Superannuation

Notes GENERAL INSURANCE

Changing the employer contribution rate only requires an actuarial report and the Employer and Trustee - there may be additional liabilities for prior accident years which are not shown in the table.
agreeing to the recommendation. Changing the member cont rate requires a Deed Amendment and then
member communications to explain the change in design. Factors to consider in pricing
- projected number of policies will differ from past history? Higher volume, able to spread fixed cost, lowering
In terms of how member conts are set initially, things the employer would consider would be: expense per policy
-engaging the membership in their super(by having compulsory contributions) - anticipated change in mix of policies, e.g. geographical, which may influence average amount per policy and
-offering a perceived larger final benefit by having members contribute to the funding or the rating structure.
-what other competitors in the labour market are offering - competitors prices? Have to repond
- reinsurance premiums, and reinsurance
FUNDING VS ACCOUNTING - company circumstances, is it chasing market share, if so, then have to cut premiums.
- Funding valuation - any change to deductibles
- Actuary controls all assumptions any change to legislation (reinstatement of fire levy etc)
- Financial assumptions used: Best estimate return on assets the funds invested in but include margins
(implicit or explicit) PS400 >50% of being achieved, i.e. narrowing of the gap
- Accounting valuation - Acquisition expense in personals lines are usually lower than commercial lines because personal lines are
- Assumptions prescribed in accounting standards, actuary provide recommendation on other usually sold through the internet, phone; whereas commercial lines are sold through brokers and
assumptions intermediaries.
- Financial assumptions used:
- AASB119 High quality corporate bond rate Premium Rating Factors
- AASB 1056 Best estimate return on assets the funds invested in Comprehensive Motor Amount covered
Implications: affect size of gap, AASB119 results in smaller gap, may cause deficit; Address car is kept overnight
AASB1056 results in larger gap, may cause surplus Car use
- Methodology are heavily prescribed (AASB1056 for Companies, AASB119 for Super Funds) Age of listed drivers
- In terms of spreading of costs, accounting costs are more variable especially in dealing with Gender of Listed Drivers
emerging experience, because (PUC) forces emerging costs to be reported in year in which they accrue rather Whether car is financed
than being smoothed. Type of car
Car age
Annual distance car is driven
Past claims history
Common suggestions License history of listed driver (demerit points)
- additional topup contributions if currently investment markets are to perform badly in ST
- topup contribution to return to 100% VBI Householders Age and Construction of Home (cost more to
- funding plans needs review if technical insolvency rebuild)
- overlay long term contribution rate with higher short term contribution rate to increase likelihood of stable Roof Condition (Old roofs difficult to withstand
contributions over next 3 years. But risk of insolvency severe weather conditions)
Location of Home (natural disaster, theft)
Surplus Level of Cover / Excesses
- trustee prefer to maintain buffer against adverse experience Past Claim Histroy
- using all surplus will result in more volatile contribution required Distance from Fire Hydrant
- trustee may consider members claim to share of surplus Marital Status (proxy, married makes less claims)
- consider impact of more members than expected electing to take pension benefits Purpose of Home (Currently living / holiday home/
- if lower cont overlay long term cont, consider risk of employer not being able to pay cont in future rental prop/ unoccupied)
- if lower cont overlay long term cont, does trust deed allow cont to be reduced below long term funding rate? Type of home (apartment/house/townhouse)
Security Features
Used for Business purposes?
Travel Insurance (medical cover, accidental death, Length of trip
cancellation, alternate transport expenses, luggage Age of traveller
loss, luggage delay, theft of cash, personal liability) Type of cover requested
 Region in which you will be travelling Fire and ISR Industry/ Occupation
Single person or multi person policy Business Location
Extras (extreme sport, increased item limit, cover for Annual Turnover
cruise)
Travel insurance:
Lenders Mortgage Insurance (not to be confused Size of loan (greater potential loss of FI in the event Length of holiday The longer the trip the longer the period of cover and hence increasing the probability
with mortgage protection insurance) of a borrowers default) policyholders making a claim
- to protect lender from financial loss in the event Amount of deposit (smaller deposit, higher cost) Destination different destinations have different exposures to risk. The cost of attaining medical
that the borrower cant afford to keep up their home Purpose of Home (stay or investment) attention or transport costs is also different for different areas.
loan repayments. FI may make it a condition of Employment Status (part time vs full time) Age and gender This rating factor impacts the likelihood and the type of medical claim the policyholder
borrowing that you pay for a lenders mortgage Occupation (professional occupations have lower is exposed to.
insurance policy risks to FI) Cover type This includes how many people are covered and the level of inclusions such as cancellations,
- must buy if deposit <20% (i.e. Loan to value ratio is baggage loss and medical costs.
80% or less) Length of time between purchase and travel The longer the gap the higher the chance that a
Pet insurance Type of Animal cancellation claim may occur.
Pet Breed
Age of Pet Motor:
Gender of Pet Age of driver(s): this is seen as a proxy for experience or riskiness of driving behaviour, which will
Annual Limit influence the size and frequency of claims
Per incident Limit Sum insured: a higher sum insured may lead to higher payouts if a claim occurs
Location Claims history: previous claims may indicate poor driving and therefore a higher likelihood of future claims
Deductibles Type of car: factors such as make/model and age may influence the occurrence and severity of claims (for
Public Liability Insurance Business Type (lower risk, low prem) example, if it is an expensive car)
Business Size (more staff / high rev, high chance of Business vs private use: commercial vehicles are typically driven more often or for longer periods of time,
making claim) which increases relative exposure
Location of Business (airports, mine sites) Location: the postcode may be an indicator of various risks such as weather and theft (due to local crime
Period of Cover, Deductible, Sum Insured rates)
Workers Compensation Occupation of Employees Parking location: whether it is parked in a secure garage or on the street may affect the possibility of theft
Wages Paid to Employees
Industry of Employer Medical malpractice insurance for doctors:
Certain industries may often be subjected to Specialty of practice the most important rating factor the type of work that doctoris performing (i.e.
additional safety criteria (e.g. mining) General Practice, Obstetrics, Neurosurgery, etc.). Certain practices are riskier than others.
Claims history of Employer Location of work State of practice (i.e. NSW, VIC, SA, etc.), urban or rural location (rural locations can
Special rates for apprentices and non permanent have a higher risk), private practice or in a public or private hospital (practice in public hospitals can have a
workers higher risk and are not subject to certain government recoveries).
Sports Insurance (prize indemnity, player bonus, Previous claim history Expected billings/sessions for the year, which is a proxy for how much work the doctor expects to
adverse weather, cancellation, non-appearance, Hiring of equipment or own them perform. The higher the billings/sessions the greater than risk.
death) Hiring or owning the premises Number of years being covered (i.e. claim made years) measures/identifies how many years of historical
Professional Indemnity Occupation Type (Financial Services more risky) plus current work will be covered under the claims made policy, since claims are covered by the year in
Work for APRA regulated products which they are reported (rather than occurred). If it is an occurrence year based policy, then this might not
Number of employees be a rating factor (except to maybe get a sense at how proficient the doctor may be at his/her practice).
Estimated Annual Revenue
Level of Cover Home property insurance:
Revenue by activity split (bookkeeping, forensic acc, Sum insured key exposure measure linked with claim size
SMSF admin, accounting software etc) Location the perils a risk is exposed (and hence its claim costs) to will depend on its location. E.g.
Type of clients (accounting listed companies, public properties in Far North Queensland are more prone to cyclone/windstorm damage, while properties in
companies, private companies, charities) Sydney are subject to hail and earthquake damage.
Past Claims Age of property older properties would generally be prone to more damage to newer houses, but newer
Exclusions and excesses houses may be more costly to repair.
 Building material how prone a property is to damage will depend on its construction materials. E.g. a Hull construction material. Boats constructed of fibreglass tend to attract lower premiums than boats
weatherboard house would sustain more damage than a brick/concrete built house. constructed of timber.
- Condition of Roof Optional covers (eg. Waters Skiers Liability, Racing Cover, Additional Boat Contents Cover). The more
Policy age tend to find that newer policies tend to have worse claims experience, possibly due to bad optional covers you choose the higher your premium will be.
risks constantly churning between insurers to get best price. Level of basic excess. If you choose a higher basic excess this will attract a lower premium, due to a lower
Prior claims experience this is a contentious rating factor (on a technical level anyway) I believe. Similar claim cost retained by the insurer.
to how NCB status on motor insurance is generally found to be a non-significant factor in technical analysis, Payment frequency. If you pay by the month your premium will be higher than if you chose to pay in one
claims history does not appear as a significant predictor of claim costs. However most insurers include it as annual payment because insurer charges a monthly fee.
part of their target price calculations.
Lenders Mortgage Insurance (LMI):
Consumer Credit Insurance: Region: different areas are subject to different property market forces, for example prices in Sydney
Length of the loan The longer the loan length, the larger the exposure to risk continue to trend upwards, while those in Hobart have been going sideways.
Type of cover, whether it is a single cover or double cover Type of property (i.e. free-standing house, apartment, etc) and its value
Occupation of the insured Some jobs are more prone to redundancy than others Loan to valuation ratio: the more that is being borrowed the higher the risk
Age of the insured Older people will have more chance to have accident Loan term: shorter term loans are riskier due to higher monthly repayments
Exposure measure is sum insured/loan amount Rating variables using the borrowers information include:
Credit score
Workers Compensation: Employment history, for example, if the borrower is self-employed or have had unexplained periods out
Occupation of Employees of the workforce theyde be considered higher risk
Wages Paid to Employees Income and details on any existing loans
Industry of Employer Whether theyre a first home buyer or not
Certain industries may often be subjected to additional safety criteria (e.g. mining)
Claims history of Employer Business insurance (SME):
Special rates for apprentices and non permanent workers Location for each of the business(e.g. franchise)
- Preventative traning Then for each of the business:
Liability sum insured (there is usually a minimum sum insured requirement)
Extended warranty product: Building sum insured
Type of products (e.g. washing machine, TV, fridge) Stock & content sum insured which may contain regular stock and seasonal stocks
both claim frequency and repair cost would vary by different type of product Turnover
Cost of goods Occupation
key exposure measure links to the repair cost, hence claim size Number of employees
Manufacturer
likely to impact the claim frequency, as some brands are more reliable then others even after their original Business Interruption:
warranty Business type different businesses have different suppliers and may be more susceptible to disruption
Length of original warranty and thus have differing claim frequencies;
linked to exposure measure, as dont need to cover for the period of the original warranty How long the business has been running more established businesses may have contingency plans in
Domestic/ imported good place which may reduce the frequency of claims;
likely to impact the repair cost, as there might be no part to replace for imported good Annual gross revenue the greater the revenue, the larger the average claim size;
Location Number of employees indicator of the size of the business where a greater number of employees
linked to the cost of transport to the repair centre suggests a larger business and a greater than average claim size;
Past claims history businesses which have had claims in the past may be more likely to claim in the
Boat Insurance: future.
Age of Boat. Newer boats attract a higher premium, while older boats attract a lower premium. The repair
costs for newer boats are higher in general. CTP (element of community rating):
Boat Value. The higher the boats value at the commencement of the policy, the higher the premium due - Class of vechicles (passenger, motorcycle, van etc)
to our increased exposure to risk. - pensioner vs non-pensioner (social decision)
Type of boat. Small powerboats or sailing boats attract lower premiums than high speed powerboats or - Melbourne vs non-Melbourne
yachts.

Economic Capital LIFE
- amount of capital that the firm needs to ensure that it remains solvent over a certain time period with a Reversionary bonus
specified probability - addition to the sum insured payable on death or maturity. Once the bonus is delared it becomes a legal
- it is essentially the capital theoretically needed to support a venture given its risk profile. liability of the company. Due to the guaranteed nature, usually used to distribute profits from realised gains
- parts of business that are riskiest have a higher allocation of capital for management purposes than less risky and investment and non investment earnings
parts
- no constant relationship between economic capital and regulatory capital. Terminal bonus
- because regulators has a focus on protecting consumers and not primarily concerned with shareholders - a percentage addition to the amount of the claim, typically including reversionary bonuses. Developed to
return deal with volatility from equity investments, in particular unrealised gains. It is not guaranteed, so if
investment markets decline, the terminal bonus percentage can be adjusted accordingly.
we should set larger margins for long tail insurance compared to short tail. This was because:

There is more uncertainty in long tail business. Policy Liabilities
Capital needs to be held for longer, therefore you need a bigger margin to service this capital Life insurance contract liabilities are measured at the net present value of future receipts from and payments
from a premium point of view, all sources of uncertainty should be considered. From the point of view of to policyholders using a risk free discount rate (or expected fund earning rate where benefits are contractually
the insurer there is uncertainty regarding the associated claims costs, expenses, and the investment return linked to the asset performance), and are calculated in accordance with the principles of Margin on Services
received on the premiums. As you point out, margins may be implicit or explicit. profit reporting as set out in Prudential Standard LPS 340 Valuation of Policy Liabilities issued by APRA.

the capital providers should require a higher % rate of return given the greater inherent uncertainty for long Target Surplus:
tailed claims (e.g. court awards etc), and for identical discounted expected claims costs there will be a Amount that the company wishes to retain in addition to its reserves to protect against adverse experience
greater dollar margin for long tailed compared to short tailed.
Margin on Service:
The intent of a MoS valuation is that profit will only emrge when it has been earned, by providing the relevant
service and receiving payment. The expected profit measured at issue of the policy is spread over one or more
profit carriers, representing the major services provided under the contract. For example, the major service
under a level premium term insurance contract is coverage of the mortality risk.

For the exam, the most important thing is to understand the intention of having different tiers of capital and
what the intention would be for regulator defining both a prescribed capital amount and a prudential capital
requirement.

Eligible capital: types of capital which can be counted in deciding whether the institution meets the min cap
req

Tier 1 capital is permanent and does not impose any ongoing servicing costs on the insurer

In assessing the adequacy of a regulated institutions capital base, attention must be paid not only to the
risks it is likely to face, but also to the quality of the support provided by various forms of capital. In
assessing the quality of support provided by a particular form of capital, regard must be had to the extent to
which it:
(a) provides a permanent and unrestricted commitment of funds;
(b) is freely available to absorb losses;
(c) does not impose any unavoidable servicing charges against earnings; and
(d) ranks behind the claims of policyholders and creditors in the event of the winding-up of the regulated
institution.



Tier 2 capital may have a limited life and or ongoing servicing obligations.
MISC
General Insurance

Market Layer
First, there may be a calculation made for a dominant layer that negates the requirement to follow the
aggregate premium calculation followed by relativities calculation. For example, in the case of CTP,
passenger vehicles may account for 95% of policy volume, so can calculate the prices directly, rather than
make a calculation across all vehicles (i.e. including motorbikes, vans, trucks etc.) then applying a relativity.
Given the predominance of passenger vehicles, would expect the relativity between passenger vehicles and
the entire portfolio to be close to one.

Secondly, you might treat a particular layer or cohort differently. For example, you might be cutting rates to
increase/maintain market share, however you might know that one particular cohort shows little price
sensitivity (e.g. middle aged males). You might decide to not cut their rates on the basis that you can keep
earning "excess" profits from this group

General insurance policy liabilities comprise two components: unearned premium liability and outstanding
claims liability.
The unearned premium liability is subject to a liability adequacy test.
Any deficiency will be recognised as an expense in the Income Statement by first writing down any related
deferred acquisition costs, with any excess being recorded on the Balance Sheet as an unexpired risk
liability.
The provision for outstanding claims is measured as the central estimate of the present value of expected
future claims payments plus a risk margin. The expected future payments include those in relation to claims
reported but not yet paid; claims incurred but not reported; claims incurred but not enough reported; and
estimated claims handling costs.