Specific instructionsSpecific instructions

Specific instructions

While the form needs to be lodged on a quarterly basis to enable the calculation of a capital charge, as this analysis is normally completed formally on an annual basis, there is no need to remodel the charge each quarter. However, an insurer must inform APRA of any changes to its MER arising as a result of changes to its REMS, risk profile, classes of business underwritten or reinsurance program.

Refer to GPS 116 for further information on the method of calculation and definitions.

Maximum Event Retention

The MER is the largest loss to which an insurer will be exposed (taking into account the probability of that loss) due to a concentration of risk exposures, after netting out any potential reinsurance assets[4].

The MER for lenders mortgage insurers[5] must reconcile with the MER calculated on GRF 170.1.4 Maximum Event Retention and Risk Charge for LMIs – Summary.

In determining the level of MER for a given portfolio, the insurer must consider:

(a) the classes of business in which the insurer is engaged;

(b) the types of catastrophic risk which need to be addressed;

(c) the level of capital available to the insurer;

(d) the geographical zones in which the insurer transacts business;

(e) the effects of combined risks, e.g. where an insurer provides coverage for both workers’ compensation business and building insurance in the same geographical area;

(f) how the geographical zones will be grouped for calculation purposes; and

(g) an insurer’s overall risk appetite and desired probability of ruin.

An insurer must at a minimum adopt an MER which relates to an accumulation of exposures to a single event. However, an insurer with a complex portfolio of insurance risks may be required by APRA to estimate its MER using a whole of portfolio approach.

In calculating the MER, an insurer must not take into account potential recoveries from a reinsurance arrangement unless the reinsurance arrangement:

(a) complies with the two month rule and six month rule imposed under GPS 230 Reinsurance Management; or

(b) fails to comply with those rules as at the date of the relevant deadline but:

(i) subsequent to the deadline specified under the two month rule, the reinsurance arrangement is documented in accordance with the other requirements of the two month rule (in which case the reinsurance recoveries from the reinsurance arrangement may be taken into account for the purposes of calculating the MER until the reinsurance arrangement fails to comply with the six month rule); or