Insurance (prudential standard) determination No. 4 of 2014 - Prudential Standard GPS 113 - Capital Adequacy: Internal Model-based Method
Internal Model-based MethodInternal Model-based Method
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Internal Model-based Method
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The IMB Method is intended to allow a regulated institution to have its prescribed capital amount determined based on its own ECM. The underlying purpose of allowing a regulated institution to use the IMB Method is to have regulatory capital requirements that better reflect the nature and extent of risks in the regulated institution’s particular business structure and business mix.
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There is no prescribed form or structure for a regulated institution’s ECM. Each regulated institution has the flexibility to develop a model that is suited to its business, and to use the ECM in the way it chooses. The manner in which the ECM is used as part of the RCM to determine the prescribed capital amount is likely to vary from the use of the ECM by the regulated institution for its own risk and capital management purposes.
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The ECM and RCM must meet the criteria specified in this Prudential Standard and the RCM must be approved by APRA before it can be used for the purpose of determining the regulated institution’s prescribed capital amount. Paragraph 30 specifies the matters to be included in the RCM.
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APRA will not provide approval for use of the IMB Method unless a regulated institution has and maintains an advanced and stable approach to risk management. APRA will make an assessment of the regulated institution’s approach to risk management at the time of application under this Prudential Standard and on subsequent review of the RCM. This assessment will be based on information provided as part of the application under this Prudential Standard, as well as the information available through APRA’s normal supervisory processes, including the regulated institution’s business plan.[2]
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APRA will not provide approval for use of the IMB Method unless a regulated institution has and maintains a prudent approach to capital management, as demonstrated through the regulated institution’s Internal Capital Adequacy Assessment Process (ICAAP). APRA will make an assessment of the adequacy of the regulated institution’s approach to capital management, including target capital, as demonstrated in the ICAAP at the time of application under this Prudential Standard and on subsequent review of the RCM. This assessment will be based on information provided as part of the application under this Prudential Standard as well as the information available through APRA’s normal supervisory processes, including the regulated institution’s business plan.