Application of the capital framework for COVID-19 related disruptions - frequently asked questions
In response to the COVID-19 pandemic and the resultant uncertainty on how to value the deferred claims liability (DCL), APRA issued interpretative guidance in June 2020 on how the DCL should be assessed for prudential purposes.
As data has emerged on the impact of the COVID-19 pandemic and valuation techniques have evolved, APRA has progressively relaxed its guidance and moved to a principles-based approach. This places greater reliance on insurers to calculate their DCL and manage the risks associated with it.
This update is the next step in APRA’s principles-based approach. The key changes in the December 2022 update are:
- Removal of the simplified option to value the DCL for the Capital Adequacy Requirement; and
- Removal of the expectation that insurers provide supplementary information on the DCL with the quarterly returns.
Given significant and ongoing uncertainty on how the COVID-19 pandemic will impact private health insurers, entities should remain prudent in managing the DCL and impacts on earnings and capital. Where APRA has concerns relating to the ongoing management of the DCL, APRA will discuss this directly with insurers.
With the removal of APRA’s simplified option, insurers are reminded that the ultimate responsibility for the valuation of insurance liabilities rests with the board. It is also the board’s responsibility to maintain a risk management framework that is appropriate to the size, business mix and complexity of the insurer. The insurer’s Appointed Actuary is expected to be a key source of advice in valuing the DCL.
These FAQs replace those issued in March 2022. Archived versions of FAQ guidance can be found here.
The Department of Health, ASIC, ACCC and the Commonwealth Ombudsman have a particular interest in the actions taken by private health insurers and APRA has been in regular communication with each of these agencies regarding these issues.
Questions on these FAQs can be directed to email@example.com.
Last updated: 7 December 2022.
FAQ 1: Why is APRA removing the simplified option to value the DCL for the Capital Adequacy Requirement?
On and from 31 December 2022, the DCL for both the regulatory balance sheet and Capital Adequacy Requirement will be determined by the insurer. It is the responsibility of the insurer to estimate the liability, manage the risks and ensure this is done prudently.
As at December 2022, there is almost three years of data available on how the COVID-19 pandemic has impacted claims, which claims have returned and which claims are more likely to emerge in the future. APRA has observed that the COVID-19 pandemic has affected each insurer, state and region differently. Accordingly, it is appropriate for each insurer to reflect these differences in the DCL for both the regulatory balance sheet and the Capital Adequacy Requirement under HPS110.
It is also recognised that industry approaches have evolved to estimate the claims that are more likely to return. Notably, a greater focus on;
- surgical compared to non-surgical claims for hospital treatment;
- major dental compared to other claims for general treatment; and
- the time elapsed since the claims would otherwise have been expected to occur.
APRA will continue to monitor each insurer’s approach to calculating the DCL and may discuss this with insurers directly. Where insurers are unable to demonstrate a prudent approach to managing the DCL, APRA may consider taking further action, including the application of a capital adequacy supervisory adjustment.
It is possible for an insurer that has previously used APRA’s simplified method to adopt a similar approach going forward. However, it is incumbent on the insurer to determine that this method is appropriate, in the same way as an insurer devising its own independent method of valuation.
FAQ 2: What are APRA’s expectations for the management of the DCL?
Given the purpose of the DCL, APRA expects all insurers will prudently manage the calculation of the DCL. Prudent management includes, but is not limited to:
- clear documentation of the approach to valuing the DCL;
- required input from the Appointed Actuary;
- the use of adverse scenarios;
- alignment to, and compliance with, risk management frameworks;
- an understanding of capital implications; and
- appropriate board sign-offs.
APRA may request this documentation to support the supervision of the management of the DCL.
APRA also expects insurers that have made commitments not to profit from the impacts of COVID-19 to honour these commitments. Insurers are expected to notify APRA of a decision to provide policyholder relief before it is publicly announced.
These Frequently Asked Questions (FAQs) are published for discussion purposes only. The content of these FAQs is not legal advice. Users are encouraged to obtain professional advice about the application of any legislation or prudential standard to their particular circumstances. Users should exercise their own skill and care when relying on any material contained in the FAQs. APRA disclaims any liability for any loss or damage arising out of any use of or reliance on these FAQs. The FAQs may include links to external websites that are beyond APRA’s control. APRA accepts no responsibility for the accuracy, completeness or currency of the content of these FAQs.