Insurance (prudential standard) determination No. 6 of 2010 - Prudential Standard GPS 113 - Capital Adequacy: Internal model-based method

Administered by Department of the Treasury

Legislation au F2010L01716 Not in force Legislative Instrument

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Insurance (prudential standard) determination Nos. 3 to 11 of 2010
 

 

EXPLANATORY STATEMENT

Prepared by the Australian Prudential Regulation Authority (APRA)

 

Insurance Act 1973, paragraphs 32(1)(a) and (b) and subsection 32(4)

 

 

Paragraphs 32(1)(a) and (b) of the Insurance Act 1973 (“the Insurance Act”) provide 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 (“the Legislative Instruments Act”), such Prudential Standards are legislative instruments for the purposes of the Legislative Instruments Act.  Subsection 32(4) of the Insurance Act gives APRA the power to vary Prudential Standards so determined.

 

  1.          Background

 

In December 2009, APRA released the discussion paper titled Proposed changes to general insurance prudential reporting.  APRA’s key proposal was the alignment of the balance sheet and income statement with the Australian equivalents to International Financial Reporting Standards (AIFRS).  A number of other refinements were also proposed. 

 

APRA’s objectives were to refine the prudential reporting requirements to reduce the reporting obligations for insurers, to align performance measures and to enhance APRA’s analysis of the financial performance of general insurers, while maintaining the current capital framework.

 

2.            Purpose of the Instruments

 

The changes to the prudential reporting framework required the introduction of new and amended reporting requirements.  This also required consequential changes to the terminology used in some general insurance prudential standards.

 

The purpose of making the instruments is to replace existing prudential standards with prudential standards that implement the proposals. 

 

Accordingly the Insurance (prudential standard) determination Nos. 3 to 11 of 2010 will revoke the following prudential standards with effect from 1 July 2010:

 

  • General Insurance Prudential Standard GPS 001 Definitions made on 15 December 2009;
  • General Insurance Prudential Standard GPS 110 Capital Adequacy made on 23 June 2008;
  • General Insurance Prudential Standard GPS 112 Capital Adequacy: Measurement of Capital made on 23 June 2008;
  • General Insurance Prudential Standard GPS 113 Capital Adequacy: Internal model-based method made on 19 December 2008;
  • General Insurance Prudential Standard GPS 114 Capital Adequacy: Investment Risk Capital Charge made on 23 June 2008 as amended by Insurance (prudential standard) No. 1 of 2009 made on 11 May 2009;
  • General Insurance Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Capital Charge made on 23 June 2008;
  • General Insurance Prudential Standard GPS 116 Capital Adequacy: Concentration Risk Capital Charge made on 10 March 2010;
  • General Insurance Prudential Standard GPS 120 Assets in Australia made on 23 June 2008; and
  • General Insurance Prudential Standard GPS 310 Audit and Actuarial Reporting and Valuation made on 23 June 2008.

 

Additionally the Insurance (prudential standard) determination Nos. 3 to 11 of 2010 will make the following prudential standards to take effect from 1 July 2010:

 

  • General Insurance Prudential Standard GPS 001 Definitions (GPS 001);
  • General Insurance Prudential Standard GPS 110 Capital Adequacy (GPS 110);
  • General Insurance Prudential Standard GPS 112 Capital Adequacy: Measurement of Capital (GPS 112);
  •  General Insurance Prudential Standard GPS 113 Capital Adequacy: Internal model-based method (GPS 113);
  • General Insurance Prudential Standard GPS 114 Capital Adequacy: Investment Risk Capital Charge (GPS 114);
  • General Insurance Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Capital Charge (GPS 115);
  • General Insurance Prudential Standard GPS 116 Capital Adequacy: Concentration Risk Capital Charge (GPS 116);
  • General Insurance Prudential Standard GPS 120 Assets in Australia (GPS 120); and
  • General Insurance Prudential Standard GPS 310 Audit and Actuarial Reporting and Valuation (GPS 310).

 

3.            Operation of the Instruments

 

  • Insurance (prudential standard) determination No. 3 of 2010: General Insurance Prudential Standard GPS 001 Definitions

 

The following definition has been added to GPS 001:

 

  1. Deferred reinsurance expense (DRE) represents the amount of reinsurance expense which is capitalised as an asset over the life of the reinsurance contract in accordance with GPS 310 Audit and Actuarial Reporting and Valuation.

 

The following definitions for lenders mortgage insurance and lenders mortgage insurer from GPS 116 have now been included in GPS 001.

 

2.      Lenders mortgage insurance has its ordinary commercial meaning and includes insurance under a policy which protects a lender from losses in the event of borrower default on a loan secured by a mortgage over residential or other property.

 

3.      Lenders mortgage insurer means an insurer that has written or reinsured, or proposes to write or reinsure, policies of lenders mortgage insurance.

 

The definitions for classes of business as currently set out in general insurance reporting instruction guides[1] have now been reproduced in GPS 001.

 

The following definitions have been amended in GPS 001:

 

  1. Expected reinsurance recoveries means any amounts due to an insurer, or to an entity that carries on international business within a Level 2 insurance group, from a reinsurer that arise from the recognition of Premiums Liabilities referred to in the capital standards and Prudential Standard GPS 310 Audit and Actuarial Reporting and Valuation. This is distinguished from reinsurance recoverables.

 

The definition for expected reinsurance recoveries has been amended because it has been removed as a component of reinsurance assets.

 

2.      Reinsurance assets in relation to an insurer or an entity that carries on international business within a Level 2 group comprises:

(a)     reinsurance recoverables; and

(b)     deferred reinsurance expense.

 

One of the reporting simplification measures taken in the project was to risk charge ‘deferred reinsurance expense’ as a substitute for ‘expected reinsurance recoveries.’ The definition of reinsurance assets has been used to refer to the particular reinsurance-related assets that will have a risk charge applied. This definition has been modified to change the terminology from ‘expected reinsurance recoveries’ to ‘deferred reinsurance expense’, as expected reinsurance recoveries on premium liabilities will no longer be risk-charged.

 

These changes in terminology have required other minor consequential amendments to the following general insurance prudential standards to ensure consistency across all prudential standards. 

 

  • Insurance (prudential standard) determination No. 4 of 2010: General Insurance Prudential Standard GPS 110 Capital Adequacy;
  • Insurance (prudential standard) determination No. 5 of 2010: General Insurance Prudential Standard GPS 112 Capital Adequacy: Measurement of Capital;
  • Insurance (prudential standard) determination No. 6 of 2010: General Insurance Prudential Standard GPS 113 Capital Adequacy: Internal model-based method;
  • Insurance (prudential standard) determination No. 7 of 2010: General Insurance Prudential Standard GPS 114 Capital Adequacy: Investment Risk Capital Charge;
  • Insurance (prudential standard) determination No. 11 of 2010: General Insurance Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Capital Charge;
  • Insurance (prudential standard) determination No. 8 of 2010: General Insurance Prudential Standard GPS 116 Capital Adequacy: Concentration Risk Capital Charge;
  • Insurance (prudential standard) determination No. 9 of 2010: General Insurance Prudential Standard GPS 120 Assets in Australia; and
  • Insurance (prudential standard) determination No. 10 of 2010: General Insurance Prudential Standard GPS 310 Audit and Actuarial Reporting and Valuation

 

4.   Consultation

 

Section 17 of the Legislative Instruments Act 2003 requires consultation when a rule-maker makes a legislative instrument.  APRA undertook consultation with the general insurance industry from 3 December 2009 to 12 February 2010 on the proposed changes to the current prudential reporting framework. The consultation process involved the release of a discussion paper outlining the proposed changes, draft prudential standards, draft reporting forms and instructions, together with a quantitative impact study. APRA received submissions that were generally supportive of the proposals and no material changes have been made to the key proposals. Some minor modifications have been made to address aspects raised in the submissions.

[1] Instruction guides form part of the reporting standards as made under the Financial Sector (Collection of Data) Act 2001.

Overview

The Insurance (prudential standard) determination Nos. 3 to 11 of 2010, made by the Australian Prudential Regulation Authority (APRA) under the Insurance Act 1973, aim to refine and update the prudential reporting requirements for general insurers and authorised non-operating holding companies (NOHCs). These determinations address a gap in the existing prudential standards by introducing new and amended reporting requirements, thereby reducing the reporting burden on insurers, aligning performance measures, and enhancing APRA's analysis of the financial performance of general insurers. The primary objective of these instruments is to implement the proposed changes to general insurance prudential reporting, which include the alignment of the balance sheet and income statement with the Australian equivalents to International Financial Reporting Standards (AIFRS), while maintaining the current capital framework. The instruments revoke existing prudential standards and introduce new standards to take effect from 1 July 2010.

Scope and Application

The Insurance (prudential standard) determination Nos. 3 to 11 of 2010, issued by the Australian Prudential Regulation Authority (APRA) under the Insurance Act 1973, applies to general insurers and authorised non-operating holding companies (NOHCs) within Australia. These instruments aim to revise and replace existing prudential standards, enhancing the financial reporting requirements for insurers and aligning them with Australian equivalents to International Financial Reporting Standards (AIFRS). The new standards, effective from 1 July 2010, introduce significant changes such as the introduction of deferred reinsurance expense as a new asset category and the alignment of various definitions and reporting requirements to reduce the burden on insurers while maintaining the regulatory capital framework. APRA undertook consultations with the insurance industry to gather feedback on the proposed changes, resulting in minor modifications based on industry submissions. These determinations are legislative instruments under the Legislative Instruments Act 2003, and APRA retains the power to vary these standards as needed to ensure effective prudential regulation of the insurance industry.

Key Provisions

The Insurance (prudential standard) determination Nos. 3 to 11 of 2010 introduce new and amended reporting requirements for general insurers and authorised Non-Operating Holding Companies (NOHCs) under the Insurance Act 1973. These determinations replace existing prudential standards with updated ones, effective from 1 July 2010. They incorporate changes to the terminology and reporting measures to align with Australian equivalents to International Financial Reporting Standards (AIFRS). Among the changes, the determinations include new definitions for terms such as 'deferred reinsurance expense' and 'lenders mortgage insurance', and adjustments to the definitions of 'reinsurance assets' to reflect the new risk charging approach. These amendments ensure that the terminology is consistent across all prudential standards, thereby facilitating a smoother transition and better compliance for insurers. Under these determinations, general insurers and authorised NOHCs are required to update their reporting practices to align with the new standards. This includes using the revised definitions and adopting the new reporting measures, which are designed to reduce the burden of reporting while maintaining the necessary prudential oversight. Insurers must ensure that their financial statements and reports accurately reflect these changes, particularly in how they account for reinsurance expenses and assets. The determinations also necessitate that insurers review and, where necessary, revise their internal processes and systems to ensure compliance with the new standards. Failure to comply with the new prudential standards could result in regulatory action from the Australian Prudential Regulation Authority (APRA). While the determinations do not explicitly outline specific penalties for non-compliance, non-compliance with APRA’s standards can lead to enforcement actions, which may include financial penalties, restrictions on business activities, or other regulatory measures. APRA has the authority to take such actions under the Insurance Act 1973 and the Financial Sector (Collection of Data) Act 2001. Additionally, serious breaches may have implications for the insurer's licence and reputation, potentially leading to more severe consequences such as fines or even revocation of the insurer's licence. Insurers are thus required to adhere closely to the new standards to avoid these potential repercussions.

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