{"id":"F2023L00675","name":"Insurance (prudential standard) determination No. 8 of 2023","slug":"insurance-prudential-standard-determination-no-8-of-2023","collection":"legislative_instrument","jurisdiction":"commonwealth","status":"in_force","isInForce":true,"actNumber":null,"makingDate":null,"administeringDepartment":null,"currentVersion":{"id":441882,"registerId":"F2023L00675-fast-fetch-1775957058637","compilationNumber":null,"startDate":"2026-04-12","status":"InForce","reasons":null,"registeredAt":null},"sections":[{"sectionNumber":"1","sectionType":"section","heading":"Insurance (prudential standard) determination No. 8 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 118\n---\n\n\n\nInsurance (prudential standard) determination\n\nNo. 8 of 2023\n\nPrudential Standard GPS 118 Capital Adequacy: Operational 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. 7 of 2019, including Prudential Standard GPS 118 Capital Adequacy: Operational Risk Charge, made under that Determination; and\n\n \n\n(b) under subsection 32(1) of the Act determine Prudential Standard GPS 118 Capital Adequacy: Operational 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\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 118 Capital Adequacy: Operational Risk Charge, comprises the document commencing on the following page.\n\n \n\n \n\n\n\nPrudential Standard GPS 118 \n\nCapital Adequacy: Operational 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 operational 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 Operational Risk Charge is the minimum amount of capital required to be held against operational risks. The Operational Risk Charge relates to the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
This Prudential Standard sets out the method for calculating the Operational 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](#_Toc110004660)\n\n[Application and commencement](#_Toc110004661)\n\n[Interpretation](#_Toc110004662)\n\n[Operational Risk Charge](#_Toc110004663)\n\n[Calculation of the Operational Risk Charge](#_Toc110004664)\n\n[Adjustments and exclusions](#_Toc110004665)\n\n[Previous exercise of discretion](#_Toc110004666)\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\n# Operational Risk Charge\n\n5. This Prudential Standard sets out the method for calculating the Operational Risk Charge for a regulated institution using the Standard Method to determine its prescribed capital amount. \n\n6. The Operational Risk Charge is the minimum amount of capital a regulated institution must hold against the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.\n\n# Calculation of the Operational Risk Charge\n\n7. The Operational Risk Charge for a regulated institution is calculated as the sum of:\n\n(a) the Operational Risk Charge for inwards reinsurance business (ORCI) defined in paragraph 9; and\n\n(b) the Operational Risk Charge for business that is not inwards reinsurance business (ORCNI) defined in paragraph 10. \n\nThe Operational Risk Charge for a Level 2 insurance group is calculated after consolidation of intra-group exposures.\n\n8. For the purposes of paragraphs 9 and 10:\n\n(a) GP1 is written premium revenue (gross of reinsurance) for the 12 months ending on the reporting date;\n\n(b) GP0 is written premium revenue (gross of reinsurance) for the 12 months ending on the date 12 months prior to the reporting date;\n\n(c) Written premium revenue is the amount charged in relation to accepting risk from the insured. For the purposes of the Operational Risk Charge calculation, this includes levies imposed by state and territory governments, and revenue relating to portfolio transfers and unclosed business;\n\n(d) NL is the central estimate of insurance liabilities (net of reinsurance) determined in accordance with Prudential Standard GPS 340 Insurance Liability Valuation (GPS 340), at the reporting date[[1]](#_ftn1); and\n\n(e) |GP1 – GP0| is the absolute value of the difference between GP1 and GP0.\n\nAll transfers of insurance business made in accordance with the Act must be recognised in line with the corresponding requirements under Australian Accounting Standards.\n\n9. The ORCI is calculated as follows:\n\n\n\n10. The ORCNI is calculated as follows:\n\n\n\n# Adjustments and exclusions\n\n11. 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\n12. 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---\n\n\n[[1]](#_ftnref1) Under Prudential Standard GPS 340 Insurance Liability Valuation, a Level 2 insurance group may use accounting entries to determine its premiums liabilities, after allowing for necessary adjustments made under GPS 340. Where accounting entries have been used to determine net premiums liabilities, the Level 2 insurance group must use the accounting equivalent of net premiums liabilities instead of the net central estimate for the purposes of the Operational Risk Charge.\n","sortOrder":0}],"analysis":{"flash_summary_failed":{"failed":true,"reason":"Unauthenticated. Configure AI_GATEWAY_API_KEY or use a provider module. Learn more: https://ai-sdk.dev/unauthenticated-ai-gateway","source":"analysis-cron"},"flash_summary":{"complexity_score":4,"scope_assessment":{"changed":false,"description":"The instrument revokes the 2019 determination and reissues Prudential Standard GPS 118 applying to general insurers and Level 2 insurance groups (requirements imposed on parent entities where applicable). The text does not state an expanded or narrowed regulated population; scope is expressed as applying to the same categories identified in the application and commencement clauses (paras 2–3) and the instrument preamble."},"complexity_factors":["Formulaic calculation using multiple inputs (GP1, GP0 and NL) and piecewise functions (absolute differences and floors) increases quantitative implementation work (paras 8–10).","Two distinct components to compute (inwards reinsurance ORCI and non‑inwards ORCNI) requiring correct business classification (para 7).","Consolidation requirement for Level 2 insurance groups requires intra‑group elimination and consistent data aggregation (para 7).","Dependence on GPS 340 for the definition and possible accounting treatment of NL introduces cross‑standard coordination and judgment (footnote 1).","Requirement to recognise insurance business transfers in line with Australian Accounting Standards creates accounting adjustments to inputs (para 8(c)).","APRA discretion to adjust or exclude specific requirements creates regulatory uncertainty and case‑by‑case compliance burdens (para 11).","Requirement to confirm reliance on prior exemptions or discretions adds administrative steps for entities with historical relief (para 12).","Part of the Standard Method for prescribed capital amount, so implementation interacts with broader capital framework and reporting systems (Objective summary)."],"plain_english_summary":"This instrument replaces the prior GPS 118 and sets a formulaic minimum capital charge (the Operational Risk Charge) that Australian general insurers and Level 2 insurance groups (applied to their parent entities) must hold against operational risk. It prescribes inputs (12‑month written premiums, prior 12‑month premiums and a net central estimate of liabilities) and separate calculations for inward reinsurance and other business. APRA can adjust or exclude requirements by written notice, so firms must reflect the charge in capital planning and reporting."},"kimi_summary":{"content_quality":"ok","complexity_score":4,"scope_assessment":{"changed":false,"description":"The legislation maintains its original narrow scope as a technical capital adequacy calculation standard. It replaces the 2019 version with updated formulae but does not expand beyond operational risk capital requirements for general insurers."},"complexity_factors":["Mathematical formulae with multiple variables (GP0, GP1, NL, ORCI, ORCNI) requiring cross-referencing to accounting standards","Dependency on external definitions from Prudential Standard GPS 001 (5 defined terms imported by reference)","Dependency on Prudential Standard GPS 340 for valuation methodology","Nested conditional logic in formulae (maximum functions, absolute values, conditional thresholds at 0.2 × GP0)","Dual calculation tracks for different business types (inwards reinsurance vs. non-reinsurance)","Consolidation requirements for Level 2 insurance groups","Discretionary override power in paragraph 11 allowing APRA to adjust/exclude requirements"],"plain_english_summary":"This APRA prudential standard requires general insurers, certain insurance groups and authorised NOHCs to hold a minimum Operational Risk Charge — a capital buffer against system failures, fraud, human error and external shocks. The charge is calculated from premium revenue, insurance liabilities and growth volatility, applying 3% for direct business and 2% for reinsurance. It replaced a 2019 standard, took effect 1 July 2023, and APRA may adjust or waive requirements in specific cases."}},"importantCases":[],"_links":{"self":"/api/acts/insurance-prudential-standard-determination-no-8-of-2023","history":"/api/acts/insurance-prudential-standard-determination-no-8-of-2023/history","analysis":"/api/acts/insurance-prudential-standard-determination-no-8-of-2023/analysis","conflicts":"/api/acts/insurance-prudential-standard-determination-no-8-of-2023/conflicts","importantCases":"/api/acts/insurance-prudential-standard-determination-no-8-of-2023/important-cases","documents":"/api/acts/insurance-prudential-standard-determination-no-8-of-2023/documents"}}