Insurance (prudential standard) determination No. 19 of 2008
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority (APRA)
Insurance Act 1973, paragraphs 32(1) (a) and (b)
Paragraphs 32(1)(a) and (b) of the Insurance Act 1973 (“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.
- Background
This Explanatory Statement is concerned with the introduction of a new prudential standard, Prudential Standard GPS 113 Capital Adequacy: Internal Model-based Method (GPS 113), which deals with the use of internal models by general insurer and insurance groups to determine their minimum capital requirement (MCR).
Prudential Standard GPS 110 Capital Adequacy for General Insurers made by Insurance (prudential standard) No.7 of 2006 (old GPS 110) was revoked on 23 June 2008 by Determination No 2 of 2008, which replaced that standard with Prudential Standard GPS 110 Capital Adequacy (new GPS 110). Attachment B to old GPS 110 set out the requirements for the use of an internal model. When old GPS 110 was revoked, Attachment B was intended to be replaced by a separate standard covering the use of an internal model. That was not done at the time due to the consultation process that was intended to take place from June to August 2008. At the time, no insurer was using the Internal Model-based Method (IMB Method) to determine its MCR so it was not crucial that a new standard be determined immediately upon revocation of old GPS 110.
There have been significant developments since 2002, in Australia and internationally, and in both banking and insurance industries, in the use of internal models. Accordingly APRA has reviewed and revised the requirements in its prudential standards in relation to use of the IMB Method. These revised requirements are set out in GPS 113.
2. Purpose of the Instrument
The purpose of the determination is to make a new prudential standard covering the use of internal models by general insurers, replacing Attachment B to the old GPS 110 and taking into account significant recent developments in the use of such models.
3. Operation of the Instrument
Under new GPS 110, an insurer may determine its Minimum Capital Requirement (MCR) using a prescribed method based on requirements contained in:
- new GPS 110;
- Prudential Standard GPS 114 Capital Adequacy: Investment Risk Charge;
- Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Charge; and
- Prudential Standard GPS 116 Capital Adequacy: Concentration Risk Charge,
or it may determine its MCR using the IMB Method subject to APRA’s approval to do so.
GPS 113 also has application in relation to the determination of the capital required to be held by an insurance group. Prudential Standard GPS 111 Capital Adequacy: Level 2 insurance groups requires a Level 2 insurance group to determine its MCR using either the prescribed approach or the IMB Method. GPS 113 also applies to the use of the IMB Method by Level 2 insurance groups.
4. Consultation
APRA undertook extensive consultation between June and August 2008 on proposals that are now reflected in the final standard. The responses to the consultation indicated that industry was supportive of APRA’s requirements with only minor technical amendments made as a result of the consultation process.