In determining the size of regulatory adjustments (i.e. deductions) from a category of a private health insurer’s capital base, items must be valued on the same basis as a private health insurer’s accounts prepared in accordance with the FSCODA.
For the purposes of deductions to Additional Tier 1 Capital and Tier 2 Capital:
where the amount of Additional Tier 1 Capital is insufficient to cover the amount of deductions required to be made from this category of capital, the shortfall must be deducted from Common Equity Tier 1 Capital; and
where the amount of Tier 2 Capital is insufficient to cover the amount of deductions required to be made from this category of capital, the shortfall must be deducted from Additional Tier 1 Capital and, if Additional Tier 1 Capital is insufficient to cover the amount of the deductions required, the remaining amount must be deducted from Common Equity Tier 1 Capital.
Where a capital instrument is required to be deducted and it is not possible to determine whether it should be deducted from Common Equity Tier 1 Capital, Additional Tier 1 Capital or Tier 2 Capital, the deduction must be made from Common Equity Tier 1 Capital. A private health insurer must consult APRA if there is uncertainty about the category of capital against which a deduction must be made.
For the purposes of deducting from the relevant category of the capital base, a private health insurer may net any provisions against the relevant exposures or holdings, or the relevant non-defaulted exposures or holdings that represent identified losses, before making the necessary deductions from the relevant categories of capital.
A private health insurer must not recognise, for the purpose of measuring its capital adequacy, any transactions (or dealings) which have the aim of offsetting required deductions.
Holdings of own capital instruments
Unless otherwise indicated, a private health insurer must deduct from the corresponding category of capital holdings of the private health insurer’s own capital instruments, whether held directly or indirectly[12], unless otherwise exempted in writing by APRA or unless eliminated under Australian Accounting Standards from the relevant category of capital. This deduction must include any capital instruments that the private health insurer could be contractually obliged to purchase and also all of the unused portion of any limit agreed with APRA under paragraph 26 of this Prudential Standard.
Regulatory adjustments to Common Equity Tier 1 Capital
Part Attachment B — Regulatory adjustments - Health Insurance (prudential standard) determination No. 3 of 2024 - Attachment B — Regulatory adjustments | Zoe
A private health insurer must adjust their Common Equity Tier 1 Capital to allow for the effects of ‘accounts receivables’ and ‘accounts payables’ on the AASB 17 insurance and reinsurance contract liability (net of insurance and reinsurance contract assets and net of tax effects). ‘Accounts receivables’ are added to CET1 capital and ‘accounts payables’ are deducted from CET1 capital.
Additionally, a private health insurer must make the following deductions to determine Common Equity Tier 1 Capital.
Cash flow hedge reserve
A private health insurer must eliminate the amount of the cash flow hedge reserve that relates to the hedging of items that are not recorded at fair value on the balance sheet (including projected cash flows).[13]
Deferred tax assets and deferred tax liabilities
Subject to paragraphs 11, 12 and 13 of this Attachment, a private health insurer must deduct deferred tax assets net of deferred tax liabilities.[14]
The netting of these items must be on a consistent basis. Where deferred tax liabilities exceed deferred tax assets, the excess of deferred tax liabilities must not be added to Common Equity Tier 1 Capital (i.e. the net deduction is zero). Deferred tax assets and liabilities include any tax effects that would result from the accounts receivables and accounts payables adjustment outlined in paragraph 7 of this Attachment and the technical provisions in surplus or deficit of HPS 340 liabilities outlined in paragraph 32(f) of this Prudential Standard.
The netting of deferred tax assets and deferred tax liabilities must only be applied where the private health insurer has a legally enforceable right to set-off current tax assets against current tax liabilities where they relate to income taxes levied by the same taxation authority and the taxation authority permits the private health insurer to make or receive a single net payment.
The deferred tax liabilities and deferred tax assets that may be netted must exclude amounts that have been used to adjust:
goodwill and intangible assets; and
defined benefit superannuation assets.
In order to apply the treatment in paragraph 10 of this Attachment, a private health insurer must:
have procedures in place to monitor changes in relevant laws and taxation practices that may affect the written opinions it is required to obtain covering netting of deferred tax assets and deferred tax liabilities; and
ensure that the written opinions are updated in the event of changes in laws or taxation practices overseas that could materially impact on overseas taxation authorities continuing to allow netting of deferred tax assets and deferred tax liabilities.
Gains and losses arising from changes in own creditworthiness
A private health insurer must eliminate all unrealised gains and losses that have resulted from changes in the value of liabilities (including capital instruments) and any associated embedded derivatives due to changes in the private health insurer’s own creditworthiness. Additional Tier 1 and Tier 2 Capital instruments must continue to be measured for capital adequacy purposes at their contractual values. Additional Tier 1 Capital and Tier 2 Capital instruments can be hedged in accordance with accounting standards.
Goodwill and other intangibles
Subject to paragraph 18 of this Attachment, a private health insurer must deduct the following, net of any associated deferred tax assets and deferred tax liabilities that would be extinguished if the assets involved become impaired or derecognised under Australian Accounting Standards:
goodwill and any other intangible assets[15] arising from an acquisition, net of adjustments to profit or loss reflecting any changes arising from ‘impairment’ of goodwill; and
other intangible assets net of adjustments to profit or loss reflecting amortisation and impairment. Intangible assets are as defined in Australian Accounting Standards and include capitalised expenses and capitalised transaction costs. These include, but are not limited to:
costs associated with debt raisings and other similar transaction-related costs that are capitalised as an asset;
costs associated with issuing capital instruments if not already charged to profit and loss;
capitalised information technology software costs; and
other capitalised expenses including capitalised expenses of a general nature such as strategic business development initiatives. These include, in addition to the above listed items, other forms of transaction costs and like costs that are required to be deferred/capitalised and amortised as part of the measurement of assets and liabilities under Australian Accounting Standards.
The balance of any transaction costs and like items that are capitalised and deferred as an asset must be netted off against the balance of any income deferred as a liability relating to the products giving rise to the capitalised transaction costs (i.e. only deferred costs and income in particular product portfolios may be netted). Any net balance of capitalised transaction costs must be deducted from Common Equity Tier 1 Capital in accordance with this Prudential Standard. Any surplus of fee income received from sources other than the insurer’s health insurance policies over deferred costs may be included in Common Equity Tier 1 Capital provided the fee income received satisfies the criteria in paragraph 35 of this Prudential Standard. Otherwise, up-front fee income received from sources other than the insurer’s health insurance policies must not be added to capital.
An investment in a subsidiary, joint venture or associate that:
is operationally independent;
represents a genuine arm’s length investment;
is not subject to prudential capital requirements; and
does not undertake ‘health insurance business’ or business related to health insurance business[16];
does not have its intangible assets (including the intangible component that could arise after or outside of acquisition) deducted under paragraph 16 of this Attachment.
Superannuation funds
A private health insurer must deduct any surplus in a defined benefit superannuation fund, of which the private health insurer is an employer-sponsor, unless otherwise approved in writing by APRA. The surplus must be net of any associated deferred tax liability that would be extinguished if the assets involved become impaired or derecognised under Australian Accounting Standards. A private health insurer may apply to APRA to include a surplus as an asset for capital adequacy purposes where the private health insurer is able to demonstrate unrestricted and unfettered access to a superannuation fund surplus in a timely manner. Subject to APRA approval the private health insurer may include the surplus in its capital base. This surplus will no longer be required to be deducted from Common Equity Tier 1 Capital.
A private health insurer must deduct any deficit in a defined benefit superannuation fund of which a private health insurer is an employer-sponsor and that is not already reflected in Common Equity Tier 1 Capital.
Reinsurance assets
A private health insurer must deduct all reinsurance assets[17] (if positive) reported in relation to each reinsurance arrangement that, subject to a six month grace period from risk inception, does not comprise an executed and legally binding contract.
Investments in subsidiaries, joint ventures and associates
A private health insurer must make a deduction for investments in subsidiaries, joint ventures and associates that are subject to regulatory capital requirements. The amount of the deduction is the lesser of the private health insurer’s share of the regulatory capital requirements[18] and the value of the investment that is recorded on the private health insurer’s balance sheet after adjustment for any intangible component in accordance with paragraphs 16 and 18 of this Attachment. This deduction must be applied after any deduction for intangibles in the investment in accordance with paragraphs 16 and 18 of this Attachment.
For the purposes of the deduction in paragraph 22 of this Attachment, the regulatory capital requirement of the investment is:
the prescribed capital amount if the investment is in a private health insurer as defined under the Act; or
the equivalent amount to the prescribed capital amount if the investment is an entity carrying on private health insurance business in a foreign jurisdiction; or
a comparable regulatory capital requirement as agreed with APRA.[19]
If the investment subject to the deduction in paragraph 22 of this Attachment is a non-operating holding company (NOHC), the private health insurer must ‘look-through’ the investment to the value and regulatory capital requirements of the entity/entities owned by the NOHC.
Assets under a fixed or floating charge
A private health insurer must deduct all assets of the private health insurer that are under a fixed or floating charge,[20] mortgage or other security to the extent of the indebtedness secured on those assets. This deduction may be reduced by the amount of any liability for the charge that is recognised on the private health insurer’s balance sheet.
Fair value adjustments
A private health insurer may measure its non-financial assets, short-term receivables, and intercompany receivables and payables using the requirements in the Australian Accounting Standards rather than fair value.
A private health insurer must deduct the difference between fair value and the reported value of each asset. This deduction can be a negative amount (that is, an addition to Common Equity Tier 1 Capital) if fair value exceeds reported value.
A private health insurer must make any other deduction required by APRA in writing where APRA considers that fair values are not prudent or reliable.
Other adjustments
A private health insurer must make any other deductions required under any other Prudential Standard.
Regulatory adjustments to the net assets of a health benefits fund or general fund
The amount of net assets to be included in the capital base of a health benefits fund or general fund of a private health insurer must be calculated after making deductions for all regulatory adjustments to Common Equity Tier 1 Capital required under this Attachment.
In determining the deduction for deferred tax assets net of deferred tax liabilities, a private health insurer may assume that tax benefits in one fund can be offset against deferred tax liabilities in another health benefits fund or the general fund, subject to the offset only being used once in the calculation of the capital base for the funds.