Reporting Form GRF 170.0Reporting Form GRF 170.0

Reporting Form GRF 170.0

Concentration Risk Charge

Instruction Guide

Introduction

This form collects information to calculate the Concentration Risk Capital Charge in accordance with GPS 110 Capital Adequacy.

GPS 110 Capital Adequacy details the calculation using the Prescribed Method for determining the Concentration Risk Capital Charge. It sets out the issues that an insurer should consider in setting its Maximum Event Retention (MER) for catastrophe purposes. It is the responsibility of the insurer’s Board and senior management to ensure that the MER is set at a level which is consistent with the insurer’s risk profile and its reinsurance program.

Audit requirements

The form relating to authorised insurance entities and reinsurance entities is required to be subject to audit review and testing.

The scope and nature of audit testing required is outlined in the applicable Auditing and Assurance Guidance Statement issued by the Auditing and Assurance Standards Board.

Information provided in the form in respect of a financial year of an insurer forms part of the insurer’s ‘yearly statutory accounts’ within the meaning of section 3 of the Insurance Act 1973. This means that:

• the completed form for the financial year must be audited by the approved auditor of the insurer (see paragraph 49J(1)(a) of the Act);

• the insurer must make such arrangements as to enable the auditor to do this (subsection 49J(2));

• the auditor must give the insurer a certificate relating to the completed form (and other completed forms that are part of the insurer’s yearly statutory accounts), which must contain statements of the auditor’s opinion on the matters required by the prudential standards to be dealt with in the certificate (subsection 49J(3));

• the certificate must be lodged with APRA as provided for in the prudential standards (paragraph 49L(1)(a)), namely by the due date for lodging the form in respect of the financial year for the insurer.

Reporting entity

Forms are to be completed for the following reporting entities where appropriate:

1. Branch insurers of a foreign parent insurer (reference to licensed insurer in the form means total operations of the branch, excluding the parent operations);
2. Authorised insurance entities, including mutual entities (reference to licensed insurer in the form means total operations of the licensed entity); and
3. Authorised reinsurance entities (reference to licensed insurer in the form means total operations of the licensed entity).

Reporting period

Insurers are required to report the information in the reporting form on a quarterly and annual basis.

• The quarterly information is to be completed in respect of each quarter based on the financial year of the insurer, not the calendar year.
• The annual information is to be completed in respect of the financial year of the insurer.
• The financial information requested in this form is to be reported as at the last day of the reporting period on a financial year to date basis of the insurer.

Reporting lag

This form must be lodged for each of the reporting units, within the number of business days after the end of the quarter as set out in Reporting Standard GRS 170.0 Concentration Risk Charge.

Unit of measurement

Amounts denominated in foreign currency are to be converted to AUD in accordance with AASB 121 ‘The Effects of Changes in Foreign Exchange Rates’.

The general requirements of AASB 121 ‘The Effects of Changes in Foreign Exchange Rates’ for translation are:

1. Foreign currency monetary items[1] outstanding at the reporting date must be translated at the spot rate[2] at the reporting date.
2. Foreign currency non-monetary items[3] that are measured at historical cost in a foreign currency must be translated using the exchange rate at the date of the transaction.
3. Foreign currency non-monetary items that are measured at fair value will be translated at the exchange rate at the date when fair value was determined.

Transactions arising under foreign currency derivative contracts at the reporting date must be prepared in accordance with AASB 139 ‘Financial Instruments: Recognition and Measurement’. However, those foreign currency derivatives that are not within the scope of AASB 139 ‘Financial Instruments: Recognition and Measurement’ (e.g. some foreign currency derivatives that are embedded in other contracts) remain within the scope of AASB 121 ‘The Effects of Changes in Foreign Exchange Rates’.

For APRA purposes equity items must be translated using the foreign currency exchange rate at the date of investment or acquisition. Post acquisition changes in equity are required to be translated on the date of the movement.

As foreign currency derivatives are measured at fair value, the currency derivative contracts are translated at the spot rate at the reporting date.

Exchange differences should be recognised in profit and loss in the period which they arise. For foreign currency derivatives, the exchange differences would be recognised immediately in profit and loss if the hedging instrument is a fair value hedge. For derivatives used in a cash flow hedge, the exchange differences should be recognised directly in equity.

The ineffective portion of the exchange differences in all hedges would be recognised in profit and loss.

4. Translation of financial reports of foreign operations.

A foreign operation is defined in AASB 121 ‘The Effects of Changes in Foreign Exchange Rates’ as meaning an entity that is a subsidiary, associate, joint venture or branch of a reporting entity, the activities of which are based or conducted in a country or currency other than those of the reporting entity.

• Exchange differences relating to foreign currency monetary items that form part of the net investment of an entity in a foreign operation, must be recognised as a separate component of equity.
• Translation of financial reports should otherwise follow the requirements in AASB 121 ‘The Effects of Changes in Foreign Exchange Rates’.

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 110 Capital Adequacy 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 policies, after netting out any reinsurance recoveries[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

(ii) subsequent to the deadline specified under the six month rule, the reinsurance arrangement is documented in accordance with the other requirements of the six month rule; or

(c) has been treated by APRA, under GPS 230 Reinsurance Management, as complying with the two month rule and six month rule.

Cost of one reinstatement

Report the cost of one full reinstatement premium for the insurer’s catastrophe reinsurance cover.

Total concentration risk charge

The concentration risk charge is set equal to an insurer’s MER, plus the cost of one reinstatement of the catastrophe cover in cases where the reinstatement reinsurance cover has not been pre-paid by the insurer.

This amount is automatically calculated by the form. The concentration risk charge is included in the calculation of the MCR for the insurer.