Reporting Standard GRS 131.0_G (2009) Off Balance Sheet Exposure Risk Charge

Financial Sector (Collection of Data) Act 2001

I, John Roy Trowbridge, a Member of APRA and delegate of APRA, under paragraph 13(1)(a) of the Financial Sector (Collection of Data) Act 2001 (‘the Act’) MAKE the reporting standard set out in the Schedule, which applies to financial sector entities of the kind specified in paragraph 2 of the reporting standard.

Under section 15 of the Act, I DECLARE that the reporting standard shall begin to apply to those entities on registration of this instrument on the Federal Register of Legislative Instruments.

Dated 21 August 2009

[Signed]

John Trowbridge

Member
Interpretation

In this Determination

APRA means the Australian Prudential Regulation Authority.

Federal Register of Legislative Instruments means the register established under section 20 of the Legislative Instruments Act 2003.

Schedule

Reporting Standard GRS 131.0_G (2009) Off Balance Sheet Exposure Risk Charge comprises the 27 pages commencing on the next page.

Reporting Standard GRS 131.0_G (2009)

Off Balance Sheet Exposure Risk Charge

Objective of this reporting standard

This reporting standard is made under section 13 of the Financial Sector (Collection of Data) Act 2001 (the Collection of Data Act). It requires Level 2 insurance groups to report to APRA, generally on a semi-annual and annual basis, off balance sheet exposures in the form of:

• Credit Substitutes Provided and Risk Charge
• Charges Granted and Risk Charge
• Credit Support Received

This reporting standard outlines the overall requirements for the provision of this information to APRA. It should be read in conjunction with:

• Form GRF 131.0_G Off Balance Sheet Exposure Risk Charge (Form GRF 131.0_G) and the associated instructions (which are attached and all form part of this reporting standard); and
• any prudential standards referenced in the attached instructions.

Purpose

1. Data collected in Form GRF 131.0_G is used by APRA for the purpose of prudential supervision including assessing a Level 2 insurance group’s compliance with the capital standards.

Application and commencement

2. This reporting standard applies to all Level 2 insurance groups for reporting periods commencing on or after 30 June 2009.

Information required

3. A Level 2 insurance group must provide APRA with the information required by the Form GRF 131.0_G for each reporting period specified in paragraph 5 for the Level 2 insurance group.

Forms and method of submission

4. The information required by this reporting standard must be given to APRA either:

(a) in electronic form using the ‘Direct to APRA’ application, applying one of the electronic submission mechanisms under that application; or

(b) by manually completing Form GRF 131.0_G on paper and mailing the completed form to APRA’s head office at Level 26, 400 George Street, Sydney, New South Wales.

Where the information is submitted by means of an agent to whom the Level 2 insurance group has outsourced the function of providing the information on the Level 2 insurance group’s behalf, the agent may only provide the information in accordance with subparagraph 4(b) if the agent has contacted APRA and advised that the agent cannot submit the information in electronic form under subparagraph 4(a).

Note: the Direct to APRA application software and paper forms may be obtained from APRA.

Reporting periods and due dates

5. Subject to paragraph 6, a Level 2 insurance group must provide the information required by this reporting standard:

(a) in respect of each half year based on the financial year (as defined in Prudential Standard GPS 001 Definitions (GPS 001)) of the Level 2 insurance group on an unaudited basis; and

(b) in respect of each financial year (as defined in GPS 001) of the Level 2 insurance group on an audited basis.

Note: The annual information required by paragraphs 3, 4 and 5(b) together with certain annual information required by other reporting standards, will form part of the Level 2 insurance group’s annual accounts within the meaning of GPS 001. Prudential Standard GPS 311 Audit and Actuarial Reporting and Valuation: Level 2 Insurance Groups (GPS 311) contains the relevant provisions governing audits.

6. APRA may, by notice in writing to the parent entity, change the reporting periods, or specified reporting periods, for a particular Level 2 insurance group to require it to provide the information:

(a) more frequently (if, having regard to the particular circumstances of the Level 2 insurance group, APRA considers it necessary or desirable to obtain information more frequently for the purposes of the prudential supervision of the Level 2 insurance group); or

(b) less frequently (if, having regard to the particular circumstances of the Level 2 insurance group and the extent to which it requires prudential supervision, APRA considers it unnecessary to require the Level 2 insurance group to provide the information as frequently.

7. The information required by paragraph 3 of this reporting standard from a Level 2 insurance group must be provided to APRA by the following times:

(a) in the case of the half yearly information required by subparagraph 5(a) – three months after the end of the reporting period to which the information relates; and

(b) in the case of the audited annual information required by subparagraph 5(b) – four months after the end of the reporting period to which the information relates.

Note: GPS 311 requires a Level 2 insurance group to ensure that its Group Auditor conducts a limited assurance review of the group’s annual accounts. Accordingly, the Group Auditor’s report(s) as required by GPS 311 (relating to the information required by paragraph 3) must be provided to APRA by the time specified in subparagraph 7(b) of this reporting standard (unless an extension is granted under paragraph 8).

8. APRA may by notice in writing to the parent entity grant a Level 2 insurance group an extension of a due date for the provision of the information, in which case the new due date will be the date on the notice of extension.

9. On the written application of the parent entity of a Level 2 insurance group, APRA may by notice in writing to the parent entity exclude the requirement under subparagraph 5(a) to provide half yearly information.

Quality control

10. The information provided by a Level 2 insurance group under this reporting standard must be the product of processes and controls that have been reviewed and tested by the Group Auditor of the Level 2 insurance group. This will require the Group Auditor to review and test the systems, processes and controls supporting the reporting of the information to ensure that they produce accurate data and are otherwise reliable. This review and testing must be done on:

(a) an annual basis to enable the Group Auditor to form an opinion on the accuracy and reliability of the data; and

(b) at least a limited assurance engagement consistent with the professional standards and guidance notes issued by the Auditing and Assurance Standards Board (AUASB) as may be amended from time to time, to the extent that they are not inconsistent with the requirements of Prudential Standard GPS 311 Audit and Actuarial Reporting and Valuation: Level 2 Insurance Groups.

11. The information provided by a Level 2 insurance group under this reporting standard must be subject to processes and controls developed by the Level 2 insurance group for the internal review and authorisation of that information. It is the responsibility of the board and senior management of the parent entity of the Level 2 insurance group to ensure that an appropriate set of policies and procedures for the authorisation of data submitted to APRA is in place.

Authorisation

12. If an officer of a parent entity[1] of a Level 2 insurance group provides the information required by this reporting standard:

(a) under subparagraph 4(a), the officer must digitally sign, authorise and encrypt the information (for which purpose APRA’s certificate authority will issue digital certificates, for use with the ‘Direct to APRA’ application, to officers of the parent entity of the Level 2 insurance group who have authority from the parent entity of the Level 2 insurance group to transmit data to APRA); or

(b) under subparagraph 4(b), the completed form must be signed in accordance with paragraph 13.

13. If a Level 2 insurance group provides the information required by this reporting standard through an agent under either subparagraphs 4(a) or (b), the agent will not be required to sign or authorise the information. However, the Level 2 insurance group must:

(a) obtain from the agent a paper copy of the completed form as provided to APRA (whether it was provided under subparagraph 4(a) or (b)); and

(b) cause the paper copy to be signed in accordance with paragraph 13; and

(c) lodge the signed paper copy with APRA by mailing the completed form to APRA’s head office at Level 26, 400 George Street, Sydney, New South Wales, by the relevant due date (unless APRA, in writing, waives the requirement to lodge the signed paper copy with APRA by varying this reporting standard in relation to the Level 2 insurance group).

Note: APRA may, for example, determine to waive the requirement under subparagraph 13(c) where a Level 2 insurance group has undertaken to retain the signed copy of the completed form for an agreed period of time.

14. If information under this reporting standard is provided in paper form, it must be signed on the front page of the relevant completed form by either:

(a) the Principal Executive Officer of the parent entity of the Level 2 insurance group; or

(b) the Chief Financial Officer of the parent entity of the Level 2 insurance group (whatever his or her official title may be).

Minor alterations to forms and instructions

15. APRA may make minor variations to the instructions to a form, to clarify their application to the form without changing any substantive requirement in the form or instructions.

16. If APRA makes such a variation it must notify the parent entity of each Level 2 insurance group in writing.

Transition

17. Where APRA has granted a period of transition to a Level 2 insurance group by determining a later effective date for:

(a) Prudential Standard GPS 111 Capital Adequacy: Level 2 Insurance Group;

(b) Prudential Standard GPS 221 Risk Management: Level 2 Insurance Group; and

(c) Prudential Standard GPS 311 Audit and Actuarial Reporting and Valuation: Level 2 Insurance Group

a later effective date for this Reporting Standard will apply to the Level 2 insurance group as determined by APRA.

Adjustments

18. The parent entity of a Level 2 insurance group may apply in writing to APRA to vary the reporting requirements of GRF 131.0_G Off Balance Sheet Exposure Risk Charge in relation to that Level 2 insurance group. APRA may in its discretion in writing approve such an application.

Interpretation

19 In this reporting standard (including the attachments):

(a) Unless the contrary intention appears, words and expressions have the meanings given to them in Prudential Standard GPS 001 Definitions;

(b) APRA-authorised reinsurer means an insurer carrying on reinsurance business. For the purposes of this definition, a Lloyd’s underwriter as defined under the Act is an APRA-authorised reinsurer if it carries on reinsurance business;

business days means ordinary business days, exclusive of Saturdays, Sundays and public holidays;

capital standards means the prudential standards which relate to capital adequacy as defined in Prudential Standard GPS 001 Definitions;

foreign insurer means a foreign general insurer within the meaning of the Insurance Act;

Note: A reference to a ‘branch’ or ‘branch operation’ is a reference to the Australian operations of a foreign insurer.

Group Auditor has the meaning given in Prudential Standard GPS 311 Audit and Actuarial Reporting and Valuation: Level 2 Insurance Groups;

Insurance Act means the Insurance Act 1973;

insurer means a general insurer within the meaning of the Insurance Act;

Note: In the forms and instructions, a reference to an ‘authorised insurer’, ‘authorised insurance entity’ or ‘licensed insurer’ is a reference to an insurer, and a reference to an ‘authorised reinsurance entity’ is a reference to an insurer whose business consists only of undertaking liability by way of reinsurance.

Non-APRA authorised reinsurer means any reinsurer that is not an APRA-authorised reinsurer;

Principal Executive Officer means the current principal executive officer of the entity, regardless of title, and whether or not he or she is a member of the governing board of the entity;

reporting period means a period mentioned in subparagraph 5(a) or (b) or, if applicable, paragraph 6.

20 A reference to a prudential standard is a reference to the applicable prudential standard made under section 32 of the Insurance Act, as amended from time to time. If the prudential standard has been revoked and replaced, the reference shall be taken to be to the prudential standard that has replaced it.

Objective of this reporting standard

This reporting standard is made under section 13 of the Financial Sector (Collection of Data) Act 2001 (the Collection of Data Act). It requires Level 2 insurance groups to report to APRA, generally on a semi-annual and annual basis, off balance sheet exposures in the form of:

• Credit Substitutes Provided and Risk Charge
• Charges Granted and Risk Charge
• Credit Support Received

This reporting standard outlines the overall requirements for the provision of this information to APRA. It should be read in conjunction with:

• Form GRF 131.0_G Off Balance Sheet Exposure Risk Charge (Form GRF 131.0_G) and the associated instructions (which are attached and all form part of this reporting standard); and
• any prudential standards referenced in the attached instructions.

Purpose

1. Data collected in Form GRF 131.0_G is used by APRA for the purpose of prudential supervision including assessing a Level 2 insurance group’s compliance with the capital standards.

Application and commencement

2. This reporting standard applies to all Level 2 insurance groups for reporting periods commencing on or after 30 June 2009.

Information required

3. A Level 2 insurance group must provide APRA with the information required by the Form GRF 131.0_G for each reporting period specified in paragraph 5 for the Level 2 insurance group.

Forms and method of submission

4. The information required by this reporting standard must be given to APRA either:

(a) in electronic form using the ‘Direct to APRA’ application, applying one of the electronic submission mechanisms under that application; or

(b) by manually completing Form GRF 131.0_G on paper and mailing the completed form to APRA’s head office at Level 26, 400 George Street, Sydney, New South Wales.

Where the information is submitted by means of an agent to whom the Level 2 insurance group has outsourced the function of providing the information on the Level 2 insurance group’s behalf, the agent may only provide the information in accordance with subparagraph 4(b) if the agent has contacted APRA and advised that the agent cannot submit the information in electronic form under subparagraph 4(a).

Note: the Direct to APRA application software and paper forms may be obtained from APRA.

Reporting periods and due dates

5. Subject to paragraph 6, a Level 2 insurance group must provide the information required by this reporting standard:

(a) in respect of each half year based on the financial year (as defined in Prudential Standard GPS 001 Definitions (GPS 001)) of the Level 2 insurance group on an unaudited basis; and

(b) in respect of each financial year (as defined in GPS 001) of the Level 2 insurance group on an audited basis.

Note: The annual information required by paragraphs 3, 4 and 5(b) together with certain annual information required by other reporting standards, will form part of the Level 2 insurance group’s annual accounts within the meaning of GPS 001. Prudential Standard GPS 311 Audit and Actuarial Reporting and Valuation: Level 2 Insurance Groups (GPS 311) contains the relevant provisions governing audits.

6. APRA may, by notice in writing to the parent entity, change the reporting periods, or specified reporting periods, for a particular Level 2 insurance group to require it to provide the information:

(a) more frequently (if, having regard to the particular circumstances of the Level 2 insurance group, APRA considers it necessary or desirable to obtain information more frequently for the purposes of the prudential supervision of the Level 2 insurance group); or

(b) less frequently (if, having regard to the particular circumstances of the Level 2 insurance group and the extent to which it requires prudential supervision, APRA considers it unnecessary to require the Level 2 insurance group to provide the information as frequently.

7. The information required by paragraph 3 of this reporting standard from a Level 2 insurance group must be provided to APRA by the following times:

(a) in the case of the half yearly information required by subparagraph 5(a) – three months after the end of the reporting period to which the information relates; and

(b) in the case of the audited annual information required by subparagraph 5(b) – four months after the end of the reporting period to which the information relates.

Note: GPS 311 requires a Level 2 insurance group to ensure that its Group Auditor conducts a limited assurance review of the group’s annual accounts. Accordingly, the Group Auditor’s report(s) as required by GPS 311 (relating to the information required by paragraph 3) must be provided to APRA by the time specified in subparagraph 7(b) of this reporting standard (unless an extension is granted under paragraph 8).

8. APRA may by notice in writing to the parent entity grant a Level 2 insurance group an extension of a due date for the provision of the information, in which case the new due date will be the date on the notice of extension.

9. On the written application of the parent entity of a Level 2 insurance group, APRA may by notice in writing to the parent entity exclude the requirement under subparagraph 5(a) to provide half yearly information.

Quality control

10. The information provided by a Level 2 insurance group under this reporting standard must be the product of processes and controls that have been reviewed and tested by the Group Auditor of the Level 2 insurance group. This will require the Group Auditor to review and test the systems, processes and controls supporting the reporting of the information to ensure that they produce accurate data and are otherwise reliable. This review and testing must be done on:

(a) an annual basis to enable the Group Auditor to form an opinion on the accuracy and reliability of the data; and

(b) at least a limited assurance engagement consistent with the professional standards and guidance notes issued by the Auditing and Assurance Standards Board (AUASB) as may be amended from time to time, to the extent that they are not inconsistent with the requirements of Prudential Standard GPS 311 Audit and Actuarial Reporting and Valuation: Level 2 Insurance Groups.

11. The information provided by a Level 2 insurance group under this reporting standard must be subject to processes and controls developed by the Level 2 insurance group for the internal review and authorisation of that information. It is the responsibility of the board and senior management of the parent entity of the Level 2 insurance group to ensure that an appropriate set of policies and procedures for the authorisation of data submitted to APRA is in place.

Authorisation

12. If an officer of a parent entity[1] of a Level 2 insurance group provides the information required by this reporting standard:

(a) under subparagraph 4(a), the officer must digitally sign, authorise and encrypt the information (for which purpose APRA’s certificate authority will issue digital certificates, for use with the ‘Direct to APRA’ application, to officers of the parent entity of the Level 2 insurance group who have authority from the parent entity of the Level 2 insurance group to transmit data to APRA); or

(b) under subparagraph 4(b), the completed form must be signed in accordance with paragraph 13.

13. If a Level 2 insurance group provides the information required by this reporting standard through an agent under either subparagraphs 4(a) or (b), the agent will not be required to sign or authorise the information. However, the Level 2 insurance group must:

(a) obtain from the agent a paper copy of the completed form as provided to APRA (whether it was provided under subparagraph 4(a) or (b)); and

(b) cause the paper copy to be signed in accordance with paragraph 13; and

(c) lodge the signed paper copy with APRA by mailing the completed form to APRA’s head office at Level 26, 400 George Street, Sydney, New South Wales, by the relevant due date (unless APRA, in writing, waives the requirement to lodge the signed paper copy with APRA by varying this reporting standard in relation to the Level 2 insurance group).

Note: APRA may, for example, determine to waive the requirement under subparagraph 13(c) where a Level 2 insurance group has undertaken to retain the signed copy of the completed form for an agreed period of time.

14. If information under this reporting standard is provided in paper form, it must be signed on the front page of the relevant completed form by either:

(a) the Principal Executive Officer of the parent entity of the Level 2 insurance group; or

(b) the Chief Financial Officer of the parent entity of the Level 2 insurance group (whatever his or her official title may be).

Minor alterations to forms and instructions

15. APRA may make minor variations to the instructions to a form, to clarify their application to the form without changing any substantive requirement in the form or instructions.

16. If APRA makes such a variation it must notify the parent entity of each Level 2 insurance group in writing.

Transition

17. Where APRA has granted a period of transition to a Level 2 insurance group by determining a later effective date for:

(a) Prudential Standard GPS 111 Capital Adequacy: Level 2 Insurance Group;

(b) Prudential Standard GPS 221 Risk Management: Level 2 Insurance Group; and

(c) Prudential Standard GPS 311 Audit and Actuarial Reporting and Valuation: Level 2 Insurance Group

a later effective date for this Reporting Standard will apply to the Level 2 insurance group as determined by APRA.

Adjustments

18. The parent entity of a Level 2 insurance group may apply in writing to APRA to vary the reporting requirements of GRF 131.0_G Off Balance Sheet Exposure Risk Charge in relation to that Level 2 insurance group. APRA may in its discretion in writing approve such an application.

Interpretation

19 In this reporting standard (including the attachments):

(a) Unless the contrary intention appears, words and expressions have the meanings given to them in Prudential Standard GPS 001 Definitions;

(b) APRA-authorised reinsurer means an insurer carrying on reinsurance business. For the purposes of this definition, a Lloyd’s underwriter as defined under the Act is an APRA-authorised reinsurer if it carries on reinsurance business;

business days means ordinary business days, exclusive of Saturdays, Sundays and public holidays;

capital standards means the prudential standards which relate to capital adequacy as defined in Prudential Standard GPS 001 Definitions;

foreign insurer means a foreign general insurer within the meaning of the Insurance Act;

Note: A reference to a ‘branch’ or ‘branch operation’ is a reference to the Australian operations of a foreign insurer.

Group Auditor has the meaning given in Prudential Standard GPS 311 Audit and Actuarial Reporting and Valuation: Level 2 Insurance Groups;

Insurance Act means the Insurance Act 1973;

insurer means a general insurer within the meaning of the Insurance Act;

Note: In the forms and instructions, a reference to an ‘authorised insurer’, ‘authorised insurance entity’ or ‘licensed insurer’ is a reference to an insurer, and a reference to an ‘authorised reinsurance entity’ is a reference to an insurer whose business consists only of undertaking liability by way of reinsurance.

Non-APRA authorised reinsurer means any reinsurer that is not an APRA-authorised reinsurer;

Principal Executive Officer means the current principal executive officer of the entity, regardless of title, and whether or not he or she is a member of the governing board of the entity;

reporting period means a period mentioned in subparagraph 5(a) or (b) or, if applicable, paragraph 6.

20 A reference to a prudential standard is a reference to the applicable prudential standard made under section 32 of the Insurance Act, as amended from time to time. If the prudential standard has been revoked and replaced, the reference shall be taken to be to the prudential standard that has replaced it.

Instruction Guide

Introduction

This form is used to calculate the required capital charge of a Level 2 insurance group’s off-balance sheet exposures for capital adequacy purposes in accordance with Prudential Standard GPS 111 Capital Adequacy: Level 2 Insurance Groups (GPS 111).

This form captures information on:

1. Credit substitutes provided;
2. Charges granted; and
3. Direct credit support provided to the Level 2 insurance group.

Audit requirements

The annual return of GRF 131.0_G Off Balance Sheet Exposure Risk Charge (Level 2 Insurance Group) required under paragraphs 3 and 5(c) of Reporting Standard GRS 131.0_G must be subject to a limited assurance[2] review by the Group Auditor (see Prudential Standard GPS 311 Audit and Actuarial Reporting and Valuation: Level 2 Insurance Groups (GPS 311)).

The Group Auditor must prepare a review report on the basis of a limited assurance engagement in accordance with the requirements of GPS 311. Assurance in the review report will be provided in the form of negative assurance. To express negative assurance in the review report, the auditor will use limited procedures to obtain sufficient appropriate evidence. Enquiries of the Level 2 insurance group’s staff and analytical procedures will be the primary tools used to obtain evidence. These procedures will not provide all the evidence that would be required in an audit.

The scope and nature of audit testing required is outlined in the Standard on Assurance Engagement ASAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information issued by the Auditing and Assurance Standards Board.

Reporting entities

GRF 131.0_G Off Balance Sheet Exposure Risk Charge (Level 2 Insurance Group) is to be completed by the parent entity of a Level 2 insurance group as defined under GPS 001.

Consolidation at Level 2 should cover the Level 2 insurance group as defined under GPS 001.

In the context of this form, that means that only off-balance sheet exposures with counterparties outside of the Level 2 insurance group will incur a risk charge. Where, for instance, one group company guarantees the obligations of another group company within the same region (Australia or International), those guarantees are not to be reported here as they are eliminated on consolidation. Where, for instance, an intra-group guarantee exists between regions, these guarantees are to be reported in this form, and then an inter-region elimination item is to be reported.

Unit of measurement

This form is to be presented in Australian dollars (AUD), rounded to thousands of dollars, with no decimal place.

Amounts denominated in foreign currency are to be converted to AUD in accordance with Australian accounting standards.

Transactions arising under foreign currency derivative contracts at the reporting date must be prepared in accordance with Australian accounting standards.

Materiality

GRF 131.0_G Off Balance Sheet Exposure Risk Charge (Level 2 Insurance Group) is to be prepared based on the concept of materiality as applied in Australian accounting standards subject to APRA’s discretion. APRA’s discretion is likely to apply in instances where the application of materiality criteria is not suitable for prudential reporting purposes.

Reporting period

Level 2 insurance groups are required to report the information in the reporting form. This information is to be reported on three occasions in a Level 2 insurance group’s financial year. A Level 2 insurance group is required to submit:

• semi-annual return which is to be completed in respect of each half year from the start of the financial year of the Level 2 insurance group; and
• an audited annual return which will be based on a limited assurance review by the Group Auditor (see Audit requirements).

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 Level 2 insurance group.

Reporting lag

Submission times for Level 2 reporting forms are as follows (in accordance with GRS 131.0_G Off Balance Sheet Exposure Risk Charge):

• The semi-annual return is to be lodged within three months after the end of the reporting period.
• The audited annual return is to be lodged within four months after the end of the reporting period.

International business

Level 2 insurance groups are required to report financial data on both Australian and international exposures. For the purposes of segment reporting, Level 2 insurance groups are not to follow the requirements under the Australian accounting standards when completing this form.

For prudential reporting purposes ‘Australian Business’ is as defined in Prudential Standard GPS 001 Definitions (GPS 001) and means insurance business carried on by any Level 1 insurer within a Level 2 Insurance group. Therefore, all insurance business written by Level 1 insurers is deemed to be Australian business. ‘International Business’[3] is insurance business carried on by an entity within the group that is not authorised under the Insurance Act 1973.[4] This treatment is different to the requirements of AASB 1023 ‘General Insurance Contracts’ and other Australian accounting standards.

For entities which are not insurers within the Level 2 insurance group, items should be reported as:

• ‘Australian Business’ when they relate to an entity incorporated in Australia; and
• ‘International Business’ where they relate to an entity incorporated outside of Australia.

For prudential reporting purposes ‘Level 1 insurer’ is as defined in Prudential Standard GPS 001 Definitions (GPS 001).

Inter-region elimination

The value of inter-region or inter-segment transactions, which are eliminated on consolidation, need to be reported as negative values under ‘Inter-region elimination’.

Reporting Supplement

In determining the Investment Risk Capital Charge for off-balance sheet exposures, the Level 2 insurance group will need to complete the necessary calculations outside of this reporting form. These calculations do not constitute part of the formal accounts but must be submitted to APRA separately unless APRA advises otherwise. The reporting supplement is to be submitted to the Level 2 insurance group’s APRA Responsible Supervisor.

Investment Capital Factors

For the purposes of this form use the asset grade scales and the applicable investment capital factors set out in GPS 114 Capital Adequacy: Investment Risk Capital Charge (GPS 114).

Specific instructions

This form is to be completed by separating out ‘Australian business’ and aggregate ‘international business’. The value of inter-region or inter-segment transactions, which are eliminated on consolidation, need to be reported under ‘Inter-region elimination’. The total business for the group will be the sum of the Australian business, international business and any inter-region elimination.

The form is separated into the following parts:

1. Credit Substitutes Provided and Risk Charge
2. Charges Granted and Risk Charge
3. Credit Support Received

The requirements for each of these are detailed below:

1. Credit substitutes provided and risk charge

This section of the form allows Level 2 insurance groups to report the amount of direct credit substitutes provided by the group in accordance with the requirements contained in GPS 111.

Non market related items

This term ‘non market’ refers to items that are not transacted in financial markets.

Transactions relating specifically to financial market products such as derivative financial instruments are not to be included in these calculations. Information regarding exposures to derivative financial instruments is to be recorded in GRF 110.0_G Minimum Capital Requirement (Level 2 Insurance Group) under item 6 ‘Derivatives Activity and Risk Charge’.

Credit substitutes include:

Direct credit substitutes

This includes any irrevocable off-balance sheet obligations, which carry the same credit risk as a direct extension of credit. The following are examples constituting a direct credit substitute (i.e. the risk of loss depends on the creditworthiness of the counterparty, or the party on which a potential claim is acquired):

• An undertaking to make a payment to a third party in the event that a counterparty fails to meet a financial obligation; or
• An undertaking to a counterparty to acquire a potential claim on another party in the event of default by that party.

This includes potential credit exposures arising from the issue/provision of following:

• guarantees;
• credit derivatives (i.e. selling credit protection);
• standby letters of credit serving as financial guarantees for loans, securities and any other financial liabilities; and
• bill endorsements

Trade-related contingencies

These are contingent liabilities arising from trade-related obligations which are secured against an underlying shipment of goods. This includes documentary letters of credit issued, acceptances on trade bills, shipping guarantees issued and any other trade-related contingencies.

Sale & Repurchase Agreements (“Repos”)

This relates to arrangements whereby a Level 2 insurance group sells a loan, security or other asset to another party with a commitment to repurchase the asset at an agreed price on an agreed future date.[5] Any assets acquired by a Level 2 insurance group under reverse repos (i.e. purchase and resale agreements) are to be treated as collateralised loans to the counterparty.[6]

Assets Sold With Recourse

This includes any asset sales (to the extent that such assets are not included in on-balance sheet) by the Level 2 insurance group where the holder of the asset is entitled to “put” the asset back to the Level 2 insurance group within an agreed period or under certain prescribed circumstances, e.g. deterioration in the value or credit quality of the asset concerned.[7]

Forward Asset Purchases

This includes commitments to purchase at a specified future date and on pre-arranged terms, an asset from another party, including written put options on specified assets with the character of a credit enhancement.[8]

Written put options expressed in terms of market rates for currencies or financial instruments bearing no credit risk are excluded from risk assets.

For the purposes of the APRA forms do not include market related securities that are recorded on a trade date basis and transacted in accordance with accepted financial market settlements periods. Such securities, for Level 2 insurance group reporting, are to be included in GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group). These do not constitute forward asset purchases for the purposes of GRF 131.0_G Off Balance Sheet Exposure Risk Charge (Level 2 Insurance Group).

Partly Paid Shares and Securities

This includes any amounts owing on the uncalled portion of partly paid shares and securities held by the Level 2 insurance group, which represent commitments with certain drawdown by the issuer at a future date.[9]

Placements of Forward Deposits

This relates to any agreement between the Level 2 insurance group and another party whereby the Level 2 insurance group will place a deposit at an agreed rate of interest with that party at a predetermined future date.

Surety Bonds

Include, in the calculations, the value of surety bonds which are treated as a type of direct credit substitute by the Level 2 insurance group. The risk charge should be applied to 25 per cent of the value of the surety bond business as specified in GPS 114.

Other Non-Market-Related Off-Balance Sheet Items

Include, in the calculations, all other off-balance sheet non-market related items that are not specifically listed above.

Reporting Form GRF 131.0_G

Off Balance Sheet Exposure Risk Charge (Level 2 Insurance Group)

Instruction Guide

Introduction

This form is used to calculate the required capital charge of a Level 2 insurance group’s off-balance sheet exposures for capital adequacy purposes in accordance with Prudential Standard GPS 111 Capital Adequacy: Level 2 Insurance Groups (GPS 111).

This form captures information on:

1. Credit substitutes provided;
2. Charges granted; and
3. Direct credit support provided to the Level 2 insurance group.

Audit requirements

The annual return of GRF 131.0_G Off Balance Sheet Exposure Risk Charge (Level 2 Insurance Group) required under paragraphs 3 and 5(c) of Reporting Standard GRS 131.0_G must be subject to a limited assurance[2] review by the Group Auditor (see Prudential Standard GPS 311 Audit and Actuarial Reporting and Valuation: Level 2 Insurance Groups (GPS 311)).

The Group Auditor must prepare a review report on the basis of a limited assurance engagement in accordance with the requirements of GPS 311. Assurance in the review report will be provided in the form of negative assurance. To express negative assurance in the review report, the auditor will use limited procedures to obtain sufficient appropriate evidence. Enquiries of the Level 2 insurance group’s staff and analytical procedures will be the primary tools used to obtain evidence. These procedures will not provide all the evidence that would be required in an audit.

The scope and nature of audit testing required is outlined in the Standard on Assurance Engagement ASAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information issued by the Auditing and Assurance Standards Board.

Reporting entities

GRF 131.0_G Off Balance Sheet Exposure Risk Charge (Level 2 Insurance Group) is to be completed by the parent entity of a Level 2 insurance group as defined under GPS 001.

Consolidation at Level 2 should cover the Level 2 insurance group as defined under GPS 001.

In the context of this form, that means that only off-balance sheet exposures with counterparties outside of the Level 2 insurance group will incur a risk charge. Where, for instance, one group company guarantees the obligations of another group company within the same region (Australia or International), those guarantees are not to be reported here as they are eliminated on consolidation. Where, for instance, an intra-group guarantee exists between regions, these guarantees are to be reported in this form, and then an inter-region elimination item is to be reported.

Unit of measurement

This form is to be presented in Australian dollars (AUD), rounded to thousands of dollars, with no decimal place.

Amounts denominated in foreign currency are to be converted to AUD in accordance with Australian accounting standards.

Transactions arising under foreign currency derivative contracts at the reporting date must be prepared in accordance with Australian accounting standards.

Materiality

GRF 131.0_G Off Balance Sheet Exposure Risk Charge (Level 2 Insurance Group) is to be prepared based on the concept of materiality as applied in Australian accounting standards subject to APRA’s discretion. APRA’s discretion is likely to apply in instances where the application of materiality criteria is not suitable for prudential reporting purposes.

Reporting period

Level 2 insurance groups are required to report the information in the reporting form. This information is to be reported on three occasions in a Level 2 insurance group’s financial year. A Level 2 insurance group is required to submit:

• semi-annual return which is to be completed in respect of each half year from the start of the financial year of the Level 2 insurance group; and
• an audited annual return which will be based on a limited assurance review by the Group Auditor (see Audit requirements).

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 Level 2 insurance group.

Reporting lag

Submission times for Level 2 reporting forms are as follows (in accordance with GRS 131.0_G Off Balance Sheet Exposure Risk Charge):

• The semi-annual return is to be lodged within three months after the end of the reporting period.
• The audited annual return is to be lodged within four months after the end of the reporting period.

Adjustments

The parent entity of a Level 2 insurance group may apply in writing to APRA to vary the reporting requirements of GRF 131.0_G Off Balance Sheet Exposure Risk Charge (Level 2 Insurance Group) in relation to that Level 2 insurance group. APRA may, at its discretion, approve such an application in writing.

International business

Level 2 insurance groups are required to report financial data on both Australian and international exposures. For the purposes of segment reporting, Level 2 insurance groups are not to follow the requirements under the Australian accounting standards when completing this form.

For prudential reporting purposes ‘Australian Business’ is as defined in Prudential Standard GPS 001 Definitions (GPS 001) and means insurance business carried on by any Level 1 insurer within a Level 2 Insurance group. Therefore, all insurance business written by Level 1 insurers is deemed to be Australian business. ‘International Business’[3] is insurance business carried on by an entity within the group that is not authorised under the Insurance Act 1973.[4] This treatment is different to the requirements of AASB 1023 ‘General Insurance Contracts’ and other Australian accounting standards.

For entities which are not insurers within the Level 2 insurance group, items should be reported as:

• ‘Australian Business’ when they relate to an entity incorporated in Australia; and
• ‘International Business’ where they relate to an entity incorporated outside of Australia.

For prudential reporting purposes ‘Level 1 insurer’ is as defined in Prudential Standard GPS 001 Definitions (GPS 001).

Inter-region elimination

The value of inter-region or inter-segment transactions, which are eliminated on consolidation, need to be reported as negative values under ‘Inter-region elimination’.

Reporting Supplement

In determining the Investment Risk Capital Charge for off-balance sheet exposures, the Level 2 insurance group will need to complete the necessary calculations outside of this reporting form. These calculations do not constitute part of the formal accounts but must be submitted to APRA separately unless APRA advises otherwise. The reporting supplement is to be submitted to the Level 2 insurance group’s APRA Responsible Supervisor.

Investment Capital Factors

For the purposes of this form use the asset grade scales and the applicable investment capital factors set out in GPS 114 Capital Adequacy: Investment Risk Capital Charge (GPS 114).

Specific instructions

This form is to be completed by separating out ‘Australian business’ and aggregate ‘international business’. The value of inter-region or inter-segment transactions, which are eliminated on consolidation, need to be reported under ‘Inter-region elimination’. The total business for the group will be the sum of the Australian business, international business and any inter-region elimination.

The form is separated into the following parts:

1. Credit Substitutes Provided and Risk Charge
2. Charges Granted and Risk Charge
3. Credit Support Received

The requirements for each of these are detailed below:

1. Credit substitutes provided and risk charge

This section of the form allows Level 2 insurance groups to report the amount of direct credit substitutes provided by the group in accordance with the requirements contained in GPS 111.

Non market related items

This term ‘non market’ refers to items that are not transacted in financial markets.

Transactions relating specifically to financial market products such as derivative financial instruments are not to be included in these calculations. Information regarding exposures to derivative financial instruments is to be recorded in GRF 110.0_G Minimum Capital Requirement (Level 2 Insurance Group) under item 6 ‘Derivatives Activity and Risk Charge’.

Credit substitutes include:

Direct credit substitutes

This includes any irrevocable off-balance sheet obligations, which carry the same credit risk as a direct extension of credit. The following are examples constituting a direct credit substitute (i.e. the risk of loss depends on the creditworthiness of the counterparty, or the party on which a potential claim is acquired):

• An undertaking to make a payment to a third party in the event that a counterparty fails to meet a financial obligation; or
• An undertaking to a counterparty to acquire a potential claim on another party in the event of default by that party.

This includes potential credit exposures arising from the issue/provision of following:

• guarantees;
• credit derivatives (i.e. selling credit protection);
• standby letters of credit serving as financial guarantees for loans, securities and any other financial liabilities; and
• bill endorsements

Trade-related contingencies

These are contingent liabilities arising from trade-related obligations which are secured against an underlying shipment of goods. This includes documentary letters of credit issued, acceptances on trade bills, shipping guarantees issued and any other trade-related contingencies.

Sale & Repurchase Agreements (“Repos”)

This relates to arrangements whereby a Level 2 insurance group sells a loan, security or other asset to another party with a commitment to repurchase the asset at an agreed price on an agreed future date.[5] Any assets acquired by a Level 2 insurance group under reverse repos (i.e. purchase and resale agreements) are to be treated as collateralised loans to the counterparty.[6]

Assets Sold With Recourse

This includes any asset sales (to the extent that such assets are not included in on-balance sheet) by the Level 2 insurance group where the holder of the asset is entitled to “put” the asset back to the Level 2 insurance group within an agreed period or under certain prescribed circumstances, e.g. deterioration in the value or credit quality of the asset concerned.[7]

Forward Asset Purchases

This includes commitments to purchase at a specified future date and on pre-arranged terms, an asset from another party, including written put options on specified assets with the character of a credit enhancement.[8]

Written put options expressed in terms of market rates for currencies or financial instruments bearing no credit risk are excluded from risk assets.

For the purposes of the APRA forms do not include market related securities that are recorded on a trade date basis and transacted in accordance with accepted financial market settlements periods. Such securities, for Level 2 insurance group reporting, are to be included in GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group). These do not constitute forward asset purchases for the purposes of GRF 131.0_G Off Balance Sheet Exposure Risk Charge (Level 2 Insurance Group).

Partly Paid Shares and Securities

This includes any amounts owing on the uncalled portion of partly paid shares and securities held by the Level 2 insurance group, which represent commitments with certain drawdown by the issuer at a future date.[9]

Placements of Forward Deposits

This relates to any agreement between the Level 2 insurance group and another party whereby the Level 2 insurance group will place a deposit at an agreed rate of interest with that party at a predetermined future date.

Surety Bonds

Include, in the calculations, the value of surety bonds which are treated as a type of direct credit substitute by the Level 2 insurance group. The risk charge should be applied to 25 per cent of the value of the surety bond business as specified in GPS 114.

Other Non-Market-Related Off-Balance Sheet Items

Include, in the calculations, all other off-balance sheet non-market related items that are not specifically listed above.

1.1 Total non-market-related credit substitutes

Australian business

Report the total value of non-market-related credit substitutes provided by the Australian business of the Level 2 insurance group.

International business

Report the total value of non-market-related credit substitutes provided by the international business of the Level 2 insurance group.

Inter-region elimination

Report the value of inter-region or inter-segment transactions, which are eliminated on consolidation, under ‘Inter-region elimination’.

Total business

This is automatically calculated by the form and represents the sum of Australian business, international business and inter-region eliminations.

1.2 Total off-balance sheet required risk charge

Calculation of the investment risk capital charge is to be achieved by applying, to the face value of the credit substitute reported in item 1.1, the investment capital factor that would be applied to the obligation or the asset over which the credit substitute has been written. Risk charges will be based on the counterparty / grade of the obligation / asset over which the credit substitute has been written and the appropriate investment capital factors specified in GPS 114.

Australian business

Report the total off-balance sheet required risk charge applicable to non-market-related credit substitutes provided by the Australian business of the Level 2 insurance group.

International business

Report the total off-balance sheet required risk charge applicable to non-market-related credit substitutes provided by the international business of the Level 2 insurance group.

Inter-region elimination

Report the value of inter-region transactions, which are eliminated on consolidation, under ‘Inter-region elimination’.

Total business

This is automatically calculated by the form and represents the sum of Australian business, international business and inter-region eliminations.

2. Charges granted and risk charge

This section of the form requires Level 2 insurance groups to report the risk charge associated with the value of any charges granted over the assets of the group (e.g. to secure funding). This is to be done in accordance with GPS 111.

Note: Paragraph 34 of GPS 111 excludes the 100 per cent capital charge from applying to the international business of a Level 2 insurance group. That is, the requirements of 27 and 28 of GPS 114 only apply to charges granted from entities conducting Australian business (or non-insurers incorporated in Australia) where the counterparty is external to the group. Specific assets that are not subject to a charge or encumbrance will have no effect on the minimum capital requirement.

Type of charge/encumbrance

The following is not an exhaustive list but is provided as an example:

Fixed charge

A fixed charge is generally given in relation to a specific asset or assets and it will generally limit the ability or right of the Level 2 insurance group to deal with those assets.

Floating charge

A floating charge may be given over specific assets or all assets of the insurance company and may generally only crystallise and become a fixed charge on the occurrence of a specific event that is agreed between the parties (i.e. default on payment, or not maintaining specified interest coverage ratios).

Grade of Assets subject to charge

For the purposes of this form use the asset grade scales and the applicable investment capital factors set out in GPS 114.

2.1 Total required investment capital charge

Assets of the Level 1 insurers (and non-insurers incorporated in Australia) of the Level 2 insurance group that are under a fixed or floating charge, mortgage or other security are subject to an investment capital factor of 100 per cent, to the extent of indebtedness secured on those assets. This will replace the investment capital factor that would otherwise apply to the secured assets

Where the charged or encumbered security supports the group’s insurance liabilities, the investment capital factor of 100 per cent is applicable only to the amount by which the fair value of the charged assets exceeds the Level 2 group’s supported insurance liabilities.

The required investment capital charge applies to the value of charged assets receiving an investment capital factor of 100 per cent. This value is to be reported gross without deducting the investment risk charge rebate.

Australian business

Report the total required investment capital charge applicable to charged or encumbered assets from the Australian business of the Level 2 insurance group.

International business

It is expected that this value will be zero (see note under section 2).

Inter-region elimination

Report the value of inter-region transactions, which are eliminated on consolidation, under ‘Inter-region elimination’.

Total business

This is automatically calculated by the form and represents the sum of Australian business, international business and inter-region eliminations.

2.2 Total investment capital charge rebate

This is the portion of the investment capital charge applicable to the charged assets if the 100 per cent investment capital factor was not applied.

Australian business

Report the total investment capital charge rebate applicable to the charged or encumbered assets from the Australian business of the Level 2 insurance group.

International business

It is expected that this value will be zero (see note under section 2).

Inter-region elimination

Report the value of inter-region transactions, which are eliminated on consolidation, under ‘Inter-region elimination’.

Total business

This is automatically calculated by the form and represents the sum of Australian business, international business and inter-region eliminations.

2.3 Adjusted required investment capital charge

Australian business

This item is automatically calculated by the form and represents the difference between ‘Total required investment capital charge’ and ‘Total investment capital charge rebate’ from the Australian business of the Level 2 insurance group.

International business

This item is automatically calculated by the form and is expected to be zero.

Inter-region elimination

This item is automatically calculated by the form and represents the difference between ‘Total required investment capital charge’ and ‘Total investment capital charge rebate’ on inter-region eliminations.

Total business

This is automatically calculated by the form and represents the sum of Australian business, international business and inter-region eliminations.

3. Credit support received

GPS 114 outlines the treatment of eligible collateral and guarantees as risk mitigants.

The capital charge for Investment Risk may be reduced where the Level 2 insurance group holds certain types of collateral against an asset, or where the asset has been guaranteed, as a means of reducing risk.

This section of the form requires Level 2 insurance groups to report the rebate which can be used to reduce the investment capital charge calculated in other forms. Accordingly, the fair value of the Level 2 insurance group’s investments is to be entered in other forms for the calculation of investment risk charge without adjusting for any guarantee or eligible collateral.

This section of the form is divided into two parts:

• Eligible Collateral Provided to the Level 2 insurance group; and

• Guarantees Provided to the Level 2 insurance group.

3.1 Eligible collateral provided to the Level 2 insurance group

Relating to reinsurance recoverables from non-APRA-authorised reinsurer in relation to Australian business[10]

Where the Level 1 insurers of the Level 2 insurance group possesses recognised collateral in Australia against reinsurance recoverables due from a non-APRA-authorised reinsurer, it may apply the Investment Capital Factor relevant to the collateral to the value of the reinsurance recoverables (instead of applying the capital factor that would otherwise apply to the reinsurance recoverables).

For the purposes of this paragraph, collateral is recognised only:

(a) to the extent that it takes the form of:

(i) assets held in Australia which form part of a trust fund maintained by a trustee resident in Australia;

(ii) deposits held by the insurer in Australia made by the non-APRA-authorised reinsurer;

(iii) a combination of the two forms of collateral specified in paragraphs (a) and (b); or

(iv) any other form of collateral as may be approved by APRA in writing in a particular case;

(b) if it provides effective security against liabilities arising under the reinsurance contract; and

(c) if it is not available for distribution to creditors of the reinsurer other than the insurer in the event of insolvency of the reinsurer.

Where the fair value of the collateral does not cover the full value of the reinsurance recoverables, only that part of the value of the reinsurance recoverables that is covered by collateral may be assigned the Investment Capital Factor applicable to the collateral.

The collateral must be effective for the expected period for payment of claims under the reinsurance contract under which the reinsurance recoverables arise. If this is impractical, the collateral must be effective for at least 2 years but be renegotiable each year to allow at least a year to identify alternative arrangements if the collateral cannot be renegotiated.

Collateral provided to the Level 2 insurance group other than for reinsurance recoverables from non-APRA-authorised reinsurers in relation to Australian business

Where the Level 2 insurance group possesses recognised collateral against an asset, it may apply the Investment Risk Capital Factor relevant to the collateral to the value of the asset (instead of applying the capital factor that would otherwise apply to the asset). Collateral will be recognised only to the extent that it takes the form of a charge, mortgage or other security interest in, or over, an Eligible Collateral Item.

Eligible collateral items must also be held for the period for which the asset is held. Where the fair value of the collateral does not cover the full value of the asset, only that part of an asset that is covered by collateral may be assigned the Investment Capital Factor applicable to the collateral. Refer to GPS 114 for these Investment Capital Factors.

Fair value

Fair value has the same meaning as defined in the Australian accounting standards.

Investment Capital Factors

For the purposes of this section of the form use the asset grade scales and the applicable investment capital factors set out in GPS 114.

3.1.1 Total assets being supported

Australian business

Report the total fair value of the assets of the Australian business of the Level 2 insurance group which are subject to credit support.

International business

Report the total fair value of the assets of the international business of the Level 2 insurance group which are subject to credit support.

Inter-region elimination

Report the value of inter-region transactions, which are eliminated on consolidation, under ‘Inter-region elimination’.

Total business

This is automatically calculated by the form and represents the sum of Australian business, international business and inter-region eliminations.

3.1.2 Total eligible collateral provided

Australian business

Report the total fair value of eligible collateral items of the Australian business of the Level 2 insurance group which are providing credit support.

International business

Report the total fair value of eligible collateral items of the international business of the Level 2 insurance group which are providing credit support.

Inter-region elimination

Report the value of inter-region transactions, which are eliminated on consolidation, under ‘Inter-region elimination’.

Total business

This is automatically calculated by the form and represents the sum of Australian business, international business and inter-region eliminations..

3.1.3 Adjustment to investment capital charge

This rebate can be used to reduce the investment capital charge calculated in other forms and is to be calculated in accordance with GPS 111.

The process for calculating the adjustment to investment capital charge is outlined below.

For each asset supported by collateral:

(i) Determine the investment capital charge for the collateral providing support.

Multiply the fair value of the collateral by the appropriate investment capital factor according to its grade. The investment capital factors for the various asset grades are outlined in GPS 114.

If the eligible collateral supports more than one asset type, having different investment capital factors, the support provided will need to be allocated appropriately between the different assets. For example, the eligible collateral could be prorated based on the proportion of each type of supported asset to the total value of supported assets.

Where there are various collateral items of differing grades supporting one asset, the investment risk charges applicable to each asset grade will need summed to produce the total risk charge for the collateral providing support.

(ii) Determine the proportion of the risk charge from eligible collateral that can be allocated to the asset.

For each asset receiving support, this is calculated as:

• The risk charge for the collateral providing support (calculated in (i) above);

Multiplied by

• The minimum of:
  • The fair value of the asset subject to the credit support divided by the fair value of the eligible collateral provided; or
  • One.

(iii) Determine the risk charge applicable to the value of the asset in excess of that covered by collateral.

For each asset, this is calculated as:

• Fair value of the asset subject to collateral support;

Less

• Fair value of the collateral provided;

Multiply the difference by

• The appropriate investment risk capital factor for the grade of asset subject to collateral support.

Note: where the fair value of the collateral exceeds the fair value of the asset, the investment risk charge on the difference will be zero.

(iv) Determine the total risk charge applicable to the asset with collateral support provided.

For each asset, this is calculated as the sum of:

• Item (ii), the proportion of the risk charge from eligible collateral that can be allocated to the asset; and
• Item (iii), the risk charge applicable to value of the asset in excess of that covered by collateral.

(v) Determine the risk charge applicable to the asset if collateral support was not provided.

This is calculated as:

• The fair value of the asset;

Multiplied by

• The appropriate investment capital factor according to the grade of asset. The investment capital factors are based on the asset rating grades set out in GPS 114.

(vi) Determine the adjustment to the investment capital charge.

For each asset, this is calculated as:

• Item (v), the risk charge applicable to the asset if collateral support was not provided;

Less

• Item (iv), the total risk charge applicable to the asset with collateral support provided.

(vii) Determine the total adjustment to the investment capital charges.

This is calculated by summing all the adjustments to the investment capital charges for each asset (i.e. the sum of (vi) for each asset receiving support).

Australian business

Report the total adjustment to the investment capital charge due to the support of eligible collateral items from the Australian business of the Level 2 insurance group.

International business

Report the total adjustment to the investment capital charge due to the support of eligible collateral items from the international business of the Level 2 insurance group.

Inter-region elimination

Report the value of inter-region transactions, which are eliminated on consolidation, under ‘Inter-region elimination’.

Total business

This is automatically calculated by the form and represents the sum of Australian business, international business and inter-region eliminations..

3.2 Guarantees or letters of credit provided to the Level 2 insurance group

Relating to reinsurance recoverables from non-APRA-authorised reinsurer

Where the Australian business of a Level 2 insurance group possesses a guarantee or a letter of credit in respect of the reinsurance recoverables due from a non-APRA-authorised reinsurer, the Investment Capital Factor to be used is that applicable to the guarantor or the issuer of the letter of credit, as the case may be. This applies only if[11]:

• The guarantor or the issuer of the letter of credit is an authorised deposit-taking institution;
• The guarantee or letter of credit is explicit, unconditional and irrevocable;
• The guarantor or issuer of the letter of credit is obliged to pay the Level 1 insurer of the Level 2 insurance group in Australia; and
• The obligation of the guarantor or issuer of the letter of credit to pay the Level 1 insurer of the Level 2 insurance group is specifically linked to performance of the reinsurance contract or contracts under which the reinsurance recoverables arise.

The guarantee or letter of credit must be effective for the expected period for payment of claims under the reinsurance contract under which the reinsurance recoverables arise. If this is impractical, the guarantee or letter of credit must be effective for at least 2 years but be renegotiable each year to allow at least a year to identify alternative arrangements if the guarantee or letter of credit cannot be renegotiated.

Guarantees provided to the insurer other than for reinsurance recoverables from non-APRA-authorised reinsurer

Where the guarantees provided to the Level 2 insurance group relates to an asset other than for reinsurance recoverables from a non-APRA-authorised reinsurer, the assets of the Level 2 insurance group that have been explicitly, unconditionally and irrevocably guaranteed for their remaining term to maturity by a guarantor with a counterparty rating (or for governments, the long-term foreign currency credit rating) of Grades 1, 2 or 3 may be assigned the Investment Capital Factor that would be applicable to the guarantor.

Where the value of the guarantee does not cover the full fair value of the asset, only that part of an asset that is covered by the guarantee may be assigned the Investment Capital Factor applicable to the guarantor. Fair value has the same meaning as defined in the Australian accounting standards.

This section of the form allows Level 2 insurance groups to report the rebate which can be used to reduce the investment capital charge calculated in other forms. Accordingly the fair value of the Level 2 insurance group’s investments is to be entered in other forms for the calculation of investment risk charge without adjusting for any guarantees.

Some parent entities of Level 2 insurance groups are not ultimate parent entities and therefore may receive guarantees from parent entities.

Guarantees provided to the Level 2 insurance group by its own parent or a related party of the parent are not eligible for this treatment.

Related party

‘Related party’ referred to in this form, has the same meaning as contained in the Australian accounting standards.

3.2.1 Adjustment to investment capital charge

The adjustment to the investment capital charge, due to guarantees provided to the Level 2 insurance group, is calculated in accordance with GPS 111. The process for calculating the adjustment to the investment capital charge is outlined below.

For each asset guaranteed:

(i) Determine the investment capital charge applicable to the guarantor.

For each asset guaranteed, this is calculated as:

• The investment capital factor appropriate for the grade of guarantor. The investment capital factors for the various guarantor grades are outlined in GPS 114;

Multiplied by

• The minimum of:
  • The fair value of the asset being guaranteed; or
  • The value of the guarantee.

If the guarantee supports more than one asset type, having different investment capital factors, the guarantee provided will need to be allocated appropriately between the different assets. For example, the guarantee could be prorated based on the proportion of each type of supported asset to the total value of supported assets.

(ii) Determine the capital charge applicable to the asset in excess of that covered by the guarantee.

This is calculated as:

• The fair value of the asset subject to the guarantee;

Less

• The value of the guarantee;

Multiply the difference by

• The capital factor appropriate for the grade of asset being guaranteed. The investment capital factors are based on the asset rating grades set out in GPS 114.

(iii) Determine the total risk charge applicable to the asset with the guarantee provided.

For each asset, this is calculated as the sum of:

• Item (i), the capital charge applicable to the guarantor; and
• Item (ii), the capital charge applicable to the asset in excess of that covered by the guarantee.

(iv) Determine the risk charge applicable to the asset if the guarantee was not provided.

This is calculated as:

• The fair value of the asset;

Multiplied by

• The appropriate investment capital factor according to the grade of asset. The investment capital factors are based on the asset rating grades set out in GPS 114.

(v) Determine the adjustment to the investment capital charge.

For each asset, this is calculated as:

• Item (iv), the risk charge applicable to the asset if the guarantee was not provided;

Less

• Item (iii), the total risk charge applicable to the asset with the guarantee provided.

(vi) Determine the total adjustment to the investment capital charges.

This is calculated by summing all the adjustments to the investment capital charges for each asset (i.e. the sum of (v) for each asset supported by a guarantee).

Australian business

Report the total adjustment to the investment capital charge due to guarantees provided to the Australian business of the Level 2 insurance group.

International business

Report the total adjustment to the investment capital charge due to guarantees provided to the international business of the Level 2 insurance group.

Inter-region elimination

Report the value of inter-region transactions, which are eliminated on consolidation, under ‘Inter-region elimination’.

Total business

This is automatically calculated by the form and represents the sum of Australian business, international business and inter-region eliminations..

4.0 Total off-balance sheet exposure risk charge

Australian business

This field automatically calculates the total off-balance sheet risk charge (or rebate) for the Australian business of the Level 2 insurance group. This is calculated as item 1.2 plus 2.3 less 3.1.3 less 3.2.1.

International business

This field automatically calculates the total off-balance sheet risk charge (or rebate) for the international business of the Level 2 insurance group.

Inter-region elimination

This field automatically calculates the total off-balance sheet risk charge (or rebate) for inter-region eliminations of the Level 2 insurance group.

Total business

This is automatically calculated by the form and represents the sum of Australian business, international business and inter-region eliminations. This amount will need to be included in the calculation of the Level 2 insurance group’s minimum capital requirement.

Australian business

Report the total value of non-market-related credit substitutes provided by the Australian business of the Level 2 insurance group.

Total business

This is automatically calculated by the form and represents the sum of Australian business, international business and inter-region eliminations.

1.2 Total off-balance sheet required risk charge

Calculation of the investment risk capital charge is to be achieved by applying, to the face value of the credit substitute reported in item 1.1, the investment capital factor that would be applied to the obligation or the asset over which the credit substitute has been written. Risk charges will be based on the counterparty / grade of the obligation / asset over which the credit substitute has been written and the appropriate investment capital factors specified in GPS 114.

2. Charges granted and risk charge

This section of the form requires Level 2 insurance groups to report the risk charge associated with the value of any charges granted over the assets of the group (e.g. to secure funding). This is to be done in accordance with GPS 111.

Note: Paragraph 34 of GPS 111 excludes the 100 per cent capital charge from applying to the international business of a Level 2 insurance group. That is, the requirements of 27 and 28 of GPS 114 only apply to charges granted from entities conducting Australian business (or non-insurers incorporated in Australia) where the counterparty is external to the group. Specific assets that are not subject to a charge or encumbrance will have no effect on the minimum capital requirement.

Type of charge/encumbrance

The following is not an exhaustive list but is provided as an example:

Fixed charge

A fixed charge is generally given in relation to a specific asset or assets and it will generally limit the ability or right of the Level 2 insurance group to deal with those assets.

Floating charge

A floating charge may be given over specific assets or all assets of the insurance company and may generally only crystallise and become a fixed charge on the occurrence of a specific event that is agreed between the parties (i.e. default on payment, or not maintaining specified interest coverage ratios).

Grade of Assets subject to charge

For the purposes of this form use the asset grade scales and the applicable investment capital factors set out in GPS 114.

2.1 Total required investment capital charge

Assets of the Level 1 insurers (and non-insurers incorporated in Australia) of the Level 2 insurance group that are under a fixed or floating charge, mortgage or other security are subject to an investment capital factor of 100 per cent, to the extent of indebtedness secured on those assets. This will replace the investment capital factor that would otherwise apply to the secured assets

Where the charged or encumbered security supports the group’s insurance liabilities, the investment capital factor of 100 per cent is applicable only to the amount by which the fair value of the charged assets exceeds the Level 2 group’s supported insurance liabilities.

The required investment capital charge applies to the value of charged assets receiving an investment capital factor of 100 per cent. This value is to be reported gross without deducting the investment risk charge rebate.

2.2 Total investment capital charge rebate

This is the portion of the investment capital charge applicable to the charged assets if the 100 per cent investment capital factor was not applied.

Reporting Form GRF 131.0_G

Off Balance Sheet Exposure Risk Charge (Level 2 Insurance Group)

Instruction Guide

Introduction

This form is used to calculate the required capital charge of a Level 2 insurance group’s off-balance sheet exposures for capital adequacy purposes in accordance with Prudential Standard GPS 111 Capital Adequacy: Level 2 Insurance Groups (GPS 111).

This form captures information on:

1. Credit substitutes provided;
2. Charges granted; and
3. Direct credit support provided to the Level 2 insurance group.

Audit requirements

The annual return of GRF 131.0_G Off Balance Sheet Exposure Risk Charge (Level 2 Insurance Group) required under paragraphs 3 and 5(c) of Reporting Standard GRS 131.0_G must be subject to a limited assurance[2] review by the Group Auditor (see Prudential Standard GPS 311 Audit and Actuarial Reporting and Valuation: Level 2 Insurance Groups (GPS 311)).

The Group Auditor must prepare a review report on the basis of a limited assurance engagement in accordance with the requirements of GPS 311. Assurance in the review report will be provided in the form of negative assurance. To express negative assurance in the review report, the auditor will use limited procedures to obtain sufficient appropriate evidence. Enquiries of the Level 2 insurance group’s staff and analytical procedures will be the primary tools used to obtain evidence. These procedures will not provide all the evidence that would be required in an audit.

The scope and nature of audit testing required is outlined in the Standard on Assurance Engagement ASAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information issued by the Auditing and Assurance Standards Board.

Reporting entities

GRF 131.0_G Off Balance Sheet Exposure Risk Charge (Level 2 Insurance Group) is to be completed by the parent entity of a Level 2 insurance group as defined under GPS 001.

Consolidation at Level 2 should cover the Level 2 insurance group as defined under GPS 001.

In the context of this form, that means that only off-balance sheet exposures with counterparties outside of the Level 2 insurance group will incur a risk charge. Where, for instance, one group company guarantees the obligations of another group company within the same region (Australia or International), those guarantees are not to be reported here as they are eliminated on consolidation. Where, for instance, an intra-group guarantee exists between regions, these guarantees are to be reported in this form, and then an inter-region elimination item is to be reported.

Unit of measurement

This form is to be presented in Australian dollars (AUD), rounded to thousands of dollars, with no decimal place.

Amounts denominated in foreign currency are to be converted to AUD in accordance with Australian accounting standards.

Transactions arising under foreign currency derivative contracts at the reporting date must be prepared in accordance with Australian accounting standards.

Materiality

GRF 131.0_G Off Balance Sheet Exposure Risk Charge (Level 2 Insurance Group) is to be prepared based on the concept of materiality as applied in Australian accounting standards subject to APRA’s discretion. APRA’s discretion is likely to apply in instances where the application of materiality criteria is not suitable for prudential reporting purposes.

Reporting period

Level 2 insurance groups are required to report the information in the reporting form. This information is to be reported on three occasions in a Level 2 insurance group’s financial year. A Level 2 insurance group is required to submit:

• semi-annual return which is to be completed in respect of each half year from the start of the financial year of the Level 2 insurance group; and
• an audited annual return which will be based on a limited assurance review by the Group Auditor (see Audit requirements).

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 Level 2 insurance group.

Reporting lag

Submission times for Level 2 reporting forms are as follows (in accordance with GRS 131.0_G Off Balance Sheet Exposure Risk Charge):

• The semi-annual return is to be lodged within three months after the end of the reporting period.
• The audited annual return is to be lodged within four months after the end of the reporting period.

Adjustments

The parent entity of a Level 2 insurance group may apply in writing to APRA to vary the reporting requirements of GRF 131.0_G Off Balance Sheet Exposure Risk Charge (Level 2 Insurance Group) in relation to that Level 2 insurance group. APRA may, at its discretion, approve such an application in writing.

International business

Level 2 insurance groups are required to report financial data on both Australian and international exposures. For the purposes of segment reporting, Level 2 insurance groups are not to follow the requirements under the Australian accounting standards when completing this form.

For prudential reporting purposes ‘Australian Business’ is as defined in Prudential Standard GPS 001 Definitions (GPS 001) and means insurance business carried on by any Level 1 insurer within a Level 2 Insurance group. Therefore, all insurance business written by Level 1 insurers is deemed to be Australian business. ‘International Business’[3] is insurance business carried on by an entity within the group that is not authorised under the Insurance Act 1973.[4] This treatment is different to the requirements of AASB 1023 ‘General Insurance Contracts’ and other Australian accounting standards.

For entities which are not insurers within the Level 2 insurance group, items should be reported as:

• ‘Australian Business’ when they relate to an entity incorporated in Australia; and
• ‘International Business’ where they relate to an entity incorporated outside of Australia.

For prudential reporting purposes ‘Level 1 insurer’ is as defined in Prudential Standard GPS 001 Definitions (GPS 001).

Inter-region elimination

The value of inter-region or inter-segment transactions, which are eliminated on consolidation, need to be reported as negative values under ‘Inter-region elimination’.

Reporting Supplement

In determining the Investment Risk Capital Charge for off-balance sheet exposures, the Level 2 insurance group will need to complete the necessary calculations outside of this reporting form. These calculations do not constitute part of the formal accounts but must be submitted to APRA separately unless APRA advises otherwise. The reporting supplement is to be submitted to the Level 2 insurance group’s APRA Responsible Supervisor.

Investment Capital Factors

For the purposes of this form use the asset grade scales and the applicable investment capital factors set out in GPS 114 Capital Adequacy: Investment Risk Capital Charge (GPS 114).

Specific instructions

This form is to be completed by separating out ‘Australian business’ and aggregate ‘international business’. The value of inter-region or inter-segment transactions, which are eliminated on consolidation, need to be reported under ‘Inter-region elimination’. The total business for the group will be the sum of the Australian business, international business and any inter-region elimination.

The form is separated into the following parts:

1. Credit Substitutes Provided and Risk Charge
2. Charges Granted and Risk Charge
3. Credit Support Received

The requirements for each of these are detailed below:

1. Credit substitutes provided and risk charge

This section of the form allows Level 2 insurance groups to report the amount of direct credit substitutes provided by the group in accordance with the requirements contained in GPS 111.

Non market related items

This term ‘non market’ refers to items that are not transacted in financial markets.

Transactions relating specifically to financial market products such as derivative financial instruments are not to be included in these calculations. Information regarding exposures to derivative financial instruments is to be recorded in GRF 110.0_G Minimum Capital Requirement (Level 2 Insurance Group) under item 6 ‘Derivatives Activity and Risk Charge’.

Credit substitutes include:

Direct credit substitutes

This includes any irrevocable off-balance sheet obligations, which carry the same credit risk as a direct extension of credit. The following are examples constituting a direct credit substitute (i.e. the risk of loss depends on the creditworthiness of the counterparty, or the party on which a potential claim is acquired):

• An undertaking to make a payment to a third party in the event that a counterparty fails to meet a financial obligation; or
• An undertaking to a counterparty to acquire a potential claim on another party in the event of default by that party.

This includes potential credit exposures arising from the issue/provision of following:

• guarantees;
• credit derivatives (i.e. selling credit protection);
• standby letters of credit serving as financial guarantees for loans, securities and any other financial liabilities; and
• bill endorsements

Trade-related contingencies

These are contingent liabilities arising from trade-related obligations which are secured against an underlying shipment of goods. This includes documentary letters of credit issued, acceptances on trade bills, shipping guarantees issued and any other trade-related contingencies.

Sale & Repurchase Agreements (“Repos”)

This relates to arrangements whereby a Level 2 insurance group sells a loan, security or other asset to another party with a commitment to repurchase the asset at an agreed price on an agreed future date.[5] Any assets acquired by a Level 2 insurance group under reverse repos (i.e. purchase and resale agreements) are to be treated as collateralised loans to the counterparty.[6]

Assets Sold With Recourse

This includes any asset sales (to the extent that such assets are not included in on-balance sheet) by the Level 2 insurance group where the holder of the asset is entitled to “put” the asset back to the Level 2 insurance group within an agreed period or under certain prescribed circumstances, e.g. deterioration in the value or credit quality of the asset concerned.[7]

Forward Asset Purchases

This includes commitments to purchase at a specified future date and on pre-arranged terms, an asset from another party, including written put options on specified assets with the character of a credit enhancement.[8]

Written put options expressed in terms of market rates for currencies or financial instruments bearing no credit risk are excluded from risk assets.

For the purposes of the APRA forms do not include market related securities that are recorded on a trade date basis and transacted in accordance with accepted financial market settlements periods. Such securities, for Level 2 insurance group reporting, are to be included in GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group). These do not constitute forward asset purchases for the purposes of GRF 131.0_G Off Balance Sheet Exposure Risk Charge (Level 2 Insurance Group).

Partly Paid Shares and Securities

This includes any amounts owing on the uncalled portion of partly paid shares and securities held by the Level 2 insurance group, which represent commitments with certain drawdown by the issuer at a future date.[9]

Placements of Forward Deposits

This relates to any agreement between the Level 2 insurance group and another party whereby the Level 2 insurance group will place a deposit at an agreed rate of interest with that party at a predetermined future date.

Surety Bonds

Include, in the calculations, the value of surety bonds which are treated as a type of direct credit substitute by the Level 2 insurance group. The risk charge should be applied to 25 per cent of the value of the surety bond business as specified in GPS 114.

Other Non-Market-Related Off-Balance Sheet Items

Include, in the calculations, all other off-balance sheet non-market related items that are not specifically listed above.

1.1 Total non-market-related credit substitutes

Australian business

Report the total value of non-market-related credit substitutes provided by the Australian business of the Level 2 insurance group.

International business

Report the total value of non-market-related credit substitutes provided by the international business of the Level 2 insurance group.

Inter-region elimination

Report the value of inter-region or inter-segment transactions, which are eliminated on consolidation, under ‘Inter-region elimination’.

Total business

This is automatically calculated by the form and represents the sum of Australian business, international business and inter-region eliminations.

1.2 Total off-balance sheet required risk charge

Calculation of the investment risk capital charge is to be achieved by applying, to the face value of the credit substitute reported in item 1.1, the investment capital factor that would be applied to the obligation or the asset over which the credit substitute has been written. Risk charges will be based on the counterparty / grade of the obligation / asset over which the credit substitute has been written and the appropriate investment capital factors specified in GPS 114.

Australian business

Report the total off-balance sheet required risk charge applicable to non-market-related credit substitutes provided by the Australian business of the Level 2 insurance group.

International business

Report the total off-balance sheet required risk charge applicable to non-market-related credit substitutes provided by the international business of the Level 2 insurance group.

Inter-region elimination

Report the value of inter-region transactions, which are eliminated on consolidation, under ‘Inter-region elimination’.

Total business

This is automatically calculated by the form and represents the sum of Australian business, international business and inter-region eliminations.

2. Charges granted and risk charge

This section of the form requires Level 2 insurance groups to report the risk charge associated with the value of any charges granted over the assets of the group (e.g. to secure funding). This is to be done in accordance with GPS 111.

Note: Paragraph 34 of GPS 111 excludes the 100 per cent capital charge from applying to the international business of a Level 2 insurance group. That is, the requirements of 27 and 28 of GPS 114 only apply to charges granted from entities conducting Australian business (or non-insurers incorporated in Australia) where the counterparty is external to the group. Specific assets that are not subject to a charge or encumbrance will have no effect on the minimum capital requirement.

Type of charge/encumbrance

The following is not an exhaustive list but is provided as an example:

Fixed charge

A fixed charge is generally given in relation to a specific asset or assets and it will generally limit the ability or right of the Level 2 insurance group to deal with those assets.

Floating charge

A floating charge may be given over specific assets or all assets of the insurance company and may generally only crystallise and become a fixed charge on the occurrence of a specific event that is agreed between the parties (i.e. default on payment, or not maintaining specified interest coverage ratios).

Grade of Assets subject to charge

For the purposes of this form use the asset grade scales and the applicable investment capital factors set out in GPS 114.

2.1 Total required investment capital charge

Assets of the Level 1 insurers (and non-insurers incorporated in Australia) of the Level 2 insurance group that are under a fixed or floating charge, mortgage or other security are subject to an investment capital factor of 100 per cent, to the extent of indebtedness secured on those assets. This will replace the investment capital factor that would otherwise apply to the secured assets

Where the charged or encumbered security supports the group’s insurance liabilities, the investment capital factor of 100 per cent is applicable only to the amount by which the fair value of the charged assets exceeds the Level 2 group’s supported insurance liabilities.

The required investment capital charge applies to the value of charged assets receiving an investment capital factor of 100 per cent. This value is to be reported gross without deducting the investment risk charge rebate.

Australian business

Report the total required investment capital charge applicable to charged or encumbered assets from the Australian business of the Level 2 insurance group.

International business

It is expected that this value will be zero (see note under section 2).

Inter-region elimination

Report the value of inter-region transactions, which are eliminated on consolidation, under ‘Inter-region elimination’.

Total business

This is automatically calculated by the form and represents the sum of Australian business, international business and inter-region eliminations.

2.2 Total investment capital charge rebate

This is the portion of the investment capital charge applicable to the charged assets if the 100 per cent investment capital factor was not applied.

Australian business

Report the total investment capital charge rebate applicable to the charged or encumbered assets from the Australian business of the Level 2 insurance group.

International business

It is expected that this value will be zero (see note under section 2).

Inter-region elimination

Report the value of inter-region transactions, which are eliminated on consolidation, under ‘Inter-region elimination’.

Total business

This is automatically calculated by the form and represents the sum of Australian business, international business and inter-region eliminations.

2.3 Adjusted required investment capital charge

Australian business

This item is automatically calculated by the form and represents the difference between ‘Total required investment capital charge’ and ‘Total investment capital charge rebate’ from the Australian business of the Level 2 insurance group.

International business

This item is automatically calculated by the form and is expected to be zero.

Inter-region elimination

This item is automatically calculated by the form and represents the difference between ‘Total required investment capital charge’ and ‘Total investment capital charge rebate’ on inter-region eliminations.

Total business

This is automatically calculated by the form and represents the sum of Australian business, international business and inter-region eliminations.

3. Credit support received

GPS 114 outlines the treatment of eligible collateral and guarantees as risk mitigants.

The capital charge for Investment Risk may be reduced where the Level 2 insurance group holds certain types of collateral against an asset, or where the asset has been guaranteed, as a means of reducing risk.

This section of the form requires Level 2 insurance groups to report the rebate which can be used to reduce the investment capital charge calculated in other forms. Accordingly, the fair value of the Level 2 insurance group’s investments is to be entered in other forms for the calculation of investment risk charge without adjusting for any guarantee or eligible collateral.

This section of the form is divided into two parts:

• Eligible Collateral Provided to the Level 2 insurance group; and

• Guarantees Provided to the Level 2 insurance group.

3.1 Eligible collateral provided to the Level 2 insurance group

Relating to reinsurance recoverables from non-APRA-authorised reinsurer in relation to Australian business[10]

Where the Level 1 insurers of the Level 2 insurance group possesses recognised collateral in Australia against reinsurance recoverables due from a non-APRA-authorised reinsurer, it may apply the Investment Capital Factor relevant to the collateral to the value of the reinsurance recoverables (instead of applying the capital factor that would otherwise apply to the reinsurance recoverables).

For the purposes of this paragraph, collateral is recognised only:

(a) to the extent that it takes the form of:

(i) assets held in Australia which form part of a trust fund maintained by a trustee resident in Australia;

(ii) deposits held by the insurer in Australia made by the non-APRA-authorised reinsurer;

(iii) a combination of the two forms of collateral specified in paragraphs (a) and (b); or

(iv) any other form of collateral as may be approved by APRA in writing in a particular case;

(b) if it provides effective security against liabilities arising under the reinsurance contract; and

(c) if it is not available for distribution to creditors of the reinsurer other than the insurer in the event of insolvency of the reinsurer.

Where the fair value of the collateral does not cover the full value of the reinsurance recoverables, only that part of the value of the reinsurance recoverables that is covered by collateral may be assigned the Investment Capital Factor applicable to the collateral.

The collateral must be effective for the expected period for payment of claims under the reinsurance contract under which the reinsurance recoverables arise. If this is impractical, the collateral must be effective for at least 2 years but be renegotiable each year to allow at least a year to identify alternative arrangements if the collateral cannot be renegotiated.

Collateral provided to the Level 2 insurance group other than for reinsurance recoverables from non-APRA-authorised reinsurers in relation to Australian business

Where the Level 2 insurance group possesses recognised collateral against an asset, it may apply the Investment Risk Capital Factor relevant to the collateral to the value of the asset (instead of applying the capital factor that would otherwise apply to the asset). Collateral will be recognised only to the extent that it takes the form of a charge, mortgage or other security interest in, or over, an Eligible Collateral Item.

Eligible collateral items must also be held for the period for which the asset is held. Where the fair value of the collateral does not cover the full value of the asset, only that part of an asset that is covered by collateral may be assigned the Investment Capital Factor applicable to the collateral. Refer to GPS 114 for these Investment Capital Factors.

Fair value

Fair value has the same meaning as defined in the Australian accounting standards.

Investment Capital Factors

For the purposes of this section of the form use the asset grade scales and the applicable investment capital factors set out in GPS 114.

3.1.1 Total assets being supported

Australian business

Report the total fair value of the assets of the Australian business of the Level 2 insurance group which are subject to credit support.

International business

Report the total fair value of the assets of the international business of the Level 2 insurance group which are subject to credit support.

Inter-region elimination

Report the value of inter-region transactions, which are eliminated on consolidation, under ‘Inter-region elimination’.

Total business

This is automatically calculated by the form and represents the sum of Australian business, international business and inter-region eliminations.

3.1.2 Total eligible collateral provided

Australian business

Report the total fair value of eligible collateral items of the Australian business of the Level 2 insurance group which are providing credit support.

International business

Report the total fair value of eligible collateral items of the international business of the Level 2 insurance group which are providing credit support.

Inter-region elimination

Report the value of inter-region transactions, which are eliminated on consolidation, under ‘Inter-region elimination’.

Total business

This is automatically calculated by the form and represents the sum of Australian business, international business and inter-region eliminations..

3.1.3 Adjustment to investment capital charge

This rebate can be used to reduce the investment capital charge calculated in other forms and is to be calculated in accordance with GPS 111.

The process for calculating the adjustment to investment capital charge is outlined below.

For each asset supported by collateral:

(i) Determine the investment capital charge for the collateral providing support.

Multiply the fair value of the collateral by the appropriate investment capital factor according to its grade. The investment capital factors for the various asset grades are outlined in GPS 114.

If the eligible collateral supports more than one asset type, having different investment capital factors, the support provided will need to be allocated appropriately between the different assets. For example, the eligible collateral could be prorated based on the proportion of each type of supported asset to the total value of supported assets.

Where there are various collateral items of differing grades supporting one asset, the investment risk charges applicable to each asset grade will need summed to produce the total risk charge for the collateral providing support.

(ii) Determine the proportion of the risk charge from eligible collateral that can be allocated to the asset.

For each asset receiving support, this is calculated as:

• The risk charge for the collateral providing support (calculated in (i) above);

Multiplied by

• The minimum of:
  • The fair value of the asset subject to the credit support divided by the fair value of the eligible collateral provided; or
  • One.

(iii) Determine the risk charge applicable to the value of the asset in excess of that covered by collateral.

For each asset, this is calculated as:

• Fair value of the asset subject to collateral support;

Less

• Fair value of the collateral provided;

Multiply the difference by

• The appropriate investment risk capital factor for the grade of asset subject to collateral support.

Note: where the fair value of the collateral exceeds the fair value of the asset, the investment risk charge on the difference will be zero.

(iv) Determine the total risk charge applicable to the asset with collateral support provided.

For each asset, this is calculated as the sum of:

• Item (ii), the proportion of the risk charge from eligible collateral that can be allocated to the asset; and
• Item (iii), the risk charge applicable to value of the asset in excess of that covered by collateral.

(v) Determine the risk charge applicable to the asset if collateral support was not provided.

This is calculated as:

• The fair value of the asset;

Multiplied by

• The appropriate investment capital factor according to the grade of asset. The investment capital factors are based on the asset rating grades set out in GPS 114.

(vi) Determine the adjustment to the investment capital charge.

For each asset, this is calculated as:

• Item (v), the risk charge applicable to the asset if collateral support was not provided;

Less

• Item (iv), the total risk charge applicable to the asset with collateral support provided.

(vii) Determine the total adjustment to the investment capital charges.

This is calculated by summing all the adjustments to the investment capital charges for each asset (i.e. the sum of (vi) for each asset receiving support).

Australian business

Report the total adjustment to the investment capital charge due to the support of eligible collateral items from the Australian business of the Level 2 insurance group.

International business

Report the total adjustment to the investment capital charge due to the support of eligible collateral items from the international business of the Level 2 insurance group.

Inter-region elimination

Report the value of inter-region transactions, which are eliminated on consolidation, under ‘Inter-region elimination’.

Total business

This is automatically calculated by the form and represents the sum of Australian business, international business and inter-region eliminations..

3.2 Guarantees or letters of credit provided to the Level 2 insurance group

Relating to reinsurance recoverables from non-APRA-authorised reinsurer

Where the Australian business of a Level 2 insurance group possesses a guarantee or a letter of credit in respect of the reinsurance recoverables due from a non-APRA-authorised reinsurer, the Investment Capital Factor to be used is that applicable to the guarantor or the issuer of the letter of credit, as the case may be. This applies only if[11]:

• The guarantor or the issuer of the letter of credit is an authorised deposit-taking institution;
• The guarantee or letter of credit is explicit, unconditional and irrevocable;
• The guarantor or issuer of the letter of credit is obliged to pay the Level 1 insurer of the Level 2 insurance group in Australia; and
• The obligation of the guarantor or issuer of the letter of credit to pay the Level 1 insurer of the Level 2 insurance group is specifically linked to performance of the reinsurance contract or contracts under which the reinsurance recoverables arise.

The guarantee or letter of credit must be effective for the expected period for payment of claims under the reinsurance contract under which the reinsurance recoverables arise. If this is impractical, the guarantee or letter of credit must be effective for at least 2 years but be renegotiable each year to allow at least a year to identify alternative arrangements if the guarantee or letter of credit cannot be renegotiated.

Guarantees provided to the insurer other than for reinsurance recoverables from non-APRA-authorised reinsurer

Where the guarantees provided to the Level 2 insurance group relates to an asset other than for reinsurance recoverables from a non-APRA-authorised reinsurer, the assets of the Level 2 insurance group that have been explicitly, unconditionally and irrevocably guaranteed for their remaining term to maturity by a guarantor with a counterparty rating (or for governments, the long-term foreign currency credit rating) of Grades 1, 2 or 3 may be assigned the Investment Capital Factor that would be applicable to the guarantor.

Where the value of the guarantee does not cover the full fair value of the asset, only that part of an asset that is covered by the guarantee may be assigned the Investment Capital Factor applicable to the guarantor. Fair value has the same meaning as defined in the Australian accounting standards.

This section of the form allows Level 2 insurance groups to report the rebate which can be used to reduce the investment capital charge calculated in other forms. Accordingly the fair value of the Level 2 insurance group’s investments is to be entered in other forms for the calculation of investment risk charge without adjusting for any guarantees.

Some parent entities of Level 2 insurance groups are not ultimate parent entities and therefore may receive guarantees from parent entities.

Guarantees provided to the Level 2 insurance group by its own parent or a related party of the parent are not eligible for this treatment.

Related party

‘Related party’ referred to in this form, has the same meaning as contained in the Australian accounting standards.

3.2.1 Adjustment to investment capital charge

The adjustment to the investment capital charge, due to guarantees provided to the Level 2 insurance group, is calculated in accordance with GPS 111. The process for calculating the adjustment to the investment capital charge is outlined below.

For each asset guaranteed:

(i) Determine the investment capital charge applicable to the guarantor.

For each asset guaranteed, this is calculated as:

• The investment capital factor appropriate for the grade of guarantor. The investment capital factors for the various guarantor grades are outlined in GPS 114;

Multiplied by

• The minimum of:
  • The fair value of the asset being guaranteed; or
  • The value of the guarantee.

If the guarantee supports more than one asset type, having different investment capital factors, the guarantee provided will need to be allocated appropriately between the different assets. For example, the guarantee could be prorated based on the proportion of each type of supported asset to the total value of supported assets.

(ii) Determine the capital charge applicable to the asset in excess of that covered by the guarantee.

This is calculated as:

• The fair value of the asset subject to the guarantee;

Less

• The value of the guarantee;

Multiply the difference by

• The capital factor appropriate for the grade of asset being guaranteed. The investment capital factors are based on the asset rating grades set out in GPS 114.

(iii) Determine the total risk charge applicable to the asset with the guarantee provided.

For each asset, this is calculated as the sum of:

• Item (i), the capital charge applicable to the guarantor; and
• Item (ii), the capital charge applicable to the asset in excess of that covered by the guarantee.

(iv) Determine the risk charge applicable to the asset if the guarantee was not provided.

This is calculated as:

• The fair value of the asset;

Multiplied by

• The appropriate investment capital factor according to the grade of asset. The investment capital factors are based on the asset rating grades set out in GPS 114.

(v) Determine the adjustment to the investment capital charge.

For each asset, this is calculated as:

• Item (iv), the risk charge applicable to the asset if the guarantee was not provided;

Less

• Item (iii), the total risk charge applicable to the asset with the guarantee provided.

(vi) Determine the total adjustment to the investment capital charges.

This is calculated by summing all the adjustments to the investment capital charges for each asset (i.e. the sum of (v) for each asset supported by a guarantee).

Australian business

Report the total adjustment to the investment capital charge due to guarantees provided to the Australian business of the Level 2 insurance group.

International business

Report the total adjustment to the investment capital charge due to guarantees provided to the international business of the Level 2 insurance group.

Inter-region elimination

Report the value of inter-region transactions, which are eliminated on consolidation, under ‘Inter-region elimination’.

Total business

This is automatically calculated by the form and represents the sum of Australian business, international business and inter-region eliminations..

4.0 Total off-balance sheet exposure risk charge

Australian business

This field automatically calculates the total off-balance sheet risk charge (or rebate) for the Australian business of the Level 2 insurance group. This is calculated as item 1.2 plus 2.3 less 3.1.3 less 3.2.1.

International business

This field automatically calculates the total off-balance sheet risk charge (or rebate) for the international business of the Level 2 insurance group.

Inter-region elimination

This field automatically calculates the total off-balance sheet risk charge (or rebate) for inter-region eliminations of the Level 2 insurance group.

Total business

This is automatically calculated by the form and represents the sum of Australian business, international business and inter-region eliminations. This amount will need to be included in the calculation of the Level 2 insurance group’s minimum capital requirement.

3. Credit support received

GPS 114 outlines the treatment of eligible collateral and guarantees as risk mitigants.

The capital charge for Investment Risk may be reduced where the Level 2 insurance group holds certain types of collateral against an asset, or where the asset has been guaranteed, as a means of reducing risk.

This section of the form requires Level 2 insurance groups to report the rebate which can be used to reduce the investment capital charge calculated in other forms. Accordingly, the fair value of the Level 2 insurance group’s investments is to be entered in other forms for the calculation of investment risk charge without adjusting for any guarantee or eligible collateral.

This section of the form is divided into two parts:

• Eligible Collateral Provided to the Level 2 insurance group; and

• Guarantees Provided to the Level 2 insurance group.

3.1 Eligible collateral provided to the Level 2 insurance group

Relating to reinsurance recoverables from non-APRA-authorised reinsurer in relation to Australian business[10]

Where the Level 1 insurers of the Level 2 insurance group possesses recognised collateral in Australia against reinsurance recoverables due from a non-APRA-authorised reinsurer, it may apply the Investment Capital Factor relevant to the collateral to the value of the reinsurance recoverables (instead of applying the capital factor that would otherwise apply to the reinsurance recoverables).

For the purposes of this paragraph, collateral is recognised only:

(a) to the extent that it takes the form of:

(i) assets held in Australia which form part of a trust fund maintained by a trustee resident in Australia;

(ii) deposits held by the insurer in Australia made by the non-APRA-authorised reinsurer;

(iii) a combination of the two forms of collateral specified in paragraphs (a) and (b); or

(iv) any other form of collateral as may be approved by APRA in writing in a particular case;

(b) if it provides effective security against liabilities arising under the reinsurance contract; and

(c) if it is not available for distribution to creditors of the reinsurer other than the insurer in the event of insolvency of the reinsurer.

Where the fair value of the collateral does not cover the full value of the reinsurance recoverables, only that part of the value of the reinsurance recoverables that is covered by collateral may be assigned the Investment Capital Factor applicable to the collateral.

The collateral must be effective for the expected period for payment of claims under the reinsurance contract under which the reinsurance recoverables arise. If this is impractical, the collateral must be effective for at least 2 years but be renegotiable each year to allow at least a year to identify alternative arrangements if the collateral cannot be renegotiated.

Collateral provided to the Level 2 insurance group other than for reinsurance recoverables from non-APRA-authorised reinsurers in relation to Australian business

Where the Level 2 insurance group possesses recognised collateral against an asset, it may apply the Investment Risk Capital Factor relevant to the collateral to the value of the asset (instead of applying the capital factor that would otherwise apply to the asset). Collateral will be recognised only to the extent that it takes the form of a charge, mortgage or other security interest in, or over, an Eligible Collateral Item.

Eligible collateral items must also be held for the period for which the asset is held. Where the fair value of the collateral does not cover the full value of the asset, only that part of an asset that is covered by collateral may be assigned the Investment Capital Factor applicable to the collateral. Refer to GPS 114 for these Investment Capital Factors.

Fair value

Fair value has the same meaning as defined in the Australian accounting standards.

Investment Capital Factors

For the purposes of this section of the form use the asset grade scales and the applicable investment capital factors set out in GPS 114.

3.1.1 Total assets being supported

Inter-region elimination

Report the value of inter-region transactions, which are eliminated on consolidation, under ‘Inter-region elimination’.

3.2 Guarantees or letters of credit provided to the Level 2 insurance group

Relating to reinsurance recoverables from non-APRA-authorised reinsurer

Where the Australian business of a Level 2 insurance group possesses a guarantee or a letter of credit in respect of the reinsurance recoverables due from a non-APRA-authorised reinsurer, the Investment Capital Factor to be used is that applicable to the guarantor or the issuer of the letter of credit, as the case may be. This applies only if[11]:

• The guarantor or the issuer of the letter of credit is an authorised deposit-taking institution;
• The guarantee or letter of credit is explicit, unconditional and irrevocable;
• The guarantor or issuer of the letter of credit is obliged to pay the Level 1 insurer of the Level 2 insurance group in Australia; and
• The obligation of the guarantor or issuer of the letter of credit to pay the Level 1 insurer of the Level 2 insurance group is specifically linked to performance of the reinsurance contract or contracts under which the reinsurance recoverables arise.

The guarantee or letter of credit must be effective for the expected period for payment of claims under the reinsurance contract under which the reinsurance recoverables arise. If this is impractical, the guarantee or letter of credit must be effective for at least 2 years but be renegotiable each year to allow at least a year to identify alternative arrangements if the guarantee or letter of credit cannot be renegotiated.

Guarantees provided to the insurer other than for reinsurance recoverables from non-APRA-authorised reinsurer

Where the guarantees provided to the Level 2 insurance group relates to an asset other than for reinsurance recoverables from a non-APRA-authorised reinsurer, the assets of the Level 2 insurance group that have been explicitly, unconditionally and irrevocably guaranteed for their remaining term to maturity by a guarantor with a counterparty rating (or for governments, the long-term foreign currency credit rating) of Grades 1, 2 or 3 may be assigned the Investment Capital Factor that would be applicable to the guarantor.

Where the value of the guarantee does not cover the full fair value of the asset, only that part of an asset that is covered by the guarantee may be assigned the Investment Capital Factor applicable to the guarantor. Fair value has the same meaning as defined in the Australian accounting standards.

This section of the form allows Level 2 insurance groups to report the rebate which can be used to reduce the investment capital charge calculated in other forms. Accordingly the fair value of the Level 2 insurance group’s investments is to be entered in other forms for the calculation of investment risk charge without adjusting for any guarantees.

Some parent entities of Level 2 insurance groups are not ultimate parent entities and therefore may receive guarantees from parent entities.

Guarantees provided to the Level 2 insurance group by its own parent or a related party of the parent are not eligible for this treatment.

Related party

‘Related party’ referred to in this form, has the same meaning as contained in the Australian accounting standards.

3.2.1 Adjustment to investment capital charge

The adjustment to the investment capital charge, due to guarantees provided to the Level 2 insurance group, is calculated in accordance with GPS 111. The process for calculating the adjustment to the investment capital charge is outlined below.

For each asset guaranteed:

(i) Determine the investment capital charge applicable to the guarantor.

For each asset guaranteed, this is calculated as:

• The investment capital factor appropriate for the grade of guarantor. The investment capital factors for the various guarantor grades are outlined in GPS 114;

Multiplied by

• The minimum of:
  • The fair value of the asset being guaranteed; or
  • The value of the guarantee.

If the guarantee supports more than one asset type, having different investment capital factors, the guarantee provided will need to be allocated appropriately between the different assets. For example, the guarantee could be prorated based on the proportion of each type of supported asset to the total value of supported assets.

(ii) Determine the capital charge applicable to the asset in excess of that covered by the guarantee.

This is calculated as:

• The fair value of the asset subject to the guarantee;

Less

• The value of the guarantee;

Multiply the difference by

• The capital factor appropriate for the grade of asset being guaranteed. The investment capital factors are based on the asset rating grades set out in GPS 114.

(iii) Determine the total risk charge applicable to the asset with the guarantee provided.

For each asset, this is calculated as the sum of:

• Item (i), the capital charge applicable to the guarantor; and
• Item (ii), the capital charge applicable to the asset in excess of that covered by the guarantee.

(iv) Determine the risk charge applicable to the asset if the guarantee was not provided.

This is calculated as:

• The fair value of the asset;

Multiplied by

• The appropriate investment capital factor according to the grade of asset. The investment capital factors are based on the asset rating grades set out in GPS 114.

(v) Determine the adjustment to the investment capital charge.

For each asset, this is calculated as:

• Item (iv), the risk charge applicable to the asset if the guarantee was not provided;

Less

• Item (iii), the total risk charge applicable to the asset with the guarantee provided.

(vi) Determine the total adjustment to the investment capital charges.

This is calculated by summing all the adjustments to the investment capital charges for each asset (i.e. the sum of (v) for each asset supported by a guarantee).