Insurance (prudential standard) determination No. 5 of 2008 Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Capital Charge (Cth)

Insurance (prudential standard) determination No. 5 of 2008

Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Capital Charge

Insurance Act 1973

I, John Roy Trowbridge, Member of APRA, delegate of APRA, under subsection 32(1) of the Insurance Act 1973 (the Act), DETERMINE Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Capital in the form set out in the Schedule, which applies to all general insurers.

This determination takes effect on 1 July 2008.

Dated   23 June 2008

[Signed]

John Trowbridge

Member

Interpretation

In this instrument:

APRA means the Australian Prudential Regulation Authority.

general insurer has the meaning given in section 11 of the Act.

Schedule          

Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Capital Charge comprises the 5 pages attached.

Prudential Standard GPS 115

Capital Adequacy: Insurance Risk Capital Charge

Objective and key requirements of this Prudential Standard

This Prudential Standard sets out the calculation of the Insurance Risk Capital Charge under the Prescribed Method of calculating the Minimum Capital Requirement applicable to a general insurer.

A general insurer is required to calculate its insurance liabilities in accordance with the requirements of Prudential Standard GPS 310 Audit and Actuarial Reporting and Valuation.  The Insurance Risk Capital Charge relates to the risk that the value of the net insurance liabilities is greater than the value determined under Prudential Standard GPS 310 Audit and Actuarial Reporting and Valuation. There are two components to the Insurance Risk Capital Charge:

·        the charge with respect to Outstanding Claims; and

·        the charge with respect to Premium Liabilities (or unexpired risk).

The prescribed charges with respect to particular classes of business are set out in Attachment A.

This Prudential Standard forms part of a comprehensive set of prudential standards that deal with the measurement of a general insurer’s capital adequacy.

Authority

1. This Prudential Standard is made under section 32 of the Insurance Act 1973 (the Act).

Application

1. This Prudential Standard applies to insurers authorised under the Act.[1]

   [1] Refer to sections 32 and 35 of the Act.

1. Subject to any specific transition rules, this Prudential Standard applies to insurers from 1 July 2008.

1. As a consequence of the key role played by capital in the financial health of an insurer, every insurer must maintain sufficient capital to enable its insurance obligations to be met under a wide range of circumstances.  This required level of capital for regulatory purposes is referred to as the Minimum Capital Requirement (MCR).

Interpretation

1. Unless otherwise defined in this Prudential Standard, expressions in bold are defined in Prudential Standard GPS 001 Definitions.

Insurance Risk Capital Charge

1. This Prudential Standard sets out the calculation of the Insurance Risk Capital Charge for an insurer using the Prescribed Method to determine its MCR.

1. The Insurance Risk Capital Charge relates to the risk that the value of net insurance liabilities is greater than the value determined in accordance with Prudential Standard GPS 310 Audit and Actuarial Reporting and Valuation (GPS 310).  It has two components:

(a)a charge in respect of Outstanding Claims Risk; and

(b)a charge in respect of Premiums Liability Risk. 

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

Outstanding Claims Risk

1. The capital charge for Outstanding Claims Risk relates to the risk that the value of the net outstanding claims liabilities is greater than the value determined in accordance with GPS 310.

1. For the purposes of the Prescribed Method, Outstanding Claims Risk is to be measured as a percentage of the value of the net outstanding claims liabilities.  Because Outstanding Claims Risk will vary by class of business, different capital charges for Outstanding Claims Risk must be calculated for each class of business.

1. The capital charge for each class of business is calculated by multiplying the net outstanding claims liabilities for that class (as determined in accordance with GPS 310) by the relevant Outstanding Claims Risk Capital Factor.  For these purposes, classes of business have been divided into three categories with respect to direct insurance business and a matrix of three classes with four types of business with respect to inwards reinsurance business (as set out in the tables at Attachment A).  Classes of business within the same category are regarded as having broadly similar levels of Outstanding Claims Risk.  The total capital charge for Outstanding Claims Risk is the sum of the capital charges for each class of business.

Premiums Liability Risk

1. The capital charge for Premiums Liability Risk relates to the risk that premiums relating to post calculation date exposures, including premiums written before but incepting after the calculation date, will be insufficient to fund the liabilities arising from that business.

1. The value of the net premiums liabilities, as determined in accordance with GPS 310, is taken as the base value for the liabilities upon which the capital charge for Premiums Liability Risk is calculated.

1. For the purposes of the Prescribed Method, Premiums Liability Risk is to be measured as a percentage of the value of the net premiums liabilities.  As for Outstanding Claims Risk, the extent of Premiums Liability Risk will vary by class of business.  However, in a stable portfolio, Premiums Liability Risk is likely to be greater than Outstanding Claims Risk for the same class of business.  A separate capital charge for Premiums Liability Risk must be calculated for each class of business.

1. The capital charge for each class of business is calculated by multiplying the net premiums liabilities for that class (as determined in accordance with GPS 310) by the relevant Premiums Liability Risk Capital Factor (using the same categories as for Outstanding Claims Risk – see the tables at Attachment A).  The total capital charge for Premiums Liability Risk is the sum of the capital charges for Premiums Liability Risk for each class of business.

Business covering multiple classes

1. Where an insurer underwrites an inwards reinsurance contract and is unable to split this business into the classes and types listed below, it must use the highest factors specified in Table 2[2] at Attachment A on its outstanding claims liabilities and its premiums liabilities.

   [2]        That is, those set for casualty business.

1. Where an insurer underwrites an inwards reinsurance contract which spans multiple classes and the insurer cannot readily split the contract between classes, the contract must be allocated by using an appropriate method (provided the same method is used for all contracts and all subsequent periods), including the following methods:

(a)allocate the contract to the category which represents the greatest exposure; or

(b)allocate the contract to the category representing the greatest premium income.

Attachment A

Table 1:  Direct insurance business

Class of business	Outstanding Claims Risk Capital Factor	Premiums Liability Risk Capital Factor
Householders Commercial Motor Domestic Motor Travel	9%	13.5%
Fire and ISR Marine and Aviation Consumer Credit Mortgage Other Accident Other	11%	16.5%
CTP Public and Product Liability Professional Indemnity Employers’ Liability	15%	22.5%

Table 2:  Inwards reinsurance business

Class of business	Outstanding Claims Risk Capital Factor	Premiums Liability Risk Capital Factor
Property -        Facultative Proportional -        Treaty Proportional -        Facultative Excess of Loss -        Treaty Excess of Loss	9.0% 10.0% 11.0% 12.0%	13.5% 15.0% 16.5% 18.0%
Marine & Aviation -        Facultative Proportional -        Treaty Proportional -        Facultative Excess of Loss -        Treaty Excess of Loss	11.0% 12.0% 13.0% 14.0%	16.5% 18.0% 19.5% 21.0%
Casualty -        Facultative Proportional -        Treaty Proportional -        Facultative Excess of Loss -        Treaty Excess of Loss	15.0% 16.0% 17.0% 18.0%	22.5% 24.0% 25.5% 27.0%