{"id":"F2023L00673","name":"Life Insurance (prudential standard) determination No. 6 of 2023","slug":"life-insurance-prudential-standard-determination-no-6-of-2023","collection":"legislative_instrument","jurisdiction":"commonwealth","status":"in_force","isInForce":true,"actNumber":null,"makingDate":null,"administeringDepartment":null,"currentVersion":{"id":441885,"registerId":"F2023L00673-fast-fetch-1775957058665","compilationNumber":null,"startDate":"2026-04-12","status":"InForce","reasons":null,"registeredAt":null},"sections":[{"sectionNumber":"1","sectionType":"section","heading":"Life Insurance (prudential standard) determination No. 6 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. 6 of 2023\n\nPrudential Standard LPS 110 Capital Adequacy\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. 2 of 2012, including Prudential Standard LPS 110 Capital Adequacy made under that Determination; and\n\n \n\n(b) under subsection 230A(1) of the Act determine Prudential Standard LPS 110 Capital Adequacy, 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\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 110 Capital Adequacy, comprises the document commencing on the following page.\n\n \n\n \n\n\n\nPrudential Standard LPS 110 \n\nCapital Adequacy \n\n| Objectives and key requirements of this Prudential Standard
This Prudential Standard requires a life company to maintain adequate capital against the 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 key requirements of this Prudential Standard are that a life company must:
have an Internal Capital Adequacy Assessment Process;maintain required levels of capital within each of its funds and for the company as a whole;determine each fund’s prescribed capital amount having regard to a range of risk factors that may adversely impact the company’s ability to meet its obligations. These factors include insurance risk, asset risk, asset concentration risk and operational risk;comply with any supervisory adjustment to capital imposed by APRA;make certain public disclosures about the capital adequacy position of each fund and the company as a whole;seek APRA’s consent for certain planned capital reductions of the company; andinform APRA of any significant adverse changes in the capital position of the company as a whole or any of its funds. |\n| --- |\n\n\n \n\n \n\nTable of Contents\n\n[Authority](#_Toc109651408)\n\n[Application and commencement](#_Toc109651409)\n\n[Interpretation](#_Toc109651410)\n\n[Responsibility for capital management](#_Toc109651411)\n\n[Internal Capital Adequacy Assessment Process](#_Toc109651412)\n\n[Capital base](#_Toc109651413)\n\n[Prudential Capital Requirement](#_Toc109651414)\n\n[Standard Method](#_Toc109651415)\n\n[Supervisory adjustment](#_Toc109651423)\n\n[Disclosure](#_Toc109651424)\n\n[Reductions in capital base](#_Toc109651425)\n\n[Materiality](#_Toc109651426)\n\n[Notification requirements](#_Toc109651427)\n\n[Adjustments and exclusions](#_Toc109651428)\n\n[Previous exercise of discretion](#_Toc109651429)\n\n[Attachment A - Variable annuities](#_Toc109651430)\n\n[Attachment B - Combined stress scenario adjustment](#_Toc109651431)\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, its shareholders’ fund and the life company as a whole; and\n\n(b) for a friendly society: to each of its approved benefit funds, its management fund and the friendly society as a whole.\n\n4. This Prudential Standard only applies to the business of an Eligible Foreign Life Insurance Company (EFLIC) which is carried on 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\n7. Unless otherwise indicated:\n\n(a) the term statutory fund will be used to refer to a statutory fund of a life company other than a friendly society, or an approved benefit fund of a friendly society, as relevant;\n\n(b) the term general fund will be used to refer to the shareholders’ fund of a life company other than a friendly society, or the management fund of a friendly society, as relevant; and\n\n(c) the term ‘fund’ will be used to refer to a statutory fund or a general fund, as relevant.\n\n# Responsibility for capital management\n\n8. Capital is the cornerstone of a life company’s financial strength. It supports a life company’s operations by providing a buffer to absorb unanticipated losses from its activities and, in the event of such losses, enables the life company to continue to meet its insurance obligations.\n\n9. As a consequence of the key role played by capital in the financial strength of a life company, the Board of a life company must ensure that:\n\n(a) the life company as a whole; and\n\n(b) each fund\n\nhas capital that is adequate for the scale, nature and complexity of its business and its risk profile, such that it is able to meet its obligations under a wide range of circumstances.\n\n# Internal Capital Adequacy Assessment Process\n\n10. A life company must have in place an Internal Capital Adequacy Assessment Process (ICAAP) that considers each fund of the life company, as well as the life company as a whole. The ICAAP must:\n\n(a) be adequately documented, with the documentation made available to APRA on request; and\n\n(b) be approved by the Board initially, and when significant changes are made.\n\n11. A life company’s ICAAP must be appropriate to the life company’s size, business mix and the complexity of its operations.\n\n12. A life company that is part of a group may rely on the ICAAP of the group provided that the Board of the life company is satisfied that the group ICAAP meets the criteria in paragraph 13 in respect of the life company.\n\n13. The ICAAP must include at a minimum:\n\n(a) adequate policies, procedures, systems, controls and personnel to identify, measure, monitor and manage the risks arising from the life company’s activities on a continuous basis, and the capital held against such risks;\n\n(b) a strategy for ensuring adequate capital is maintained over time, including specific capital targets set in the context of the life company’s risk profile, the Board’s risk appetite and regulatory capital requirements. This includes plans for how target levels of capital are to be met and the means available for sourcing additional capital where required;\n\n(c) actions and procedures for monitoring the life company’s compliance with its regulatory capital requirements and capital targets. This includes the setting of triggers to alert management to, and specified actions to avert and rectify, potential breaches of the regulatory capital requirements;\n\n(d) stress testing and scenario analysis relating to potential risk exposures and available capital resources;\n\n(e) processes for reporting on the ICAAP and its outcomes to the Board and senior management of the life company, and for ensuring that the ICAAP is taken into account in making business decisions;\n\n(f) policies to address the capital impact of material risks not covered by explicit regulatory capital requirements; and\n\n(g) an ‘ICAAP summary statement’ as defined in paragraph 14.\n\n14. The ICAAP summary statement is a high level document that describes and summarises the capital assessment and management processes of the life company. It must outline at a minimum the aspects of the ICAAP listed in paragraphs 13(a) to 13(f) and this paragraph. The ICAAP summary statement must also include:\n\n(a) a statement of the objectives of the ICAAP, the expected level of financial soundness associated with the capital targets and the time horizon over which the ICAAP applies;\n\n(b) a description of the key assumptions and methodologies utilised by the life company in its ICAAP, including stress testing and scenario analysis;\n\n(c) triggers for reviewing the ICAAP in light of changes to business operations, regulatory, economic and financial market conditions, and other factors affecting the life company’s risk profile and capital resources;\n\n(d) a summary of the life company’s policy for reviewing its ICAAP, including who is responsible for the review, details of the frequency and scope of the review, and mechanisms for reporting on the review and its outcomes to the Board and senior management;\n\n(e) a description of the basis of measurement of capital used in the ICAAP, and an explanation of the differences where this basis differs from that used for regulatory capital; and\n\n(f) references to supporting documentation and analysis, as relevant.\n\n15. A life company must ensure its ICAAP is subject to regular and robust review by appropriately qualified persons who are operationally independent of the conduct of capital management. The frequency and scope of the review must be appropriate to the life company, having regard to its size, business mix, complexity of its operations, and the nature and extent of any changes that have occurred or are likely to occur in its business profile or its risk appetite. A review must be conducted at least every three years. The review must be sufficient to reach a view on whether the ICAAP is adequate and effective.\n\n16. A life company must, on an annual basis, provide a report on the implementation of its ICAAP to APRA (ICAAP report). A copy of the ICAAP report must be provided to APRA no later than three months from the end of the ICAAP reporting period to which it relates.\n\n17. The ICAAP report must include:\n\n(a) detailed information on current and three-year projected capital levels relative to minimum regulatory capital requirements and target levels for each fund and the life company as a whole;\n\n(b) detailed information on the actual outcomes of applying the ICAAP over the period, relative to the planned outcomes in the previous ICAAP report (including analysis of the life company’s actual capital position relative to minimum regulatory capital requirements and capital targets and actual-versus-planned capital management actions);\n\n(c) description of material changes to the ICAAP since the previous ICAAP report;\n\n(d) detail and outcomes of stress testing and scenario analysis used in undertaking the ICAAP;\n\n(e) a breakdown of capital usage over the planning horizon, as relevant, by material:\n\n(i) business activity;\n\n(ii) geographic spread of exposures; and\n\n(i) risk types;\n\n(f) an assessment of anticipated changes in the life company’s risk profile or capital management processes over the planning horizon;\n\n(g) details of any review of the ICAAP since the previous ICAAP report, including any recommendations for change and how those recommendations have been, or are being, addressed; and\n\n(h) references to supporting documentation and analysis as relevant.\n\n18. The ICAAP report submitted to APRA by the life company must be accompanied by a declaration approved by the Board and signed by the CEO stating whether:\n\n(a) capital management has been undertaken by the life company in accordance with the ICAAP over the period and, if not, a description of, and explanation for, deviations;\n\n(b) the life company has assessed the capital targets contained in its ICAAP to be adequate given the size, business mix and complexity of its operations; and\n\n(c) the information included in the ICAAP report is accurate in all material respects.\n\n# Capital base\n\n19. In assessing the adequacy of a fund’s or a life company’s capital base, attention must be paid not only to the risks it is likely to face, but also the quality of the support provided by various forms of capital. In assessing the quality of support provided by a particular form of capital, regard must be had to the extent to which it:\n\n(a) provides a permanent and unrestricted commitment of funds;\n\n(b) is freely available to absorb losses;\n\n(c) does not impose any unavoidable servicing charges against earnings; and\n\n(d) ranks behind the claims of policy owners and creditors in the event of the winding-up of the life company.\n\n20. Not all forms of capital meet these criteria equally. Due to the need to ensure that the capital base of a life company provides adequate support for its activities, APRA imposes some restrictions on the composition of the capital base. The forms of capital deemed eligible for inclusion in the capital base, and the conditions as to their inclusion, are specified in Prudential Standard LPS 112 Capital Adequacy: Measurement of Capital (LPS 112). LPS 112 defines the different categories and components of the capital base and the restrictions on the quality of the capital that is used to meet the required level of capital for regulatory purposes.\n\n21. A fund or life company’s balance sheet may contain certain assets (such as deferred tax assets, goodwill and other intangibles) that are acceptable from an accounting perspective. However, for supervisory purposes, such assets are either generally not available, or of questionable value, should the fund or life company encounter difficulties. Similarly, the policy liabilities on the balance sheet may reflect allowance for future transactions (such as future premium income) that it is not appropriate to recognise for supervisory purposes. A life company is therefore required to make certain adjustments in determining the capital base. Details of these adjustments are specified in LPS 112.\n\n# Prudential Capital Requirement\n\n22. This Prudential Standard establishes a risk-based approach for measuring the capital adequacy of a fund or a life company. This required level of capital for regulatory purposes is referred to as the Prudential Capital Requirement (PCR). The PCR is intended to take account of the full range of risks to which a fund or life company is exposed.\n\n23. A life company must ensure that the life company and each of its funds have a capital base, at all times, in excess of its PCR.\n\n24. The PCR for a fund equals:\n\n(a) a prescribed capital amount determined by applying the ‘Standard Method’ set out in this Prudential Standard; plus\n\n(b) any supervisory adjustment determined by APRA under paragraph 43.\n\n25. The prescribed capital amount for a life company is the sum of the prescribed capital amounts of each of its funds. Regardless of the outcome of the method used for determining the prescribed capital amount, a life company’s prescribed capital amount cannot be less than $10 million.\n\n26. The prescribed capital amount for a statutory fund with liabilities for variable annuity business must be calculated in accordance with Attachment A.\n\n27. A life company intending to issue variable annuities must, before it issues these policies, obtain approval from APRA of the method to be used for calculating the prescribed capital amount for the statutory fund issuing these variable annuities.\n\n28. The PCR for a life company is the sum of the PCRs of each of its funds (or such higher amount as determined by APRA under paragraph 43).\n\n# Standard Method\n\n29. The prescribed capital amount for a fund is determined as:\n\n(a) the Insurance Risk Charge; plus\n\n(b) the Asset Risk Charge; plus\n\n(c) the Asset Concentration Risk Charge; plus\n\n(d) the Operational Risk Charge; less\n\n(e) an ‘aggregation benefit’ as defined in paragraph 36; plus\n\n(f) a combined stress scenario adjustment.\n\n30. The prescribed capital amount of a fund determined under the Standard Method is intended to be sufficient, such that if a fund was to start the year with a capital base equal to the prescribed capital amount, and losses occurred at the 99.5 per cent confidence level then the assets remaining would be at least sufficient to provide for the adjusted policy liabilities and ‘other liabilities’ of the fund at the end of the year. The other liabilities to be provided for exclude those liabilities that satisfy the criteria for inclusion in the capital base.\n\n### Insurance Risk Charge\n\n31. The Insurance Risk Charge relates to the risk of adverse impacts due to movements in future mortality, morbidity, longevity, servicing expenses, lapses and other insurance risks such as option take-up rates.\n\n32. The Insurance Risk Charge for a fund is determined by assessing the impact on the capital base of the fund of adverse changes in the variables in paragraph 31. The method for determining the Insurance Risk Charge is set out in Prudential Standard LPS 115 Capital Adequacy: Insurance Risk Charge (LPS 115).\n\n### Asset Risk Charge\n\n33. The Asset Risk Charge relates to the risk of adverse movements in the value of a fund’s on-balance sheet and off-balance sheet exposures. The method for determining the Asset Risk Charge is set out in Prudential Standard LPS 114 Capital Adequacy: Asset Risk Charge (LPS 114). Asset risk can be derived from a number of sources, including market risk and credit risk.\n\n### Asset Concentration Risk Charge\n\n34. The Asset Concentration Risk Charge relates to the risk resulting from concentrations in individual assets or large exposures to individual counterparties or groups of related counterparties. The method for determining the Asset Concentration Risk Charge is set out in Prudential Standard LPS 117 Capital Adequacy: Asset Concentration Risk Charge.\n\n### Operational Risk Charge\n\n35. The Operational Risk Charge relates to the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The method for determining the Operational Risk Charge is set out in Prudential Standard LPS 118 Capital Adequacy: Operational Risk Charge.\n\n### Aggregation benefit\n\n36. The aggregation benefit makes an explicit allowance for diversification between asset and insurance risks in the calculation of the prescribed capital amount.\n\n37. The aggregation benefit formula is:\n\n\n\nwhere:\n\n(a) ‘A’ is the Asset Risk Charge;\n\n(b) ‘I’ is the Insurance Risk Charge; and\n\n(c) ‘correlation’ is 20 per cent.\n\n38. The Asset Concentration Risk Charge and the Operational Risk Charge are not included in the calculation of the aggregation benefit.\n\n### Combined stress scenario adjustment\n\n39. Future shareholder tax benefits arising in the stressed scenarios are recognised in determining the Insurance Risk Charge and Asset Risk Charge. A life company must increase the prescribed capital amount by the aggregate amount of any tax benefits that cannot be netted against deferred tax liabilities as specified in LPS 112.\n\n40. In the calculation of the Insurance Risk Charge and Asset Risk Charge, an allowance may be made for any anticipated management actions that would reduce future policy benefits, for example, increasing fees and premium rates, reducing surrender values and reducing bonuses and other discretionary additions to policy owner benefits. However, there are limits to the extent to which policy benefits can be reduced. A life company must increase the prescribed capital amount if the aggregated management actions would reduce policy benefits below these limits.\n\n41. The method for calculating the combined stress scenario adjustment is specified in Attachment B.\n\n### APRA may adjust the Standard Method for calculating the prescribed capital amount\n\n42. If APRA is of the view that the Standard Method for calculating the prescribed capital amount does not produce an appropriate outcome in respect of a particular fund, or a life company has used inappropriate judgement or estimation in calculating the prescribed capital amount, APRA may, in writing, adjust any aspect of the prescribed capital amount calculation for that fund. If such an adjustment is applied to a fund under this paragraph, a life company must comply with the adjusted calculation.\n\n# Supervisory adjustment\n\n43. APRA recognises that any measure of the adequacy of a fund or a life company’s capital involves judgement and estimation, including quantification of risks that may be difficult to quantify. If APRA is of the view that there are prudential reasons for doing so, APRA may, in writing, determine a supervisory adjustment to be included in the PCR of a fund or life company.\n\n# Disclosure\n\n44. To improve the understanding of its capital adequacy position by policy owners and other market participants, a life company must publish, at least annually, the following items for the life company as a whole:\n\n(a) the amount of Common Equity Tier 1 Capital;\n\n(b) the aggregate amount of any regulatory adjustments applied in the calculation of Common Equity Tier 1 Capital;\n\n(c) the amount of Additional Tier 1 Capital;\n\n(d) the aggregate amount of any regulatory adjustments applied in the calculation of Additional Tier 1 Capital;\n\n(e) the amount of Tier 2 Capital;\n\n(f) the aggregate amount of any regulatory adjustments applied in the calculation of Tier 2 Capital;\n\n(g) the total capital base of the life company derived from the items (a) to (f);\n\n(h) the prescribed capital amount; and\n\n(i) the capital adequacy multiple (item (g) divided by item (h)).\n\n45. A life company must also publish, at least annually, the following items for each of its funds:\n\n(a) the amount of the fund’s ‘net assets’, after applying any regulatory adjustments;\n\n(b) the aggregate amount of any regulatory adjustments applied to the fund’s net assets;\n\n(c) the amount of Tier 2 Capital held by the fund;\n\n(d) the aggregate amount of any regulatory adjustments applied in the calculation of the fund’s Tier 2 Capital;\n\n(e) the total capital base of the fund derived from the items (a) to (d);\n\n(f) the fund’s prescribed capital amount;\n\n(g) the components of the fund’s prescribed capital amount[[3]](#_ftn3) specified in paragraph 29[[4]](#_ftn4); and\n\n(h) the capital adequacy multiple of the fund (item (e) divided by item (f)).\n\n46. A life company must publish the information specified in paragraphs 44 and 45 so that it is readily accessible to both policy owners and other market participants.\n\n47. A life company must not disclose any supervisory adjustment determined by APRA in accordance with paragraph 43.\n\n# Reductions in capital base\n\n48. A life company must obtain APRA’s written approval prior to making any planned reduction in the capital base of the company.\n\n49. A reduction in a life company’s capital base includes[[5]](#_ftn5):\n\n(a) a share buyback or the redemption, repurchase or repayment of any qualifying Common Equity Tier 1 Capital, Additional Tier 1 Capital and Tier 2 Capital instruments issued by the company;\n\n(b) trading in the life company’s own shares or capital instruments outside of any arrangement agreed upon with APRA in accordance with LPS 112; and\n\n(c) the aggregate amount of dividend payments on ordinary shares that exceeds a life company’s after-tax earnings (as reported to APRA in the life company’s statutory accounts) after taking into account any payments on more senior capital instruments, in the financial year[[6]](#_ftn6) to which they relate.\n\n50. A life company proposing a capital reduction must provide APRA with a forecast showing the projected future capital position (including PCR) after the proposed capital reductions. The forecast should extend for at least two years.\n\n51. A life company must satisfy APRA that its capital base will remain adequate for its future needs after a proposed reduction.\n\n# Materiality\n\n52. A life company may take into account materiality when calculating its capital base and prescribed capital amount. Particular values or components are considered material to the overall result of a calculation if misstating or omitting them would produce results likely to be misleading to the users of the information.\n\n# Notification requirements\n\n53. A life company must inform APRA as soon as practicable of:\n\n(a) any breach or prospective breach of its PCR or the PCR of any of its funds;\n\n(b) any significant departure from its ICAAP; or\n\n(c) any significant adverse changes in the capital base or PCR of the company or any of its funds.\n\nThe notice must include any remedial actions taken or planned to be taken to address the situation and the timing of these actions.\n\n# Adjustments and exclusions\n\n54. 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\n55. 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\n## Attachment A - Variable annuities\n\n1. The calculation of the prescribed capital amount for a statutory fund containing variable annuity business must be undertaken in accordance with this Attachment.\n2. Variable annuities are a type of life insurance product that has special features that are not adequately catered for under the Standard Method. Accordingly, more sophisticated modelling must be performed to determine the prescribed capital amount for a statutory fund with liabilities for this type of product.\n3. The required modelling could be undertaken using stochastic techniques or scenario-based techniques, as long as the techniques are adequate for assessing the risks inherent in the relevant variable annuities. The modelling must consider both asset and insurance risks simultaneously.\n4. The modelling of asset and insurance risks must be consistent with the principles outlined in paragraph 30 of this Prudential Standard and LPS 114 and LPS 115 respectively.\n5. The following issues must be addressed in determining the prescribed capital amount for a statutory fund with liabilities for variable annuities:\n\n\n(a) the uncertainty associated with the company’s ability to implement any required hedging strategy in a timely and effective manner;\n\n(b) the effectiveness of hedging arrangements;\n\n(c) the ability to access suitable hedge instruments in the future;\n\n(d) whether a matched asset and liability profile within 12 months can be achieved for this type of product, particularly given the risks that exist for these type of products beyond 12 months, e.g. ratchets and path dependencies;\n\n(e) allowance for any discretions available; and\n\n(f) allowance for management corrective action to achieve a matched asset and liability profile within 12 months.\n\n6. The prescribed capital amount (before addition of the Asset Concentration Risk Charge and the Operational Risk Charge) for a statutory fund with liabilities for variable annuity business must be determined via the following formula:\n\n\n\nwhere:\n\n(a) Capital (including hedging) = the capital requirement for asset and insurance risks calculated assuming that dynamic hedging is included in the model;\n\n(b) Capital (excluding hedging) = the capital requirement for asset and insurance risks assuming there is no dynamic hedging but allowance can be made for hedge positions that exist at the valuation date; and\n\n(c) E = an effectiveness factor that reflects the level of sophistication of the dynamic hedging in the model.\n\nA dynamic hedging strategy is a hedging strategy that requires frequent rebalancing of the asset portfolio. The Capital (including hedging) and Capital (excluding hedging) may allow for diversification between asset and insurance risks but must not attribute any value to tax benefits that cannot be netted against deferred tax liabilities.\n\n7. In determining E, the following points must be taken into account:\n\n(a) E cannot be greater than 0.70 because most models would include at least some approximations or idealistic assumptions;\n\n(b) if certain economic risks are not hedged, yet the model does not generate scenarios that sufficiently capture those risks, E must be in the lower end of the range of 0.0 to 0.7;\n\n(c) a life company that does not have 12 months of experience to date must set E to a value no greater than 0.30[[7]](#_ftn7); and\n\n(d) the ultimate effect of the current hedging strategy (including currently held hedge positions) needs to recognise all:\n\n(i) risks;\n\n(ii) associated costs;\n\n(iii) imperfections in the hedges; and\n\n(iv) hedging mismatch tolerances associated with the hedging strategy.\n\n8. The risks referred to in subparagraph 7(d)(i) above include, but are not limited to:\n\n(a) basis;\n\n(b) gap;\n\n(c) price;\n\n(d) parameter estimation; and\n\n(e) variation in any assumptions (mortality, lapses, annuitisation, etc.).\n\n9. The costs referred to in paragraph 7(d)(ii) above include, but are not limited to:\n\n(a) transaction, margin (opportunity costs associated with margin requirements); and\n\n(b) administration.\n\n10. APRA may require a life company to adopt a value for E specified by APRA in writing if APRA is satisfied that the value of E adopted by the company is not appropriate.\n\n11. The Asset Concentration Risk Charge and the Operational Risk Charge apply to statutory funds with liabilities for variable annuities in addition to the capital requirement calculated under this Attachment.\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n## Attachment B - Combined stress scenario adjustment\n\n1. The combined stress scenario adjustment must be calculated from a single scenario in which all of the asset risk and insurance risk stresses are applied. The stresses must be modified by multiplying them by diversification factors.\n2. The combined stress scenario adjustment must be calculated as:\n\n\n(a) the capital charge for the single scenario;\n\n(b) less the Insurance Risk Charge;\n\n(c) less the Asset Risk Charge;\n\n(d) plus the aggregation benefit.\n\nThe combined stress scenario adjustment cannot be less than zero.\n\n3. The capital charge for the single scenario is the reduction in the capital base in this scenario.\n\n4. The stressed policy liabilities for the single scenario are defined in the same way as for the Insurance Risk Charge.\n\n5. The insurance risk stresses for the single scenario must be the adjusted stress margins[[8]](#_ftn8) used in determining the Insurance Risk Charge, multiplied by the ‘aggregation diversification factor’ between insurance risks and asset risks.\n\n6. The aggregation diversification factor must be calculated as the sum of:\n\n(a) the Insurance Risk Charge;\n\n(b) plus the Asset Risk Charge;\n\n(c) less the aggregation benefit\n\ndivided by the sum of the Insurance Risk Charge and the Asset Risk Charge.\n\n7. The asset risk stresses for the single scenario must be the stresses used in determining the Asset Risk Charge, multiplied by both the aggregation diversification factor and an ‘asset risk diversification factor’. The asset risk diversification factor is calculated as the Asset Risk Charge divided by the sum of the capital charges for the seven asset risk stresses. For the stresses that apply in two directions, the capital charge for the direction that determines the overall amount of the Asset Risk Charge must be used.\n\n8. For the purpose of deducting deferred tax assets net of deferred tax liabilities from the capital base, these amounts must be adjusted to include all additional tax assets and liabilities accruing over the 12 months following the reporting date.\n\n9. The taking of discretionary management actions in the single scenario can only be assumed to the extent that they are appropriate, justifiable and equitable in the adverse conditions assumed.\n\n10. For a statutory fund that has liabilities for life policies that provide participating benefits or discretionary additions to benefits, the life company must use a single scenario where the direction of the asset risk stresses for real interest rates and expected inflation are both down, if this scenario would result in a higher capital charge.\n\n \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\n[[3]](#_ftnref3) This item must separately identify any transition amount approved by APRA under the capital adequacy standards.\n\n[[4]](#_ftnref4) A fund containing variable annuity business is not required to separately disclose an Asset Risk Charge, Insurance Risk Charge and aggregation benefit.\n\n[[5]](#_ftnref5) For an EFLIC, the requirements relating to reductions in capital base must be applied at the level of each statutory fund of the Australian operations.\n\n[[6]](#_ftnref6) ‘Financial year’ means the last four quarters for which the life company was required to submit quarterly returns in accordance with reporting standards made under the Financial Sector (Collection of Data) Act 2001 to APRA preceding the date of the proposed dividend.\n\n[[7]](#_ftnref7) Such a company must take into account the factors in paragraph 7 of this Attachment to determine E within the range of 0.0 to 0.3.\n\n[[8]](#_ftnref8) As defined in LPS 115.\n","sortOrder":0}],"analysis":{"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"},"kimi_summary":{"content_quality":"ok","complexity_score":7,"scope_assessment":{"changed":false,"description":"This is a straightforward replacement/update of an existing prudential standard (revoking the 2012 version). The scope remains tightly focused on capital adequacy requirements for life insurers, consistent with the original intent of the Life Insurance Act 1995 prudential framework. No scope creep is evident — it maintains the same fundamental purpose of ensuring insurers hold sufficient capital against risks."},"complexity_factors":["Heavy cross-referencing to four other prudential standards (LPS 112, LPS 114, LPS 115, LPS 117, LPS 118) for detailed calculation methods — the actual math is outsourced to these other documents","Nested conditional logic: the Standard Method formula in paragraph 29 has six components with specific inclusion/exclusion rules (e.g., aggregation benefit excludes Asset Concentration and Operational Risk Charges)","Mathematical formulas with defined variables and correlation coefficients (e.g., the aggregation benefit formula with square roots and correlation of 20%)","Dual calculation regimes: standard method vs. special Attachment A modelling for variable annuities, with effectiveness factors (E) capped at 0.70 and further restricted to 0.30 for inexperienced companies","Multiple fund structures requiring parallel calculations: statutory funds, general funds (shareholders'/management funds), and company-wide assessments","Sophisticated adjustments: combined stress scenario calculations with diversification factors, tax benefit netting rules, and management action limits","27 defined terms or references to external definitions (LPS 001), with specific terminology distinguishing between 'capital base', 'prescribed capital amount', 'Prudential Capital Requirement', and 'PCR'","Supervisory discretion clauses allowing APRA to adjust calculations, determine supervisory adjustments, or specify effectiveness factors — creating regulatory uncertainty that requires legal interpretation","Attachment B's recursive calculation where diversification factors depend on the very charges being calculated, requiring iterative computation"],"plain_english_summary":"This APRA prudential standard sets minimum capital buffers for Australian life insurers (including friendly societies and foreign branches with statutory funds) to ensure they can meet claims and withstand insurance, asset, concentration and operational shocks. Insurers must run a board‑approved internal capital assessment, calculate a Prescribed Capital Amount (with a standard formula and adjustments), disclose their position, and seek APRA approval for capital reductions.\n\nIt protects policyholders by limiting excessive risk‑taking and ensuring payout capacity in severe stress."},"flash_summary":{"complexity_score":8,"scope_assessment":{"changed":false,"description":"This instrument replaces the prior 2012 LPS 110 but retains the original scope — ensuring life companies maintain adequate capital for their risks — rather than expanding into a new substantive subject area (introductory paragraphs; paras 8, 22–24). The 2023 version, however, tightens and clarifies the regime through more prescriptive governance and reporting (ICAAP rules, paras 10–18), explicit disclosure requirements (paras 44–47), a $10 million company floor (para 25), detailed treatment of variable annuities (Attachment A) and a formalised combined stress adjustment (Attachment B). Those are technical refinements and greater prescription rather than a fundamental enlargement of scope; they raise compliance and modelling requirements but do not change the Standard’s core objective of capital adequacy."},"complexity_factors":["Cross-references to multiple other Prudential Standards (LPS 001, LPS 112, LPS 114, LPS 115, LPS 117, LPS 118) increasing interpretive load (paras 6,19,31–35 and attachments).","Multiple layers of calculation with defined components (Insurance Risk Charge, Asset Risk Charge, Asset Concentration Risk Charge, Operational Risk Charge, aggregation benefit, combined stress adjustment) and formulaic aggregation (paras 29–39, 36–38).","Special modelling attachment for variable annuities requiring stochastic/scenario techniques and an effectiveness parameter E with bounds and APRA override (Attachment A paras 2–11).","Combined stress-scenario mechanics that modify stresses via diversification and aggregation factors with non-linear interactions (Attachment B paras 1–7).","Governance, reporting and review regime for ICAAP including documentation, Board approval, independent review at least every three years, annual ICAAP report with specified contents and a Board/CEO declaration (paras 10–18).","Regulatory discretion: APRA can adjust prescribed capital calculations, determine supervisory adjustments, and adjust or exclude requirements for specific firms (paras 42–43, 54) — creates conditional outcomes.","Operational/administrative requirements: annual disclosures at company and fund level, notification obligations for breaches or adverse changes, and pre-approval for capital reductions (paras 44–51, 53).","Minimum prescribed capital floor ($10 million) and per-fund application increases boundary conditions for small entities (para 25).","References to accounting and supervisory adjustments (e.g. deferred tax adjustments, disallowed assets) requiring reconciliation between accounting and regulatory bases (paras 19–21, Attachment B para 8).","Nested exceptions and application rules (different treatment for friendly societies, EFLICs, variable annuity funds, and transition/previous discretions) require entity-specific application (paras 2–4, 25–28, 55)."],"plain_english_summary":"**What this instrument does (mechanically)**\n\n- Revokes the prior Prudential Standard LPS 110 and replaces it with a new Prudential Standard LPS 110 Capital Adequacy that commences on 1 July 2023 (introductory paragraphs). \n- Applies to every life company and friendly society registered under the Life Insurance Act 1995, and requires the Standard to be applied separately to each statutory/approved benefit fund, the general (shareholders’/management) fund and the life company as a whole (paras 2–4). \n- Establishes a regulatory minimum capital framework (the Prudential Capital Requirement or PCR) and a “Standard Method” for calculating the prescribed capital amount for each fund (paras 22–29). \n- Requires life companies to maintain a capital base that at all times exceeds the PCR for each fund and for the company overall (para 23). \n- Requires an Internal Capital Adequacy Assessment Process (ICAAP) governed and approved by the Board, documented, reviewed at least every three years, and reported annually to APRA with a Board/CEO declaration (paras 10–18). \n- Sets out the components of the Standard Method: Insurance Risk Charge, Asset Risk Charge, Asset Concentration Risk Charge, Operational Risk Charge, an aggregation benefit, and a combined stress-scenario adjustment (paras 29–39). \n- Provides special, more detailed modelling requirements for statutory funds that contain variable annuity business (Attachment A) and specifies how a combined stress-scenario adjustment is calculated (Attachment B). \n- Requires minimum disclosures to the market about capital composition and capital adequacy multiples for the company and for each fund, but prohibits disclosure of any supervisory adjustment APRA imposes (paras 44–47). \n- Requires APRA approval before any planned reduction in a life company’s capital base (share buybacks, redemptions of capital instruments, certain dividend payments) and requires forecasted capital positions to be provided (paras 48–51). \n- Gives APRA explicit supervisory powers to adjust prescribed capital calculations, to determine supervisory adjustments to the PCR, and to adjust or exclude requirements for individual life companies (paras 42–43, 54).\n\n**Who this affects**\n\n- All Australian-registered life insurance companies and friendly societies (paras 2–4). \n- For Eligible Foreign Life Insurance Companies (EFLICs), the Standard applies only to business carried on through their Australian statutory funds (para 4 and fn 2). \n- Boards, CEOs and senior management of life companies are directly responsible for governance, the ICAAP and reporting obligations (paras 8–18). \n- Investors and policy owners are affected indirectly through the disclosure requirements (paras 44–47) and through limits on capital reductions (paras 48–51).\n\n**Why it matters (official rationale and practical effect)**\n\n- Officially: the Standard is intended to ensure life companies hold adequate, high‑quality capital to absorb losses and meet insurance obligations under a wide range of circumstances; it places ultimate responsibility on Boards to ensure capital adequacy (paras 8–9, Objectives and key requirements). \n- Practically: the Standard increases the regulatory prescription around how capital is measured and managed. It creates recurring compliance tasks (ICAAP creation, review and annual reporting), ongoing modelling and capital calculation work (including special modelling for variable annuities), public disclosures, and prior-approval requirements for capital reductions. These translate into administrative costs, modelling and actuarial expense, and internal governance obligations.\n\n**Costs, incentives, trade-offs and implementation risks**\n\n- Who pays: The direct compliance costs fall on life companies (boards, actuarial, risk and finance teams) in the form of modelling, governance, reporting, and possibly higher capital-raising costs if the Standard increases regulatory capital requirements (paras 10–18, 29–41). \n- Who decides: APRA has significant discretion — it can adjust prescribed capital calculations, impose supervisory adjustments to PCR, set or override parameters (for example an effectiveness factor E for variable annuity hedging), and exclude or adjust requirements for individual companies (paras 42–43, Attachment A para 10, para 54). That places decision-making power over specific capital outcomes with the regulator. \n- Behavioural effects and incentives: \n - Firms are incentivised to strengthen governance around capital (Board-approved ICAAPs, monitoring and triggers) to avoid supervisory action (paras 10–18, 13(c)). \n - The detailed modelling rules for variable annuities (Attachment A) and the aggregation/combined stress rules (paras 36–41; Attachment B) encourage firms to invest in more sophisticated models and to document hedging effectiveness. \n - Restrictions on capital reductions (paras 48–51) reduce the scope for firms to return capital to shareholders without prior regulatory scrutiny, which may change dividend/share buyback policies and capital management strategies. \n- Trade-offs and opportunity costs: \n - More conservative or prescriptive capital measurement can reduce the risk of insurer failure but may increase the cost of capital, potentially affecting returns to shareholders and pricing or product design for policy owners. \n - Smaller firms incur proportionally higher compliance costs for ICAAP documentation, modelling and annual reporting. \n- Implementation risk and operational burden: \n - Cross-references to other Prudential Standards (LPS 112, 114, 115, 117, 118, and LPS 001 definitions) mean life companies must align multiple standards and systems; inconsistent interpretations across standards create operational risk (paras 19–21; references throughout). \n - The E (effectiveness) parameter for dynamic hedging (Attachment A paras 6–11) and APRA’s ability to set or override values creates uncertainty for capital planning until APRA’s expectations are clear. \n- Concentrated benefits and capture risk: \n - The Standard affords APRA significant firm-specific discretion (paras 42–43, 54). Where APRA applies adjustments or sets parameters for a specific firm, benefits (e.g. lower PCR) or constraints accrue to that firm subject to APRA’s judgment. Any such firm-specific divergence must be disclosed to APRA and may be subject to confidentiality, which concentrates informational advantage with regulated firms and the regulator.\n\n**Concrete effects on market choices and competition**\n\n- Product design: The explicit treatment of variable annuities (Attachment A) raises the bar for offering these products; firms without modelling/hedging capability may avoid issuing variable annuities or price them higher. \n- Capital management: The requirement for APRA approval before capital reductions (paras 48–51) constrains capital-return strategies and may favour firms with stronger capital buffers. \n- Disclosure: Regular public disclosure on capital composition and capital adequacy multiples (paras 44–46) increases transparency for market participants and may affect credit assessments and competition for capital.\n\n**Key implementation and compliance items for a life company**\n\n- Prepare and document an ICAAP, get Board approval, review at least every three years, and file an annual ICAAP report to APRA with a Board/CEO declaration (paras 10–18). \n- Calculate prescribed capital amounts for each fund using the Standard Method and the specified risk-charge standards (LPS 114–115, 117, 118) and apply aggregation, combined stress adjustments and minimum floors (paras 29–41, 25–27). \n- If issuing variable annuities, obtain APRA approval of the calculation method before issuance; apply Attachment A modelling requirements and set or justify E values (paras 26–28; Attachment A). \n- Publish the prescribed capital disclosure items annually and make them readily accessible; do not disclose supervisory adjustments (paras 44–47). \n- Seek APRA approval for planned capital reductions and provide at least two years’ capital forecasts (paras 48–51).\n\n**Source claims versus practical limits**\n\n- The instrument claims to ensure adequate capital and Board accountability (paras 8–9). That design rightly focuses fiduciary responsibility on Boards and imposes quantitative tests. \n- The effectiveness of that approach depends on APRA’s judgments, the quality of firms’ ICAAPs and models, and firms’ ability to finance higher capital if required. The instrument increases measurement precision but shifts significant judgement to APRA (paras 42–43, 54), creating a reliance on regulator decisions and potential variability across firms. \n\n"}},"importantCases":[],"_links":{"self":"/api/acts/life-insurance-prudential-standard-determination-no-6-of-2023","history":"/api/acts/life-insurance-prudential-standard-determination-no-6-of-2023/history","analysis":"/api/acts/life-insurance-prudential-standard-determination-no-6-of-2023/analysis","conflicts":"/api/acts/life-insurance-prudential-standard-determination-no-6-of-2023/conflicts","importantCases":"/api/acts/life-insurance-prudential-standard-determination-no-6-of-2023/important-cases","documents":"/api/acts/life-insurance-prudential-standard-determination-no-6-of-2023/documents"}}