Insurance (prudential standard) determination No. 1 of 2022

Administered by Department of the Treasury

Legislation au F2022L00880 Not in force Legislative Instrument

Legislation content

Insurance (prudential standard) determinations Nos. 1 to 4 of 2022

EXPLANATORY STATEMENT

Prepared by the Australian Prudential Regulation Authority (APRA)

Insurance Act 1973, section 32

APRA may, in writing, determine, vary or revoke a prudential standard that applies to an APRA-regulated institution under subsections 32(1) and (4) of the Insurance Act 1973 (the Act), in relation to general insurers, authorised non-operating holding companies (authorised insurance NOHCs), and subsidiaries of general insurers and authorised insurance NOHCs.

On 22 June 2022, APRA made the following determinations (the Instruments):

(1)          Insurance (prudential standard) determination No. 1 of 2022 which revokes Prudential Standard GPS 001 Definitions made under Insurance determination No. 2 of 2018 and determines a new Prudential Standard GPS 001 Definitions;

 

(2)          Insurance (prudential standard) determination No.2 of 2022 which revokes Prudential Standard GPS 114 Capital Adequacy: Asset Risk Charge made under Insurance determination No. 4 of 2019 and determines a new Prudential Standard GPS 114 Capital Adequacy: Asset Risk Charge;

 

(3)          Insurance (prudential standard) determination No. 3 of 2022 which revokes Prudential Standard GPS 116 Capital Adequacy: Insurance Concentration Risk Charge made under Insurance determination No. 13 of 2019 and determines a new Prudential Standard GPS 116: Capital Adequacy: Insurance Concentration Risk Charge; and

 

(4)          Insurance (prudential standard) determination No. 4 of 2022 which revokes Prudential Standard GPS 117 Capital Adequacy: Asset Concentration Risk Charge made under Insurance determination No. 2 of 2017 and determines a new Prudential Standard GPS 117 Capital Adequacy: Asset Concentration Risk Charge.

These Instruments commence on 1 July 2022.

1. Background

On 22 June 2022, APRA determined four general insurance prudential standards incorporating consequential amendments to the prudential framework to support the operation of the Australian Government’s cyclone and related flood damage reinsurance pool. The amendments clarify that reinsurance provided by the Australian Reinsurance Pool Corporation (ARPC) are not subject to a capital charge in recognition of the Australian Government guarantee that supports the reinsurance pool.

The Instruments:

  • amend the definition of an APRA-authorised reinsurer to include the ARPC;
  • remove footnotes made redundant by the change to the definition of an APRA-authorised reinsurer; and
  • add footnotes to clarify the treatment of reinsurance cover provided by the ARPC. 

2. Purpose and operation of the instruments

The purpose of these Instruments is to revoke the four existing prudential standards requiring consequential amendments and replace them with corresponding standards which incorporate appropriate amendments.

The determined prudential standards will recognise the ARPC as a high-grade APRA-authorised reinsurer and ensure that reinsurance recoverables from the ARPC are not subject to a capital charge in recognition of the Australian Government guarantee that supports the pool.

The prudential standards which have been revoked and replaced are:

  • Prudential Standard GPS 001 Definitions;
  • Prudential Standard GPS 114 Capital Adequacy: Asset Risk Charge;
  • Prudential Standard GPS 116 Capital Adequacy: Insurance Concentration Risk Charge; and
  • Prudential Standard GPS 117 Capital Adequacy: Asset Concentration Risk Charge.

Where these standards refer to an Act, Regulation or Prudential Standard, this is a reference to the document as it exists from time to time, and which is available on the Federal Register of Legislation at www.legislation.gov.au.

3. Consultation

On 28 April 2022, APRA undertook consultation with all general insurers in relation to its proposed consequential amendments to the prudential framework to support the operation of the Australian Government’s cyclone and related flood damage reinsurance pool.

As part of the consultation, APRA requested written submissions by 1 June 2022 on its proposal to recognise the ARPC as a high-grade APRA-authorised reinsurance and its proposal that reinsurance recoverables from the ARPC are not subject to a capital charge in recognition of the Australian Government guarantee that supports the pool.

No submissions were received. APRA is satisfied the consultation was appropriate and reasonably practicable as the consequential amendments can be regarded as minor and machinery.

4. Regulation Impact Statement

The OBPR confirmed that a Regulation Impact Statement was not required for the changes described in this explanatory statement as they were considered minor and machinery.

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) determinations Nos. 1 to 4 of 2022

These Legislative Instruments are compatible with the human rights and freedoms recognised or declared in the international instrument listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (HRPS Act).

Insurance (prudential standard) determination No. 1 of 2022

Insurance (prudential standard) determination No. 2 of 2022

Insurance (prudential standard) determination No. 3 of 2022

Insurance (prudential standard) determination No. 4 of 2022

Overview of the Legislative Instruments

The purpose of the Legislative Instruments is to make consequential changes to Prudential Standard GPS 001 Definitions, Prudential Standard GPS 114 Capital Adequacy: Asset Risk Charge, Prudential Standard GPS 116 Capital Adequacy: Insurance Concentration Risk Charge and Prudential Standard GPS 117 Capital Adequacy: Asset Concentration Risk Charge to recognise the Australian Reinsurance Pool Corporation (ARPC) as a high-grade APRA-authorised reinsurer and to ensure that reinsurance recoverables from the ARPC are not subject to a capital charge in recognition of the Australian Government guarantee that supports the scheme.

Human rights implications

APRA has assessed the Legislative Instruments and is of the view that they do 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

These Legislative Instruments are compatible with human rights as they do not raise any human rights issues.

 

Overview

The Insurance (prudential standard) determinations Nos. 1 to 4 of 2022, issued by the Australian Prudential Regulation Authority (APRA) under the authority granted by the Insurance Act 1973, aim to address a gap in the regulatory framework concerning the Australian Government’s cyclone and related flood damage reinsurance pool. These determinations were enacted to support the operations of the Australian Reinsurance Pool Corporation (ARPC), recognising it as a high-grade APRA-authorised reinsurer. The changes clarify that reinsurance provided by the ARPC is not subject to a capital charge due to the Australian Government guarantee that underpins the reinsurance pool. The primary objective of these legislative instruments is to ensure that the prudential standards governing capital adequacy and risk charges are appropriately adjusted to reflect the unique nature of the ARPC's operations and the government support it receives. These determinations will come into effect on 1 July 2022.

Scope and Application

The Insurance (prudential standard) determinations Nos. 1 to 4 of 2022 apply to APRA-regulated institutions, which include general insurers, authorised non-operating holding companies (authorised insurance NOHCs), and subsidiaries of these entities. The determinations concern prudential standards that govern the capital adequacy and risk management of these institutions. These standards are crucial in ensuring the financial stability and robustness of the insurance sector in Australia. Geographically, the application of these standards is national in scope, reflecting the Commonwealth’s overarching regulatory authority through the Australian Prudential Regulation Authority (APRA). The changes to the prudential standards, which commence on 1 July 2022, include recognising the Australian Reinsurance Pool Corporation (ARPC) as a high-grade APRA-authorised reinsurer and exempting reinsurance recoverables from the ARPC from capital charges, owing to the Australian Government’s guarantee supporting the reinsurance pool. The Instruments also include consequential amendments to definitions and footnotes within the prudential standards. There are no specified exclusions or thresholds in these determinations, and they extend their application through subordinate instruments as outlined.

Key Provisions

Under sections 32(1) and (4) of the Insurance Act 1973 (the Act), the Australian Prudential Regulation Authority (APRA) has the authority to determine, vary, or revoke prudential standards that apply to APRA-regulated institutions. On 22 June 2022, APRA exercised this authority to make four determinations (the Instruments) concerning general insurers, authorised non-operating holding companies (authorised insurance NOHCs), and their subsidiaries. These Instruments revoke existing prudential standards and introduce new ones. Specifically, Insurance (prudential standard) determination No. 1 of 2022 revokes and replaces Prudential Standard GPS 001 Definitions, while determination No. 2 of 2022 does the same for Prudential Standard GPS 114 Capital Adequacy: Asset Risk Charge. Determination No. 3 of 2022 revokes and replaces Prudential Standard GPS 116 Capital Adequacy: Insurance Concentration Risk Charge, and determination No. 4 of 2022 revokes and replaces Prudential Standard GPS 117 Capital Adequacy: Asset Concentration Risk Charge. These Instruments came into effect on 1 July 2022. These Instruments impose several obligations and requirements on the parties governed by them. Firstly, they amend the definition of an APRA-authorised reinsurer to include the Australian Reinsurance Pool Corporation (ARPC). This amendment recognises the ARPC as a high-grade APRA-authorised reinsurer. Additionally, the Instruments remove footnotes that have become redundant due to the change in the definition of an APRA-authorised reinsurer. They also add new footnotes to clarify the treatment of reinsurance cover provided by the ARPC. Furthermore, the Instruments ensure that reinsurance recoverables from the ARPC are not subject to a capital charge, in recognition of the Australian Government guarantee that supports the reinsurance pool. These changes necessitate that regulated entities comply with the new definitions and standards set out in the Instruments. There are no specific offences, penalties, or civil or criminal consequences outlined in the Instruments for breaches of the prudential standards. However, failure to comply with APRA’s determinations and the prudential standards set out in the Instruments could potentially lead to regulatory actions by APRA. Such actions may include enforcement measures, fines, or other sanctions under the Insurance Act 1973 or other relevant legislation. The exact consequences would depend on the nature and severity of the non-compliance and would be determined by APRA in accordance with its regulatory powers and the provisions of the relevant Acts and regulations. The Instruments are designed to ensure that the prudential framework supports the Australian Government’s cyclone and related flood damage reinsurance pool. By recognising the ARPC as a high-grade APRA-authorised reinsurer and ensuring that reinsurance recoverables from the ARPC are not subject to a capital charge, the Instruments aim to provide clarity and stability to the insurance sector. APRA has assessed that these changes do not engage any of the applicable rights or freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011, thus deeming the Instruments compatible with human rights.

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Sourced from the Federal Register of Legislation at 26 August 2026. For the latest information on Australian Government law please go to https://www.legislation.gov.au.