{"id":"F2023L00686","name":"Insurance (prudential standard) determination No. 5 of 2023","slug":"insurance-prudential-standard-determination-no-5-of-2023","collection":"legislative_instrument","jurisdiction":"commonwealth","status":"in_force","isInForce":true,"actNumber":null,"makingDate":null,"administeringDepartment":null,"currentVersion":{"id":441892,"registerId":"F2023L00686-fast-fetch-1775957063402","compilationNumber":null,"startDate":"2026-04-12","status":"InForce","reasons":null,"registeredAt":null},"sections":[{"sectionNumber":"1","sectionType":"section","heading":"Insurance (prudential standard) determination No. 5 of 2023","content":"---\nmeta-content-style-type: text/css\nmeta-content-type: application/xhtml+xml; charset=utf-8\nmeta-generator: Aspose.Words for .NET 22.10.0\nmeta-keywords: \"[SEC=UNOFFICIAL]\"\ntitle: Prudential Standard GPS 115\n---\n\n\n\nInsurance (prudential standard) determination\n\nNo. 5 of 2023\n\nPrudential Standard GPS 115 Capital Adequacy: Insurance Risk Charge\n\nInsurance Act 1973\n\nI, Helen Rowell, a delegate of APRA:\n\n(a) under subsection 32(4) of the Insurance Act 1973 (the Act), revoke Insurance (prudential standard) determination No. 5 of 2019, including Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Charge, made under that Determination; and\n\n \n\n(b) under subsection 32(1) of the Act determine Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Charge, in the form set out in the Schedule, which applies to:\n\n \n\n(i) all general insurers and authorised NOHCs; and\n\n \n\n(ii) a subsidiary of a general insurer or authorised NOHC, where that subsidiary is a parent entity of a Level 2 insurance group.\n\nThis instrument commences on 1 July 2023.\n\nDated: 24 May 2023\n\n \n\n[Signed]\n\n \n\nHelen Rowell\n\nDeputy Chair \n\n \n\nInterpretation\n\nIn this instrument:\n\n \n\nAPRA means the Australian Prudential Regulation Authority.\n\n \n\nauthorised NOHC has the meaning given in section 3 of the Act.\n\n \n\ngeneral insurer has the meaning given in section 11 of the Act.\n\n \n\nLevel 2 insurance group has the meaning given in Prudential Standard GPS 001 Definitions.\n\n \n\nparent entity has the meaning given in Prudential Standard GPS 001 Definitions.\n\n \n\nsubsidiary has the meaning given in Prudential Standard GPS 001 Definitions.\n\n \n\nSchedule\n\n \n\nPrudential Standard GPS 115 Capital Adequacy: Insurance Risk Charge, comprises the document commencing on the following page.\n\n \n\n \n\n\n\nPrudential Standard GPS 115 \n\nCapital Adequacy: Insurance Risk Charge\n\n| Objectives and key requirements of this Prudential Standard
This Prudential Standard requires a general insurer or Level 2 insurance group to maintain adequate capital against the insurance risks associated with its activities.
The ultimate responsibility for the prudent management of capital of a general insurer or Level 2 insurance group rests with its Board of directors. The Board must ensure that the general insurer or Level 2 insurance group maintains an adequate level and quality of capital commensurate with the scale, nature and complexity of its business and risk profile, such that it is able to meet its obligations under a wide range of circumstances.
The Insurance Risk Charge is the minimum amount of capital required to be held against insurance risks. The Insurance Risk Charge relates to the risk that the value of the net insurance liabilities is greater than the value determined by the Appointed Actuary or Group Actuary.
This Prudential Standard sets out the method for calculating the Insurance Risk Charge. This charge is one of the components of the Standard Method for calculating the prescribed capital amount for general insurers and Level 2 insurance groups. |\n| --- |\n\n\n \n\n \n\nTable of Contents\n\n[Authority](#_Toc109644676)\n\n[Application and commencement](#_Toc109644677)\n\n[Interpretation](#_Toc109644678)\n\n[Insurance Risk Charge](#_Toc109644679)\n\n[Premiums Liability Risk](#_Toc109644681)\n\n[Classes of business](#_Toc109644682)\n\n[Business covering multiple classes](#_Toc109644683)\n\n[Material net written premium](#_Toc109644684)\n\n[Securitisation](#_Toc109644685)\n\n[Adjustments and exclusions](#_Toc109644686)\n\n[Previous exercise of discretion](#_Toc109644687)\n\n[Attachment A](#_Toc109644688)\n\n# Authority\n\n1. This Prudential Standard is made under section 32 of the Insurance Act 1973 (the Act).\n\n\n# Application and commencement\n\n2. This Prudential Standard applies to each:\n\n(a) general insurer authorised under the Act (insurer); and\n\n(b) Level 2 insurance group as defined in Prudential Standard GPS 001 Definitions (GPS 001).\n\nWhere a requirement is made in respect of a Level 2 insurance group, the requirement is imposed on the parent entity of the Level 2 insurance group.\n\n3. This Prudential Standard applies to insurers and Level 2 insurance groups (regulated institutions) from 1 July 2023.\n\n# Interpretation\n\n4. Terms that are defined in GPS 001 appear in bold the first time they are used in this Prudential Standard.\n\n5. For the purposes of this Prudential Standard the term ‘Actuary’ is a reference to either the Appointed Actuary for an insurer or the Group Actuary for a Level 2 insurance group (as appropriate).\n\n# Insurance Risk Charge\n\n6. This Prudential Standard sets out the method for calculating the Insurance Risk Charge for a regulated institution using the Standard Method to determine its prescribed capital amount.\n\n7. The Insurance Risk Charge relates to the risk that the value of net insurance liabilities is greater than the value determined in accordance with Prudential Standard GPS 340 Insurance Liability Valuation (GPS 340). It has two components:\n\n(a) a risk charge in respect of Outstanding Claims Risk; and\n\n(b) a risk charge in respect of Premiums Liability Risk. \n\nThe total Insurance Risk Charge is the sum of the risk charge for each of the two components.\n\n#### Outstanding Claims Risk\n\n8. The risk charge for Outstanding Claims Risk relates to the risk that the value of the net outstanding claims liabilities will be greater than the value determined in accordance with GPS 340.\n\n9. For the purposes of the Standard Method, the risk charge for each class of business is calculated by multiplying the net outstanding claims liabilities for that class (as determined in accordance with GPS 340) by the relevant Outstanding Claims Risk Capital Factor in Attachment A. The total risk charge for outstanding claims risk is the sum of the risk charges for each class of business. \n\n# Premiums Liability Risk\n\n10. The risk charge for Premiums Liability Risk relates to the risk that the value of the net premiums liabilities will be greater than the value determined in accordance with GPS 340. It also relates to the risk that ‘material net written premium’, as defined in paragraph 17, will be insufficient to fund the liabilities arising from that business.\n\n11. For the purposes of the Standard Method, the risk charge for each class of business is calculated by multiplying the sum of:\n\n(a) net premiums liabilities as determined in accordance with GPS 340; and\n\n(b) material net written premiums\n\nby the relevant Premiums Liability Risk Capital Factor in Attachment A. The total risk charge for Premiums Liability Risk is the sum of the risk charges for Premiums Liability Risk for each class of business.\n\n \n\n# Classes of business\n\n12. For the purposes of the Outstanding Claims Risk Capital Factor and Premiums Liability Risk Capital Factor, all but the ‘other’ direct class of business[[1]](#_ftn1) and ‘other’ reinsurance class of business have been classified into different categories in Attachment A (Table 1 and Table 2 respectively). The ‘other’ class of business must be allocated to a category by the Actuary, in accordance with paragraphs 13 and 14.\n\n13. For the purpose of calculating the Insurance Risk Charge in respect of any ‘other’ business (whether it is direct business or reinsurance), the Actuary is required to determine the most appropriate category (i.e. category A, B or C) in Table 1 and Table 2 of Attachment A. The choice must be based on the underlying risk characteristics of the business being written. The regulated institution must then apply the corresponding Outstanding Claims Risk Capital Factor and Premiums Liability Risk Capital Factor listed in Attachment A in determining the Insurance Risk Charge. \n\n14. If the ‘other’ class of business includes multiple risks with differing risk profiles, the Actuary may subdivide the net outstanding claims liabilities, net premiums liabilities and material net written premiums into more than one category.\n\n15. The reasons for selecting the specific risk category or categories to which the ‘other’ class of business is assigned must be documented in the Actuarial Valuation Report.\n\n# Business covering multiple classes\n\n16. Where a regulated institution underwrites an inwards reinsurance contract which spans multiple classes, the contract must be allocated by using an appropriate method (provided the same method is used for all contracts and all subsequent periods). Appropriate methods include:\n\n(a) allocating the contract on a pro rata basis to each of the relevant categories; or\n\n(b) allocating the contract to the category which represents the greatest exposure; or\n\n(c) allocating the contract to the category representing the greatest premium income.\n\nThe regulated institution may use an alternative method from those listed above for allocating inwards reinsurance business that spans multiple classes. The regulated institution must be able to demonstrate that the chosen method is appropriate and is used for all contracts and all subsequent periods. \n\n# Material net written premium\n\n17. With respect to direct business and reinsurance business where policies incept in the following reporting period and where these policies would have a material impact on capital adequacy, net written premium for exposure that has not been included in the calculation of the premiums liabilities is to be subject to the premiums liabilities risk charge.[[2]](#_ftn2) This premium amount is defined as ‘material net written premium’. The materiality of the business that incepts in the next reporting period should be determined in accordance with the Australian accounting and auditing standards subject to APRA’s discretion.\n\n18. For inwards proportional reinsurance contracts, the value of material net written premium calculated in paragraph 17 must reflect the full premium revenue expected for the full term[[3]](#_ftn3) of the reinsurance contract, where revenue has not yet been recognised, subject to the appropriate subsection below:\n\n(a) where the remaining term of the contract is five years or less, the value of material net written premium should not exceed the net premium revenue forecast for 18 months from the end of the current reporting period; or\n\n(b) where the remaining term exceeds five years, an insurer may approach APRA to determine alternate treatment.\n\n# Securitisation\n\n19. If a regulated institution securitises insurance liabilities, the net insurance liabilities may reduce. The regulated institution must apply to APRA for approval to include the securitisation transaction in the Insurance Risk Charge.\n\n# Adjustments and exclusions\n\n20. APRA may, by notice in writing to a regulated institution, adjust or exclude a specific requirement in this Prudential Standard in relation to that regulated institution.\n\n# Previous exercise of discretion\n\n21. A regulated institution must contact APRA if it seeks to place reliance, for the purposes of complying with this Prudential Standard, on a previous exemption or other exercise of discretion made by APRA under a previous version of this Prudential Standard.\n\n## Attachment A\n\nTable 1: Direct insurance business\n\n| Category | Class of business | Outstanding Claims Risk Capital Factor
(%) | Premiums Liability Risk Capital Factor
(%) |\n| --- | --- | --- | --- |\n| A | Householders
Commercial Motor
Domestic Motor | 9.0
| 13.5 |\n| B | TravelFire and ISR
Marine and Aviation
Consumer CreditOther Accident | 11.0 | 16.5 |\n| C | MortgageCTP
Public and Product Liability
Professional Indemnity
Directors and Officers
Employers Liability
Cyber | 14.0 | 21.0 |\n\n\n##### Table 2: Inwards reinsurance business\n\n- Category Class of business Reinsurance type Outstanding Claims Risk Capital Factor(%) Premiums Liability Risk Capital Factor(%)\n- A HouseholdersCommercial MotorDomestic Motor Proportional 10.0 15.0\n- Non-proportional 12.0 18.0\n- B TravelFire and ISRMarine and AviationConsumer CreditOther Accident Proportional 12.0 18.0\n- Non-proportional 14.0 21.0\n- C MortgageCTP Public and Product LiabilityProfessional IndemnityDirectors and OfficersEmployers LiabilityCyber Proportional 15.0 22.5\n- Non-proportional 17.0 25.5\n\n\n \n\n \n\n \n\n---\n\n\n[[1]](#_ftnref1) The other class of business is as defined in paragraph 1(k) of Attachment B of GPS 001.\n\n[[2]](#_ftnref2) This requirement is based on the principle that an insurer should be able to meet its insurance obligations at all times, not just at the quarterly reporting date. With regards to written contracts for which insurers are not on risk in the current reporting period, APRA has not defined how far into the subsequent reporting period the capital requirement applies. APRA expects that at the reporting date, insurers will hold sufficient capital for all general insurance contracts for which the general insurer is committed, regardless of when the contract incepts.\n\n[[3]](#_ftnref3) For reinsurance contracts that are continuous but cancellable at regular intervals or on specified dates, the term of the contract can be measured to the earliest cancellation date that is not less than 12 months from the previous cancellable date.\n","sortOrder":0}],"analysis":{"flash_summary":{"complexity_score":6,"scope_assessment":{"changed":false,"description":"The instrument revokes Insurance (prudential standard) determination No. 5 of 2019 and reissues Prudential Standard GPS 115. The source defines scope as applying to general insurers, authorised NOHCs and subsidiaries that are parent entities of Level 2 insurance groups (see instrument head and paras 2–3). The instrument text does not state that the scope has been expanded or narrowed compared with the previous Determination."},"complexity_factors":["Actuarial judgement required to allocate 'other' classes to categories and to subdivide heterogeneous risks (paras 12–15).","Multiple calculation streams: Outstanding Claims Risk and Premiums Liability Risk, summed across classes (paras 7–11).","Fixed percentage capital factors vary by class, reinsurance type and category (Attachment A Tables 1 & 2), requiring correct mapping of business.","Interaction with external valuation standard GPS 340 for net liabilities inputs — reliance on another prudential standard (para 6).","Treatment of material net written premium requires forecasting and accounting judgment for premiums that incept in the next reporting period (paras 17–18 and footnotes).","Different treatments for proportional vs non‑proportional inwards reinsurance and options for allocating multi‑class contracts create operational choices (para 16; Attachment A Table 2).","Discretion and approval powers retained by APRA for adjustments, exclusions and securitisation inclusion — introduces regulatory negotiation and case‑by‑case processes (paras 19–20).","Documentation and reporting obligations (Actuarial Valuation Report) create compliance and audit evidentiary burdens (para 15)."],"plain_english_summary":"This Prudential Standard sets how general insurers and Level 2 insurance groups must calculate an Insurance Risk Charge for capital adequacy, revoking the 2019 version and commencing 1 July 2023. It applies to all general insurers, authorised NOHCs and subsidiaries that are parent entities of Level 2 groups.\n\nMechanically, the insurer’s Appointed or Group Actuary assigns business to prescribed classes and applies specified percentage factors to net outstanding claims and premiums liabilities to generate the charge; APRA can adjust or exclude requirements and must approve securitisation treatments."},"kimi_summary":{"content_quality":"ok","complexity_score":6,"scope_assessment":{"changed":false,"description":"This is a routine update replacing the 2019 version of the same standard. The scope remains tightly focused on capital adequacy requirements for insurance risk using the Standard Method. While the specific risk factors and some technical details may have been refined, the fundamental purpose—setting minimum capital buffers against insurance liabilities—has not expanded beyond the original intent of the Insurance Act 1973 prudential framework."},"complexity_factors":["Cross-referencing to multiple other standards: GPS 001 (Definitions), GPS 340 (Insurance Liability Valuation), and the Insurance Act 1973","Nested conditional logic for 'material net written premium' calculations with time-based thresholds (18-month cap, 5-year contract term distinctions)","Multiple allocation methods for multi-class reinsurance contracts with 'appropriate method' flexibility requiring documentation","Actuarial discretion provisions requiring professional judgment for 'other' class categorisation and documentation in Actuarial Valuation Reports","Dual calculation pathways for proportional vs non-proportional reinsurance with different capital factors","Footnote-based definitional expansions that modify primary obligations (e.g., footnote 3 on cancellable contract terms)","APRA override provisions allowing case-by-case adjustments without legislative amendment"],"plain_english_summary":"This APRA prudential standard sets how much extra capital general insurers, Level 2 insurance groups and their parents must hold against insurance risk so they can meet claims after major losses. It requires an Insurance Risk Charge—covering outstanding claims and future policy liabilities—calculated by applying APRA’s risk-factor tables (higher factors for riskier lines). The approach is largely standardised and risk‑based, with actuary input and APRA discretion for tailored arrangements."},"flash_summary_failed":{"failed":true,"reason":"A positive credit balance is required for all requests, including BYOK, so fallback providers remain available. Add credits at https://vercel.com/d?to=%2F%5Bteam%5D%2F%7E%2Fai%3Fmodal%3Dtop-up to continue.","source":"analysis-cron"}},"importantCases":[],"_links":{"self":"/api/acts/insurance-prudential-standard-determination-no-5-of-2023","history":"/api/acts/insurance-prudential-standard-determination-no-5-of-2023/history","analysis":"/api/acts/insurance-prudential-standard-determination-no-5-of-2023/analysis","conflicts":"/api/acts/insurance-prudential-standard-determination-no-5-of-2023/conflicts","importantCases":"/api/acts/insurance-prudential-standard-determination-no-5-of-2023/important-cases","documents":"/api/acts/insurance-prudential-standard-determination-no-5-of-2023/documents"}}