Insurance (prudential standard) determination No. 2 of 2017 - Prudential Standard GPS 117 Capital Adequacy: Asset Concentration Risk Charge

Administered by Department of the Treasury

Legislation au F2017L00102 Not in force Legislative Instrument

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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.

 

  1.               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.

 

 

Overview

The Insurance (prudential standard) determination No. 2 of 2017 was enacted to address the need for clarification in the treatment of certain non-reinsurance exposures for the purposes of the Asset Concentration Risk Charge. This determination, made under the authority of the Insurance Act 1973, was introduced by the Australian Prudential Regulation Authority (APRA) to ensure the correct application of prudential standards across the industry. The determination revokes the previous Prudential Standard GPS 117 Capital Adequacy: Asset Concentration Risk Charge and establishes a new version to rectify minor ambiguities and ensure consistency in how asset concentration risks are assessed and managed by general insurers and Level 2 insurance groups. The policy objective is to maintain a stable and resilient insurance sector by providing clear guidelines on the calculation of the Asset Concentration Risk Charge.

Scope and Application

The Insurance (prudential standard) determination No. 2 of 2017, prepared by the Australian Prudential Regulation Authority (APRA) under the Insurance Act 1973, applies to general insurers and authorised non-operating holding companies (authorised NOHCs) in Australia. This legislative instrument revokes the previous Prudential Standards GPS 117 Capital Adequacy: Asset Concentration Risk Charge and determines a new version of GPS 117, which pertains to the calculation of the Asset Concentration Risk Charge. The new GPS 117 clarifies the treatment of certain non-reinsurance exposures, ensuring that exposures to the Australian Reinsurance Pool Corporation are treated as exposures to an APRA-authorised reinsurer, and specifies the definition of Eligible Collateral Items. The instrument commenced on 13 February 2017, and it operates to ensure the correct application of the Prudential Standard across the industry, ensuring that general insurers and Level 2 insurance groups correctly calculate the Asset Concentration Risk Charge on exposures to counterparties. There are no exclusions, exemptions, or thresholds specified in this determination, and the instrument’s application is not extended or restricted through subordinate instruments.

Key Provisions

The main operative sections of the Insurance (prudential standard) determination No. 2 of 2017 (the instrument) concern the revocation of the existing Prudential Standards GPS 117 Capital Adequacy: Asset Concentration Risk Charge (GPS 117) and the establishment of a new GPS 117. This change was made to clarify the treatment of certain non-reinsurance exposures for the purposes of the Asset Concentration Risk Charge (section 1). Specifically, the new GPS 117 amends paragraph 24 to clarify the definition of Eligible Collateral Items, and it updates paragraph 26 to ensure that exposures to the Australian Reinsurance Pool Corporation (ARPC) are treated similarly to exposures to an APRA-authorised reinsurer (section 2). The Act imposes specific obligations on general insurers and authorised non-operating holding companies (authorised NOHCs) to comply with the prudential standards determined by APRA. These entities must adhere to the guidelines set forth in GPS 117, which dictates the method for calculating the Asset Concentration Risk Charge. The revised GPS 117 ensures that insurers correctly identify and quantify their concentrations in exposures to particular assets, counterparties, or groups of related counterparties. This compliance is crucial to maintaining the stability and resilience of the insurance industry and preventing adverse movements in the capital base of regulated institutions. The instrument also outlines the potential consequences for non-compliance with the new GPS 117. Although the explanatory statement does not specify detailed penalties, non-compliance with APRA’s prudential standards can lead to enforcement actions, which may include fines, public reprimands, or other regulatory sanctions. The penalties for breaches of prudential standards can be severe, reflecting the importance of these standards in safeguarding the financial system. Given the regulatory nature of APRA’s role, it is likely that serious or repeated breaches could result in significant penalties, both civil and criminal, depending on the severity and intent behind the non-compliance. The instrument ensures that the Asset Concentration Risk Charge is applied consistently across the industry, which is vital for maintaining fair and effective risk management practices among general insurers and Level 2 insurance groups. By clarifying the treatment of specific exposures, APRA aims to prevent potential risks that could undermine the financial stability of the insurance sector. The minor amendments to GPS 117 aim to enhance the accuracy and effectiveness of risk assessments, ensuring that insurers are adequately capitalised to withstand potential adverse movements in their capital base.

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