Licence Condition 21 and Mutual Discretionary Risk Products
To obtain its AFS licence, Capricorn Mutual had to demonstrate to the Australian Securities and Investments Commission (ASIC) that it met stringent financial requirements. The licence conditions require the Mutual to always have adequate financial resources to discharge its future liabilities or make payments to the holders of its product.
Under the Conditions forming part of AFS Licence No 230038, Capricorn Mutual Limited is required to inform a person applying for membership and Protections at the time it makes an offer or issues a mutual risk product that:
(i) Capricorn Mutual Limited is not authorised under the Insurance Act 1973 to conduct insurance business in; and
(ii) Capricorn Mutual Limited and the product:
(a) are not subject to the provisions of the Insurance Act 1973, which establishes a system of financial supervision of general insurers in Australia; and
(b) are not regulated by the Australian Prudential Regulation Authority (APRA).
Estimating Future Liabilities or Future Payments to Members
Capricorn Mutual Limited is also required to show the extent to which it will:
(i) estimate its future liabilities or its future payments to Members; and
(ii) ensure that it has has adequate financial resources to discharge future liabilities, or make future payments, to Members.
Capricorn Mutual will estimate its future liabilities or future payments to members by:
(i) applying conservative case estimates for claims upon which the Board has exercised its discretion to pay; and
(ii) applying annual projections for outstanding claims liabilities.
CMM has developed a mathematical model, which Capricorn Mutual will use to calculate:
(i) Income to be received by Capricorn Mutual from:
• contributions; and
• interest on investments.
(ii) The outgoings to be paid by Capricorn Mutual for:
• Fixed management costs;
• The number of claims lodged each year;
• The number of claims lodged for specific risks;
• The cost of its own insurance;
• The delay in lodging claims;
• The cost of an average claim; and
• Stamp duty and withholding tax on premiums payable to reinsurers.
Each financial year Capricorn Mutual will set aside funds to pay any future claims that may be made by members. The mathematical model is based on Capricorn Mutual being a fully funded mutual. This means that contributions will be calculated on the assumption that in any one financial year Capricorn Mutual will not receive or pay all the claims that members may have the right to claim on it for that financial year.
Capricorn Mutual will manage these future liabilities and payments through its own risk management program and through its claim reserving policy. Capricorn Mutual will calculate contributions of members on the basis that it will have adequate financial resources to discharge future liabilities and make future payments to members with protection, based on a mathematical model and independent actuarial advice.
The Rules include provisions relevant to the day-to-day running of Capricorn Mutual including provisions on how Members join Capricorn Mutual, how Contributions are to be applied by Capricorn Mutual and how and in respect of what risks, the Members may apply for protection.
The Rules also set out how the Board of Capricorn Mutual deals with the financial aspects of Capricorn Mutual including potential surpluses and potential deficits.
In the event of a surplus in any one-year, the Board may apply that surplus by either returning Contributions to Members in proportion to their respective contributions for that year or by putting the surplus into Capricorn Mutual's claims reserves, or both. The Board's discretion is subject to the requirements imposed on Directors to ensure that the company remains solvent and is able to meet the financial requirements imposed on it as an AFS licensee.
Will Additional Contributions Ever be Required?
In the event of a deficit, Capricorn Mutual may draw on its reserves or may levy an Additional Contribution from Members in proportion to their respective Contributions. Any Additional Contribution payable by a Member in any financial will be limited to a maximum of 5% of the Contribution paid by that Member in the relevant financial year.
Capricorn Mutual assesses its risk exposures each year and uses actuarial modelling to calculate the level of contribution levied on Members and closely monitors the model's predictions for claims incurred but not notified, as against claims notified and approved by the Board.
Ensuring it has Adequate Financial Resources to Meet Future Payments
Capricorn Mutual will use its best endeavours to ensure that it has adequate financial resources to discharge future liabilities, or make future payments, to holders of the product. By:
(i) calculating Member Contributions in each financial year with the intention of recovering the budgeted cost projections (including claim costs) plus a budgeted surplus;
(ii) projecting financial years claims costs with the assistance of its consulting actuary;
(iii) purchasing appropriate insurance coverage via CINZ, in protection of its contingent liabilities after striking the best balance between insurance and risk retention;
(iv) transferring from time to time (at the discretion of the Board) an agreed percentage of any surpluses to a general reserve;
(v) maintaining a conservative investment strategy; and by
(vi) preparing cash flow budgets on a monthly basis and monitoring actual against budget.
To reduce the risk of a call for Additional Contributions being made, Capricorn Mutual has entered into indemnity arrangements with Capricorn Insurance New Zealand Limited (CINZ) to indemnify Capricorn Mutual for any payments it may make to members that are in excess of Capricorn Mutual's self retention level. CINZ in turn is protected by reinsurance for any payment it may make to Capricorn Mutual.
Dated 19th September 2005