From 1 January 2013, life insurers have had to calculate future stress margins for the purpose of determining regulatory capital requirements.
However, a recent paper presented to the Actuaries Institute Summit found there were wide differences in the way insurance companies were interpreting the rules.
“To some extent we were expecting variation in the results... [But] the variation was very wide...It did not stack up in terms of companies that should have similar margins actually had quite different [margins],” said Briallen Cummings, one of the authors of the paper.
It seems as though companies are approaching the regulations as either a rigid law or more flexibly: “Some companies were interpreting the standards prescriptively, i.e. adopting a black letter law approach to the standard; others were adopting a more principles-based approach,” Ms Cummings said.
APRA, apparently, is also unclear on which approach is correct. “There is a case for both a prescriptive review and a principles-based review, because there is information on both sides,” Ms Cummings said in reference to the regulations.
These differences in industry opinion are present regarding the types of risk covered, the assumption processes, the time horizons and also the allowance of diversification benefits.
In its paper, the institute advocates adopting a nine-step framework to assist in reducing the variance in risk margins observed across the industry.
“We quite like the scorecard approach, we think it creates a nice structure [within which] to do the quantitative and qualitative analysis,” Ms Cummings said.
However, the industry is likely to still require a future steer from the regulators if risk margin calculations are to have any consistency.
“Unless APRA provides guidance specifically on the interpretation issues, it is very unlikely the industry will come to a consensus,” Ms Cummings stated.
