Insurance (prudential standard) determination No. 3 of 2011 - Prudential Standard GPS 111 - Capital Adequacy: Level 2 Insurance Groups
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 a Level 2 insurance group’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 33 to 37, 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 according to the relevant reporting standards made under the Financial Sector (Collection of Data) Act 2001 (Collection of Data Act). The method for determining the Investment Risk Capital Charge is set out in GPS 114.
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The following adjustments to GPS 114 must be made in relation to any entities within the Level 2 insurance group carrying on international business for the purposes of determining the MCR of the group:
(a) the investment capital factors set out in GPS 114 that apply specifically to reinsurance assets receivable from non-APRA authorised reinsurers do not apply in respect of those entities; and
(b) the investment capital factors referable to reinsurance recoverables from APRA-authorised reinsurers must be substituted for all reinsurance assets of those entities.
The reinsurance recoverables on international business will, in effect, attract an investment risk capital charge according to the capital factors which apply to reinsurance recoverables from APRA-authorised reinsurers.
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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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When calculating the investment risk capital charge, paragraphs 27 and 28 of GPS 114 do not apply to the international business of the Level 2 insurance group.
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A Level 2 insurance group 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. In respect of any overseas entities within the group carrying on insurance business, identification of asset or counterparty exposures is to be carried out on a best endeavours basis using information held by entities within the Level 2 insurance group, or otherwise publicly available information, in a manner consistent with the group’s documented credit risk management policies.