Insurance (prudential standard) determination No. 1 of 2019
Aggregation benefitAggregation benefit
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Aggregation benefit
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The aggregation benefit makes an explicit allowance for diversification between asset risk and the sum of insurance risk and insurance concentration risk in the calculation of the prescribed capital amount.
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The aggregation benefit formula is:
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where:
(a) ‘A’ is the Asset Risk Charge;
(b) ‘I’ is the sum of the Insurance Risk Charge and Insurance Concentration Risk Charge; and
(c) ‘correlation’ is:
(i) 20 per cent for all insurers except lenders mortgage insurers;
(ii) 50 per cent for lenders mortgage insurers; or
(iii) the weighted average of the factors in sub-paragraphs (i) and (ii) for Level 2 insurance groups. The weighting of the factors must be by the size of the insurance risk charges for the non-lenders mortgage insurance and lenders mortgage insurance business, respectively.
33. The Asset Concentration Risk Charge and the Operational Risk Charge are not included in the calculation of the aggregation benefit.
APRA may adjust the Standard Method for calculating the prescribed capital amount
- If APRA is of the view that the Standard Method for calculating the prescribed capital amount does not produce an appropriate outcome in respect of a regulated institution, or a regulated institution has used inappropriate judgement or estimation in calculating the prescribed capital amount, APRA may, in writing, adjust any aspect of the prescribed capital amount calculation for that regulated institution. If such an adjustment is applied to a regulated institution under this paragraph, the regulated institution must comply with the adjusted calculation.
Internal Model-based Method
- A regulated institution may use its own internal capital measurement model to calculate the prescribed capital amount. Use of the IMB Method is conditional on APRA’s approval.[4] APRA approval requires a regulated institution to satisfy a range of criteria, as set out in Prudential Standard GPS 113 Capital Adequacy: Internal Model-based Method (GPS 113). Regulated institutions that do not use an internal model that meets the criteria specified in GPS 113 must use the Standard Method described in this Prudential Standard.
Supervisory adjustment
- APRA recognises that any measure of the adequacy of a regulated institution’s capital involves judgement and estimation, including quantification of risks that may be difficult to quantify. If APRA is of the view that there are prudential reasons for doing so, APRA may, in writing, determine a supervisory adjustment to be included in the PCR of the regulated institution.