GPS 115 Capital Adequacy: Insurance Risk Charge

Article tabs

On this page

About this standard

This standard requires a general insurer or level 2 insurance group to maintain adequate capital for its insurance risks. General insurers or level 2 insurance groups must use the prescribed method to calculate the minimum amount of capital for these risks. This standard supports GPS 110 Capital Adequacy, which is a core standard in the Financial Resilience Pillar. It applies to all general insurers and level 2 insurance groups.

Objectives and key requirements of this Prudential Standard This Prudential Standard requires a general insurer or Level 2 insurance group to maintain adequate capital against the insurance risks associated with its activities. The ultimate responsibility for the prudent management of capital of a general insurer or Level 2 insurance group rests with its Board of directors. The Board must ensure that the general insurer or Level 2 insurance group maintains an adequate level and quality of capital commensurate with the scale, nature and complexity of its business and risk profile, such that it is able to meet its obligations under a wide range of circumstances. The Insurance Risk Charge is the minimum amount of capital required to be held against insurance risks. The Insurance Risk Charge relates to the risk that the value of the net insurance liabilities is greater than the value determined by the Appointed Actuary or Group Actuary. This Prudential Standard sets out the method for calculating the Insurance Risk Charge. This charge is one of the components of the Standard Method for calculating the prescribed capital amount for general insurers and Level 2 insurance groups.

Preamble

Insurance (prudential standard) determination
No. 5 of 2023
Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Charge Insurance Act 1973 I, Helen Rowell, a delegate of APRA :
under subsection 32(4) of the
Insurance Act 1973
(the Act), revoke Insurance (prudential standard) determination No. 5 of 2019, including Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Charge, made under that Determination; and under subsection 32(1) of the Act determine Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Charge , in the form set out in the Schedule, which applies to:
all general insurers and authorised NOHCs; and a subsidiary of a general insurer or authorised NOHC , where that subsidiary is a parent entity of a Level 2 insurance group . This instrument commences on 1 July 2023. Dated: 24 May 2023 [Signed] Helen Rowell Deputy Chair Interpretation In this instrument:
APRA means the Australian Prudential Regulation Authority. authorised NOHC has the meaning given in section 3 of the Act. general insurer has the meaning given in section 11 of the Act. Level 2 insurance group has the meaning given in Prudential Standard GPS 001 Definitions. parent entity has the meaning given in Prudential Standard GPS 001 Definitions. subsidiary has the meaning given in Prudential Standard GPS 001 Definitions.
Schedule
Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Charge, comprises the document commencing on the following page. Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Charge Authority This Prudential Standard is made under section 32 of the Insurance Act 1973 (the Act). Application and commencement This Prudential Standard applies to each:
general insurer authorised under the Act ( insurer ); and Level 2 insurance group as defined in Prudential Standard GPS 001 Definitions ( GPS 001 ). Where a requirement is made in respect of a Level 2 insurance group, the requirement is imposed on the parent entity of the Level 2 insurance group. This Prudential Standard applies to insurers and Level 2 insurance groups ( regulated institutions ) from 1 July 2023. Interpretation Terms that are defined in GPS 001 appear in bold the first time they are used in this Prudential Standard . For the purposes of this Prudential Standard the term ‘Actuary’ is a reference to either the Appointed Actuary for an insurer or the Group Actuary for a Level 2 insurance group (as appropriate). parent entity parent entity has the meaning given in Prudential Standard GPS 001 Definitions.

Insurance Risk Charge

This Prudential Standard sets out the method for calculating the Insurance Risk Charge for a regulated institution using the Standard Method to determine its prescribed capital amount .

The Insurance Risk Charge relates to the risk that the value of net insurance liabilities is greater than the value determined in accordance with Prudential Standard GPS 340 Insurance Liability Valuation ( GPS 340 ). It has two components:

a risk charge in respect of Outstanding Claims Risk; and

a risk charge in respect of Premiums Liability Risk.

The total Insurance Risk Charge is the sum of the risk charge for each of the two components.

Outstanding Claims Risk

The risk charge for Outstanding Claims Risk relates to the risk that the value of the net outstanding claims liabilities will be greater than the value determined in accordance with GPS 340 .

For the purposes of the Standard Method, the risk charge for each class of business is calculated by multiplying the net outstanding claims liabilities for that class (as determined in accordance with GPS 340 ) by the relevant Outstanding Claims Risk Capital Factor in Attachment A. The total risk charge for outstanding claims risk is the sum of the risk charges for each class of business.

Premiums Liability Risk

The risk charge for Premiums Liability Risk relates to the risk that the value of the net premiums liabilities will be greater than the value determined in accordance with GPS 340 . It also relates to the risk that ‘material net written premium’, as defined in paragraph 17, will be insufficient to fund the liabilities arising from that business.

For the purposes of the Standard Method, the risk charge for each class of business is calculated by multiplying the sum of:

net premiums liabilities as determined in accordance with GPS 340 ; and

material net written premiums

by the relevant Premiums Liability Risk Capital Factor in Attachment A. The total risk charge for Premiums Liability Risk is the sum of the risk charges for Premiums Liability Risk for each class of business.

Classes of business

For the purposes of the Outstanding Claims Risk Capital Factor and Premiums Liability Risk Capital Factor, all but the ‘ other ’ direct class of business [1] and ‘ other’ reinsurance class of business have been classified into different categories in Attachment A (Table 1 and Table 2 respectively). The ‘other’ class of business must be allocated to a category by the Actuary, in accordance with paragraphs 13 and 14.

[1]

The other class of business is as defined in paragraph 1(k) of Attachment B of GPS 001 .

For the purpose of calculating the Insurance Risk Charge in respect of any ‘other’ business (whether it is direct business or reinsurance), the Actuary is required to determine the most appropriate category (i.e. category A, B or C) in Table 1 and Table 2 of Attachment A. The choice must be based on the underlying risk characteristics of the business being written. The regulated institution must then apply the corresponding Outstanding Claims Risk Capital Factor and Premiums Liability Risk Capital Factor listed in Attachment A in determining the Insurance Risk Charge.

If the ‘other’ class of business includes multiple risks with differing risk profiles, the Actuary may subdivide the net outstanding claims liabilities, net premiums liabilities and material net written premiums into more than one category.

The reasons for selecting the specific risk category or categories to which the ‘other’ class of business is assigned must be documented in the Actuarial Valuation Report .

Business covering multiple classes

Where a regulated institution underwrites an inwards reinsurance contract which spans multiple classes, the contract must be allocated by using an appropriate method (provided the same method is used for all contracts and all subsequent periods). Appropriate methods include:

allocating the contract on a pro rata basis to each of the relevant categories; or

allocating the contract to the category which represents the greatest exposure; or

allocating the contract to the category representing the greatest premium income.

The regulated institution may use an alternative method from those listed above for allocating inwards reinsurance business that spans multiple classes. The regulated institution must be able to demonstrate that the chosen method is appropriate and is used for all contracts and all subsequent periods.

Material net written premium

With respect to direct business and reinsurance business where policies incept in the following reporting period and where these policies would have a material impact on capital adequacy, net written premium for exposure that has not been included in the calculation of the premiums liabilities is to be subject to the premiums liabilities risk charge. [2] This premium amount is defined as ‘material net written premium’. The materiality of the business that incepts in the next reporting period should be determined in accordance with the Australian accounting and auditing standards subject to APRA’s discretion.

[2]

This requirement is based on the principle that an insurer should be able to meet its insurance obligations at all times, not just at the quarterly reporting date . With regards to written contracts for which insurers are not on risk in the current reporting period , APRA has not defined how far into the subsequent reporting period the capital requirement applies. APRA expects that at the reporting date, insurers will hold sufficient capital for all general insurance contracts for which the general insurer is committed, regardless of when the contract incepts.

For inwards proportional reinsurance contracts, the value of material net written premium calculated in paragraph 17 must reflect the full premium revenue expected for the full term [3] of the reinsurance contract, where revenue has not yet been recognised, subject to the appropriate subsection below:

[3]

For reinsurance contracts that are continuous but cancellable at regular intervals or on specified dates, the term of the contract can be measured to the earliest cancellation date that is not less than 12 months from the previous cancellable date.

where the remaining term of the contract is five years or less, the value of material net written premium should not exceed the net premium revenue forecast for 18 months from the end of the current reporting period; or

where the remaining term exceeds five years, an insurer may approach APRA to determine alternate treatment.

Securitisation

If a regulated institution securitises insurance liabilities, the net insurance liabilities may reduce. The regulated institution must apply to APRA for approval to include the securitisation transaction in the Insurance Risk Charge.

Adjustments and exclusions

APRA may, by notice in writing to a regulated institution, adjust or exclude a specific requirement in this Prudential Standard in relation to that regulated institution.

Previous exercise of discretion

A regulated institution must contact APRA if it seeks to place reliance, for the purposes of complying with this Prudential Standard, on a previous exemption or other exercise of discretion made by APRA under a previous version of this Prudential Standard.

Attachment A
Table 1: Direct insurance business

Category
Class of business
Outstanding
Claims Risk
Capital Factor
(%)
Premiums Liability Risk Capital Factor
(%)
A
Householders
Commercial Motor
Domestic Motor
9.0
13.5
B
Travel
Fire and ISR
Marine and Aviation
Consumer Credit
Other Accident
11.0
16.5
C
Mortgage
CTP
Public and Product Liability
Professional Indemnity
Directors and Officers
Employers Liability
Cyber
14.0
21.0

Table 2: Inwards reinsurance business

Category
Class of business
Reinsurance type
Outstanding Claims Risk Capital Factor
(%)
Premiums Liability Risk Capital Factor
(%)
A
Householders
Commercial Motor
Domestic Motor
Proportional
10.0
15.0
Non-proportional
12.0
18.0
B
Travel
Fire and ISR
Marine and Aviation
Consumer Credit
Other Accident
Proportional
12.0
18.0
Non-proportional
14.0
21.0
C
Mortgage
CTP
Public and Product Liability
Professional Indemnity
Directors and Officers
Employers Liability
Cyber
Proportional
15.0
22.5
Non-proportional
17.0
25.5