Insurance (prudential standard) determination No. 2 of 2022

Administered by Department of the Treasury

Legislation au F2022L00881 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 Australian Prudential Regulation Authority (APRA) has introduced the Insurance (prudential standard) determinations Nos. 1 to 4 of 2022, which were enacted to address specific gaps in the prudential framework of the Insurance Act 1973. This legislation was developed to support the Australian Government’s cyclone and related flood damage reinsurance pool by ensuring that reinsurance provided by the Australian Reinsurance Pool Corporation (ARPC) is not subject to a capital charge. This change recognises the Australian Government guarantee that underpins the reinsurance pool. The purpose of these determinations is to amend existing prudential standards to include the ARPC as a high-grade APRA-authorised reinsurer and to clarify the treatment of reinsurance recoverables from the ARPC. These determinations aim to ensure that the prudential standards remain effective and relevant in supporting the financial stability of APRA-regulated institutions. These legislative instruments were introduced to facilitate minor and machinery changes that are considered necessary for the operational integrity of the reinsurance pool. APRA consulted with general insurers on these proposed changes, although no submissions were received. APRA determined that a Regulation Impact Statement was not necessary for these amendments, given their minor and machinery nature. Additionally, a Statement of Compatibility with Human Rights was prepared to confirm that these legislative instruments are compatible with human rights as recognised in the Human Rights (Parliamentary Scrutiny) Act 2011.

Scope and Application

The Insurance (prudential standard) determinations Nos. 1 to 4 of 2022, made by the Australian Prudential Regulation Authority (APRA) under the Insurance Act 1973, apply to APRA-regulated institutions, specifically general insurers, authorised non-operating holding companies (authorised insurance NOHCs), and their subsidiaries. These instruments, which commenced on 1 July 2022, focus on updating and replacing certain prudential standards to accommodate the Australian Government's cyclone and related flood damage reinsurance pool. The primary changes include revoking existing prudential standards and introducing new ones that recognise the Australian Reinsurance Pool Corporation (ARPC) as a high-grade APRA-authorised reinsurer, thereby ensuring that reinsurance recoverables from the ARPC are exempt from capital charges due to the Australian Government guarantee backing the reinsurance pool. This adjustment aims to support the operation of the reinsurance pool by aligning the regulatory framework with the government's support structure. The instruments extend across the Commonwealth and are integral to the prudential regulation of the insurance sector in Australia.

Key Provisions

The Australian Prudential Regulation Authority (APRA) has introduced a series of legislative instruments, specifically Insurance (prudential standard) determinations Nos. 1 to 4 of 2022, under the Insurance Act 1973 (the Act). These determinations, which came into effect on 1 July 2022, aim to revise certain prudential standards to support the Australian Government’s cyclone and related flood damage reinsurance pool. They specifically address 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. The revised standards recognise the Australian Reinsurance Pool Corporation (ARPC) as a high-grade APRA-authorised reinsurer and clarify that reinsurance recoverables from the ARPC are not subject to a capital charge due to the Australian Government guarantee backing the reinsurance pool. The revised prudential standards impose specific obligations on APRA-regulated institutions, including general insurers, authorised non-operating holding companies (authorised insurance NOHCs), and their subsidiaries. These obligations include recognising the ARPC as a high-grade APRA-authorised reinsurer, adhering to the updated definitions and footnotes, and ensuring that reinsurance recoverables from the ARPC are not subject to a capital charge. Institutions must update their internal policies and practices to align with these revised standards to remain compliant with APRA’s regulatory framework. Failure to comply with these prudential standards may lead to regulatory scrutiny or enforcement actions by APRA. While the legislative instruments do not explicitly detail civil or criminal penalties for non-compliance, APRA has the authority to take various enforcement measures, including issuing directives, imposing financial penalties, or initiating more severe regulatory actions if necessary. The exact penalties would depend on the nature and severity of the non-compliance and would be determined in accordance with APRA’s regulatory powers under the Act. Institutions are advised to ensure they fully understand and implement the revised standards to avoid potential regulatory consequences.

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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.