysis
and reports on specific areas of interest, such as; elements of scheme design; the phenomenon of
superimposed inflation; and appropriate profit margins in monopoly classes.




                                                                                               3
The level of involvement and the perceived importance of the role of actuaries within schemes
varies from scheme to scheme, as it does with general insurers. A brief examination of the
history of such involvement would indicate that it has increased significantly over the last forty
years since actuaries first ventured into general insurance and accident compensation.


However, this involvement is not statutorily defined in most cases. There are limited references
to the role of actuaries in schemes in the legislation. In would be possible for governments and
scheme management to do away with actuaries all together, although one would hope the
possibility of that outcome would be rather remote.


3.2       Do Actuaries add value?


Given the involvement of actuaries in schemes is standard practice, does that mean that actuaries
are doing a good job? I propose the following criteria as being relevant to the question:


     Being rigorous in our analysis, applying models which are being updated to reflect leading-
      edge techniques

     Ability to embed knowledge of what we do into the scheme

     Ability to communicate our findings clearly and concisely, avoiding jargon

     Ability to link our findings to scheme outcomes and recommendations which are able to be
      implemented by the scheme

     Strategic thinking, capable of adding to discussions at board and executive level to tie the
      actuarial work to the strategy of the scheme, i.e. ability to see the big picture

     Breadth of experience across other schemes, and currency of knowledge of regulations, and
      the economic, political and social environment


Our ability to demonstrate these abilities determines the relevance of the actuarial profession in
any field of practice. In my view, actuaries have demonstrated these capabilities in the past, as
evidenced by the papers at this and previous seminars, and reports which are publicly available.
For example, our technical skills continue to be refined with the use of new statistical techniques,
whilst our ability to contribute at the strategic level is evidenced by the contribution to the
introduction this year of the Lifetime Care and Support Scheme in NSW.


This leads to the question as to whether the role of approved actuary is needed and what would be
the benefit to schemes of having this role? The following sections of the paper start by defining
the role, and proposing how the role might be relevant for schemes.




                                                                                                 4
The role of the approved actuary is outlined in APRA’s Prudential Standard GPS310, which is
shown in Appendix A.


4       Appointment and approval


4.1     APRA requirement


Under GPS310, licensed general insurers in Australia are required to appoint an approved
actuary, which needs to be approved by APRA. Exceptions to the requirements to have an
approved actuary are where the insurance liabilities are less than $20m and are not significantly
long-tailed in nature.


4.2     Relevance to schemes


All Schemes in Australia have insurance liabilities which exceed $20m and are long-tailed in
nature. Therefore, under APRA’s rules, an approved actuary would be required by all Schemes.


The approval process for an approved actuary requires a fit and proper declaration to be
completed. Such declarations usually require the approved actuary to demonstrate that they have
the competence, character, diligence, honesty, integrity and judgement to properly perform the
role; that the person is not disqualified under an Act from holding the position; and that they have
no conflicts of interest in performing the required duties.


In the case of a Scheme, there is no immediately obvious reason why the approval process should
be any different. The size of liabilities, nature of benefits provided, and the significant financial
and social impacts of the operation of schemes are such that one could even argue that the
importance of ensuring that Actuaries advising the Scheme are fit and proper should be even
greater than for APRA regulated insurers.



5       Primary role


5.1     APRA’s requirements


The primary role of the approved actuary is to provide advice on the valuation of the insurer’s
insurance liabilities and to provide an impartial assessment of the overall financial condition of
the insurer.




                                                                                                5
The two key reports required be produced annual are the Insurance Liability Valuation Report
(“ILVR”) and the Financial Condition Report. The ILVR must be peer reviewed, but there is
currently no requirement for the FCR to be peer reviewed.


If an insurer does not accept the advice of the approved actuary when preparing its statutory
accounts, it must inform APRA in writing of the reasons for adopting a different result.


APRA has the power to mandate a special purpose review of the insurers’ operations, financial
affairs or risk management to be carried out by the approved actuary. In addition, APRA can
request that the approved actuary provide information about an insurer from the past seven years
in order to assist in carrying out its functions under the Act.


5.2     Relevance to schemes


Schemes have employed Actuaries to estimate insurance liabilities and prepare reviews of
premiums and solvency as a matter of course for many years. The key elements of the
calculations carried out by actuaries advising schemes are often different to that prescribed by
APRA, in particular with respect to risk margins and premiums liabilities. However, in general
terms, the role of the approved actuary in preparing insurance liability estimates already exists in
schemes.


Conversely, the role of an actuary preparing a financial condition report is not one which exists in
many schemes, apart from those which are privately underwritten. When the FCR was
introduced by APRA as a mandatory requirement, there was significant debate as to whether the
approved actuary was the most appropriate person to be preparing and signing such a report, and
how to deal with the interaction between the approved actuary and management in preparing the
FCR. It would be anticipated that within schemes there would be similar debate. As is the case
for APRA licensed insurers, it is less common for actuaries advising schemes to comment on the
risk management framework and investment policies, which are areas covered in the FCR.


General insurers continue to be divided as to the usefulness of the FCR, with almost polarised
opinion emerging from meetings of approved actuaries. In some instances, boards have
expressed that they find the reports incredibly useful, and in others they are viewed as largely a
compliance exercise. Whilst disappointing to the profession, it is inevitable that a divergence of
views will exist, and it is evidence that the debate from 20 years ago as to the relevance of the
profession remains.


The financial condition report is discussed in more detail in section 7.




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6       Whistle blowing


6.1     APRA’s requirements


It is an onus on the approved actuary to notify APRA of any activity or deficiency in relation to
an insurer where this will prejudice the interests of policyholders. Furthermore, the approved
actuary must not notify the insurer of such communication with APRA if doing so would
jeopardise the interests of policyholders.



6.2     Relevance to schemes


Scheme regulators are charged with balancing competing needs of many stakeholders. Therefore,
it is not an appropriate role of the actuary to opine on whether the interests of policyholders of
schemes, i.e. employers and motorists, are being prejudiced. This is obviously different to the
role within general insurers, whereby the approved actuary is charged with alerting APRA where
the actions of the insurer might prejudice policyholders’ interests in favour of
shareholder/owners.


For publicly underwritten schemes, the presence of Government guarantees means that the
security of claimants’ entitlements is not really an issue as it is for general insurers. Privately
underwritten schemes have a whistle-blowing requirement for individual insurers through
APRA’s regulations, but no such role exists for the scheme as a whole in most cases. In
summary, the nature of schemes lessens the need to have a whistle-blowing mechanism for
protection of participants.


However, despite the differences between general insurers and schemes, it would still be valid for
an approved actuary to have a formal reporting mechanism to the responsible Government
department overseeing the scheme regulator. If the scheme actuary thought that the actions or
operations of the regulator were threatening the viability of the scheme, or that there were
indications of fraud, it would obviously be appropriate for the actuary to share this opinion via a
formal reporting mechanism.


In this way, the responsible Government department would act in the role of APRA for the
scheme. The responsible minister would then be accountable for balancing the advice of the
approved actuary with the political implications of that advice and deciding on a course of action.




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7         Financial condition report


7.1       APRA’s requirements


Section 43 outlines the requirements for the FCR as providing an objective assessment of the
overall financial condition of the insurer on an annual basis. The preparation of this report is
subject to compliance with Professional Standard 305 of the Institute of Actuaries of Australia,
which has been included as Appendix B.

The FCR must include discussion of the following:

     business overview;

     assessment of the insurer’s recent experience and profitability, including at least the
      experience during the year ending on the valuation date;

     summary of the key results of the ILVR;

     assessment of the adequacy of past estimates for insurance liabilities (where appropriate, this
      may include references to the ILVR or past ILVRs);

     assessment of asset and liability management, including the insurer’s investment strategy;

     assessment of current and future capital adequacy and a discussion of the insurer’s approach
      to capital management;

     assessment of pricing, including adequacy of premiums;

     assessment of the suitability and adequacy of reinsurance arrangements, including the
      Maximum Event Retention, documentation of reinsurance arrangements and the existence
      and impact of any limited risk transfer arrangements; and

     assessment of the suitability and adequacy of the risk management framework.


The FCR is provided to the board and management of the insurer.


7.2       Relevance to schemes


The financial condition report is intended to be a summary of the current financial status of a
general insurer. Some areas of the advice given to general insurers in an FCR will not be as
relevant to Schemes, such as discussions regarding reinsurance arrangements and documentation.
However, there are some areas which are very relevant to schemes, including:




                                                                                                8
   Capital management. The FCR ties the premium, capital and budget projections together and
    considers whether the general insurer is likely to meet its prudential requirements into the
    future under a range of foreseeable scenarios. There has been a trend over time towards full
    funding for accident compensation schemes, and adoption of risk margins in outstanding
    claims provisions. Publicly underwritten schemes obviously manage the balance between
    premiums and capital over time, unlike APRA regulated insurers which need to ensure full
    funding on a continual basis. This obviously gives the publicly underwritten schemes a
    greater degree of flexibility in managing the balance over time.


    Actuaries have provided advice to schemes on levels of risk margins and target funding
    strategies. It is quite common for actuaries to also project funding levels for schemes when
    setting premium rates. Therefore, the scope of work for the capital management section of
    the FCR might not be significantly different to that already carried out for Schemes. If
    anything, the greater flexibility afforded publicly underwritten schemes means that there is
    greater scope for analysis of the projected capital position under various scenarios, resulting
    in a more detailed capital management report in the FCR.


   Asset and liability management, including the insurer’s investment strategy. It is less
    common for actuaries to provide advice on these parts of Scheme financial management. It
    would be the usual domain of investment committees within Schemes to obtain advice from
    investment professionals. The FCR requires that the Actuary comment on the investment
    strategy and whether there are any issues resulting from the adopted approach which could
    adversely impact the financial condition of the insurer. This is an especially important
    function in long-tailed schemes, and needs to be considered along with the funding targets
    and current solvency.


   Consideration of the Maximum Event Retention. Schemes generally do not purchase
    reinsurance for their exposures. It can be instructive to consider what significant events could
    impact Schemes, and what would be the impact on funding, premiums and intergenerational
    equity of insured participants.


   Assessment of the suitability and adequacy of the risk management framework. This is also
    an area where there has been traditionally less involvement of actuaries advising Schemes or
    general insurers.


In summary, the financial condition report prepared for general insurers could be of use to
schemes. However, it is likely that much of the most useful analysis in an FCR as proposed
above, is already prepared by actuaries advising schemes, or by the schemes themselves. The
only additional benefit would be that the analysis is presented in a single report, with an overall
synthesis of the key areas which impact the financial condition of the scheme. Therefore, the
report would need additional tailoring for schemes in order to make it relevant.




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7.3       Scheme condition report


I define a scheme condition report as being the equivalent of the FCR but tailored to be more
specific and useful for schemes. The scheme condition report would start with the items outlined
in section 7.2 above. There are other areas which would be appropriate to include in a Scheme
Condition Report, including:


     Impact of changes to the scheme during the year on funding, premium levels, cross-subsidies
      between insured participants, and intergenerational equity.

     Discussion of the performance of the scheme relative to stated goals in terms of outcomes for
      injured claimants. Comparison of the balance achieved by the operation of the scheme in
      terms of meeting the competing needs of stakeholders.

     Ability of the Scheme to meet long term stated goals given current and projected financial
      and operational status.

     Hindsight analysis of the impact of legislative change both in financial terms and in meeting
      stated aims for outcomes.


These additional items are designed to recognise that the scheme has multiple stakeholders, and
act to broaden the focus from a purely financial one to a more holistic view of the operation of the
scheme, from the actuary’s perspective.


In addition, it would be appropriate for actuaries to prepare reports when significant scheme
changes are made throughout the year, commenting on the impact on pricing, funding and equity.




8         Schemes versus insurers.


The previous sections examined the role of an approved actuary to determine its relevance for
schemes. The conclusion from that discussion is that the role can be tailored to be relevant for
schemes. However, there are differences between general insurers and schemes which need to be
examined in the context of the need for an approved actuary. These are explored in the following
sections.


8.1       History of schemes versus insurers

In APRA’s submission to the HIH Royal Commission, they stated that,




                                                                                              10
“A major weakness of the prudential and accounting regime under which HIH operated was that
an insurer’s Board and management had too much discretion in valuing their insurance
liabilities. Insurers could choose what, if any, level of prudential margin should be included
within their liability valuations, could select a discount rate of their own choosing, and need not
consider their future liabilities on existing policies on a prospective basis (ie did not need to
provide for evident under-pricing of risk). There was also no obligation on insurers to seek or
follow actuarial advice on the value of their insurance liabilities. As a result, the process of
liability valuation was largely opaque to the supervisor, and more so for policyholders and
investors.”


Has there been an equivalent problem in accident compensation schemes which would warrant
the introduction of a statutory role for actuaries?

The problems for accident compensation schemes historically have been due to periods of
imbalance in stakeholder interests, followed by corrections brought about with significant scheme
reform. In most instances, actuaries provided advice to regulators during these periods of reform,
estimating the impact of proposed changes to funding and premium levels.


These “corrections” in the history of scheme operations are part of the normal operation of
schemes, and not something which can be considered in the same way as the historic problems of
general insurers in estimating insurance liabilities. However, periods of change are very
disruptive for schemes and can have significant political ramifications.


It is difficult to hypothesise whether the role of approved actuary would have made any
difference to the impact on schemes of these periods of change. The existence of an annual
scheme condition report may have highlighted emerging trends in the scheme at a slightly earlier
point in some cases. If this report were made public, it would add to the transparency of the
operations of the scheme, and the impact of key decisions made by politicians regarding its
operation. An increase in transparency was one of the key aims for APRA’s changes, and it
appears that it would be a relevant aim for Schemes also.


In the current political environment, there is increasing call for transparency in many aspects of
Government decision making, for example private sector partnerships for infrastructure and other
development.


In summary, there has not been a specific issue or crisis in schemes to prompt the introduction of
an approved actuary role at this point in time in the same way as for general insurers. However,
an increased desire for transparency, coupled with potential future changes on the horizon could
provide impetus, which is considered further in section 9.



8.2     Regulatory role


Accident compensation schemes in Australia take the following forms:


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   Authorised insurers with oversight of a regulator
   Managed Schemes
   Combined insurer/regulators
   Combined insurer/regulators with self insurance options

Appendix C outlines the different accident compensation Schemes across Australia and the
associated regulators. The regulators must ensure the balance of the needs of all the key
stakeholders, which may include:


   Injured claimants
   Employers and motorists
   Employee groups
   Health care providers
   Lawyers and other professional service providers
   Insurers in privately underwritten schemes


Each regulator is responsible for determining the balance between the competing needs of
different stakeholders. This balance is very different across different schemes.


The primary responsibility of APRA, on the other hand, is to protect the interests of
policyholders, through ensuring the on-going financial viability of insurers. In effect the
approved actuary’s role is to ensure that general insurers hold enough capital and write ongoing
profitable business, which is appropriately managed to enable them to meet their obligations to
policyholders.


APRA is also accountable for the degree of regulatory burden placed on insurers, and therefore
must find a balance between cost of compliance and cost of insurer failure. In addition, APRA
must manage the political landscape of the day and interactions with Government.


In summary, APRA’s primary responsibility is weighted more towards protection of
policyholders than most scheme regulators. Although APRA does have many different
constituents, it has less scope to balance the sometimes competing aims of stakeholders.


So how does this difference impact the requirement for an approved actuary?

   If the approved actuary prepares a scheme condition report which includes discussion about
    how the scheme is travelling in terms of various stakeholder interests, this view, when added
    to the regulator’s own analysis, would assist regulators in their role in the same way as the
    approved actuary assists APRA with their role of protecting policyholders.

   The regulator has the issue of balancing the cost of administration versus the benefit of the
    information produced, which is similar to the cost of compliance issue faced by APRA.



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Therefore, the differences in regulatory role do not preclude the creation of an approved actuary
role for schemes. However, there is still no compelling argument as to why the role should exist.
The following section outlines two such arguments.



9       Scheme Actuary


9.1     Capital and funding


One of the key roles for the approved actuary is to comment on whether the insurer is likely to
meet prudential capital requirements in the future. The analysis carried out of funding and
pricing by actuaries is already well embedded in schemes as mentioned in previous sections.


There has been an evident focus over the last ten years for public schemes to target full funding,
with the result that the largest states have now achieved that goal. Actuaries obviously played a
significant role in that achievement. This now presents an interesting conundrum which is being
considered by some regulators for the first time: how to manage a surplus position? This is
obviously a situation where the competing interests of stakeholders need to be managed,
including the significant political forces.


Therefore, although actuaries have had a significant role in the area of scheme funding in the past,
it could be argued that the current environment provides impetus for increasing that role and
making it more focused on strategic advice for the scheme. The proposed role of scheme actuary
would include working with scheme management to provide such strategic advice, as a means to
ensure that politicians are as well informed as possible.


9.2     Harmonisation


The Council for the Australian Federation, which comprises all State Premiers and Territory
Chief Ministers reported from its first meeting in October 2006, that there is an increase in
appetite for greater harmonisation of workers’ compensation schemes across the nationv.
Evidence to date has emerged in small changes to workers compensation in NSW, Victoria and
Queensland to align various practices. However, a comparison of benefit structures in workers
compensation as of a year ago reveals similar findings made by Sir Owen, in that, for example, a
workplace injury resulting in death in NSW is worth approximately 50% more than under the
Comcare scheme.


If the initial indications of an increase in momentum for change does eventuate, the role of the
actuary in providing advice to each of the Schemes will help to increase the relevance of actuaries
in accident compensation.




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If scheme approved actuaries were appointed and prepare scheme condition reports which tie the
financial condition of each scheme to the goals and outcomes of the scheme, this would provide a
good starting point for schemes to discuss and reach common goals across the nation. Ideally,
this would lead to a better informed debate about the differences between schemes and the steps
which could be undertaken to lessen them.




10       Conclusion


This paper explored the main functions of an approved actuary and the key considerations for
whether these functions are relevant for schemes. It outlined a role of scheme approved actuary,
with the following key features:


    The appointment of the scheme approved actuary would be made by the scheme regulator,
     with a declaration by the actuary that they are a fit and proper person.

    The role of the scheme approved actuary would be to prepare annual insurance liability
     reports and scheme condition reports, which would be prepared for the board and
     management of the regulator and the overseeing Government department.

    The scheme approved actuary would be required to prepare a report for all significant scheme
     changes

    The role would include the current work done for premium reviews and funding analysis

    The scheme approved actuary would have a formal reporting requirement to the Government
     department overseeing the scheme.


In summary, the question of whether schemes need an approved actuary is not answered
definitely in this paper. The conclusion is that there are good reasons in the current environment
for schemes to consider an elevated role for actuaries. The question remains whether schemes
have the view that the profession is able to provide the “wise advice” at the strategic level in
order to earn that elevated role, or whether they would see us “getting under the feet of men of
affairs.”vi




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A       APRA’s GPS 310
A fully copy of the standard is available on APRA’s website: www.apra.gov.au
The following extract covers the sections which are relevant to the Approved Actuary role.


Prudential Standard GPS 310

Audit and Actuarial Reporting and Valuation

Objective and key requirements of this Prudential Standard
This Prudential Standard aims to ensure that the Board and senior management of a general
insurer are provided with impartial advice in relation to its operations, financial condition and
insurance liabilities. This advice is designed to assist the Board and senior management in
carrying out their responsibility for the sound and prudent management of the general insurer.

Accordingly, this Prudential Standard outlines the roles and responsibilities of a general insurer’s
Approved Auditor and, where the general insurer is required to have one, its Approved Actuary;
it also outlines the obligations of a general insurer to make arrangements to enable its Approved
Auditor and Approved Actuary to fulfil their responsibilities. In addition, the Prudential Standard
establishes a set of principles and practices for the consistent measurement and reporting of
insurance liabilities for all general insurers.

The key requirements of the Insurance Act 1973 and this Prudential Standard in relation to audit
and actuarial reporting and valuation are:

   an insurer must make arrangements to enable its Approved Auditor and Approved Actuary to
    undertake their roles and responsibilities;

   an insurer will be exempt from the requirement to have an Approved Actuary in certain
    circumstances;

   the Approved Auditor must audit the yearly statutory accounts of the general insurer and
    must review other aspects of the general insurer’s operations on an annual basis. The
    Approved Auditor must prepare a certificate and a report on these matters and provide them
    to the Board of the general insurer. An Approved Auditor may also be required to undertake
    other functions, such as a special purpose review;

   the Approved Actuary must provide an assessment of the overall financial condition of the
    general insurer and advice on the valuation of its insurance liabilities on an annual basis. In
    particular, the Approved Actuary must prepare a Financial Condition Report and an Insurance
    Liability Valuation Report and provide these reports to the Board. An Approved Actuary may
    also be required to undertake other functions, such as a special purpose review;

   for the purposes of Prudential Standard GPS 110 Capital Adequacy and reporting
    requirements under the Financial Sector (Collection of Data) Act 2001, a general insurer’s
    insurance liabilities must be valued in accordance with this Prudential Standard. This applies
    whether or not the general insurer is required to have an Approved Actuary;



                                                                                              15
   a general insurer must arrange to have the Insurance Liability Valuation Report of its
    Approved Actuary peer reviewed by another actuary; and

   a general insurer must submit to APRA all certificates and reports required to be prepared by
    its Approved Auditor and Approved Actuary


Application

        2. This Prudential Standard applies to all general insurers (insurers) authorised under the
            1
        Act. Certain requirements in this Prudential Standard have been tailored for foreign
        general insurers (foreign insurers).


Obligations of an insurer

      8. Under the Act, subject to certain exceptions, an insurer must appoint an actuary
                                                                                             5
      (Approved Actuary), being an actuary whose appointment is approved by APRA.

      9. Under the Act, an insurer must make arrangements that are necessary to enable its
      Approved Auditor and Approved Actuary to undertake their functions as required by the
                                                          6
      Act and prudential standards made under the Act. These arrangements include ensuring
      that an insurer’s Approved Auditor and Approved Actuary are fully informed of all
      prudential requirements applicable to the insurer. Prudential requirements include
      requirements imposed by the Act, prudential standards, the Financial Sector (Collection of
      Data) Act 2001 (the Collection of Data Act), reporting standards, conditions on the
      insurer’s authorisation and any other requirements imposed by APRA in writing. These
      arrangements also include ensuring that an insurer’s Approved Auditor and Approved
      Actuary are provided with any other information that APRA has provided to the insurer
      that may assist, or is requested by, the Approved Auditor or Approved Actuary, in
      performing their duties.

      10. An insurer must ensure that its Approved Auditor and Approved Actuary have access
      to all relevant data, information, reports and staff of the insurer (and must take all
      reasonable steps to ensure access to contractors of the insurer) that its Approved Auditor
      and Approved Actuary reasonably believe are necessary to fulfil their responsibilities. This
                                                7
      will include access to the insurer’s Board and Board Audit Committee.

      11. Under the Act, an insurer must submit to APRA all certificates and reports required to
                                                                       8
      be prepared by its Approved Auditor and Approved Actuary. Reports other than those
      relating to a special purpose review must be submitted on or before the day that the
      insurer’s yearly statutory accounts are required to be given to APRA in accordance with
      reporting standards made under the Collection of Data Act. Further details of those
      certificates and reports are set out in paragraphs 38 to 42. Reports relating to a special
      purpose review must be submitted to APRA in accordance with the time specified in
      paragraph 24.

      12. Prior to submitting to APRA an Insurance Liability Valuation Report (ILVR) prepared
      by its Approved Actuary, an insurer must arrange for it to be peer reviewed by another


                                                                                                 16
     actuary (the Reviewing Actuary). Further details of the requirements for peer review are
     set out in paragraphs 64 to 72.

     13. Where an insurer is exempt from the requirement to have an Approved Actuary, the
     insurer is not required to submit the reports required to be prepared by an Approved
     Actuary and is not subject to the requirements for peer review. For the purposes of
     Prudential Standard GPS 110 Capital Adequacy (GPS 110) and reporting requirements
     under the Collection of Data Act, however, the insurer must still value its insurance
     liabilities in accordance with this Prudential Standard. The value of the insurance liabilities
     is the sum of the central estimate and the risk margin for both outstanding claims liabilities
     and premiums liabilities for all classes of business written by an insurer. Attachment A
     provides further details on the requirements of this insurance liability valuation.

Exemption from requirement to appoint an actuary

       14. For the purpose of subsection 47(3) of the Act, an insurer is exempt from the
       requirement to appoint an actuary when:

       (a) the gross insurance liabilities of the insurer are less than $20 million; and

       (b) the gross insurance liabilities of the insurer do not include a material amount in
       respect of long-tail business (comprising classes of business where the claims are
       typically settled one year or more after the date of occurrence of the event that gives rise
       to the claim). In cases where APRA considers the insurer to have a material amount of
       long-tail business based on the documentary evidence required to be submitted by the
       insurer to APRA in accordance with subparagraph (d) or on other relevant information,
       APRA may notify the insurer in writing that this criterion has not been satisfied; and

       (c) the gross insurance liabilities of the insurer are valued in accordance with this
       Prudential Standard; and

       (d) the insurer has provided APRA with documentary evidence that the criteria in
       subparagraphs (a) to (c) have been met; and

       (e) the insurer has attested to APRA, in writing, that it will meet the criteria in
       subparagraphs (a) to (c) for the next 12 months. This attestation must be provided by the
       chief executive officer (CEO) of the insurer.

       15. To maintain the exemption, the insurer must annually attest to APRA, in writing, that
       it has met the criteria in subparagraphs 14(a) to (c) for the past 12 months and expects to
       meet these same criteria for the next 12 months. This attestation must be provided by the
       CEO of the insurer.

       16. An insurer may also be exempt from the requirement to appoint an actuary where
       APRA considers that the circumstances of the case merit an exemption (for example,
       insurers in full run-off). In such cases, APRA must seek the approval of the Treasurer
                                       9
       before granting an exemption.

     17. Notwithstanding any exemption, APRA may at any time require an insurer to
     commission, at the insurer’s expense, an independent actuarial investigation of its



                                                                                             17
                                                      10
     insurance liabilities in accordance with the Act. The insurer must appoint an actuary that
                                                                                  11
     meets the criteria specified in the Act and APRA must approve the actuary.

Roles and responsibilities of the Approved Actuary

     25. In addition to and without derogation from the role of an Approved Actuary as
                                18
     provided for under the Act, an Approved Actuary’s primary roles are to provide advice on
     the valuation of an insurer’s insurance liabilities and to provide an impartial assessment of
     the overall financial condition of the insurer. An insurer may also seek the advice of its
     Approved Actuary in relation to other matters where the insurer considers this to be
     appropriate.

     26. An Approved Actuary must, on an annual basis (subject to paragraph 27), undertake an
     investigation to enable the preparation of the reports as required by this Prudential
              19
     Standard. These reports are the Financial Condition Report (FCR) and the ILVR (which
     may form part of the FCR).

     27. APRA may, in writing, specify that an FCR and an ILVR (or either) in respect of an
     insurer are to be prepared:

       (a) more frequently than as required in paragraph 26 if, having regard to the particular
            circumstances of the insurer, APRA considers it necessary or desirable to obtain the
            reports more frequently for the purposes of the prudential supervision of the insurer;
            or

       (b) less frequently than as required in paragraph 26 if, having regard to the particular
            circumstances of the insurer, APRA considers it unnecessary to obtain the reports on
            an annual basis for the purposes of the prudential supervision of the insurer.

     28. An Approved Actuary must provide the FCR and ILVR to the insurer within such time
     as to give the Board of the insurer a reasonable opportunity to:

       (a) consider and use the FCR and the ILVR in preparing the insurer’s yearly statutory
            accounts; and (b) provide the ILVR to the Reviewing Actuary for the purpose
           of peer review; and

       (c) provide the FCR and the ILVR to APRA on or before the day that the insurer’s
            yearly statutory accounts are required to be given to APRA in accordance
            with reporting standards made under the Collection of Data Act.

     29. Where APRA has specified that an FCR and an ILVR (or either) are to be prepared
     more or less frequently, APRA may also specify, in writing, the time within which the FCR
     and the ILVR are to be provided by the Approved Actuary to the insurer and provided by
     the insurer to APRA. In doing so, APRA will have regard to the particular circumstances of
     the insurer and the need to obtain the reports for the purposes of the prudential supervision
     of the insurer.

     30. When APRA specifies in writing, an Approved Actuary must undertake a special
     purpose review of matters specified by APRA relating to the insurer’s operations, risk



                                                                                            18
                                                                                     20
     management or financial affairs, and prepare a report in respect of that review. The review
     must be completed in accordance with any relevant professional standards (as appropriate
     to the nature of the special purpose review) published by the Institute of Actuaries of
     Australia.

     31. The cost of a special purpose review will be borne by the insurer. The Approved
     Actuary must submit the report to APRA and the insurer simultaneously within three
     months of the review being commissioned unless APRA grants an extension of time in
     writing.

Non-routine reporting by Approved Auditors and Approved Actuaries

     32. The Act specifies certain circumstances where Approved Auditors and Approved
                                                                           21
     Actuaries are required to report to APRA on a non-routine basis. This may be where
     APRA requests specific information, or where an Approved Auditor or an Approved
     Actuary has information that is specified in the Act or that they consider would assist
     APRA in performing its functions.

     33. APRA may require an Approved Auditor or an Approved Actuary to provide
     information, or to produce books, accounts or documents, about an insurer if it will assist
                                                        22
     APRA in performing its functions under the Act. To ensure that an Approved Auditor or
     an Approved Actuary is able to comply with any such request from APRA, all working
     papers and other documentation of an Approved Auditor and an Approved Actuary in
     relation to the insurer must be maintained for a period of seven years after the date of the
     report or certificate to which the working papers or documentation relate, as required under
                                 23
     the Corporations Act 2001. 34. In assessing whether the interests of policyholders may be
                           24
     materially prejudiced, an Approved Auditor and an Approved Actuary must consider not
     only a single activity or a single deficiency in isolation. Policyholder interests may be
     materially prejudiced by a number of activities or deficiencies that may not individually
     result in a material threat to policyholder interests but, when considered in total, do amount
     to a material threat. In such cases, the Approved Auditor or Approved Actuary must
     provide such information to APRA as required under the Act if they have reasonable
                                                                                               25
     grounds for believing that the interests of policyholders may be materially prejudiced.

     35. In most cases, matters reported to APRA by an Approved Auditor or an Approved
     Actuary should also be reported by that person to the insurer to which the matter relates.
     An Approved Auditor or an Approved Actuary must not notify the insurer where that
     person considers that by doing so the interests of policyholders would be jeopardised, or
     where there is a situation of mistrust between an Approved Auditor or an Approved
     Actuary and the Board or senior management of the insurer.

     36. An Approved Auditor or an Approved Actuary who is required to provide information
                                       26
     to APRA on a non-routine basis is not excused from such a requirement on the ground
     that doing so would tend to incriminate them or make them liable to a penalty. Certain
                                            27
     protection is provided under the Act to Approved Auditors or Approved Actuaries that
     supply information to APRA in these circumstances.




                                                                                             19
Meetings with Approved Auditors and Approved Actuaries

     37. APRA liaison with either an Approved Auditor or an Approved Actuary will normally
     be conducted under trilateral arrangements involving APRA, an insurer, and the insurer’s
     Approved Auditor or Approved Actuary. Any one of these parties may initiate a meeting or
     discussion when the party considers it necessary. Notwithstanding the trilateral
     relationship, APRA and an insurer’s Approved Auditor or Approved Actuary may meet on
     a bilateral basis where either party considers this to be necessary.

Financial Condition Report
                                                        32
     43. An Approved Actuary must prepare an FCR. The FCR must provide the Approved
     Actuary’s objective assessment of the overall financial condition of the insurer and should
     form an important input into decision-making by the Board and senior management in
     respect of the operations of the insurer.

     44. The FCR must be prepared on an annual basis and provided to the insurer within the
     time required by paragraph 28 (unless APRA requires more regular or less frequent
     reporting under paragraph 27). The FCR must be addressed to the Board of the insurer and
     provide the Approved Actuary’s objective assessment of the overall financial condition of
     the insurer. In preparing an FCR, an Approved Actuary must have regard to relevant
     professional standards issued by the Institute of Actuaries of Australia, to the extent that
     they are not inconsistent with the requirements of this Prudential Standard.

     45. Subject to relevance, an FCR must include (but need not be limited to) the matters
     listed below:

       (a) business overview;

       (b) assessment of the insurer’s recent experience and profitability, including at least the
            experience during the year ending on the valuation date;

       (c) summary of the key results of the ILVR (prepared in accordance with this Prudential
            Standard); (d) assessment of the adequacy of past estimates for insurance liabilities
            (where appropriate, this may include references to the ILVR or past ILVRs);

       (e) assessment of asset and liability management, including the insurer’s investment
            strategy;

       (f) assessment of current and future capital adequacy and a discussion of the insurer’s
            approach to capital management;

       (g) assessment of pricing, including adequacy of premiums;

       (h) assessment of the suitability and adequacy of reinsurance arrangements, including the
            Maximum Event Retention, documentation of reinsurance arrangements and the
            existence and impact of any limited risk transfer arrangements; and

       (i) assessment of the suitability and adequacy of the risk management framework.




                                                                                            20
      46. The Approved Actuary must consider the future implications and outlook for each of
      the matters listed immediately above. Where these implications are adverse, the Approved
      Actuary must propose recommendations designed to address the issues.

      47. As a general rule, an FCR must be completed in respect of each insurer. An insurance
      group may submit to APRA an FCR in respect of the insurance group where the Approved
      Actuary completing the FCR is the Approved Actuary for each insurer included in the
      insurance group FCR or it is practical to produce a single over-arching FCR. This
      insurance group FCR must adequately consider and address the operations of each insurer
      within that insurance group. Where APRA is of the view that the insurance group FCR
      does not adequately address the operations of each insurer and that a separate FCR is
      desirable to ensure that the requirements of this Prudential Standard are met, APRA may,
      in writing, do either or both of the following:

       (a) require one or more insurers within the insurance group to prepare and submit to
            APRA a separate FCR;

       (b) require the preparation and submission to APRA of an FCR for a different insurance
            group within the corporate group by a time specified by APRA.

      48. For foreign insurers, the FCR must be prepared in respect of the Australian branch
      operation, but with consideration given to the financial position of the head office.

Valuation of insurance liabilities

      49. An insurer’s insurance liabilities must be valued in accordance with this Prudential
      Standard, whether or not the insurer is required to have an Approved Actuary. Attachment
      A provides further details on this valuation. The valuation must then be used for the
      purpose of calculating the insurer’s Minimum Capital Requirement in accordance with
      GPS 110 and completing the insurer’s yearly statutory accounts in accordance with
      reporting standards made under the Collection of Data Act.

      50. Where an insurer includes in its yearly statutory accounts a value for insurance
      liabilities which is inconsistent with the advice received from its Approved
      Actuary, the insurer must notify APRA in writing at the same time it submits its
      yearly statutory accounts to APRA. This written notification must include:

       (a) the reasons for not accepting the Approved Actuary’s advice; and

       (b) where relevant, details of the alternative assumptions and methodologies used for
           determining the value of the insurance liabilities.

      51. In determining the value of its insurance liabilities, an insurer (after taking advice from
      its Approved Actuary where the insurer is required to have one) must determine a value for
      both its outstanding claims liabilities and its premiums liabilities for each class of
                  33
      business.

      52. Outstanding claims liabilities relate to all claims incurred prior to the valuation date,
      whether or not they have been reported to the insurer. The value of the outstanding claims
      liabilities must include an amount in respect of the expenses that the insurer expects to



                                                                                              21
incur in settling these claims. The outstanding claims liabilities are to be determined on a
prospective basis, both net and gross of expected reinsurance recoveries and non-
reinsurance recoveries.

53. Premiums liabilities relate to all future claim payments arising from future events post
the valuation date that will be insured under the insurer’s existing policies that have not yet
expired. The value of the premiums liabilities must include an amount in respect of the
expenses that the insurer expects to incur in administering and settling the relevant claims
and allow for expected premium refunds. In respect of premiums liabilities for which
reinsurance has not yet been purchased, allowance must be made for this reinsurance (refer
Attachment B for further details on the assumptions relating to this reinsurance). Premiums
liabilities are to be determined on a prospective basis, both net and gross of expected
reinsurance recoveries and non-reinsurance recoveries.

54. The value of outstanding claims liabilities and premiums liabilities must not include
any Government charges imposed such as levies, duties and taxes. Also, a deferred
acquisition cost asset must not be reported.

55. Premiums liabilities relating to insurance and reinsurance contracts written on a long-
term (or continuous) basis, with the option for the party accepting the risk to cancel the
contract at pre-agreed dates prior to the expiry date, must make allowance for future claims
payments anticipated up to the next possible cancellation date. For instance, if a multi-year
contract is written on the basis that it can be cancelled by the risk carrier at annual
anniversary dates, the insurer or reinsurer must account for premiums liabilities for any
unexpired risks as at the annual anniversary cancellation date.

56. Where the treatment in paragraph 53, when applied to an intra-group arrangement that
existed prior to this Prudential Standard taking effect, results in a premiums liability
valuation that is unsuitable in the Approved Actuary’s opinion, the insurer and the
Approved Actuary must approach APRA to determine a suitable alternative valuation
methodology. Insurers and Approved Actuaries cannot consider or propose alternative
valuation methodologies for contracts entered into after this Prudential Standard comes into
effect.

57. The valuation of insurance liabilities for each class of business must comprise:

 (a) a central estimate value of the outstanding claims liabilities;

 (b) a central estimate value of the premiums liabilities; and

 (c) risk margins that relate to the inherent uncertainty in the central estimate values for
      outstanding claims liabilities and premiums liabilities. Allowance for diversification
      and/or reinsurance can be made in determining the risk margin.

58. The valuation of insurance liabilities reflects the individual circumstances of the
insurer. In any event, the minimum value of insurance liabilities must be 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




                                                                                         22
       (b) the central estimate plus one half of a standard deviation above the mean for the
            insurance liabilities of the insurer.

     59. For insurers in run-off wanting to repatriate capital, the liability valuation has to be at a
     higher level of sufficiency. This is explained in greater detail in GPS 110.

Insurance Liability Valuation Report

     60. An Approved Actuary must prepare an ILVR on an annual basis and provide that ILVR
                                                                 34
     to the insurer within the time required by paragraph 28. The ILVR must be addressed to
     the Board of the insurer and provide the Approved Actuary’s advice in respect of the value
     of the insurer’s insurance liabilities, determined in accordance with this Prudential
     Standard. In preparing an ILVR, an Approved Actuary must have regard to professional
     standards issued by the Institute of Actuaries of Australia, to the extent that they are not
     inconsistent with the requirements of this Prudential Standard.

     61. The ILVR must, in respect of each class of business underwritten by the insurer,
     provide details (or abbreviated details for classes of business that are not material) of the
     following matters:

       (a) the value of insurance liabilities determined in accordance with this Prudential
            Standard;

       (b) assumptions used in the valuation process, including the extent to which the
           assumptions used are based on the experience of the insurer;

       (c) availability and appropriateness of the data;

       (d) significant aspects of recent experience;

       (e) the methodologies used to model the central estimates of outstanding claims liabilities
            and premiums liabilities;

       (f) an indication of the uncertainty in the central estimates, including statistics such as the
            standard deviation;

       (g) the sensitivity analyses undertaken;

       (h) a description of probability distributions and parameters, or approaches adopted to
            estimate uncertainty if these are not specifically determined; and

       (i) risk margins that relate to the inherent uncertainty in the central estimate values for
             outstanding claims liabilities and premiums liabilities.

      Further detail on the measurement and reporting of insurance liabilities is contained in
     Attachment A.

     62. The Approved Actuary must, at least annually, reassess the appropriateness of the
     assumptions and valuation methods used to determine the insurance liabilities of the
     insurer. Where a change in assumptions or method is made, the effects of that change on



                                                                                               23
the value of the insurance liabilities must emerge in the current calculation period and must
not be spread over future calculation periods. The effects must be disclosed in the ILVR.

63. The ILVR must provide sufficient information in relation to the assumptions and
methods used for the valuation of liabilities so that another actuary reading the ILVR will
be able to obtain a sound understanding of the valuation process and results, any inherent
limitations in the process and results and the key risks pertaining to the insurance liabilities
of the portfolio. An Approved Actuary must ensure that results are not presented in a way
that gives the impression of greater reliability than is actually the case. This particularly
applies in situations where materially different results could reasonably be justified.




                                                                                         24
                            Do Schemes need an Approved Actuary?




B       Professional Standard 305 of Institute of Actuaries of Australia


1 INTRODUCTION

1.1 Application

1.1.1 This Professional Standard applies to a Financial Condition Reports (FCR) produced for
an Entity authorised to carry on general insurance business under the Insurance Act 1973.

1.1.2 If similar reports are prepared for other Entities providing general insurance coverage,
such as self-insurers or accident compensation schemes, then the relevant parts of this
Professional Standard are applicable, to the extent that these are within any relevant
legislation and/or any formal request made by the Entity to the Actuary.

1.1.3 This Professional Standard does not seek to replicate or override the requirements of the
Institute’s Professional Standard 300.


1.2 Classification

1.2.1 This Professional Standard has been prepared in accordance with the Institute’s Policy
for Drafting Professional Standards as varied from time to time. This Professional Standard
must be applied in the context of the Institute’s Code of Professional Conduct.

1.2.2 This Professional Standard is binding on Members of the Institute of Actuaries of
Australia in respect of all work covered by the Professional Standard. Non-compliance with
this Professional Standard by a Member engaged in work covered by this Professional
Standard is or may be prima facie Actionable Conduct and may lead to penalties under the
Institute’s Disciplinary Scheme.

1.2.3 This Professional Standard in itself defines the requirements of the Institute in respect of
all work covered by this Professional Standard. If a Member believes that the Professional
Standard is ambiguous or for some other reason wishes to seek clarification of it, that
Member may consult the Institute’s Professional Standards Committee for guidance as to the
interpretation of this Professional Standard. Apart from legislation (including regulations,
prudential standards, subordinate standards and rules), no other document, advice or
consultation (including Practice Guidelines of the Institute) can be taken to modify or
interpret the requirements of this Professional Standard.

1.2.4 Members who find that they cannot carry out work in a manner that complies with this
Professional Standard must decline to carry out the work or terminate their agreement to do
so.


1.3 Background

1.3.1 The subject of an FCR being prepared for a general insurer was raised in a July 2002
submission by the Institute to the HIH Royal Commission. In his April 2003 final report, the
Commissioner recommended to the Government that APRA require the annual production of
such a report, akin in concept to the FCR prepared by Appointed Actuaries in the life
insurance industry. The Federal Government accepted the recommendation.




                                                                                                 25
                            Do Schemes need an Approved Actuary?


1.3.2 In December 2002, the Council of the Institute established an FCR Taskforce to
supervise the drafting of an Institute Professional Standard on the subject of an FCR. This
taskforce produced a number of drafts of this Professional Standard in the period from
November 2003 for comment by Institute members and the industry.

1.3.3 In November 2003, APRA released a Discussion Paper, which listed the elements to be
included in an FCR. This incorporated and extended the requirement for the Approved
Actuary to undertake an Insurance Liability Valuation. In May 2005, APRA released a further
Discussion Paper, which provided more detail on the FCR proposal, and required that regard
must be taken of relevant Institute Professional Standards. The relevant legislation is
described in section 1.6.


1.4 Purpose

1.4.1 APRA Prudential Standard GPS 310, Audit and Actuarial Reporting and Valuation,
“aims to ensure that the Board and senior management of a general insurer are provided with
impartial advice in relation to its operations, financial condition and insurance liabilities”. The
requirement for an FCR plays a key part in meeting this aim.

1.4.2 The FCR is intended to provide an impartial assessment of an Entity’s financial
condition and, for a general insurer authorised by APRA, in the context of its current APRA
authorisation.

1.4.3 The assessment of the financial condition of the Entity, and, for a general insurer
authorised by APRA, in the context of its current APRA authorisation, includes discussing the
implications of Material risks identified during the assessment, and, where these implications
are adverse, making recommendations as to how to address these risks.


1.5 Previous Versions

There are no previous versions of this Professional Standard.


1.6 Legislation

1.6.1 From 1 July 2002, the Insurance Act 1973, as amended by the General Insurance
Reform Act 2001, (the Act) provides for APRA to issue prudential standards, regulating the
activities of and imposing requirements on authorised general insurers.

1.6.2 APRA Prudential Standard GPS 310, Audit and Actuarial Reporting and Valuation,
mandates that an Approved Actuary “undertake an investigation to enable the preparation of
… [a] Financial Condition Report (FCR)…” and that, as a general rule, an FCR must be
completed in respect of each authorised general insurer. In addition, GPS 310 requires that
regard be taken of relevant Institute Professional Standards.

1.6.3 There may be other legislation that requires an FCR to be provided to Entities not
regulated by APRA.

1.6.4 If there is a difference between this Professional Standard and the applicable legislation,
the legislation takes precedence. In this context, legislation includes regulations, prudential
standards, subordinate standards and rules.




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                           Do Schemes need an Approved Actuary?


2 COMMENCEMENT DATE

This Professional Standard takes effect for an FCR applicable to an Effective Date from 30
June 2006.
3 DEFINITIONS

‘Actuarial Advice’ has the meaning given in the Institute’s Code of Professional Conduct.

‘Actuary’ means a Fellow or Accredited Member of the Institute.

‘Approved Actuary’ means the person appointed by an authorised general insurer and
approved by APRA under sections 39 and 40 of the Insurance Act 1973.

‘APRA’ means the Australian Prudential Regulation Authority.

‘Board’ means the directors of an Entity, or equivalent.

‘Central Estimate’ has the meaning given in the Institute’s Professional Standard 300.

‘Class of Business’ has the meaning given in the Institute’s Professional Standard 300.

‘Effective Date’ means the valuation date of the corresponding Insurance Liability Valuation.

‘Entity’ means a company, corporation, or other body with a liability to pay insurance claims,
or with a liability to compensate other parties.

‘Institute’ means The Institute of Actuaries of Australia.

‘Insurance Liability Valuation’ means the actuarial valuation by the Actuary of the general
insurance liabilities of one or more Classes of Business.

‘Entity’s Plans’ means the plans of the Entity, current at the Effective Date, including but not
limited to budgetary, business, strategic and capital management plans.

‘Material’ means important or essential in the opinion of the Actuary. For this purpose,
‘Material’ does not have the same meaning as in Australian accounting standards.
‘Materiality’ and ‘Materially’ have meanings consistent with ‘Material’.

‘Prudential Requirements’ means requirements under Commonwealth, State or Territory
legislation in Australia, including regulations, prudential standards, subordinate standards and
rules governing Actuarial Advice.

‘Risk Margin’ has the meaning given in the Institute’s Professional Standard 300.


4 SCOPE

4.1 Matters for consideration

4.1.1 Subject to 4.1.2 and 4.1.3, an FCR must include each of the matters listed below, with
consideration at the Effective Date of historical analysis and future implications, where
applicable:
            a. business overview;

            b. recent experience and profitability;


                                                                                               27
                             Do Schemes need an Approved Actuary?


             c.   Insurance Liability Valuation;
             d.   adequacy of past estimates of insurance liabilities;
             e.   pricing, including premium adequacy;
             f.   asset and liability management;
             g.   capital management and capital adequacy;
             h.   reinsurance arrangements; and
             i.   risk management.


4.1.2 Notwithstanding that the purpose of the FCR is to provide an assessment of the Entity’s
overall financial condition, the impact or influence of Classes of Business on the matters in
4.1.1 must be considered, where Material and applicable.

4.1.3 If, in the opinion of the Actuary, a matter referred to in paragraph 4.1.1 is not relevant to
the operations of the Entity, the matter may be omitted from the FCR. In that event, the
Actuary must state that the matter is not relevant and provide reasons for forming this
opinion. If the Actuary identifies additional Material matters, not detailed in 4.1.1, the
Actuary must include such matters in the FCR.


4.2 Materiality

4.2.1 The Actuary must take Materiality into account when preparing an FCR. Whether
something is Material or not will always be a matter requiring the exercise of the Actuary’s
judgement.

4.2.2 The level of detail to be provided in an FCR will depend on the size and complexity of
the operations of the Entity and considerations of Materiality.


4.3 Corporate group considerations

4.3.1 In preparing an FCR, the financial position of the corporate group to which the Entity
belongs must be considered and in particular, the potential of that corporate group to
Materially affect the position of the Entity. Similarly, the potential of exposure and
relationships within a corporate group to Materially affect the position of the Entity must be
considered.

4.3.2 Unless otherwise required by APRA, a single FCR may be produced for an insurance
group. Where an FCR is produced for an insurance group, this single FCR must consider and
address the operations of each entity authorised to carry on general insurance business within
that insurance group.

4.4 Foreign insurer considerations

4.4.1 For foreign insurers, the FCR must be prepared in respect of the Australian branch
operation that is authorised to carry on general insurance business, but with consideration
given to the financial position of the head office and, in particular, its potential to Materially
affect the position of the branch.

4.4.2 Where information cannot be obtained, owing to the structure of the branch operation or
other aspects of the foreign insurer, an explanation of the lack of information must be
provided in the FCR, together with an assessment of the consequent limitations of the FCR.




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5 REPORTING REQUIREMENTS

The FCR must include the matters set out in this section.

5.1 Statements by Actuary

5.1.1 The Actuary must sign and state the date of completion of his or her written FCR.

5.1.2 Statements must be provided setting out who commissioned the Actuary’s reporting, the
scope of and purpose of the FCR, the specific terms of reference and any restrictions or
limitations placed upon the Actuary.

5.1.3 A statement must be provided that the Actuary’s reporting has been prepared in
accordance with this Professional Standard.

5.1.4 In addition to the contents of this Professional Standard, in deciding on the content and
the level of detail for reporting, the Actuary must have regard to the reporting requirements
given in the Institute’s Code of Professional Conduct.


5.2 Information requirements

5.2.1 The Actuary must advise the Entity of the information required, including data and
reports that the Actuary will need, as well as the staff and relevant contractors of the Entity
with whom the Actuary will need to consult, in order to prepare the FCR. The Actuary must
identify in the FCR all information upon which he or she has placed Material reliance in
preparing the FCR.

5.2.2 The Actuary must take reasonable steps to verify and document the consistency,
completeness and accuracy of the information, including data and reports, provided by the
Entity against the Entity’s financial and other records. Material discrepancies that cannot be
resolved with the Entity must be outlined in the FCR, together with the consequent limitations
of the FCR.

5.2.3 The degree to which the Actuary relies upon information, including data and reports
provided by the Entity, or upon testing of the data or other information by the Entity’s internal
auditor or other third parties, must be explained in the FCR, together with an assessment of
the consequent limitations of the FCR.

5.2.4 Where the Actuary relies on work carried out by other actuaries, the Actuary must be
satisfied as to the suitability of the work. Where the Actuary is not satisfied, alternative
analyses must be undertaken and explained in the FCR.

5.2.5 Where the Entity does not provide adequate and timely access to information, including
data and reports, and staff, as required by the Actuary, and the information cannot otherwise
be practically obtained, the Actuary may omit from the FCR analysis that is dependent on that
information, but must provide an explanation as to why it has been omitted and an assessment
of the consequent limitations of the FCR.

5.2.6 Where the Actuary places reliance upon others to provide information required, and this
information is limited, or not forthcoming, the Actuary must note this in the FCR, together
with an assessment of the consequent limitations of the FCR.


5.3 Business overview


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5.3.1 An FCR must include general background information about the corporate structure and
operations of the Entity.

5.3.2 General background information includes relevant information about the Entity’s Plans,
including forward projections, and about any prudential requirements imposed on the Entity
by APRA, in writing, that do not form part of the Act or prudential standards.

5.3.3 An FCR must outline, consider and comment on Material risks arising from the Entity’s
Plans at the Effective Date.

5.4 Recent experience and profitability

5.4.1 An FCR must identify and comment on the past profitability of the Entity, including
consideration of significant features or trends in the Entity’s recent experience, over a period
of at least three previous years, to the extent that such experience exists. This assessment must
consider premiums, claims, expenses, commissions, investment return, and profits/losses,
including any abnormal features.

5.4.2 Deviations of actual experience from the expected experience in the Entity’s Plan over
at least the year since the previous balance date must also be discussed, including an
assessment of the reasons for these deviations.

5.4.3 An FCR must comment on the steps taken, or proposed to be taken, by the Board or
senior management of the Entity to address areas of deviation and/or adverse experience.


5.5 Insurance Liability Valuation

5.5.1 An FCR must include a summary of the key results of, and considerations arising from,
the Insurance Liability Valuation prepared at the Effective Date, prepared in accordance with
the Institute Professional Standard PS 300 and, for an APRA regulated Entity, APRA
Prudential Standard GPS 310, Audit and Actuarial Reporting and Valuation. The FCR must
make reference to the Insurance Liability Valuation report, which can either be a separate
report or included in the FCR.

5.5.2 An FCR must outline, consider and comment on Material issues arising from or
disclosed by the Insurance Liability Valuation.


5.6 Adequacy of past estimates of insurance liabilities

5.6.1 An FCR must include an assessment of the adequacy of past Central Estimates of either
outstanding claim liabilities or all insurance liabilities against the subsequent actual claims
experience over a period of at least three years if experience exists.

5.6.2 An FCR must include comments on any Material implications for the adequacy of
current estimates of insurance liabilities, both including and excluding Risk Margins, arising
out of the review of historical estimates.


5.7 Pricing and premium adequacy




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5.7.1 An FCR must consider the adequacy of premiums, and must outline, consider and
comment on Material issues arising from the Entity’s pricing processes and underwriting and
claim management practices.

5.7.2 An FCR must consider whether expected future profitability arising from the assessment
of premium adequacy is Materially in line with the Entity’s Plans.


5.8 Asset and liability management

5.8.1 An FCR must outline, consider and comment on Material issues arising from the
Entity’s approach to asset and liability management.

5.8.2 In undertaking this assessment, the Actuary must outline, consider and comment on
Material risks arising from:

        a) the Entity’s liability profile and liquidity needs;

       b) the Entity’s investment assets, in particular its investment strategy and the nature,
quantum and performance of those assets;

        c) the Entity’s other assets, in particular reinsurance and non-reinsurance recoveries;

        d) the Entity’s insurance liabilities;

        e) the Entity’s non-insurance liabilities

                     f) the Entity’s net assets; and


                  g) the methods for valuing assets and non-insurance liabilities, particularly,
                  changes in those methods.


5.9 Capital management and capital adequacy

5.9.1 An FCR must outline the Entity’s approach to setting and monitoring capital resources
over time, including dividend policy, and the processes and controls in place to monitor and
ensure compliance with the Minimum Capital Requirement as determined in accordance with
APRA Prudential Standard GPS 110, Capital Adequacy (MCR).

5.9.2 The Actuary must consider and comment on that approach, as well as Material risks
arising from its application, having regard to the Entity’s MCR and needs for future capital to
support the Entity’s Plans, including target and trigger capital adequacy ratios used by the
Entity.

5.9.3 An FCR must include the Entity’s MCR calculated in accordance with APRA Prudential
Standard GPS 110, Capital Adequacy.

5.9.4 An FCR must outline, consider and comment on trends in the Entity’s compliance with
its MCR and its capital targets at least in the last three years at quarterly intervals, taking into
account the impact of Material seasonal variation in the MCR. The FCR must comment on
the extent of, and reasons for, identified breaches of the Entity’s MCR or of its capital targets
during the past year, and the actions that were taken by the Entity to rectify such breaches.




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5.9.5 The Actuary must consider and comment on the Entity’s capacity to meet its MCR and
its capital targets over at least the next three years.


5.10 Reinsurance arrangements

5.10.1 An FCR must comment on Material issues arising from the use of the Entity’s
specified reinsurance strategy, and from its actual current and past reinsurance arrangements,
having regard to the Entity’s liability profile. Reference must be made to the Entity’s
Reinsurance Management Strategy (REMS) and to the Reinsurance Arrangements Statements
submitted to APRA in accordance with APRA Prudential Standard GPS 230, Reinsurance
Management.

5.10.2 In undertaking this assessment, the FCR must consider intra-group reinsurance
arrangements and relationships between the Entity and other Entity’s or institutions within the
corporate group.

5.10.3 An FCR must assess the method used to calculate the Entity’s Maximum Event
Retention (MER) and comment on whether the method is appropriate to the operations of the
Entity.

5.10.4 The Actuary must outline, consider and comment on Material risks arising from the
Entity’s reinsurance arrangements, having regard to the documentation and extent of
placement of reinsurance arrangements, obligations to pay future reinsurance premiums, and
the certainty of the Entity’s ability to make reinsurance recoveries under these arrangements.

5.10.5 The FCR must outline, consider and comment on Material risks arising from use of
limited risk transfer products, such as financial reinsurance or purported reinsurance (whether
financial or otherwise). Reference must be made to any approval by APRA of limited risk
transfer arrangements under APRA Prudential Standard GPS 230, Reinsurance Management.


5.11 Risk management

5.11.1 The Entity’s risk management framework, comprising the Entity’s risk management
policies and procedures, processes and controls, is intended to identify the risks that may
affect the financial condition of the Entity. The Actuary must comment on Material risks
arising from the risk management framework of the Entity. Where there are limitations on
such commentary, particularly those caused by the Actuary’s limited exposure to, and
interaction with, the Entity’s risk management strategy and practice, the Actuary must note
this in the FCR, together with an assessment of the consequent limitations of the FCR.

5.11.2 An FCR must make reference to the Entity’s Risk Management Strategy (RMS) that
has been submitted to APRA in accordance with APRA GPS 220 Risk Management. The
RMS is intended to identify the elements of the Entity’s risk management framework. The
Actuary must comment on Material risks arising from the use of the RMS, including the
extent of implementation of the Entity’s risk management framework. Where there are
limitations on such commentary, particularly those caused by the Actuary’s limited exposure
to, and interaction with the Entity’s risk management strategy and practice, the Actuary must
note this in the FCR, together with an assessment of the consequent limitations of the FCR.


5.12 Conclusions and recommendations




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5.12.1 The assessment of the financial condition of the Entity must include a discussion of the
implications of Material risks and issues identified during the assessment of the financial
condition of the Entity. For an APRA regulated Entity, this discussion must be placed in the
context of its current APRA authorisation.

5.12.2 Where the Actuary identifies Material risks with adverse implications for the Entity’s
overall financial condition, the Actuary must include in the FCR, recommendations intended
to address these risks and, for an APRA regulated Entity, in the context of its current APRA
authorisation.

5.12.3 The Actuary must also comment on the extent to which the Entity has addressed
recommendations provided in the previous FCR, and, if the previous FCR was not at the
balance date, on recommendations provided in the FCR at the last balance date.




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C          Accident Compensation Schemes and Regulators

C1         Summary

The following table outlines the Accident Compensation Schemes and Regulators in
Australia:

State        Accident Compensation Insurer           Regulator                             Description
NSW          WorkCover NSW agent insurers and        WorkCover NSW                         Managed Scheme
             self insurers including Treasury
             Managed Fund
NSW          Authorised NSW CTP insurers             Motor Accident Authority and APRA     Privately underwritten
                                                                                           Scheme
NSW          Lifetime Care and Support Authority     Lifetime Care and Support Authority
VIC          Victorian WorkCover agent insurers      Victorian WorkCover Authority         Managed Scheme
             and self insurers
VIC          Transport Accident Commission           Transport Accident Commission
QLD          WorkCover Queensland and self           Q-Comp
             insurers
QLD          Authorised QLD CTP insurers             Motor Accident Insurance
                                                     Commission and APRA
NT           Authorised NT workers’                  NT WorkSafe APRA and NT               Privately underwritten
             compensation insurers and self          Treasury                              Scheme
             insurers
NT           Motor Accident Compensation             NT Treasury and Independent           Administered by TIO
             Scheme                                  Pricing Commissioner
WA           WorkCover WA approved insurers          WorkCover WA Authority and APRA       Privately underwritten
             and self insurers                                                             scheme
WA           Insurance Commission of WA              Insurance Commission of WA            CTP insurance
SA           WorkCover Corp SA and self              WorkCover Corp SA
             insurers, including Government
             departments and authorities
SA           The Motor Accident Commission           The Motor Accident Commission         Claims managed by
                                                                                           Allianz
TAS          WorkCover Tasmania approved             WorkCover Tasmania and APRA           Privately underwritten
             insurers and self insurers, including                                         scheme
             State Service
TAS          Motor Accidents Insurance Board
ACT          ACT Private Sector Workers’             ACT WorkCover and APRA                Privately underwritten
             Compensation approved insurers                                                scheme
             and self insurers
ACT          ACT Authorised insurer, currently       ACT Treasury and APRA                 Privately underwritten
             IAG                                                                           scheme
C’wealth     Comcare, Seacare and self insurer       Comcare, Seacare




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D       Current role of Actuaries in Schemes:


D1      WorkCover NSW:

Workers compensation act 1987 No 70
Workers compensation regulation 2003
There is no formal documentation of the role of scheme actuary in the WorkCover NSW
legislation. However, there is reference to the “Scheme actuary” in respect of premiums
advice and outstanding claims estimation on the WorkCover website.


D2      Motor Accidents Authority (MAA):

Motor Accidents Compensation Act 1999
Motor Accidents Compensation Regulation 2005
There is no formal documentation of the role of a scheme actuary for the NSW MAA.
Reference to the requirement for the MAA to consider actuarial advice in relation to
premiums filed by individual insurers. The MAA may ask an actuary to calculate a premium
for an insurer if they reject the insurers filing.
The authority also has the ability to ask for the insurers returns to be certified by an actuary


D3      Victorian WorkCover Authority:

Accident Compensation Act 1985
Accident Compensation (WorkCover Insurance) Act 1993
There is no formal documentation of the role of a scheme actuary for VWA.
VWA has the right to have an actuary certify that the information provided by licensed
insurers is correct. For self insurers, liabilities need to be estimated by an actuary.


D4      Transport Accident Commission (TAC):

Transport accident act 1986
There is no formal documentation of the role of a scheme actuary for TAC.


D5      Q-COMP Worker’s Compensation Regulatory Authority:

Workers compensation and Rehabilitation Act 2003
Workers compensation and Rehabilitation Regulation 2003
WorkCover Queensland is required to prepare a report to the minister stating the extent to
which it is fully funded and must seek the advice of an “appropriately qualified actuary,” in
preparing this report. Therefore, the role of actuary advising WorkCover is statutorily
defined, but no further detail is provided on the role.

In addition, actuaries must assess self insurers liabilities according to the timeframes and
methods outlined in the regulations.




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D6      Motor Accident Insurance Commission (MAIC):

Motor Accident Insurance Act 1994
There is no formal documentation of the role of a scheme actuary for TAC.
Licensed insurers must provide returns to the MAIC, and there may be a requirement to have
actuarial certification of those returns.


D7      NT WorkSafe:

Northern Territory of Australia Work Health Act
A scheme monitoring committee is created of no more than seven people, appointed by the
minister, one of which must be an actuary. The committee is responsible for monitoring the
scheme performance and premium rates.


D8      Motor Accidents Compensation (MACA)

Northern Territory of Australia Motor Accidents (Compensation) Act
There is no formal documentation of the role of a scheme actuary for NT MACA.


D9      WorkCover Western Australia Authority:

Workers compensation and injury management Act 1981
There is no formal documentation of the role of a scheme actuary. There is reference to
actuarial involvement in setting premium rates.


D10     Insurance Commission of Western Australia (ICWA)

Motor Vehicle Third party Insurance Act 1943
There is reference that the Commission must procure and consider an actuarial report on the
fund when considering premiums.


D11     WorkCover Corporation (SA)

Workers Rehabilitation and Compensation Act 1986
There is no formal documentation of the role of a scheme actuary.
An actuary is required to estimate the liabilities of the Mining and Quarrying Industries Fund.
There is also reference to the use of actuarial principles in determining amounts to be paid as
lump sums.


D12     The Motor Accident Commission (MAC) (SA)

Motor Accident Commission Act 1992
There is no formal documentation of the role of a scheme actuary.




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D13     WorkCover Tasmania

Workers Rehabilitation and Compensation Act 1988
There is no formal documentation of the role of a scheme actuary.
There is reference to an actuary being involved in estimating the Nominal Insurer’s liabilities
in respect of acts of terrorism.
There is also reference to an actuary being involved in the calculation of premium rates

D14     Motor Accidents Insurance Board (MAIB)

Motor Accidents (Liabilities and Compensation) Act 1973
There is no formal documentation of the role of a scheme actuary.

D15     Comcare:

Occupational health and safety: Commonwealth employment Act 1991.
There is no formal documentation of the role of a scheme actuary for Comcare.




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1
    Institute of Actuaries of Australia, Accident Compensation Seminar, May 1988
2
    Institute of Actuaries of Australia, General Insurance Seminar IV, 1985
iii
     APRA, SUBMISSION TO THE HIH ROYAL COMMISSION FUTURE POLICY
DIRECTIONS FOR THE REGULATION AND PRUDENTIAL SUPERVISION OF THE
GENERAL INSURANCE INDUSTRY
iv
    Institute of Actuaries of Australia, Annual report 2005/2006
v
    COUNCIL FOR THE AUSTRALIAN FEDERATION COMMUNIQUÉ 13 OCTOBER
2006
vi
    Institute of Actuaries of Australia, General Insurance Seminar IV, 1985




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