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Application of the capital framework for COVID-19 related disruptions - frequently asked questions

In response to COVID-19 and uncertainty on how to value the deferred claims liability (DCL), in June 2020 APRA issued prescriptive guidance on how it should be assessed for prudential purposes.

As data has emerged on the impact of the 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 manage their specific risks and to calculate their DCL.

This update is the next step in APRA’s principles-based approach. The key changes in the March 2022 update are:

  • Removal of the prescriptive option for the valuation of the Regulatory Balance Sheet; 
     
  • Removal of minimum constraints to the valuation of the DCL for the Capital Adequacy Requirement; and
     
  • Revised  guidance for the Capital Adequacy Requirement. 

Given significant and ongoing uncertainty on how COVID-19 will impact private health insurers, entities should remain prudent in managing the DCL and any earnings and capital impacts. Where APRA has concerns relating to the ongoing management of the DCL, APRA will discuss this directly with insurers.

These FAQs replace those issued in September 2021. Archived versions of FAQ guidance can be found here. APRA will review these FAQs during the year and make revisions as appropriate.

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 insurance.policy@apra.gov.au

Last updated: 21 March 2022.

FAQ 1: Why is APRA removing prescription from the DCL?

On and from 31 March 2022, the DCL will be determined by the insurer. This will place onus on the insurer to estimate the liability, manage the risks and ensure this is done prudently. 

As at March 2022, there is two years of data on how COVID-19 has impacted claims, in terms of which claims have returned and which claims are more likely to emerge in the future. APRA has observed that the pandemic has affected each insurer, state and region differently. Accordingly, it is appropriate for each insurer to reflect these differences in the DCL calculation for both the regulatory balance sheet and the Capital Adequacy Requirement.

It is also recognised that techniques 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 and a greater focus on major dental  compared to other claims for general treatment, as well as incorporating timeframes since the procedure was expected. 

APRA will continue to monitor each insurer’s approach to calculating the DCL and may discuss this directly with insurers. 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. 

Any insurer still developing its own methodology to value the DCL may elect to continue to use its current approach if it believes this remains appropriate.

FAQ 2: Is there a simplified option or guidance to value DCL for the Capital Adequacy Requirement?

An insurer that would prefer to use guidance from APRA to calculate the DCL for the Capital Adequacy Requirement may use the approach outlined below. This can be used if an insurer prefers not to develop its own approach to calculate the DCL for the Capital Adequacy Requirement.

Table 1: APRA’s guidance to calculating the DCL for the Capital Adequacy Requirement

 

Percentage of claims that did not occur 

 

Hospital treatment

General treatment

 

Claims deferred within 12 months

Claims deferred more than 12 months ago

Claims deferred within current benefit year

Claims deferred in prior benefit years

Capital Adequacy Requirement at the 98th percentile
(BSL20790 of HRF 602.7)

90%

60%

80%

20%

These amounts have been calibrated with input from the Actuaries Institute, discussions with insurers and internal analysis.

FAQ 3: What are APRA’s expectations for the management of the DCL?

APRA expects all insurers will prudently manage the calculation and purpose 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 DCL.

All insurers are expected to provide their APRA supervisor with the following items when their quarterly returns are submitted:

(i)    The DCL amount used in the regulatory returns for the Capital Adequacy Requirement
(ii)    The DCL amount if it was calculated as per the simplified option as outlined in FAQ 2.

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.