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.
- 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:
- 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:
- 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.