calculates the required capital charge associated with an Insurers exposure to derivative financial instruments and is based on the Prescribed Method set out in paragraphs 23 – 29 of GGN 110.4 Investment Risk Capital Charge.
collects information on an Insurers derivative activities and exposures.
Audit requirements
The form relating to authorised insurance entities and reinsurance entities is required to be subject to audit review and testing. The forms relating to the consolidated insurance group reporting unit is not subject to audit review and testing.
The scope and nature of audit testing required is outlined in the applicable Audit Guidance Statement issued by the Auditing and Assurance Board of the Australian Accounting Research Foundation.
Information provided in the form in respect of a financial year of an insurer forms part of the insurer’s ‘yearly statutory accounts’ within the meaning of section 3 of the Insurance Act 1973. This means that:
the completed form for the financial year must be audited by the approved auditor of the insurer (see paragraph 49J(1)(a) of the Act);
the insurer must make such arrangements as to enable the auditor to do this (subsection 49J(2));
the auditor must give the insurer a certificate relating to the completed form (and other completed forms that are part of the insurer’s yearly statutory accounts), which must contain statements of the auditor’s opinion on the matters required by the prudential standards to be dealt with in the certificate (subsection 49J(3));
the certificate must be lodged with APRA as provided for in the prudential standards (paragraph 49L(1)(a)), namely by the due date for lodging the form in respect of the financial year for the insurer.
Reporting entity
This form is to be completed for the following reporting entities:
Branch insurers of a foreign parent insurer (reference to licensed insurer in the form means total operations of the branch, excluding the parent operations);
Authorised insurance entities, including mutual entities (reference to licensed insurer in the form means total operations of the licensed entity);
Authorised reinsurance entities (reference to licensed insurer in the form means total operations of the licensed entity); and
Consolidated insurance group.
For the purposes of APRA prudential reporting, the consolidated insurance group is interpreted as the accounts incorporating the highest parent entity in a group structure, that is an Australian authorised general insurance entity (for the purposes of the Insurance Act 1973), and includes all subsidiaries, associates and joint ventures (registered both in Australia and overseas) of that parent entity.
The highest parent entity in the corporate group does not include a company (e.g. non-operating holding company) that is not an authorised general insurance entity.
Definition of subsidiaries should be consistent with the requirements of Australian accounting standards AASB 1024 ‘Consolidated Accounts’ and definition of associates should be consistent with AASB 1016 ‘Accounting for Investments in Associates’.
This reporting unit is also applicable to licensed insurance entities of a foreign insurance company authorised and registered to operate as a subsidiary operation in Australia. The application of the consolidated insurance group concept in this regard is to exclude the foreign parent company. It is to be applied to the subsidiary company authorised and registered to operate as a general insurance operation in Australia and all its subsidiaries, associated and joint ventures.
Exemptions from the Consolidated Insurance Group requirements
Australian authorised insurers which do not have any subsidiaries are not required to complete the forms for this reporting unit.
Australian authorised insurers which have subsidiaries, but the financial position of the consolidated insurance group is not materially different from that of the licensed insurance entity, are not required to complete the forms for this reporting unit (i.e. the subsidiaries do not have any material dealings/balances).
Definitions
Definitions for data reporting items required by this form have been provided where possible in the instructions under the section headed ‘Specific Instructions’. In addition, the ‘Glossary of Terms’ also contains a list of definitions of common data reporting items.
Unit of measurement
The form is to be completed in Australian currency, rounded in thousands of dollars with no decimal place. Amounts denominated in a currency other than Australian currency are to be converted to AUD in accordance with AASB 1012 ‘Foreign Currency Translation’.
Reporting period
Insurers are required to report the information in the reporting form on a quarterly and annual basis.
The quarterly information is to be completed in respect of each quarter based on the financial year of the insurer, not the calendar year.
The annual information is to be completed in respect of the financial year of the insurer.
The financial information requested in this form is to be reported as at the last day of the reporting period on a financial year to date basis of the insurer. See the Reporting Requirements table for details.
Reporting lag
This form must be lodged for each of the reporting units within the number of business days after the end of the quarter as set out in the Reporting Requirements table.
Definitions for specific items in the form
Derivative financial instruments
Derivatives expose insurers to a full range of investment risks, even though in many cases there may be no, or only a small initial outlay. Insurers should set aside capital to cover the Investment Risk of these transactions particularly where derivatives are used for other purposes than hedging risk associated with the underlying position.
Generally defined as those instruments/contracts, where the value is based on other products, either financial or real, and/or on prices associated with financial products. Derivative contracts involve:
Future delivery, receipt or exchange of financial items such as cash or another derivative instrument, or
Future exchange of real assets for financial items where the contract may be tradeable and has a market value.
The contracts can either be binding on both parties (e.g. as with a currency swap) or subject to the exercise by one party of a right contained in the contract (as with options).
The counterparty in a derivative contract is the party assuming the credit risk. For exchange-traded contracts, credit risk is transferred or assumed by the exchange clearing house. For over the counter (OTC) contracts (e.g. derivative contracts customised for the Insurer by a bank), the other party to the contract (seller or buyer) is the counterparty.
Derivative products/contracts are not limited to but include the following:
Options (including call and put options; exchange-traded and over-the-counter options; interest-rate, bullion, commodity and equity options; warrants);
Interest rate swaps;
Cross-currency interest-rate swaps;
Foreign exchange swaps;
Foreign exchange forwards;
Futures (i.e. bank bill, bond, equity); and
Forward rate agreements.
Where the insurer has used the look through provisions under an approved Extended Licensed Entity in relation to units held in a related/controlled entity for the purposes of determining the Investment Risk Capital Charge. Any associated derivative balances relating to the insurers investment securities/portfolio that is contracted by the related entity must also be recognised by the licensed insurer.
Exclude:
Derivative margin accounts, which hold deposits lodged with an exchange or clearing house as collateral to cover adverse movements in market prices. These balances are to be reported in the Investments form under the appropriate line item within “Call Deposits”.
Repurchase/Resale agreements despite their similarity to a FRAs and/or swaps.
Specific instructions
Aggregate value of all derivative financial instruments (other than exchange traded) with residual maturity of:
This section of the form requires all derivative contract positions of the reporting insurer (except for derivatives traded on recognised futures and options exchanges which are subject to daily marked-to-market), to be classified into the residual maturity bands specified:
Less than 1 year
1 year to less than 5 years
5 years or more
Residual maturity refers to the time remaining from the reporting date to the maturity date of the derivative financial contract.
Derivative exposures/positions applicable for each of the above residual maturity bands is then required to be sub classified into those exposures/positions that are either long or short positions.
Within the long and short position sub classification, derivative exposures are then required to be further sub classified into the appropriate investment/counterparty grade of the derivative contract. The counterparty grades align with the grades specified in Attachment 1 of GGN 110.4 Investment Risk Capital Charge.
Principal amount
Note: Always record this value as positive, even for short positions in derivative financial instruments.
Principal amount for the purpose of this form refers to the face value or notional amount of the derivative financial contract.
Record the aggregate face value or notional contract amount (always positive) of the derivative exposure/position separated into net long or net short positions, for each of the items listed. Amount is to be rounded to thousands of Australian dollars.
Market (fair) value
Record the aggregate market (or fair) value of the derivative exposure/position separated into net long or net short positions, for each of the items listed. Amount is to be rounded to thousands of Australian dollars.
For the purposes of valuing derivative exposures, for this form, market value should represent an estimate of the amount, which could be expected to be received from the disposal of the derivative instrument in an orderly market, ignoring transaction costs.
Market value is defined for accounting purposes as a subset of fair value, where fair value means the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's-length transaction, and is determined as follows:
(i) the quoted market price in an active and liquid market (i.e. market value); or
(ii) when there is infrequent activity in a market, the market is not well established, small volumes are traded relative to the asset or liability to be valued, or a quoted market price is not available – an estimate of a price for the asset or liability in an active and liquid market.
Asset equivalent
Do not enter a value in this column. The form automatically calculates the asset equivalent value of the derivative exposure. This is calculated based on the Prescribed Method set out in paragraphs 23 – 29 of GGN 110.4 Investment Risk Capital Charge, and is the sum of the:
Current marked-to-market value of the derivative position (refer below); plus
A potential exposure add-on.
Current marked-to-market value of the derivative position
The current mark-to-market value of a derivative is only applicable where the position has a positive replacement value to the insurer. If the current mark-to-market value of the position is negative or zero, the value is not included in the calculation, as the calculation of the asset equivalent amount is trying to capture the credit risk value of the derivative position to the insurer.
A potential exposure add-on
The potential exposure add-on for a derivative position is determined by multiplying the notional principal amount of the derivative contract by the appropriate credit conversion factors outlined in the table below. This component of the calculation is required for all derivatives regardless of whether the derivative contract has a positive, zero or negative mark-to-market value.
Potential exposure add-on factors
Residual Maturity
Interest Rate Contracts
Foreign Exchange & Gold Contracts
Equity Contracts
Precious Metal Contracts (except gold)
Other Contracts
Less than 1 yr
Nil
1.0%
6.0%
7.0%
10.0%
1 year to less than 5 yrs
0.5%
5.0%
8.0%
7.0%
12.0%
More than 5 yrs
1.5%
7.5%
10.0%
8.0%
15.0%
Investment risk capital charge
Do not enter a value in this column. This column automatically calculates the appropriate Investment Capital Charge based on the information entered. The capital charge is calculated by multiplying the asset equivalent value by the investment capital factor applicable for each counterparty grade.
Risk Charge Per Derivative Contract Type
Do not enter a value in this field as this is automatically calculated. This is the total capital charge calculated for each contract type (i.e. Interest Rate Contracts, Equity Contracts).
Total Derivative Risk Charge
Do not enter a value in this field as this is automatically calculated. This is the total capital charge calculated for all contract types, based on the aggregate value of all derivative financial instruments other than exchange traded derivatives.
Total Derivative Exposure Classified into the Following
(Note: Capital charge is not calculated on these products, but the aggregate value is required for the first 2 columns of each type of derivative market/type).
Total 'Over the Counter' derivative financial instruments
These refer to derivative contracts that are not traded on a recognised exchange. Instead these contracts are transacted between individual counterparties (e.g. most commonly a bank). The details of a derivative contract can be negotiated between the contracting parties.
Forwards, Swaps, Other
Bought Option Positions:
(Note: do not include options in the form of credit derivatives, these are separately disclosed).
Report option positions where the insurer has purchased an option position (i.e. a call or put option) and has the right but not the obligation to exercise the option against the writer and request delivery or sale of the underlying security or cash settlement. Disclose bought option exposures into the following:
(i) Call option.
Right but not the obligation of the holder of the option to require the writer of the option to sell the underlying security/asset to the holder.
(ii) Put option.
Right but not the obligation of the holder of the option to require the writer of the option to buy the underlying security/asset from the holder.
Written Option Positions
(Note: do not include options in the form of credit derivatives, these are separately disclosed).
Report option positions where the insurer has written/sold option positions (i.e. call or put options), and as a result has the obligation to deliver or purchase the underlying product of the option or settle in cash, if exercised by the holder of the option position sold by the insurer. Disclose sold option exposures into the following:
(i) Call option.
Obligation but not the right of the writer of the option to sell the underlying security/asset to the holder of the option.
(ii) Put option.
Obligation but not the right of the writer of the option to buy the underlying security/asset from the holder.
Credit Derivatives
(Note: do not include options based on financial market products/indexes, these are separately disclosed)
Report credit derivative option positions where the insurer is:
(i) providing credit protection; or
(ii) purchasing credit protection.
2. Total exchange traded derivative financial instruments - Derivatives traded on futures and options exchanges subject to daily mark-to-market & margin payments.
These refer to derivative contracts that are transacted on a recognised futures or options exchange (e.g. in Australia the Sydney Futures Exchange) and are subject to daily mark-to-market and margin payment. These contracts are transacted in standardised parcels. The clearing house effectively becomes the counterparty to all derivative positions.
Record the aggregate principal and market value for each contract type (i.e. Interest Rate Contracts, Equity Contracts).
Total Derivative Exposure Classified into the Following (over the counter and exchange traded derivatives)
Total derivatives, which are in relation to:
Investment portfolio (as disclosed in the Investment Forms)
Record the aggregate principal and market value of derivative exposures that relate to the investment portfolio, either as hedging a component of the underlying investment portfolio (i.e. fixed interest or equities) or as an outright investment.
Other assets
Record the aggregate principal and market value of derivative exposures that are in relation to assets other than those included in the investment portfolio of the insurer (see point above), i.e. used for the purpose of hedging asset returns/values.
Claims Liabilities
Record the aggregate principal and market value of derivative exposures that relate to the insurer’s claims liabilities (e.g. hedging the currency movement on a claim liability denominated in a currency other than Australian currency).
Debt Funding/Borrowings
Record the aggregate principal and market value of derivatives that relate to specific debt/borrowings of the insurer (e.g. hedging the interest rate risk or currency risk associated with the borrowings).
Other
Record the aggregate principal and market value of derivatives that relate to other items not specifically listed above (i.e. hedging the currency risk associated with an anticipated purchase).
Total Derivatives, which are with:
Disclose those derivatives that are with the following:
Parent entity (only applicable if a parent entity is not included in the consolidated insurance group)
Disclose holdings of derivatives that are purchased from or sold to the parent entity of the licensed insurer or of the consolidated insurance group.
Controlled entities (note not applicable for the Consolidated Insurance Group)/Other branches of the parent entity
For Branches, this line item is to be interpreted as amounts in relation to “Other branches of the parent entity”, and for licensed insurance entities as amounts in relation to “Controlled entities”.
Disclose holdings of derivatives that are purchased from or sold to controlled entities of the licensed insurer.
Associate/Joint venture
Disclose holdings of derivative securities that are purchased from or sold to Associates or Joint Ventures of the licensed insurer or of the consolidated insurance group. Associates and Joint Ventures are defined in accordance with AASB 1006 and AASB 1016.
Other related parties
Disclose holdings of derivative instruments that are purchased from or sold to any other related entity of the reporting Insurer or of the consolidated insurance group not disclosed above.
Related parties
Where this term is used or referenced in these forms, related parties is to be interpreted consistently with its definition and meaning as contained in AASB 1017 ‘Related Party Disclosures’.
In accordance with AASB 1017 related party means, in relation to a reporting entity any:
(a) other entity that at any time during the financial year, has control or significant influence over the reporting entity; or
(b) other entity that at any time during the financial year, is subject to control or significant influence by the reporting entity; or
(c) other entity that, at any time during the financial year, is controlled by the same entity that controls the reporting entity. Referred to as a situation in which entities are subject to common control; or
(d) other entity that, at any time during the financial year, is controlled by the same entity that significantly influences the reporting entity; or
(e) other entity that, at any time during the financial year, is significantly influenced by the same entity that controls the reporting entity; or
(f) director of the reporting entity or any of their director-related entities; or
(g) director of any other entity identified as a related party under any of paragraphs (a) to (e), or any of their director-related entities;
but excludes any other entity (except those identified as a related party under paragraph (f)) where the related party relationship results solely from normal dealings of:
AASB 1017 defines director-related entities as meaning “the spouses of such directors, relatives of such directors or spouses and any other entity under the joint or several control or significant influence of such directors, spouses or relatives”.
Relative in relation to a person is defined in the Corporations Law to mean the spouse, partner, son, daughter, or brother or sister of the person.