Insurance (prudential standard) determination No. 1 of 2009
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority (APRA)
Insurance Act 1973, paragraphs 32(1)(a) and (b) and subsection 32(4)
Paragraphs 32(1)(a) and (b) of the Insurance Act 1973 (“the Insurance Act”) provides that APRA may determine, in writing, standards relating to prudential matters that must be complied with by general insurers and authorised NOHCs. Pursuant to subsection 32(5A) of the Insurance Act and paragraph 6(d) of the Legislative Instruments Act 2003, such Prudential Standards are legislative instruments for the purposes of the Legislative Instruments Act 2003 (“the Legislative Instruments Act”). Subsection 32(4) of the Insurance Act gives APRA power to vary Prudential Standards so determined.
- Background
This Explanatory Statement explains the reasons for variations to Prudential Standard GPS 114 Capital Adequacy: Investment Risk Capital Charge, originally determined on 23 June 2008.
The variations are a clarification of the intent GPS 114 with regard to the investment risk charge applicable to reinsurance recoverables. These variations are minor in nature, as the substantive intent of the prior standard remains unchanged.
The intent of GPS 114 was that a higher capital charge would apply to certain reinsurance recoverables from non-APRA-authorised reinsurers. After a grace period that expires on the second annual balance date following an event that gives rise to reinsurance recoverables, a higher capital factor will apply to all unsecured reinsurance recoverables. The factors will range from 20 per cent to 100 per cent depending on the counterparty rating of the non-APRA-authorised reinsurer. This treatment will only apply to recoverables arising under reinsurance contracts that incept on or after 31 December 2008. Insurers will be required to make this assessment at each quarterly reporting date.
The wording of paragraph 5 of Attachment A of the pre-variation GPS 114 could be interpreted as the grace period ending on the third annual balance date after the event giving rise to the recoverables. The relevant passage in the prior standard was:
For reinsurance recoverables due from non-APRA-authorised reinsurers, the Investment Capital Factors specified in Table 2 apply (in replacement of those specified in Table 1) to the reinsurance recoverables on and from the second balance date after the end of the financial year in which the event giving rise to each recoverable occurred.
This has been altered to read:
For reinsurance recoverables from non-APRA-authorised reinsurers, the Investment Capital Factors specified in Table 2 apply (in replacement of those specified in Table 1) to each reinsurance recoverable on and from the second annual balance date after the event giving rise to the reinsurance recoverable.
This variation ensures that the original intent is conveyed.
The word ‘due’ was intended to convey the idea that the reinsurance recoverables be payable at some time (which might be a future date). However, concern was raised that the word would be interpreted as conveying the collateral does not need to be in place until the recoverables are actually ‘due and payable’ for paragraph 5 to apply. The amendments clarify that this meaning was not intended. The full definition of ‘reinsurance recoverable’ can be found in GPS 001 Definitions if clarification is required.
Generally in the prudential standards, the word ‘due’ is not meant to mean ’due and payable’. It is merely intended to denote that there is an obligation to pay money which could be a future obligation.
Additionally, paragraph 5 of Attachment A of the pre-variation GPS 114 commented that the reinsurance recoverables were to be identified in the Insurance Liability Valuation Report (ILVR) according to Prudential Standard GPS 310 Audit and Actuarial Reporting and Valuation. This was causing confusion within the industry. In order to overcome this, the requirement in GPS 114 to identify the reinsurance recoverables in the ILVR has been removed. However, the requirement under GPS 310 regarding the Appointed Actuary assessing the reinsurance recoverables from non-APRA-authorised reinsurers remains unchanged.
2. Purpose of the Instrument
The purpose of the determination is to vary the old GPS 114 and make a new Prudential Standard GPS 114 Capital Adequacy: Investment Risk Capital Charge.
3. Operation of the Instrument
The operation of the instrument is as described in the background.
4. Consultation
The Section 17 of the Legislative Instrument Act requires consultation when a rule-maker makes a legislative instrument. However, Section 18 provides that consultation is not necessary when such consultation may be unnecessary or inappropriate. As this change is a minor change with a machinery nature, it is exempt from the requirement of consultation.
Further, APRA undertook extensive consultation prior to the determination of old GPS 114. This is described in detail in the explanatory statement for Insurance (prudential standard) determinations No. 1 to 13 of 2008.