Insurance (prudential standard) determination No. 1 of 2017
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority (APRA)
Insurance Act 1973, section 32
Under subsections 32(1)(a) and (b) of the Insurance Act 1973 (the Act), APRA has the power to determine standards (prudential standards), in writing, in relation to prudential matters to be complied with by general insurers and authorised non-operating holding companies (authorised NOHCs). Under subsection 32(4) of the Act, APRA may, in writing, vary or revoke a prudential standard.
On 7 February 2017, APRA made Insurance (prudential standard) determination No. 1 of 2017 (the instrument) which revokes Prudential Standards GPS 114 Capital Adequacy: Asset Risk Charge made under Insurance (prudential standard) determination No. 4 of 2012 and determines a new Prudential Standards GPS 114 Capital Adequacy: Asset Risk Charge (GPS 114).
The instrument commences on 13 February 2017.
The instrument makes minor amendments to GPS 114 dealing with two matters.
Firstly, paragraph 73 clarifies that that reinsurance recoverables from the Australian Reinsurance Pool Corporation (ARPC) should be treated as though they were an exposure to an APRA-authorised counterparty grade 1 entity.
Secondly, APRA has made the following minor changes that add clarity to existing provisions without changing the substance of an insurer’s obligations under the prudential standard.
- Paragraph 71 revised to clarify that unsecured loans that have a 100 per cent default factor applied in accordance with paragraph 71 will not be subject to credit spreads stress, real interest rates stress, expected inflation stress and currency stress.
- Paragraph 73 revised to clarify that default stress factors apply to both reinsurance recoverables and deferred reinsurance expenses.
- Paragraph 74 revised to clarify that novated contracts are regarded as incepting at the time specified in the contract they replaced, except where a later time is specified in the novation deed.
- Background
GPS 114 sets out the method for calculating the Asset Risk Charge, the minimum amount of capital a general insurer or Level 2 insurance group must hold against the asset risks associated with its activities. The Asset Risk Charge is one of the components of the Standard Method for calculating the prescribed capital amount, and relates to the risk of adverse movements in the value of a fund’s on-balance sheet and off-balance sheet exposures.
2. Purpose and operation of the instrument
The purpose of this instrument is to revoke GPS 114 and determine a new GPS 114 to clarify the treatment of reinsurance recoverables from the Australian Reinsurance Pool Corporation (ARPC).
This instrument determines a new version of GPS 114 that makes minor amendments to paragraph 71, 73, and 74. APRA has specifically included references to ARPC in the footnote to paragraph 73. This ensures that that reinsurance recoverables from the (ARPC) will be treated as though they were an exposure to an APRA-authorised counterparty grade 1 entity. Where GPS 114 incorporates by reference the requirements of another prudential standard, this is a reference to the prudential standard as it exists from time to time.
This instrument will ensure the correct application of the Prudential Standard across the industry. This will ensure that general insurers and Level 2 insurance groups correctly calculate the Asset Risk Charge on reinsurance exposures to counterparties.
3. Consultation
In November 2016, APRA released a consultation package to industry outlining the proposed changes and including the draft GPS 114. No submissions were received.
4. Regulation Impact Statement
The Office of Best Practice Regulation has advised that a Regulation Impact Statement is not required for this legislative instrument.
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 A to this Explanatory Statement.
Attachment A
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Insurance (prudential standard) determination No. 1 of 2017
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
This Legislative Instrument makes amendments to Prudential Standard GPS 117 Capital Adequacy: Asset Concentration Risk Charge to clarify the treatment of certain non-reinsurance exposures for the purposes of the Asset Concentration Risk Charge.
Human rights implications
APRA has assessed this 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 instruments are compatible with human rights.
Conclusion
This Legislative Instrument is compatible with human rights because it does not raise any human rights issues.