Financial Sector (Collection of Data) (reporting standard) determination No. 5 of 2009 - LRS 120.0 - Management Capital
Reporting Form LRF 120.0Reporting Form LRF 120.0
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Form LRF 120.0 Management Capital (LRF 120.0) provides APRA with the necessary information on the management capital requirement of the shareholders’ fund, as well as management capital reserve & ratio, component details, and the prudential capital requirement & coverage, to undertake an assessment of the adequacy of a life insurance company’s capital position outside of its statutory funds. It also assists APRA in the supervision of compliance with the requirements of the Life Insurance Act 1995.
This Instruction Guide is designed to assist reporting entities in the completion of LRF 120.0. The Instruction Guide provides:
general directions and notes regarding preparation and lodgement; and
instructions relating to specific items.
General directions and notes
Reporting levels
LRF 120.0 must be completed by all life insurance companies, including friendly societies.
The form is to be completed for the shareholders’ fund (management fund) only.
LRF 120.0 contains four sections:
Management Capital Requirement;
Management Capital Reserve/Ratio/Coverage;
Management Capital Inadmissible Assets; and
Management Capital Resilience Requirement.
Within each section, reporting items are to be completed at total fund level.
Unit of measurement
LRF 120.0 is to be prepared in thousands of Australian dollars (AUD). Amounts denominated in foreign currency are to be converted to AUD in accordance with AASB 121 The Effects of Changes in Foreign Exchange Rates.
Definitions
Definitions for data reporting items required by this form have been provided where appropriate in the instructions under the section headed ‘Instructions for specific items’.
Definitions, unless specified, apply to all life insurance companies, including friendly societies as if each reference to a statutory fund, or shareholders’ fund, were a reference to an approved benefit fund, or management fund, respectively. Likewise, reference to shareholders should be taken to embrace ‘members’ of a mutual association and/or a society. The term ‘life companies’ or ‘life insurance companies’ includes friendly societies unless stated otherwise. This is in line with the usage of terms in the Life Insurance Act 1995.
Reporting period
Life companies are required to report the information in the reporting form on a quarterly and annual basis.
The quarterly information is to be completed as at the end of each quarter based on the financial year of the life company, not the calendar year.
The annual information is to be completed as at the end of the financial year of the life company.
The financial information requested in this form is to be reported as at the close of business for the last day of the reporting period.
Basis of preparation
In completing this form, unless specifically stated otherwise, institutions are to follow the basis that is used for the preparation of the annual financial statements in accordance with the Australian accounting standards.
Asset values are to include interest or dividend income accrued but not received. All assets of a statutory fund are to be reported in this form at Fair Value, with movements in Fair Values recognised in Profit or Loss. NB this treatment differs from Australian accounting standards, which do not allow assets to be valued at Fair Value in all circumstances eg owner occupied property.
Actuarial valuations and calculations included in, or used in the preparation of, the form must be in accordance with prudential standards.
Whilst maintaining that the requirements of Prudential Standard LPS 6.03 Management Capital Standard (LPS 6.03) apply on a continuous basis, APRA recognises that for some periods life insurance companies (including friendly societies) may not carry out full accounting, actuarial valuation, and audit procedures or do so in sufficient time to report on the return (for quarterly returns). Where this applies, some estimation could be applied reasonably at the current quarter to determine an approximation to the results that would be obtained if full detailed valuations had been carried out.
APRA expects that all life insurance companies (including friendly societies) will utilise their best endeavours to ensure that any estimations adopted are a good and reasonable basis of approximation. The estimation process needs to be sufficiently rigorous in order to be acceptable and at a minimum should be of a standard that would be considered appropriate for use in reporting to management and the Board of directors. APRA generally expects that the approximation methodology used will be approved by the Appointed Actuary; this provides an assurance that he or she is satisfied that the methods should be reasonably acceptable and consistent with the requirements in LPS 6.03.
If additional clarification is required for specific items in this form, reference should be made to the section ‘Instructions for specific items’, which is provided as a guide.
Instructions for specific items
This form is designed to report items defined by the relevant LPS 6.03, as referred to above. Therefore the following instructions are largely intended to deal with matters not already defined or discussed in the Actuarial Standard or to highlight particular aspects of the reporting requirements.
While these instructions apply to all life insurance companies, including friendly societies, not all items may be applicable to both: some items may not be applicable to friendly societies while others may not be applicable to life insurers.
1. Management Capital Requirement
This part of the form consists of Items 1.1 to 1.9 inclusive. This section of the form aligns directly with the methodology of LPS 6.03 as set out in Section 6 of that standard. Note that some elements in this part of the form are applicable only in the case of friendly societies.
1.3. Total Amount of Liabilities for Management Capital purposes ( = L ) [derived item]
This is calculated automatically by derivations contained within the form and represents the sum of item 1.1.4 and item 1.2.3.
1.4. Management Capital Inadmissible Assets Reserve (see Section 3) [derived item]
This equals to the total inadmissible amount calculated under section 3. This item will be derived automatically by the form, i.e. no separate entry is required.
1.6. Solvency Requirement of the Shareholders’ Fund [derived item]
This is calculated automatically by derivations contained within the form, as the sum of total amount of liabilities (item 1.3), inadmissible assets reserve (item 1.4) and resilience reserve (item 1.5.3).
2.2. Management Capital Reserve [derived item]
This is calculated automatically by derivations contained within the form, as:
Total Management Capital Requirement (Item 1.9)
less
Total Liabilities of Shareholders’ Fund (Item 2.1)
The Management Capital Reserve calculated in this manner relates only to the requirements of LPS 6.03, and is before consideration of the Prudential Capital Requirement established in accordance with Prudential Standards No. 3 (PS3). As such, it agrees with the description of ‘Management Capital Reserve’ included in Attachment E to APRA’s letter of 15 March 2006 to CEO’s of all registered life insurance companies other than friendly societies, titled ‘Updated Version of APRA Life Insurance Diskette (version 6) for IFRS’.
2.3. Management Capital Reserve Ratio (%) [derived item]
This is calculated automatically by derivations contained within the form, as:
Management Capital Reserve (Item 2.2)
divided by
Total Liabilities of Shareholders’ Fund (Item 2.1)
The Management Capital Reserve Ratio (%) calculated in this manner again relates only to the requirements of LPS 6.03, and is before consideration of the Minimum Capital Amount established in accordance with PS3. While it is consistent with the corresponding reserve ratio calculated in LRF 100.0 Solvency and also with the reserve ratio calculated in LRF 110.0 Capital Adequacy in that it only reflects the capital requirement of the relevant actuarial standard, it differs from the description of ‘Management Capital Reserve %’ included in Attachment E to APRA’s letter of 15 March 2006 (as referred to above, under Item 2.2). The latter included the Minimum Capital Amount before deriving the Reserve Ratio even though the description ‘Management Capital’ was still included.
2.4. Prudential Capital Requirement – Prescribed Minimum Capital Amount
This is the requirement established in accordance with PS3.
2.5. Prudential Capital Requirement [derived item]
This is calculated automatically by derivations contained within the form, as the greater of the Management Capital Reserve (Item 2.2) and the Minimum Capital Amount (Item 2.4).
2.6. Amounts Available for Prudential Capital Requirement
This is the amount that will be compared with the Management Capital Reserve to establish ‘coverage’. It should reconcile with the Shareholder Fund net assets in LRF 300.2 Statement of Financial Position (SF Total, SHF, SH Elim, Entity) (LRF 300.2).
2.7. Prudential Capital Coverage [derived item]
This is calculated automatically by derivations contained within the form, as:
Amounts Available for Prudential Capital Requirement (Item 2.6)
divided by
Prudential Capital Requirement (Item 2.5)
The Prudential Capital Coverage calculated in this manner is consistent with the corresponding calculation described as ‘Coverage of Capital Requirement’ in Attachment E to APRA’s letter of 15 March 2006 (as referred to above, under Items 2.2 and 2.3).
Inadmissible Assets
In completing this section, life companies should refer to LPS 6.03 Section 9.
Amounts entered in the Value column are the full value of any asset which is wholly or partly inadmissible, and should be consistent with what is reported in LRF 300.2. A Value entry is not required for Item 3.4.
Amounts entered in the Inadmissible Amounts column represent the inadmissible portion of the assets reported in the Value column. These amounts add up to the Inadmissible Assets Reserve.
Resilience requirements
While the first ‘Adjustment’ column relates solely to the Yield change element of Credit Risk, the second ‘Adjustment’ column reflects not only the yield change, but also the application of Diversification benefit. The insertion of this further column assists in making the logical flow of this part of the form align more closely with the methodology in LPS 6.03.
Please refer to the instruction guide for LRF 300.1 and LRF 300.2 for definition of items under asset and liability category.
4.1. Assets with Resilience Requirement
4.1.12. Assets with non-standard resilience factors
This asset class should only be used in rare cases. It is intended to cover situations where assets are disaggregated into (1) an identifiable sub-asset and (2) a residual that does not fit into any of the asset sectors specified by LPS 6.03 for resilience purposes, or where a non-standard resilience risk has been modelled in accordance with paragraph 10.9 of LPS 6.03.
4.2. Assets with no resilience requirement
This is for assets that are admissible but do not have resilience requirements.
4.3. Total Admissible Assets
The sum of Item 4.3 and the Inadmissible Amounts items 3.1, 3.2, 3.3 and 3.5 should be equal to the total assets in LRF 300.2.
4.4. Liabilities for Resilience
4.4.2. Effective borrowings
These are to be calculated on a look through basis.