{"id":"F2023L00692","name":"Life insurance (prudential standard) determination No. 10 of 2023","slug":"life-insurance-prudential-standard-determination-no-10-of-2023","collection":"legislative_instrument","jurisdiction":"commonwealth","status":"in_force","isInForce":true,"actNumber":null,"makingDate":null,"administeringDepartment":null,"currentVersion":{"id":441900,"registerId":"F2023L00692-fast-fetch-1775957072670","compilationNumber":null,"startDate":"2026-04-12","status":"InForce","reasons":null,"registeredAt":null},"sections":[{"sectionNumber":"1","sectionType":"section","heading":"Life insurance (prudential standard) determination No. 10 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 LPS 001\n---\n\n\n\nLife Insurance (prudential standard) determination\n\nNo. 10 of 2023\n\nPrudential Standard LPS 118 Capital Adequacy: Operational Risk Charge\n\nLife Insurance Act 1995\n\nI, Helen Rowell, a delegate of APRA:\n\n(a) under subsection 230A(5) of the Life Insurance Act 1995 (the Act) revoke Life Insurance (prudential standard) determination No. 7 of 2012, including Prudential Standard LPS 118 Capital Adequacy: Operational Risk Charge made under that Determination; and\n\n \n\n(b) under subsection 230A(1) of the Act determine Prudential Standard LPS 118 Capital Adequacy: Operational Risk Charge, which applies to all life companies, including friendly societies.\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\nfriendly society has the meaning given in section 16C of the Act.\n\nlife company has the meaning given in the Schedule to the Act.\n\n\n\n\nSchedule\n\n \n\nPrudential Standard LPS 118 Capital Adequacy: Operational Risk Charge, comprises the document commencing on the following page.\n\n \n\n\n\nPrudential Standard LPS 118 \n\nCapital Adequacy: Operational Risk Charge \n\n| Objectives and key requirements of this Prudential Standard
This Prudential Standard requires a life company to maintain adequate capital against the operational risks associated with its activities.
The ultimate responsibility for the prudent management of capital of a life company rests with its Board of directors. The Board must ensure that the life company 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 life company statutory funds and general funds. |\n| --- |\n\n\n \n\n \n\nTable of Contents\n\n[Authority](#_Toc109652981)\n\n[Application and commencement](#_Toc109652982)\n\n[Interpretation](#_Toc109652983)\n\n[Operational Risk Charge](#_Toc109652984)\n\n[Calculation of the Operational Risk Charge](#_Toc109652985)\n\n[Adjustments and exclusions](#_Toc109652986)\n\n[Previous exercise of discretion](#_Toc109652987)\n\n# Authority\n\n1. This Prudential Standard is made under paragraph 230A(1)(a) of the Life Insurance Act 1995 (the Act).\n\n\n# Application and commencement\n\n2. This Prudential Standard applies to all life companies including friendly societies (together referred to as life companies) registered under the Act[[1]](#_ftn1), except where expressly noted otherwise.\n\n3. A life company must apply this Prudential Standard separately:\n\n(a) for a life company other than a friendly society: to each of its statutory funds; and\n\n(b) for a friendly society: to its management fund.\n\n4. This Prudential Standard only applies to the business of an Eligible Foreign Life Insurance Company which is carried out through its Australian statutory funds but not otherwise.[[2]](#_ftn2)\n\n5. This Prudential Standard applies to life companies from 1 July 2023.\n\n# Interpretation\n\n6. Terms that are defined in Prudential Standard LPS 001 Definitions appear in bold the first time they are used in this Prudential Standard.\n\n# Operational Risk Charge\n\n7. The Operational Risk Charge:\n\n(a) for a statutory fund of a life company that is not a friendly society, is the amount of capital that the fund is required to hold for operational risk in accordance with this Prudential Standard;\n\n(b) for a benefit fund of a friendly society, is zero;\n\n(c) for the shareholders’ fund of a life company that is not a friendly society, is zero; and\n\n(d) for the management fund of a friendly society, is the amount of capital that the friendly society is required to hold for operational risk in accordance with this Prudential Standard.\n\n8. The Operational Risk Charge is the minimum amount of capital required to be held 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\n9. The Operational Risk Charge is calculated as the sum of:\n\n(a) the Operational Risk Charge for risk business (ORCR) defined in paragraph 11;\n\n(b) the Operational Risk Charge for investment-linked business (ORCI) defined in paragraph 14; and\n\n(c) the Operational Risk Charge for other business (ORCO) also defined in paragraph 14.\n\n10. For the purposes of paragraphs 11 to 16, ‘accrued premium’ includes all premiums for life policies with the exception of premiums that are sourced from benefits paid under another life policy issued by the life company. Accrued premium is calculated as follows:\n\n\n\nwhere:\n\n(a) A = Premiums in advance at the end of the specified period - Premiums in advance at the start of the specified period;\n\n(b) B = Unpaid premiums at the end of the specified period – Unpaid premiums at the start of the specified period;\n\n(c) ‘premium’ is defined as gross of commissions and before profit share rebates (group insurance). Premium must also be inclusive of stamp duty, policy fees, loadings and discounts; and\n\n(d) for the calculation of ORCI and ORCO, ‘accrued premium’ must also include deposits received.\n\n11. The ORCR is calculated as follows:\n\n\n\nwhere:\n\n(a) is 2 per cent for a statutory fund that is a specialist reinsurer and 3 per cent for other funds;\n\n(b) GP1 is accrued premiums (gross of reinsurance) for the 12 months ending on the reporting date;\n\n(c) NL1 is the adjusted policy liabilities (net of reinsurance) at the reporting date;\n\n(d) GP0 is accrued premiums (gross of reinsurance) for the 12 months ending on the date 12 months prior to the reporting date; and\n\n(e) |GP1 – GP0| is the absolute value of the difference between GP1 and GP0.\n\n12. For the management fund of a friendly society, GP1, NL1 and GP0 must be summed across all of the risk business in the friendly society’s benefit funds.\n\n13. For a statutory fund of a life company that is not a friendly society, GP1, NL1 and GP0 must be summed across all of the risk business in the statutory fund.\n\n14. The ORCI and the ORCO are calculated as follows:\n\n\n\nwhere:\n\n(a) is .15 per cent for a statutory fund that is a specialist reinsurer and .25 per cent for other funds;\n\n(b) L1 is the adjusted policy liabilities (net of reinsurance) at the reporting date;\n\n(c) GP1 is accrued premiums (gross of reinsurance) for the 12 months ending on the reporting date;\n\n(d) GL0 is the adjusted policy liabilities (gross of reinsurance) at the date 12 months prior to the reporting date; and\n\n(e) C1 is all payments to meet liabilities to policy owners (gross of reinsurance) for the 12 months ending on the reporting date. This excludes payments that are used as premiums for another life policy issued by the life company.\n\n15. For the management fund of a friendly society, NL1, GP1, GL0 and C1 in paragraph 14 must be summed across all of the investment-linked business of the society (for ORCI) and all the other business of the friendly society that is neither risk business nor investment-linked business (for ORCO).\n\n16. For a statutory fund of a life company that is not a friendly society, NL1, GP1, GL0 and C1 in paragraph 14 must be summed across all of the investment-linked business in the statutory fund (for ORCI) and all of the other business in the statutory fund that is neither risk business nor investment-linked business (for ORCO).\n\n# Adjustments and exclusions\n\n17. APRA may, by notice in writing to a life company, adjust or exclude a specific requirement in this Prudential Standard in relation to that life company.\n\n# Previous exercise of discretion\n\n18. A life company 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) Refer to subsection 21(1) of the Act.\n\n[[2]](#_ftnref2) Refer to section 16ZD of the Act.\n","sortOrder":0}],"analysis":{"kimi_summary":{"content_quality":"ok","complexity_score":6,"scope_assessment":{"changed":false,"description":"This is a direct replacement of the 2012 version (Determination No. 7 of 2012) with the same core purpose: setting capital requirements for operational risk. The scope remains tightly focused on calculating the Operational Risk Charge as one component of the broader capital adequacy framework. While the formulas appear refined, there is no indication this has expanded beyond its original intent of prescribing minimum capital standards for operational risk."},"complexity_factors":["Mathematical formulas with multiple variables (GP1, GP0, NL1, GL0, C1, A, B) requiring precise tracking across different time periods","Different calculation methods for three distinct business types (risk business, investment-linked business, other business)","Differential treatment of entity types: friendly societies vs non-friendly societies, specialist reinsurers vs other funds","Cross-references to external defined terms in LPS 001 Definitions (terms appear in bold but definitions not included in this instrument)","Nested conditional logic: calculations must be summed across different fund types depending on whether the entity is a friendly society or not","Specific exclusions for certain fund types (benefit funds and shareholders' funds have zero Operational Risk Charge)","Footnotes referencing specific sections of the Life Insurance Act 1995 for application scope","Requires understanding of insurance accounting concepts: 'adjusted policy liabilities', 'premiums in advance', 'unpaid premiums', 'gross vs net of reinsurance'"],"plain_english_summary":"This prudential standard requires Australian life insurers (including friendly societies and foreign insurers’ Australian operations) to hold minimum capital as a buffer against operational risk—failures like system outages, fraud, human error or disasters. It applies separately to each statutory or management fund and took effect 1 July 2023, replacing a 2012 version.\n\nCapital is set by a formula with separate components for traditional risk business, investment‑linked and other business (with lower rates for specialist reinsurers). The board is ultimately responsible and APRA can adjust or waive requirements."},"flash_summary":{"complexity_score":6,"scope_assessment":{"changed":true,"description":"This instrument revokes the prior Life Insurance (prudential standard) determination No. 7 of 2012 and re‑determines Prudential Standard LPS 118 (opening paragraph). It explicitly applies the Operational Risk Charge at the fund level for life companies and management funds for friendly societies, includes eligible foreign life insurers’ Australian statutory funds, and sets new calculation rules and aggregation requirements (paras 2–5, 7–16)."},"complexity_factors":["Detailed formulae with multiple inputs (GP1, GP0, NL1, GL0, C1) and arithmetic operations across three charge components (paras 9–16).","Different parameter values for specialist reinsurers vs other funds (paras 11(a), 14(a)).","Fund-level application and aggregation rules: statutory funds, benefit funds, management funds and distinctions for friendly societies (paras 2–4, 11–16).","Accrued premium definition requires adjustments for premiums in advance and unpaid premiums and special inclusions/exclusions (para 10).","Specific zero treatments for shareholders’ funds and benefit funds (para 7(b),(c)).","APRA discretion to adjust or exclude requirements by notice creates implementation uncertainty (para 17).","Dependency on definitions in another Prudential Standard (LPS 001), increasing cross-references and interpretive work (para 6).","Requirement to reconcile current and prior period measures (GP1 vs GP0, GL0) imposes data-historical reporting burdens (paras 11–14)."],"plain_english_summary":"This determination replaces the prior LPS 118 and requires life companies (including friendly societies) to hold minimum capital against operational risk for each statutory fund or management fund. It prescribes numerical formulae for three operational risk charge components (risk business, investment‑linked business, and other business) that use premiums, liabilities and payments, and commenced on 1 July 2023.\n\nThe company Board remains responsible for capital adequacy; APRA may adjust or exclude requirements by written notice. The direct cost and reporting burden falls on life companies and their funds, which must measure, report and hold the prescribed capital."},"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/life-insurance-prudential-standard-determination-no-10-of-2023","history":"/api/acts/life-insurance-prudential-standard-determination-no-10-of-2023/history","analysis":"/api/acts/life-insurance-prudential-standard-determination-no-10-of-2023/analysis","conflicts":"/api/acts/life-insurance-prudential-standard-determination-no-10-of-2023/conflicts","importantCases":"/api/acts/life-insurance-prudential-standard-determination-no-10-of-2023/important-cases","documents":"/api/acts/life-insurance-prudential-standard-determination-no-10-of-2023/documents"}}