Calculation of Concentration risk chargeCalculation of Concentration risk charge

Calculation of Concentration risk charge

The investment concentration risk capital charge is based on the credit rating of the counterparty[4] 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 (licensed entities)/adjusted net assets in Australia (for branches) as specified in GPS 110 Capital Adequacy. These thresholds are:

An insurer 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.

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:

1. For licensed insurance entities, ‘Capital Base’ of the Licensed entity must be determined in accordance with GPS 110 Capital Adequacy.
2. For branch operations, ‘Adjusted net assets in Australia’ of the branch operation is calculated by applying the requirements of GPS 120 Assets in Australia.
3. 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 Statement of Financial Position, except where the insurer 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’.
4. Where the counterparty rating is revised and/or investment capital factor of an asset is reduced due to credit support received (e.g. guarantee or eligible collateral as defined in GPS 110 Capital Adequacy), the exposure must be reported taking into account the credit support received (i.e. the appropriate counterparty/asset rating should be reported).
5. Exposures include claims and commitments of the licensed insurance company recorded both on and off the balance sheet of the reporting Insurer, 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 fair value of exposures, net of provision for doubtful debts, recognised on-balance sheet (i.e. exposure recorded in GRF 300.0 Statement of Financial Position), except where point 3 above is satisfied in regards to netting. Fair value has the same meaning as defined in the Australian accounting standards, that is, the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s-length transaction.

Off-Balance Sheet Exposures

Note: Refer to the GRF 130 series

For off-balance sheet transactions (i.e. exposures not recorded in GRF 300.0 Statement of Financial Position) and exposures, 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.

6. Group of related counterparties (counterparties related to each other whether or not they are related to the insurer): 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 an insurer’s assessment, identify the counterparties as constituting a single risk

7. Counterparties related to the insurer: Exposures of the reporting insurer to related parties (i.e. parent entity, subsidiaries, associates and joint ventures) must be included in the analysis.

'Related parties' is to be interpreted consistently with its definition and meaning as contained in AASB 124 ‘Related Party Disclosures’.

In accordance with AASB 124, related party means a party that directly or indirectly through one or more intermediaries:

(a) controls, is controlled by or is under common control with, the entity (this includes parents, subsidiaries and fellow subsidiaries);

(b) has significant influence over the entity or has joint control over the entity; or

(c) is an associate (as defined in AASB 128 ‘Investments in Associates’) of the entity; or

(d) is a joint venture in which the entity is a venturer (see AASB 131 ‘Interests in Joint Ventures’); or

(e) is a member of the key management personnel of the entity or its parent; or

(f) is a close member of the family of any individual referred to in (a), (b) or (e); or

(g) is an entity that its controlled, jointly controlled or significantly influenced by, or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (e) or in (f); or

(h) is a post-employment benefit plan for the benefit of the employees of the entity, or of any entity that is a related party of the entity.

8. 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 reporting insurer 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 Insurer covered by risk transfer arrangements to the reporting Insurer’s foreign parent or to the subsidiaries of the foreign parent.

9. 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, and guarantee).

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 110 Capital Adequacy (Table 1 of Attachment D).

Is Performance of Asset Impaired [Y/N]

Select “Y” or “N” in this column for each exposure listed. For the purposes of this form, impairment means there exists reasonable doubt that amounts of principal (or fair value) and any associated amounts of accrued income (e.g. interest, dividends, distributions associated with the investment/asset) will be able to be collected by the Insurer.

Related party of Reporting Insurer

If the exposure of the insurer is to an entity related to the Insurer, select the appropriate related party from the following list:

• Parent

• Controlled entity

• Associate/Joint venture

• Other.

On-Balance Sheet Exposures

Refers to exposures that are recorded in GRF 300.0 Statement of Financial Position. Report the fair value of exposures, net of provision for doubtful debts (as per GRF 300.0 Statement of Financial Position), 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 Statement of Financial Position. (Refer to the GRF 130 series).

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.

Component of Investment representing goodwill & Other Intangible Assets

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 110 Capital Adequacy. 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.