Insurance Act 1973 - Determination of Prudential Standards - GPS 110 - Capital Adequacy for General Insurers; GPS 120 - Assets in Australia for General Insurers; GPS 210 - Liability Valuation for General Insurers; GPS 220 - Risk Management for General Insurers; GSP 230 - Reinsurance Arrangements for General Insurers; GPS 410 - Transfer and Amalgamation of Insurance Business for General Insurers and Transitional Prudential Standard GPS 900- Early Approvals of Auditors and Actuaries (07/02/2002)
Guidance Note GGN 110.3Guidance Note GGN 110.3
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Turn the raw legal text into a practical explanation grounded in Insurance Act 1973 - Determination of Prudential Standards - GPS 110 - Capital Adequacy for General Insurers; GPS 120 - Assets in Australia for General Insurers; GPS 210 - Liability Valuation for General Insurers; GPS 220 - Risk Management for General Insurers; GSP 230 - Reinsurance Arrangements for General Insurers; GPS 410 - Transfer and Amalgamation of Insurance Business for General Insurers and Transitional Prudential Standard GPS 900- Early Approvals of Auditors and Actuaries (07/02/2002).
Guidance Note GGN 110.3
Insurance Risk Capital Charge
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This Guidance Note details the calculation of the Insurance Risk Capital Charge for an insurer using the Prescribed Method to determine its Minimum Capital Requirement (MCR).
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The Insurance Risk Capital Charge is in response to the risk that the true value of net insurance liabilities is greater than the value determined under GPS 210 Liability Valuation. It has two components: a charge in respect of Outstanding Claims Risk and a charge in respect of Premiums Liability Risk. The total Insurance Risk Capital Charge is the sum of the capital charge for each of the two components.
Outstanding Claims Risk
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The capital charge for Outstanding Claims Risk is in response to the risk that the true value of the net outstanding claims liabilities is greater than the value determined under GPS 210.
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For the purposes of the Prescribed Method, Outstanding Claims Risk is considered to be broadly proportional to the value of the net outstanding claims liabilities. Because the extent of Outstanding Claims Risk will vary by class of business, a separate capital charge for Outstanding Claims Risk must be calculated for each class of business.
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The capital charge for each class of business is calculated by multiplying the net outstanding claims liabilities for that class (as determined under GPS 210) by the relevant Outstanding Claims Risk Capital Factor. For these purposes, APRA classes of business have been divided into three categories with respect to direct insurance business and a matrix of three classes with four types of business with respect to inwards reinsurance (as set out in Tables 1 and 2 below). Classes of business within the same category are regarded as having broadly similar levels of Outstanding Claims Risk. The total capital charge for Outstanding Claims Risk is the sum of the capital charges for each class of business.
Premiums Liability Risk
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The capital charge for Premiums Liability Risk is in response to the risk that premiums relating to post calculation date exposures, including premiums written after the calculation date, will be insufficient to fund the liabilities arising from that business. The need for a capital charge which relates, in part, to new business arises because of the time delay between calculation date and the time at which APRA is able to process information and take any action which may be necessary.
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The value of the net premium liabilities, as determined under GPS 210, is taken as the base value for the liabilities upon which the capital charge for Premiums Liability Risk is calculated.