Negative discount rates are not expected to be a significant issue for the liabilities of general insurers, says the Actuaries Institute furnishing a general insurance (GI) specific response to a discussion paper issued by the Australian Prudential Regulation Authority (APRA).
For short-tail general insurance classes of business, discount rates are already quite low. The effect of discounting itself will often be immaterial for short-tail classes of businesses, in which case the prudential framework does not require it. For longer-tail classes of business, yield curves remain upward sloping. The shape and level of the curve would need to further reduce before single equivalent discount rates become negative (and the discounted liability becomes larger than the undiscounted liability).
The APRA held a consultation exercise on issues related to integrating Australian Accounting Standard 17 on Insurance Contracts (AASB 17) into the capital and reporting frameworks for insurers and updates to the the Life and General Insurance Capital (LAGIC) framework. AASB 17 is set to be applied for annual reporting periods beginning on or after 1 January 2023. APRA executive board member Geoff Summerhayes said, “A failure to update the frameworks in a timely manner would create a divergence between the new accounting standard and APRA’s frameworks, resulting in insurers needing to maintain dual valuation, actuarial, accounting and reporting systems.”
Among the questions raised, the regulator asked all insurers whether there are any other potential impacts of low or negative interest rates on the current capital framework, aside from those set out in the discussion paper. The regulator says that over recent years, Australia has observed a steady fall in market interest rates, now at their lowest level in Australian history, and negative in some parts of the world. At the 99.5% confidence interval used in determining the Prescribed Capital Amount (PCA), APRA views it necessary to allow for the risk of market interest rates becoming negative. Low and negative interest rates impact the operation of the real interest rates stress and expected inflation stress. These stresses were designed in an environment where interest rates were at significantly higher levels and negative interest rates were far less likely than they are today.
Life insurance (LI) specific response
The Actuaries Institute notes that long-dated cash flows become relatively more important when interest rates are low or negative, with potential implications for the Adjusted Policy Liability). “We believe that other potential impacts are possible and note that the Institute has not performed any modelling,” it added.
Private health insurance (PHI) specific response
There is very little discounting of liabilities for PHI funds, and the (current) capital framework does not require an interest rate test. To the degree negative interest rates will impact the investment horizon and volatility, it should be captured in the investment stress. No further guidance is necessary with the current capital system.