Extended Licensed Entity
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In certain circumstances, an insurer may choose to hold assets in a special purpose vehicle or other related entity, rather than on its own balance sheet. Subject to meeting the conditions outlined below, APRA may allow an insurer to determine its Investment Risk Capital Charge (and any Investment Concentration Capital Charge) based on the individual assets of the related entity, rather than simply on the insurer’s direct exposure to that entity.
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The extent to which the risk of an insurer’s exposure to a related entity is commensurate with the underlying holdings of that entity depends on the insurer’s extent of control over, and integration with, the entity as well as on the existence of any third party liabilities of the entity. Potential complications under a scenario where underlying asset holdings must be liquidated during financial stress must also be considered.
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Subject to the specific requirements set out in paragraph 9, an insurer may apply to APRA to have one or more related entities approved as part of its Extended Licensed Entity (ELE). Once approved, APRA will allow the insurer to “look through” the legal structures involved, and to “consolidate” the balance sheet of the related entity with its own for the purposes of determining the Investment Risk Capital Charge. In effect, this allows the insurer to treat its own balance sheet and that of the approved entity as a single entity for the purpose of calculating that charge.
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In deciding whether to approve an entity as part of an insurer’s ELE, APRA will have regard to the following criteria in respect of the relationship between the insurer and the related entity:
(a) the related entity must be a wholly-owned and controlled by the insurer, with a Board of directors/trustees that is comprised entirely of members of the insurer’s Board or senior management;
(b) the insurer must demonstrate to APRA that there are no legal or regulatory barriers (including cross-border issues for a branch or if the proposed ELE is not an Australian entity) to the transfer of the assets back to the insurer;
(c) the insurer’s risk management systems and controls must be fully extended to the operations of the related entity. The senior management of the insurer must be in a position to monitor the operations of the related entity to the same extent as the operations of the insurer itself. Systems for monitoring and control over the related entity must be included within the internal and external audit programs of the insurer;
(d) the insurer must be able to furnish stand-alone accounting records for the related entity, and provide APRA with full and unfettered access to this information at any time (including during on-site visits);
(e) the related entity must not conduct any business that the insurer would otherwise be prevented from doing under the Insurance Act 1973; and
(f) where the related entity holds or invests in assets on behalf of the insurer, the related entity must have no material third party liabilities (APRA will exempt tax liabilities and employee entitlements from this requirement).