Concentration riskConcentration risk

Concentration risk

32. At a minimum, the Concentration Risk Capital Charge relates to the risk associated with an accumulation of exposures to a single catastrophic event at a single site. However, APRA will require a whole of portfolio approach to be implemented by an insurer if APRA assesses that the single event approach is inadequate in evaluating that insurer’s reinsurance needs. If this is required of an insurer and it does not comply with the requirement, the insurer’s MCR may be increased in accordance with paragraph 17. The method for determining the Concentration Risk Capital Charge is set out in Prudential Standard GPS 116 Concentration Risk Capital Charge (GPS 116). For lenders mortgage insurers, additional requirements for calculating the Concentration Risk Capital Charge are also set out in GPS 116.

33. The Concentration Risk Capital Charge is set equal to the insurer’s Maximum Event Retention (MER), plus the cost of one reinstatement of the catastrophe reinsurance cover in cases where the reinstatement reinsurance cover has not been pre-paid by the insurer. APRA will monitor an insurer’s calculation of its MER and may, where it is not satisfied with the methods or assumptions used, allow or require adjustments to be made to the calculation.[14]

34. In calculating the MER, an insurer may take into account potential reinsurance assets receivable from a reinsurance arrangement only if the reinsurance arrangement:

(a) complies with the two month rule and six month rule imposed under Prudential Standard GPS 230 Reinsurance Management (GPS 230); or

(b) fails to comply with those rules as at the date of the relevant deadline but:

(i) subsequent to the deadline specified under the two month rule, the reinsurance arrangement is documented in accordance with the other requirements of the two month rule (in which case the reinsurance assets from the reinsurance arrangement may be taken into account for the purposes of calculating the MER until the reinsurance arrangement fails to comply with the six month rule); or

(ii) subsequent to the deadline specified under the six month rule, the reinsurance arrangement is documented in accordance with the other requirements of the six month rule; or

(c) has been treated by APRA, under GPS 230, as complying with the two month rule and six month rule.

Disclosure

35. To improve policyholder and market understanding of its capital adequacy position, an insurer must publish annually the following items:

(a) the amount of eligible Tier 1 capital, with separate disclosure of each of the components of capital specified in GPS 112;