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)
Reductions in CapitalReductions in Capital
Start here
Get a plain-English read of Reductions in Capital
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).
Reductions in Capital
-
A reduction in an insurer’s capital includes, but is not limited to: share buybacks; the redemption, repurchase or early repayment of any eligible capital instruments issued by the insurer or a special purpose vehicle; trading in own shares (see paragraph 19); or where aggregate interest and dividend payments on Tier 1 capital exceed the insurer’s after-tax earnings in the year to which they relate (ie dividend and interest payments on Tier 1 capital wholly or partly funded from retained earnings).
-
An insurer must seek APRA’s prior approval before making a reduction in its capital base. APRA’s approval may be subject to conditions.
-
Where APRA’s prior approval is required under paragraph 21, the insurer should provide APRA with a capital plan extending for at least two years. The insurer will need to satisfy APRA, on the basis of the capital plan provided, that the company’s capital base after the proposed reduction will remain adequate for its future needs. In deciding whether or not to approve a reduction in capital, APRA will have regard to all relevant considerations, including whether the insurer’s capital plan shows that the insurer will maintain an adequate level of capital, taking account of factors such as the immediate capital position, commitments to raise capital, and core profitability.
Attachment 1
Determining an Insurer’s Capital Base
Assume an insurer has the following balance sheet:
| Assets | Liabilities | ||
|---|---|---|---|
| Investments | 20,000 | Premium liabilities | 4,000 |
| Investments in relateds | 3,000 | Outstanding claims provisions | 5,000 |
| Intangibles | 600 | Other liabilities | 300 |
| Future income tax benefits | 100 | Mandatory convertible notes | 3,000 |
| Other assets | 3,300 | Term subordinated debt | 5,000 |
| 17,300 | |||
| Shareholders’ Funds | |||
| Shareholders’ funds | 4,000 | ||
| General reserves |