Insurance (prudential standard) determination No. 2 of 2017
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority
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. 2 of 2017 (the instrument) which revokes Prudential Standards GPS 117 Capital Adequacy: Asset Concentration Risk Charge made under Insurance (prudential standard) determination No. 4 of 2012 and determines a new Prudential Standards GPS 117 Capital Adequacy: Asset Concentration Risk Charge (GPS 117).
The instrument commences on 13 February 2017.
The instrument makes minor amendments to GPS 117 dealing with two matters.
Firstly, paragraph 26 clarifies that exposures to the Australian Reinsurance Pool Corporation should be treated as though they were exposures to an APRA-authorised reinsurer with recognition of the guarantee provided by the Australian Government.
Secondly, APRA has revised paragraph 24 to clarify the definition of Eligible Collateral Items as cash, government securities, or debt obligations (i.e. loans, deposits, placements, interest rate securities and other receivables) where the counterparty has a counterparty grade of 1, 2 or 3.
- Background
The Asset Concentration Risk Charge relates to the risk of an insurer’s concentrations in exposures to a particular asset, counterparty or group of related counterparties resulting in adverse movements in the regulated institution’s capital base. GPS 117, applicable to general insurers and Level 2 insurance groups, sets out the method for calculating the Asset Concentration Risk Charge.
The Asset Concentration Risk Charge for each exposure of an insurer to a particular asset, counterparty or group of related counterparties is the amount by which this exposure exceeds the limits set out in Attachment A of GPS 117. Separate treatment applies for reinsurance exposures and non-reinsurance exposures.
2. Purpose and operation of the instrument
The purpose of this instrument is to revoke GPS 117 and determine a new GPS 117 to clarify the treatment of certain non-reinsurance exposures for the purposes of the Asset Concentration Risk Charge.
This instrument determines a new version of GPS 117 that makes a minor amendment to paragraph 24 to clarify APRA’s intent. APRA has specifically included references to the ARPC counterparties in paragraph 26 of GPS 117. This ensures that exposures to the ARPC will be subject to the same asset concentration limits as exposures to an APRA-authorised counterparty. Where GPS 117 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 Concentration Risk Charge on exposures to counterparties.
3. Consultation
In November 2016, APRA released a consultation package to industry outlining the proposed changes and including the draft GPS 117. 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. 2 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.