Application of the capital framework for COVID-19 related disruptions - frequently asked questions
In June 2020, APRA issued private health insurers with guidance on how to treat the liability arising for claims deferred due to COVID-19. This provided prescriptive direction for the purposes of APRA reporting as to how private health insurers should calculate and report the deferred claims liability (DCL).
This guidance was issued to protect the interests of policyholders by making sure that insurers would have adequate capital to meet all current and future policyholder claims. In response to circumstances as they unfolded, APRA then issued FAQs in September 2020.
These FAQs have been updated as at March 2021, replacing the FAQs issued in September 2020. The expectation is that the current FAQs will be next updated in September 2021.
As of March 2021, APRA has relaxed its guidance to allow insurers the option of determining the value of their DCL as reported in their APRA returns. However, there will be a prescribed minimum amount in relation to insurers’ Capital Adequacy Requirement.
APRA expects insurers to adopt a robust valuation approach (as detailed in the FAQs below) when determining the value of their DCL. APRA’s view is that a high level of uncertainty remains regarding future claims costs, potentially impacting the feasibility of a significant release of the DCL as at 31 March 2021.
APRA recognises that some insurers have made public commitments to not profit from the impacts of COVID-19 and expects insurers to honour these commitments, including providing policyholder relief if it is prudent to do so. The method and timing of the return of any COVID-19 related profits is a matter for the insurer’s Board and senior management.
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 firstname.lastname@example.org
Last updated: 26 March 2021
FAQ 1: What changes have been observed since issuing the previous FAQs in September 2020?
In the September 2020 FAQs, APRA highlighted that the 2020/2021 summer period was an important time in the assessment of likely future claims. Due to the delay in reporting claims, the full experience over this period will not be known until around May 2021.
APRA expects that prudent management of the DCL includes regular revaluation with measured changes as more data materialises and greater confidence builds in the value of deferred claims that may arise. Our observations of industry experience up to December 2020 suggest that a significant release of the DCL may be difficult to justify as at 31 March 2021.
APRA intends to monitor any release of the DCL.
Specifically APRA has assessed industry experience up to December 2020 and observed the following:
- The catch-up experienced varies significantly by State. States that have experienced a stronger catch-up in claims have been less affected by COVID-19, notably Western Australia and South Australia.
- Claiming patterns do not immediately revert to expected levels after restrictions on medical services are lifted. The data shows there is a gradual increase in claims over time. This suggests that persons may be less inclined to undergo procedures immediately following an increase in COVID-19 infection rates.
- Claims activity post June 2020 for individuals over 65 years old has been materially below 2019 levels. In contrast, claims activity for those under 65 years old has been broadly aligned to 2019 levels
- A catch-up in claims may begin to emerge more aggressively in those over 65 once the health risks of COVID-19 reduce or are eliminated. This may not be until the vaccine rollout has been completed and hospital capacities are restored.
- Eligibility checks have been on an upward trend since June 2020.
- December 2020 eligibility checks are the highest at any time over the last year, when compared to the prior year. This suggests there is a strong demand within the market for hospital treatment potentially leading to higher future claims.
- Data suggests the health system can undertake procedures at rates higher than expected. Both Western Australia and South Australia recorded claim rates at 115% of the prior year in September 2020.
Significant uncertainties remain and individuals’ willingness to seek medical procedures during a pandemic is a key factor in the extent to which deferred claims will materialise. The health system appears to have capacity to process claims materially higher than 2019 levels. The high rate of eligibility checks in December 2020 suggests there is a significant demand for health services.
FAQ 2: Should the voluntary deferral of procedures due to COVID-19 be treated the same as those deferred by restrictions on medical services?
In response to questions from industry and auditors, ASIC has confirmed that:
It would seem appropriate to treat procedures delayed voluntarily by an insured person due to concerns with COVID-19 in the same manner as procedures delayed due to the suspension of non-essential elective surgery. Similar reasoning would apply to that outlined in the relevant paragraph in ASIC COVID-19 financial reporting FAQ 6 (COVID-19 implications for financial reporting and audit: Frequently asked questions (FAQs) | ASIC - Australian Securities and Investments Commission) given that the insured person is aware of the need for a procedure and is likely to continue their cover.
There continues to be significant uncertainty regarding future claiming patterns and the extent of the catch-up in claims. It is therefore appropriate for the cost of all deferred claims due to COVID-19 conditions regardless of the reason to be incorporated into regulatory returns. This is especially appropriate when valuing the liability at a 98 percent probability of adequacy for the Capital Adequacy Requirement.
FAQ 3: How should insurers value the DCL for the March 2021 returns and onwards?
For the March 2021 returns and onwards insurers may use their own valuations for the DCL for both the regulatory liabilities and the prudential liabilities. Insurers are no longer requested to use the approach outlined in the June letter or the previous September 2020 FAQ 1.
Insurers using their own valuation are expected to have a robust process in place and be able to demonstrate the matters outlined in FAQ 8.
Insurers that are unable to implement a robust process or demonstrate the matters outlined in FAQ 8 should continue to use the approach outlined in the June 2020 letter and September 2020 FAQ. This is the ‘prescriptive approach’ outlined in FAQ 5.
FAQ 4: Is APRA applying any constraints to the value of the DCL?
Due to the uncertainty of the DCL and limited data available, APRA’s guidance continues to include a constraint on the minimum valuation of the other liability amount for the purpose of the Capital Adequacy Requirement under HPS 110. APRA is requesting that the other liability amount should not be less than 100% of the potential deferred claims for Hospital treatment and not less than 85% for General treatment – see Table 1.
APRA considers that this represents the minimum amount necessary to demonstrate a 98 per cent probability of adequacy for the DCL. It would be difficult to justify that a lower amount can provide the same level of adequacy. Insurers proposing a lower value for the other liability amount are requested to contact APRA before submitting regulatory returns.
Given the unprecedented nature of COVID-19 and the impact on health services, APRA wants to ensure that insurers are able to meet the cost of the deferred medical procedures as they arise.
There are no formal constraints on the valuation for the regulatory balance sheet or profit and loss statement. APRA has set expectations on the risk management and governance of the DCL in FAQ 6 and FAQ 8. APRA expects insurers will be prudent in their approach and incorporate the uncertainty involved.
Table 1: Constraints on the value of the DCL
Percentage of claims that did not occur
Deferred claims liability
Regulatory Balance Sheet and P&L
Capital Adequacy Requirement at the 98th percentile
FAQ 5: Is there a prescriptive approach available for insurers?
Insurers may continue to use the prescriptive approach outlined in the June letter and September 2020 FAQs – see Table 2. APRA encourages insurers adopting this approach to consider the items mentioned in FAQ 1, FAQ 6, FAQ 7 and FAQ 8, to the extent possible.
Under this approach insurers will be expected to continue to accrue a DCL for the Capital Adequacy Requirement at the levels outlined below. Insurers should use the claims projected during the 2021 premium round as the basis for the comparison.
For the regulatory balance sheet, insurers will have the option to:
- continue to accrue the DCL if claims are below the level expected during the 2021 premium round; or
- not accrue additional DCL if they consider claims below the level expected during the 2021 premium round are not likely to materialise at a later date.
Table 2: Determining the value of the deferred claims liability using APRA’s standard approach
Percentage of claims that did not occur
Deferred claims liability
Regulatory Balance Sheet and P&L
Capital Adequacy Requirement at the 98th percentile
FAQ 6: What are APRA’s expectations for the governance and management of the DCL?
APRA expects all insurers will clearly document their approach to valuing the DCL and any releases. APRA expects this document will be approved by the insurer’s Board prior to any releases and before amounts are submitted in regulatory returns.
APRA expects this document will incorporate:
- approvals required for any change to the DCL, specifically including the advice of the Appointed Actuary;
- the insurer’s risk appetite, risk management framework and capital management plan, including a scenario where all deferred claims materialise;
- the amount of time over which COVID-19 is expected to impact claiming patterns;
- how prudence is to be demonstrated, noting the limited data available and that actual claims will not be known for some time;
- the matters outlined in FAQ 8, and any other necessary considerations;
- approach to any policyholder relief (see FAQ 7); and
- approach to informing APRA of the valuation as outlined in FAQ 12.
As outlined in FAQ 1, APRA expects that insurers regularly revalue the DCL as more data materialises and greater confidence builds in its valuation.
FAQ 7: What are APRA’s expectations of insurers providing policyholder relief?
APRA recognises that some insurers have made public commitments to not profit from the impacts of COVID-19 and expects insurers to honour these commitments.
APRA expects insurers will conduct business in a prudent way. This extends to any policyholder relief provided. APRA expects that insurers deciding to provide policyholder relief will:
- demonstrate an appreciation for the ongoing uncertainty in the claims landscape (see FAQ 1);
- investigate the impact on performance and capital management;
- clearly communicate the relief to be provided, noting the potential for policyholder confusion and reputational risk;
- consider the impact on future premium rounds;
- have a communication strategy referencing all interested stakeholders; and
- any other necessary considerations.
It is expected that insurers notify APRA where a decision is made to provide policyholder relief. This notification should include the method and amount of the relief. APRA expects relief measures to be considered by the Board, taking advice from senior management, the Appointed Actuary and other relevant stakeholders. APRA expects that notification of the decision is provided to APRA before the relief is actioned or announced publicly.
Queries on the mechanisms by which policyholder relief can be provided in compliance with the Private Health Insurance (Complying Product) Rules 2015 and associated legislation should be directed to the Department of Health.
FAQ 8: What does APRA expect to be considered when valuing the DCL?
APRA expects insurers will demonstrate a prudent approach in valuing the DCL.
Specifically, APRA expects insurers using their own valuation for the balance sheet liability will demonstrate consideration of:
- the most recent data available, including claims paid by service month and eligibility checks;
- experience over the whole summer period spanning December 2020 to February 2021 (inclusive);
- claims that did not occur by category and an estimate of which claims are more likely to be deferred as opposed to cancelled;
- experience by state;
- potential deferred claims outstanding for members aged over 65;
- the time since medical services were last restricted;
- feedback from hospitals and allied health providers on current capacity and usage;
- the insurer’s approach to annual limits for general treatment;
- the accuracy of forecasting recent claims payments and likely accuracy in the future; and
- scenario analysis on the range of ultimate deferred claims amounts and how each scenario would be managed.
Insurers unable to demonstrate these matters may use the prescriptive approach outlined in FAQ 5.
For the purpose of the Capital Adequacy Requirement, APRA expects that insurers will also demonstrate the approach is
- prudent for APRA reporting;
- appropriate for the 98th percentile of the other liability amount in the current environment
- including whether the deferral of medical services due to the pandemic or increased risk of mental health claims would be incorporated in the other liability amount or the stressed net margin estimate;
- assessed by the insurer’s Board and Appointed Actuary as appropriate and that they are comfortable the risks are well managed; and
- reflective of the constraints in FAQ 4.
Insurers unable to demonstrate these matters, with an explanation acceptable to APRA, may be asked to resubmit their returns. APRA may also consider taking further action, such as applying a capital adequacy supervisory adjustment amount to that insurer.
FAQ 9: Is the DCL expected to increase if claims remain below expected levels?
This is a decision for each insurer with regards to the regulatory balance sheet. However, for the purpose of the Capital Adequacy Requirement, the answer is ‘yes’ if claims incurred are below the level expected, excluding movements in the DCL.
This is considered to be prudent as the impacts of COVID-19 remain unclear. From November 2020 to February 2021, Australia experienced localised lockdowns in Brisbane, Melbourne, Perth, Adelaide and parts of Sydney, including the formal restriction of medical services. In addition to deferring claims, these lockdowns deter policyholders from seeking medical treatment during a pandemic which may also contribute to a future claims catch-up – see FAQ 1 for insights from data.
In assessing whether the other liability amount in HPS 110 should increase, insurers are requested to compare claims incurred to those forecast during the most recent premium round. APRA’s view is that forecasts considered reasonable by the insurer and Appointed Actuary in November 2020 are within the 98th percentile for claims that may still occur in the future.
FAQ 10: How long will APRA request claims be compared to forecasts for the purpose of the DCL?
APRA’s expectations and guidance regarding the DCL will cease to be required once the environment is more predictable. In March 2021, APRA is relaxing the guidance on the DCL for the balance sheet as the environment moves closer to that point.
APRA is taking a prudent approach to valuing the DCL at the 98th percentile for the Capital Adequacy Requirement. The aim is to ensure that funds are able to pay the cost of claims that did not occur, including those claims deferred as a result of COVID-19.
The situation and the total quantum of the DCL is being closely monitored. APRA expects to provide a further update in September 2021.
FAQ 11: How should the DCL be released as deferred claims arise?
Payment of deferred claims is expected to reduce the liability, as outlined in APRA’s June 2020 letter.
Insurers are expected to have regard to the same factors that were used to value the deferred liability in its unwinding. That is, unwinding should have regard to the claim payments above those ordinarily expected based on experience in prior periods.
In accordance with the requirements of Prudential Standard CPS 320 Actuarial and Related Matters, APRA expects the insurer’s Appointed Actuary to calculate the value of the DCL and provide advice on its release. An insurer must notify APRA if it does not accept the advice of the Appointed Actuary in a material respect.
FAQ 12: Does an insurer need to notify APRA of its approach to the DCL?
Insurers are expected to provide APRA with a summary of their DCL valuation approach and revised DCL amount on or before the due date of the regulatory returns.
If an insurer intends to adopt a DCL valuation approach or revised DCL amount that does not align with the guidance provided in these FAQs, the notification should be provided as soon as possible. Notification should include supporting documentation on the approach taken and rationale for the deviation (see FAQ 6).
Where APRA views that a prudent approach has not been adopted, an insurer may be requested to resubmit its returns. APRA may also consider taking further action, such as applying a capital adequacy supervisory adjustment amount to that insurer.
It is also expected that insurers notify APRA where a decision is made to provide policyholder relief. APRA expects this notification to align with what is described in FAQ 7. This notification should be provided to APRA before the relief is actioned or announced publicly.
FAQ 13: Are there any expectations for the audit of the DCL in the HRS 602.0 returns?
Auditors are expected to assess whether insurers have applied the considerations in FAQ 8 when revaluing the DCL. The application of professional scepticism and professional judgement is expected when testing the DCL and evaluating the results of this testing.
APRA encourages auditors to consider the documentation outlined in FAQ 6 and any additional discussions with key stakeholders who are responsible for its preparation.
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.