Inter-region eliminationInter-region elimination

Inter-region elimination

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

Basis of preparation

In completing this form unless otherwise specifically stated below, it is recommended that Level 2 insurance groups follow the Australian accounting standards where possible, regarding the interpretation, recognition and measurement of investments notably AASB 1023 ‘General Insurance Contracts’. Unlike at Level 1, APRA will accept the notion of assets backing insurance liabilities for the Level 2 insurance group, provided these assets represent all assets controlled and managed by the group to support insurance liabilities. Investments backing general insurance liabilities must be measured at fair value.[9] Additionally, this form allows the reporting of information on a ‘look-through’ basis which is not available under Australian accounting standards. Refer to section on ‘look-through’ basis below.

The total value of item 1.1 ‘Total listed equities - direct holdings’ disclosed in this form must agree to the total reported in item 2.2.1 of GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group). The total value of item 1.2 ‘Total listed equities - Indirectly held - 'Look-through basis' disclosed on this form must agree to the amount reported in item 2.5.7.8 of GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group).

Derivative instruments that are used to hedge listed equity investments are to be included in this form. Derivatives are as defined in AASB 139 ‘Financial Instruments: Recognition and Measurement’.

The investment risk capital charge for a derivative is determined as the sum of the equity market risk component, the equity basis risk component and the counterparty risk component. The equity market risk component and the equity basis risk components only apply to derivatives over listed equities, and are covered by this form. Any counterparty risk component for derivatives over listed equities is calculated under item 6.3 on GRF 110.0_G Minimum Capital Requirement (Level 2 Insurance Group).

Where the Level 2 insurance group holds derivatives over listed equities, the investment risk capital charge applicable to all holdings of listed equities is replaced with the equity market risk component (refer to Prudential Standard GPS 114 Capital Adequacy: Investment Risk Capital Charge (GPS 114)). The equity market risk component is equal to 16 per cent of the absolute value of the net exposure to listed equities and derivatives over listed equities (where the derivatives exposure for options is calculated on a delta-weighted basis).

The equity basis risk component applies only to derivatives over listed equities for which the notional equity position is negative and will be a specified percentage of the absolute value of the notional equity position. The percentage is the lesser of eight per cent and 16 x (100 per cent – overlap percentage). The overlap percentage measures the effectiveness of the hedge between the derivative and the physical portfolio it is being used to hedge and is equal to the sum of the lesser of A and B for each stock in that portfolio where: