Subdivision - Investment Risk - 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) - - Investment Risk

- Investment Risk

The capital charge for investment risk is in response to the risk of an adverse movement in the value of an insurer’s assets and/or off-balance sheet exposures. Investment risk can be derived from a number of sources, including market risk and credit risk. The methodology for determining the Investment Risk Capital Charge is set out in Guidance Note GGN 110.4 Investment Risk Capital Charge.
Subject to paragraphs 20 to 22, the Investment Risk Capital Charge is determined as the sum, across all assets and certain off-balance sheet exposures, of the value of each investment multiplied by the relevant Investment Capital Factor for that investment. For the purposes of this Standard, assets and exposures should be valued according to Australian Accounting Standards.
The capital charge may be adjusted to recognise any reduction in investment risk arising from the availability of risk mitigants (eg collateral security or guarantees), subject to the criteria detailed in Guidance Note GGN 110.4.
An insurer may be required to hold additional capital, in the form of a capital charge for Investment Concentration Risk, if its exposure to a particular asset or counterparty exceeds the thresholds set out in Guidance Note GGN 110.4.
In certain circumstances, an insurer may choose to hold assets in a special purpose vehicle, rather than on its own balance sheet. APRA may allow the insurer to “look through” the legal structures involved, and determine its Investment Risk Capital Charge (and any Investment Concentration Capital Charge) based on the individual assets of the special purpose vehicle, rather than simply on its direct exposure to the entity. APRA will have regard to the criteria outlined in paragraph 9 of GGN 110.4 in exercising this discretion.

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