Health Insurance (prudential standard) determination No. 1 of 2025
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority (APRA)
Private Health Insurance (Prudential Supervision) Act 2015, section 92
Under subsection 92(1) of the Private Health Insurance (Prudential Supervision) Act 2015 (the Act), APRA has the power to determine standards (prudential standards), in writing, in relation to prudential matters to be complied with by or in relation to, private health insurers. Under subsection 92(5) of the Act, APRA may, in writing, vary or revoke a prudential standard.
On 15 November 2025, APRA made Health Insurance (prudential standard) determination No. 1 of 2025 (the instrument), which revokes Prudential Standard HPS 115 Capital Adequacy: Insurance Risk Charge made under Health Insurance (prudential standard) determination No. 5 of 2023 and determines a new Prudential Standard HPS 115 Capital Adequacy: Insurance Risk Charge (HPS 115).
The instrument commences on 1 January 2026.
- Background
APRA’s mandate is to ensure the safety and soundness of prudentially regulated financial institutions so that they can meet their financial promises to depositors, policyholders, and fund members within a stable, efficient, and competitive financial system.
APRA carries out this mandate through a multi-layered prudential framework that encompasses licensing and supervision of institutions. In the case of the private health insurance industry, APRA is empowered under the Act to issue legally binding prudential standards that set out specific prudential requirements with which private health insurers must comply.
HPS 115 is a legally binding prudential standard. It is part of a group of prudential standards relating to the capital that a private health insurer must hold as a safeguard to meet its promises to policyholders despite adverse conditions. Adequate capital is critical to protect policyholders and APRA sets requirements on minimum capital to ensure private health insurers can absorb unexpected losses in their business. This is a core tool of prudential regulation and supports system-level financial stability.
HPS 115 requires a private health insurer to maintain adequate capital against the insurance risks associated with its insurance activities. The Insurance Risk Charge is the minimum amount of capital required to be held against these insurance risks, and this Prudential Standard sets out the method for calculating it.
- Purpose and operation of the instrument
The purpose of the instrument is to revoke the existing HPS 115 and replace it with a new version of HPS 115.
The new version makes a minor amendment by replacing the term ‘management expenses’ with ‘other business expenses’. This amendment does not alter the intended meaning, but is made to align terminology with APRA’s Quarterly Private Health Insurance Performance Statistics and the Department of Health and Aged Care’s Premium Round Application Forms, where ‘other business expenses’ is the standard reference.
Details of the new prudential standard
See Attachment A.
Documents incorporated by reference
Under subsection 14(1)(a) of the Legislation Act 2003, the standard incorporates by reference as in force from time to time:
• Acts of Parliament and associated delegated laws;
• Prudential Standards determined by APRA under subsection 92(1) of the Act; and
• Reporting Standards determined by APRA under subsection 13(1) of the Financial Sector (Collection of Data) Act 2001.
These documents may be freely obtained on the Federal Register of Legislation at www.legislation.gov.au.
Exercise of discretion by APRA
Under subsection 92(4) of the Act, a prudential standard may provide for APRA to exercise powers and discretions under the standard, including (but not limited to) discretions to approve, impose, adjust or exclude specific prudential requirements in relation to a particular private health insurer.
APRA’s prudential standards include powers that may be exercised by APRA that involve an element of discretion and that may affect the interests of the entities to which the prudential standards apply. These powers include a power to adjust or exclude a provision of the prudential standard.
The need to apply discretion is driven by entity-specific issues and circumstances that are not adequately addressed by the generally applicable provisions of the prudential standards. For example, adjustment or exclusion of a provision may be necessary to obtain a better prudential outcome than would be the case if the prudential requirement were applied unaltered to a particular regulated entity.
When exercising its discretion, APRA considers a wide range of factors, including the considerations set out in the Act and the Australian Prudential Regulation Authority Act 1998.
The exercise of APRA's powers is governed by a robust decision-making framework which is documented in APRA's internal policies. This framework supports APRA in fulfilling its mandate by limiting decision making to those senior APRA officers with the appropriate experience and skill to exercise prudent judgement. The framework also requires decision makers to seek advice from internal technical experts.
The power is also exercised following discussion with the relevant private health insurer about its appropriateness and the impact it may have on the entity.
Review of decisions
Decisions made by APRA exercising powers in prudential standards are not themselves subject to merits review. This is because these decisions are preliminary decisions that may facilitate or lead to substantive decisions which are subject to merits review.
A breach of a prudential standard is a breach of the Act, as section 94 of the Act provides that private health insurers must comply with applicable prudential standards. However, there are no penalties prescribed for such breaches. Instead, a private health insurer’s breach of a provision in the Act is a ground for APRA to make further, substantive decisions under the Act in relation to the private health insurer. These decisions may include issuing a direction to the private health insurer, including a direction to comply with the whole or part of a prudential standard (section 96 of the Act).
It is only at this stage that the private health insurer is exposed to a penalty of 30 penalty units if it breaches the direction (section 104 of the Act). In nearly all cases, the decision is preceded by a full consultation with the insurer to raise any concerns it may have in relation to the decision.
A decision of APRA to impose a direction is subject to merits review under section 168 of the Act, which is appropriately available at the point where an insurer could be exposed to a penalty.
- Consultation
On 25 August 2025, APRA consulted[1] on a set of minor updates to the prudential and reporting framework, including amendments to HPS 115. This consultation was accompanied by the release of draft prudential and reporting standards for industry feedback. The provisions of HPS 115 which remain unchanged had been subject to prior consultation and are not being revisited as part of this process.
APRA did not receive any submissions regarding HPS 115 from insurers during the consultation.
APRA is satisfied the consultation was appropriate and reasonably practicable.
- Impact Analysis (IA)
The Office of Impact Analysis has confirmed that an Impact Analysis is not required.
5. Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
A Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 is provided at Attachment B to this Explanatory Statement.
ATTACHMENT A
Details of the new prudential standard
Authority, application, commencement and interpretation
Under subsection 92(1) of the Act, APRA may determine prudential standards to be complied with by or in relation to, private health insurers.
Paragraphs 1 to 5 are the machinery provisions relating to the legal authority under which the instrument is made, the private health insurers that are required to comply with the standard, the commencement date and interpretation used in the prudential standard.
Insurance Risk Charge
The Insurance Risk Charge is the amount of capital that an insurer must hold to cover the risk of unexpected losses from its insurance business.
Paragraphs 6 and 7 sets out the method for determining the Insurance Risk Charge, which is calculated for each fund as the sum of three components: the Insurance Liability Risk Charge, the Future Exposure Risk Charge, and the Deferred Claims Liability Risk Charge.
Insurance Liability Risk Charge
The Insurance Liability Risk Charge is the amount of capital an insurer must hold to reflect the risk that their liabilities may be higher than expected.
Paragraphs 8 to 18 define and set out the method for determining the Insurance Liability Risk Charge, which comprises of four component risk charges: Outstanding Claims, Premiums Liability, Risk Equalisation, and Other Insurance Liabilities.
Future Exposure Risk Charge
The Future Exposure Risk Charge (FER) relates to the risk that financial performance of the health insurance business (HIB) and health-related insurance business (HRIB) may be materially worse than expected and may require capital to meet policyholder obligations.
Paragraphs 19 to 35 outline how the FER is calculated for health and health-related insurance businesses, including management actions to reduce losses in response to adverse conditions, and the allowance for future cash flows to be discounted.
Deferred Claims Liability Risk Charge
The Deferred Claims Liability Risk Charge is the extra amount of capital an insurer must hold to cover the risk that future claims already owed cost more than expected.
Paragraphs 36 to 37 explain how the Deferred Claims Liability Risk Charge is calculated.
Tax benefits
Paragraph 38 states that the Insurance Risk Charge components must exclude tax benefits.
Adjustments and exclusions
Paragraph 39 relies on subsection 92(4) of the Act and provides for APRA to adjust or exclude a specific prudential requirement in the standard in relation to one or more specified private health insurers.
Previous exercise of discretion
Paragraph 40 is a saving provision and provides that an exercise of APRA’s discretion under a previous version of the prudential standard continues to have effect.
ATTACHMENT B
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Health Insurance (prudential standard) determination No. 1 of 2025
This legislative instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (HRPS Act).
Overview of the Legislative Instrument
The purpose of the legislative instrument is to revoke Prudential Standard HPS 115 Capital Adequacy: Insurance Risk Charge (HPS 115) and replace it with a new version of HPS 115.
HPS 115 is designed to ensure private health insurers remain financially resilience by maintaining sufficient capital against insurance risks associated with its activities. Private health insurers are bodies corporate that have been granted the authority, under the Private Health Insurance (Prudential Supervision) Act 2015, to carry on private health insurance business in Australia.
Human rights implications
APRA has assessed the legislative instrument and is of the view that it does not engage any of the applicable rights or freedoms recognised or declared in the international instruments listed in section 3 of the HRPS Act. Accordingly, in APRA’s assessment, the legislative instrument is compatible with human rights.
Conclusion
This legislative instrument is compatible with human rights as it does not raise any human rights issues.
[1] See: www.apra.gov.au/prudential-and-reporting-framework-minor-updates