Insurance (prudential standard) determination No. 9 of 2010 - Prudential Standard GPS 120 - Assets in Australia

Administered by Department of the Treasury

Legislation au F2010L01719 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, enacted under the authority of the Insurance Act 1973, were introduced to address the need for a more refined and effective prudential reporting framework for general insurers and authorised non-operating holding companies (NOHCs). The Australian Prudential Regulation Authority (APRA) was tasked with updating these standards to better align with Australian equivalents to International Financial Reporting Standards (AIFRS) and to reduce the overall reporting burden on insurers while maintaining a robust capital framework. The primary objective of these determinations was to streamline the prudential reporting requirements, improve performance measures, and enhance APRA's ability to analyse the financial health of general insurers. The determinations also aimed to ensure consistency in terminology and reporting across the prudential standards. These legislative instruments were developed following extensive consultation with the general insurance industry, reflecting a commitment to collaborative reform.

Scope and Application

The Insurance (prudential standard) determination Nos. 3 to 11 of 2010 applies to general insurers and authorised non-operating holding companies (NOHCs) within the Australian insurance industry. These determinations are legislative instruments made under the Insurance Act 1973, which empower the Australian Prudential Regulation Authority (APRA) to set prudential standards for these entities. The changes introduced by these determinations are designed to refine and update the prudential reporting requirements, aiming to reduce reporting burdens, align performance measures with Australian equivalents to International Financial Reporting Standards (AIFRS), and enhance APRA's ability to analyse the financial performance of general insurers, all while maintaining the existing capital framework. These standards commenced on 1 July 2010, replacing previous prudential standards and introducing new terminology to ensure consistency across the updated standards. The application of these standards is national in scope, affecting all general insurers and authorised NOHCs operating within Australia. There are no specific exclusions or exemptions stated within the text, although the standards themselves may contain specific exclusions relevant to certain circumstances or entities. The application of these standards may be further extended or restricted through subordinate instruments, as permitted by the legislative framework.

Key Provisions

The Insurance (prudential standard) determination Nos. 3 to 11 of 2010 outline the key changes to the prudential reporting framework for general insurers and authorised non-operating holding companies (NOHCs) in Australia. These determinations, made under the authority of the Insurance Act 1973 and the Legislative Instruments Act 2003, introduce new and amended reporting requirements to ensure consistency with Australian equivalents to International Financial Reporting Standards (AIFRS). These changes also aim to reduce reporting obligations, align performance measures, and enhance the Australian Prudential Regulation Authority’s (APRA) analysis of insurers’ financial performance. The operative sections of these determinations include the revocation of existing prudential standards such as GPS 001 Definitions, GPS 110 Capital Adequacy, GPS 112 Capital Adequacy: Measurement of Capital, and others, effective from 1 July 2010. They also introduce new standards that incorporate the proposed changes, such as GPS 001 Definitions, GPS 110 Capital Adequacy, GPS 112 Capital Adequacy: Measurement of Capital, and more. For example, GPS 001 now includes definitions for deferred reinsurance expense and lenders mortgage insurance, reflecting the new terminology and requirements. These standards necessitate that general insurers and authorised NOHCs adjust their reporting to align with the new definitions and requirements. The obligations imposed by these determinations include the requirement for general insurers and authorised NOHCs to update their financial reporting frameworks to reflect the new prudential standards. This includes adopting the new definitions and reporting formats as specified in the amended standards. Insurers must ensure that their balance sheets and income statements are prepared in accordance with the Australian equivalents to International Financial Reporting Standards, and they must report on new items such as deferred reinsurance expense. Additionally, authorised NOHCs must ensure that their reporting adequately reflects the capital adequacy and other requirements stipulated in the new standards. Breach of the requirements set out in these prudential standards can result in civil or criminal consequences. Under section 942A of the Corporations Act 2001, individuals who knowingly or recklessly make a false or misleading statement in a disclosure document can face substantial penalties. The maximum penalty for individuals is a fine of up to $210,000 or imprisonment for up to five years, or both. For bodies corporate, the maximum penalty can be significantly higher, reflecting the severity of non-compliance with prudential standards. Additionally, APRA has the authority to take regulatory action against insurers that fail to comply with the prudential standards, which can include imposing financial penalties, requiring corrective action, or in severe cases, revoking the insurer’s licence.

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