Insurance (prudential standard) determination No. 2 of 2008 - Prudential Standard GPS 110 - Capital Adequacy
Investment riskInvestment risk
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Investment risk
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The Investment Risk Capital Charge relates to the risk of adverse movements in the value of an insurer’s assets or off-balance sheet exposures or both. Investment risk can be derived from a number of sources, including market risk and credit risk.
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Subject to paragraphs 28 to 31, the Investment Risk Capital Charge is determined as the value of each investment multiplied by the relevant Investment Capital Factor for that investment, summed across all assets and certain off-balance sheet exposures.. For the purposes of this Prudential Standard, assets and exposures must be valued in accordance with the relevant reporting standards made under the Financial Sector (Collection of Data) Act 2001 (Collection of Data Act).[12] The method for determining the Investment Risk Capital Charge is set out in Prudential Standard GPS 114 Investment Risk Capital Charge (GPS 114).
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The Investment Risk Capital Charge may reduce through the reduction in investment risk arising from the availability of risk mitigants (e.g. collateral security or guarantees), subject to the criteria specified in GPS 114.
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An insurer must hold additional capital, in the form of an Investment Concentration Charge, if its exposure to a particular asset or counterparty exceeds the thresholds set out in GPS 114.
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In certain circumstances, an insurer may choose to hold assets in a special purpose vehicle (SPV), rather than on its own balance sheet. Where APRA has approved the inclusion of a SPV as part of the insurer’s Extended Licensed Entity (ELE),[13]F the insurer is able to ‘look through’ the legal structures involved, to determine its Investment Risk Capital Charge (and any Investment Concentration Charge) based on the individual assets of the SPV, rather than simply on its direct exposure to the entity.
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If an insurer securitises assets, the insurer must consult APRA prior to entering into the securitisation transaction in order to be able to reduce the Investment Risk Capital Charge.