Life Insurance (prudential standard) determination No. 2 of 2026
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority (APRA)
Life Insurance Act 1995, section 230A
Under subsection 230A(1) of the Life Insurance Act 1995 (the Act), APRA has power to determine standards in relation to prudential matters (prudential standards) to be complied with by life companies (including friendly societies) and registered non-operating holding companies (registered life NOHCs) and subsidiaries of life companies and registered life NOHCs. Under subsection 230A(5) of the Act, APRA may, in writing, vary or revoke a prudential standard.
On 29 April 2026, APRA made Life Insurance (prudential standard) determination No. 2 of 2026 (the instrument), which revokes Prudential Standard LPS 114 Capital Adequacy: Asset Risk Charge made under Life Insurance (prudential standard) determination No. 8 of 2023 (the previous LPS 114) and determines a new Prudential Standard LPS 114 Capital Adequacy: Asset Risk Charge (the new LPS 114).
The instrument commences on 1 July 2026.
1. Background
APRA’s mandate is to ensure the safety and soundness of prudentially regulated financial institutions so that they can meet their financial promises to depositors, policyholders, and fund members within a stable, efficient, and competitive financial system.
APRA carries out this mandate through a multi-layered prudential framework that encompasses licensing and supervision of institutions. In the case of the life insurance industry, APRA is empowered under the Act to issue legally binding prudential standards that set out specific prudential requirements with which relevant APRA-regulated institutions must comply. These standards are supported by prudential practice guides which clarify APRA’s expectations with regard to prudential requirements.
APRA regularly reviews its prudential framework and amends its prudential requirements as a result of a number of factors, including:
international developments;
changes in financial market conditions;
changes in risk management practices, in response to identified weaknesses in the prudential framework; and
to reduce potential negative impacts of emerging industry issues.
When amending its prudential requirements APRA has regard to, amongst other things, the impact on industry in terms of both industry burden and matters of proportionality.
A key component of APRA’s prudential framework for the life insurance industry is the suite of prudential standards that impose regulatory capital requirements on relevant APRA-regulated institutions for the purpose of ensuring that they hold sufficient capital to address the risks associated with their operations.
The previous LPS 114 set out the method for calculating the Asset Risk Charge, the minimum amount of capital a life company must hold against the asset risks associated with its activities, which relates to the risk of adverse movements in the value of a fund’s on-balance sheet and off-balance sheet exposures.
In June 2025, APRA commenced a review of its capital framework for longevity products (including annuities), to support better retirement outcomes for Australians by fostering a more vibrant and competitive annuity market.
The review was consistent with the Government’s objective of expanding options for retirees to manage longevity risk and was a key contribution to APRA’s strategic objective of ‘getting the balance right’ by ensuring its regulation is efficient and proportionate. The initiative was designed to support the market for retirement income products, with the better alignment of APRA’s capital settings with the long-term nature of longevity liabilities supporting greater innovation and competition in the market for longevity products and allowing life companies to offer retirees better retirement income solutions.
In April 2026, the previous LPS 114 was remade to incorporate reforms stemming from the review.
2. Purpose and operation of the instrument
The purpose of this instrument is to revoke the previous LPS 114 and replace it with the new LPS 114. The new LPS 114 amends the previous LPS 114 by incorporating changes arising out of APRA’s review of its capital framework for longevity products. This includes introducing a new, optional way to calculate the illiquidity premium (the ‘advanced illiquidity premium’ or ‘AILP’), which increases the discount rate that life companies use to calculate liabilities for longevity products under APRA’s capital framework. The changes are expected to provide capital relief benefits and to reduce pro-cyclicality within the capital requirements.
The new LPS 114 sets out the method for calculating the Asset Risk Charge, the minimum amount of capital a life company must hold against the asset risks associated with its activities. The Asset Risk Charge is one of the components of the Standard Method for calculating the prescribed capital amount for life company statutory funds and general funds and relates to the risk of adverse movements in the value of a fund’s on-balance sheet and off-balance sheet exposures.
A description of the key provisions of the new LPS 114 is set out in Attachment A to this Explanatory Statement.
3. Scope of administrative powers
Exercise of discretion by APRA
The new LPS 114 provides for APRA to exercise various discretions. Decisions made by APRA in exercising the discretions are not subject to merits review. This is because these decisions are preliminary decisions that may facilitate or lead to substantive decisions which are subject to merits review.
Under the Act, a breach of a prudential standard is a breach of the Act, as the Act provides that regulated entities must comply with the requirements of a standard. However, there are no penalties prescribed for such breaches. Instead, a breach of a provision in the Act is grounds for APRA to make further, substantive decisions under the Act in relation to the relevant entity. Those decisions may include the decision:
(a) to issue a direction to the entity, including a direction to comply with the whole or part of a prudential standard (section 230B of the Act);
(b) to impose conditions on the entity’s registration (sections 22 and 28B of the Act);
(c) to investigate life insurance business of a body corporate that is a life company, or business of a body corporate that is a registered NOHC (section 137 of the Act); and
(d) to revoke a life company’s registration under section 21 if APRA is satisfied that the company has no liabilities in respect of life insurance business carried on by it in Australia (section 26 of the Act) or to revoke a registered NOHC’s registration under section 28A (section 28C of the Act).
A decision of APRA to give a direction or impose a condition is subject to merits review under section 236 of the Act. Before exercising such a power, APRA will give an affected body corporate an opportunity to comment on whether the exercise is warranted or not.
Revocation of a life company’s registration or a life NOHC’s registration is subject to merits review (section 236 of the Act).
Adjust and exclude discretion
The new LPS 114 gives APRA the discretion to adjust or exclude a specific requirement in the prudential standard (paragraph 85). The power to include such a discretion is provided for under subsection 230A(4) of the Act.
APRA may exercise this power when it is satisfied that the adjustment or exclusion of a specific requirement will better support APRA in meeting its objectives. For example, the adjustment or exclusion may be necessary to obtain a better prudential outcome than would be the case if the prudential requirement were applied unaltered. A tailored approach gives APRA greater flexibility to ensure that the prudential requirements are fit for purpose and protect the interests of policyholders. APRA will also take into account other considerations, such as efficiency, competition, contestability, competitive neutrality and regulatory burden.
The exercise of APRA's powers is governed by a robust decision-making framework. This framework supports APRA in fulfilling its mandate by limiting decision-making to those APRA officers with the appropriate experience and skill to exercise prudent judgement.
4. Documents incorporated by reference
Under paragraph 14(1)(a) of the Legislation Act 2003, the prudential standard incorporates by reference as in force from time to time:
Acts of Parliament and associated delegated legislation;
Prudential Standards determined by APRA under:
o subsection 11AF(1) of the Banking Act 1959;
o subsection 32(1) of the Insurance Act 1973;
o subsection 230A(1) of the Act; and
o subsection 92(1) of the Private Health Insurance (Prudential Supervision) Act 2015; and
Reporting Standards determined by APRA under subsection 13(1) of the Financial Sector (Collection of Data) Act 2001;
the Australian Accounting Standards determined by the Australian Accounting Standards Board under section 334 of the Corporations Act 2001 (Cth); and
the Australian Auditing Standards determined by the Auditing and Assurance Standards Board under section 336 of the Corporations Act 2001 (Cth).
These documents may be freely obtained on the Federal Register of Legislation at www.legislation.gov.au (all documents listed above except for Australian Accounting and Auditing Standards), https://www.aasb.gov.au/pronouncements/accounting-standards/ (Australian Accounting Standards) and https://auasb.gov.au/standards-guidance/auasb-standards/auditing-standards/ (Australian Auditing Standards).
In the new LPS 114, reference is made to the “Consumer Price Index (CPI)” and to the “ASX 200 index”. These referenced items are not incorporated into the new LPS 114. There is no application of the content underpinning these items as requirements under the new LPS 114. These items do not impose any obligations on a life company and are included for scenario setting in relation to stress measures on the capital base.
5. Consultation
APRA undertook two separate rounds of public consultation on proposed changes to its capital settings for longevity products (including annuities).
In June 2025, APRA released a consultation paper inviting industry feedback on certain proposed changes to the life insurance capital framework for longevity products. In response, APRA received 11 submissions from entities and industry bodies. APRA also undertook additional engagements with several stakeholders. Submissions were generally supportive of APRA’s direction and included a range of suggestions to refine the proposal. The main suggestion was that the proposed capital benefit should be better aligned with the level of risk controls proposed. This feedback was accepted and informed the development of draft revised prudential standards.
In October 2025, APRA undertook a second round of consultation inviting further feedback on APRA’s refined proposal, including a draft version of the new LPS 114. APRA received nine submissions, primarily from entities and industry bodies. Industry feedback strongly supported the reforms, with it being noted that the changes represent a significant improvement to the current framework by reducing procyclical risks to life insurers’ capital positions. Stakeholders noted APRA’s reforms represent an important step towards developing Australia’s retirement income market by promoting innovation and expanding options for retirees to manage longevity risk. Respondents indicated that they largely expect the reforms to improve capital efficiency and stimulate greater market participation.
While overall feedback was positive, many submissions suggested some further refinements to specific parameters of the proposed ‘advanced illiquidity premium’ (AILP) calculation, notably in relation to the proposed floor for the risk allowance and treatment of the AILP in the credit spread stress charge under the new LPS 114. Mixed views were received in relation to proposed restrictions on assets backing longevity products, ranging from recommending the removal of restrictions to advocating for greater flexibility and higher asset limits. APRA acknowledged the feedback received but determined that the proposed settings for the AILP remain sound and strike the right balance in providing capital efficiency in return for appropriate risk controls.
In March 2026, APRA released a response paper finalising the changes to its capital settings for longevity products, including the new LPS 114. All relevant consultations and non-confidential submissions are available on APRA’s website.
APRA is satisfied that the consultation undertaken was appropriate and reasonably practicable.
6. Impact Analysis
The Office of Impact Analysis confirmed that a Regulation Impact Statement was not required.
7. 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 included in Attachment B to this Explanatory Statement.
ATTACHMENT A
Description of key provisions of the new LPS 114
Asset risk charge calculation
Paragraphs 10-14 set out the method for calculating the Asset Risk Charge. The Asset Risk Charge for a fund is calculated as the aggregated risk charge component, where risk charge components are calculated by considering the impact on the capital base of the fund of a range of prescribed stresses.
Assets and liabilities to be stressed
Paragraphs 15-31 set out the assets and liabilities to be stressed for the purposes of the Asset Risk Charge. In determining each risk charge component, life companies must include all effective exposures of a fund’s assets and liabilities, including on-balance sheet and off-balance sheet exposures. Information on the treatment of off-balance sheet exposures is set out in Attachment A.
Attachment B sets out information on the treatment of extended license entities, which allows a life company to look-through to approved related entities.
Management actions
Paragraphs 32 – 36 provide that when determining the change in liabilities in response to each of the asset stresses, a life company must make allowance for the actions that it could take in response to each of the stresses.
Prescribed stress tests
Prescribed stress tests are set out in paragraphs 37-81 and relate to real interest rates stress, expected inflation stress, currency stress, equity stress, property/infrastructure stress, credit spreads stress, and default stress.
Aggregation formula
Risk charge components are aggregated using the approach set out in paragraphs 82 to 84.
ATTACHMENT B
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Life Insurance (prudential standard) determination No. 2 of 2026
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
The purpose of this instrument is to revoke Prudential Standard LPS 114 Capital Adequacy: Asset Risk Charge (LPS 114) and replace it with a new version of LPS 114 to incorporate certain changes arising out of APRA’s review of its capital framework for longevity products.
LPS 114 sets out the method for calculating the Asset Risk Charge, the minimum amount of capital a life company must hold against the asset risks associated with its activities. The Asset Risk Charge is one of the components of the Standard Method for calculating the prescribed capital amount for life company statutory funds and general funds and relates to the risk of adverse movements in the value of a fund’s on-balance sheet and off-balance sheet exposures.
Human rights implications
APRA has assessed the 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.
Conclusion
Accordingly, in APRA's assessment, this legislative instrument is compatible with human rights as it does not raise any human rights issues.