GPS 118 Capital Adequacy: Operational Risk Charge

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About this standard

This standard requires a general insurer or level 2 insurance group to maintain adequate capital for its operational risks. General insurers and 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 operational 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 Operational Risk Charge is the minimum amount of capital required to be held against operational risks. The Operational Risk Charge relates to the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This Prudential Standard sets out the method for calculating the Operational 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. 8 of 2023
Prudential Standard GPS 118 Capital Adequacy: Operational 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. 7 of 2019, including Prudential Standard GPS 118 Capital Adequacy: Operational Risk Charge, made under that Determination; and under subsection 32(1) of the Act determine Prudential Standard GPS 118 Capital Adequacy: Operational 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 118 Capital Adequacy: Operational Risk Charge, comprises the document commencing on the following page. Prudential Standard GPS 118 Capital Adequacy: Operational 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. parent entity parent entity has the meaning given in Prudential Standard GPS 001 Definitions.

Operational Risk Charge

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

The Operational Risk Charge is the minimum amount of capital a regulated institution must hold against the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.

Calculation of the Operational Risk Charge

The Operational Risk Charge for a regulated institution is calculated as the sum of:

the Operational Risk Charge for inwards reinsurance business (ORCI) defined in paragraph 9; and

the Operational Risk Charge for business that is not inwards reinsurance business (ORCNI) defined in paragraph 10.

The Operational Risk Charge for a Level 2 insurance group is calculated after consolidation of intra-group exposures.

For the purposes of paragraphs 9 and 10:

GP
1 is written premium revenue (gross of reinsurance) for the 12 months ending on the reporting date ;

GP
0 is written premium revenue (gross of reinsurance) for the 12 months ending on the date 12 months prior to the reporting date;

Written premium revenue is the amount charged in relation to accepting risk from the insured. For the purposes of the Operational Risk Charge calculation, this includes levies imposed by state and territory governments, and revenue relating to portfolio transfers and unclosed business;

NL is the central estimate of insurance liabilities (net of reinsurance) determined in accordance with Prudential Standard GPS 340 Insurance Liability Valuation (GPS 340) , at the reporting date [1] ; and

[1]

Under
Prudential Standard GPS 340 Insurance Liability Valuation, a Level 2 insurance group may use accounting entries to determine its premiums liabilities, after allowing for necessary adjustments made under GPS 340 . Where accounting entries have been used to determine net premiums liabilities, the Level 2 insurance group must use the accounting equivalent of net premiums liabilities instead of the net central estimate for the purposes of the Operational Risk Charge.

|GP
1
– GP
0
| is the absolute value of the difference between GP 1 and GP 0.

All transfers of insurance business made in accordance with the Act must be recognised in line with the corresponding requirements under Australian Accounting Standards .

The ORCI is calculated as follows:

The ORCNI is calculated as follows:

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.