Financial Sector (Collection of Data) (reporting standard) determination No. 21 of 2009 - GRS 150.0_G (2009) - Asset Exposure Concentrations and Risk Charge
Calculation of Concentration risk chargeCalculation of Concentration risk charge
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The investment concentration risk capital charge is based on the credit rating of the counterparty[3] and only applies to exposures of a counterparty or a group of related counterparties that exceed the maximum concentration thresholds as a percentage of capital as specified in GPS 114. These thresholds are:
Counterparty rating(unsecured obligations)
Threshold as a Percentage of Capital Base
Grade 1, 2 or 3Grade 4Grade 5
No limit50%25%
A Level 2 insurance group must apply the relevant Investment Capital Factor to an asset or assets up to the value of the threshold, and apply a 100% Investment Capital Factor for the value in excess of this level to calculate the Investment Concentration Charge. In the case of exposures to a group of related counterparties, exposures are aggregated both against counterparties of the same grade and upwards through the rating grades, with the threshold for each grade applying to aggregate exposures summed for that grade and all lower quality grades, excluding any exposures which are already subject to a 100% capital factor. Only the tangible component of an exposure is compared to the threshold as the intangible component is deducted from the Capital Base under GRF 120.0_Determinatino of Capital Base (Level 2 Insurance Group).
This method is described as:
Exposures to a group of related counterparties at the Grade 5 level are aggregated to determine the amount in excess of the Grade 5 threshold to which the 100% Investment Capital Factor is applied. Those exposures to a group of related counterparties at the Grade 5 level (up to the Grade 5 threshold) are then aggregated with all the exposures to that group of related counterparties at the Grade 4 level to determine the amount in excess of the Grade 4 threshold to which the 100% Investment Capital Factor is applied.
Other issues that must be noted for the purposes of completing this form are set out below:
The ‘Capital Base’ of the Level 2 insurance group must be determined in accordance with GPS 111.
Report all exposures in the appropriate counterparty/asset rating band columns and select the appropriate investment capital factor. Report the fair value of the asset, net of provision for doubtful debts, as per GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group) and GRF 301.0_G Reinsurance Assets and Risk Charge (Level 2 Insurance Group), except where the Level 2 insurance group has in place netting agreements that are in the form of a legally recognised right to net or set off in accordance with AASB 132 ‘Financial Instruments: Presentation’.
Where the counterparty rating is revised and/or investment capital factor of an asset is reduced due to credit support received (e.g. guarantee, letter of credit or eligible collateral as defined in GPS 114), the exposure must be reported taking into account the credit support received (i.e. the appropriate counterparty/asset rating should be reported).
Exposures include claims and commitments of the Level 2 insurance group recorded both on and off the balance sheet, that are of the following nature:
(a) Credit exposures (i.e. exposure to a counterparty or group of related counterparties); and/or
(b) Asset exposures that are not in the nature of a credit exposure (e.g. equity investments).
On-Balance Sheet exposures
Report the carrying value of exposures, net of provision for impairment/doubtful debts, recognised on-balance sheet (i.e. exposure recorded in GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group) and GRF 301.0_G Reinsurance Assets and Risk Charge (Level 2 Insurance Group), except where point 2 above is satisfied in regards to netting. Fair value has the same meaning as defined in the Australian accounting standards.
Off-balance sheet transactions (i.e. exposures not recorded in GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group) and GRF 301.0_G Reinsurance Assets and Risk Charge (Level 2 Insurance Group)) and exposures will include direct credit substitutes, trade and performance related contingent items, guarantees, collateral and other commitments, that are of a credit nature, whether revocable or not.
The following exposures must not be taken into account in determining the Investment Concentration Charge:
(a) Exposures to which an Investment Capital Factor of 0% is applied; and
(b) Assets to which an Investment Capital Factor of 100% is applied.
Group of related counterparties (counterparties related to each other whether or not they are related to the Level 2 insurance group): Two or more counterparties will form a group of related counterparties, for the calculation of concentration risk charge, if they are linked by:
(a) Cross guarantees;
(b) common ownership or management;
(c) the ability of a counterparty to exercise control (defined in accordance with Australian Accounting Standards issued by AASB) over the other(s) whether direct or indirect;
(d) financial interdependency such that the financial soundness of any of them may affect the financial soundness of the other(s); or
(e) other connections or relationships which, according to a level 2 insurance group’s assessment, identify the counterparties as constituting a single risk.
Counterparties related to the Level 2 insurance group: Exposures of the Level 2 insurance group to related parties (i.e. parent entity, associates and joint ventures) must be included in the analysis.
‘Related party’ or ‘Related parties’, where used in these instructions and the related form is to be taken to have the same meaning as contained in Australian accounting standards.
Exposures to the foreign parent and the related entities of the parent (where applicable) are to also be considered in the analysis. This will include the following:
Direct exposures
This incorporates direct exposures of the Level 2 insurance group to the foreign parent and to any branches, subsidiaries and other related parties of the foreign parent.
Indirect exposures
This incorporates indirect exposures of the Level 2 insurance group covered by risk transfer arrangements to the Level 2 insurance group’s foreign parent or to the subsidiaries of the foreign parent.
For the purposes of the Investment Concentration Charge, investments in equity or subordinated debt must be regarded as having the same rating as unsecured debt of the issuer.
The following column headings on the form are to be interpreted as set out below:
Name of counterparty
Report the name of the counterparty in this column.
Counterparty group name
Report the name of the group to which the counterparty belongs in this column.
For the purposes of the form, individual counterparties with the same counterparty group name will be assumed to be related to each other, ie the aggregation of exposures for calculating the concentration risk charge will be determined by the counterparty group name.
Type of exposure (i.e. type of investment/asset)
Detail the type of asset (e.g. holdings of listed equity instruments, debt instruments, loan, reinsurance recoveries[4], and guarantee and letters of credit).
Grade
NOTE: This column is only applicable for the Grade 4 and 5 counterparty/asset table.
Select the appropriate counterparty grade (either 4 or 5) for the type of exposure to the counterparty.
Capital factor
Select the investment capital factor used to determine the investment risk charge on the type of exposure reported. The investment capital factors are specified in GPS 114 (Table 1 of Attachment A).
Performance of asset
Select “Y” or “N” in this column for each exposure listed in terms of whether the performance of the asset is impaired. For the purposes of this form, impairment has the same meaning as per the Australian accounting standards.
Related entity
‘Related party’ or ‘Related parties’, where used in these instructions and the related form is to be taken to have the same meaning as contained in Australian accounting standards.
If the exposure of the Level 2 insurance group is to an entity related to the group, select the appropriate related party from the following list:
Parent;
Controlled entity;
Associate / Joint venture; and
Other.
Leave blank if exposure is to an unrelated entity.
On-Balance Sheet exposure
Refers to exposures that are recorded in GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group). Report the carrying value of exposures, net of provision for impairment/doubtful debts (as per GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group)), except where a legal right of set off exists in accordance with AASB 132 ‘Financial Instruments: Presentation’.
Off Balance Sheet exposure
Refers to assets that are not recorded in GRF 300.0_G Statement of Financial Position (Level 2 Insurance Group) and are referred to in GRF 131.0_G Off-Balance Sheet Exposure Risk Charge (Level 2 Insurance Group).
For off-balance sheet transactions and exposures, include the gross value of direct credit substitutes, trade and performance related contingent items, guarantees, collateral and other commitments, that are of a credit nature, whether revocable or not.
Total exposure
This is automatically calculated by the form. This item refers to the total of the “On Balance Sheet” and “Off Balance Sheet” amounts listed for each individual counterparty/exposure.
Intangible component
Refers to that component of the value of an investment in a controlled entity (as defined in the Australian Accounting Standards) or associated entity (as defined in the Australian Accounting Standards), that constitutes goodwill and/or other intangible assets. Though this value will be included in the value disclosed in the column “On Balance Sheet Exposure”, it still needs to be separately disclosed in this column.
Grade 4 net tangible exposure
NOTE: This column is only applicable for the Grade 4 and 5 counterparty/asset table.
This is automatically calculated by the form. This item refers to the difference between the ‘Total Exposure’ and ‘Intangible Component’ for each Grade 4 exposure.
Grade 5 net tangible exposure
NOTE: This column is only applicable for the Grade 4 and 5 counterparty/asset table.
This is automatically calculated by the form. This item refers to the difference between the ‘Total Exposure’ and ‘Intangible Component’ for each Grade 5 exposure.
Gross concentration risk charge
NOTE: This column is only applicable for the Grade 4 and 5 counterparty/asset table.
This is automatically calculated by the form in accordance with GPS 111. See note on ‘Calculation of concentration risk charge’ earlier in these instructions for details on the thresholds applied.
Investment risk charge on assets subject to concentration risk charge
NOTE: This column is only applicable for the Grade 4 and 5 counterparty/asset table.
The form automatically calculates the appropriate Investment Risk Charge attributable to the exposure in excess of the concentration exposure threshold.
Net concentration risk charge
The form automatically calculates the Net Concentration Risk Charge. It is calculated by deducting the Investment Risk Charge on assets subject to the Concentration Risk Charge from the “Gross Concentration Risk charge”. This amount is used for the calculation of the Minimum Capital Requirement.