Insurance (prudential standard) determination No. 6 of 2010 - 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 an insurer to have its MCR determined based on its own ECM. The underlying purpose of allowing an insurer to use the IMB Method is to have regulatory capital requirements that better reflect the nature and extent of risks in the insurer’s particular business structure and business mix.
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There is no prescribed form or structure for an insurer’s ECM. Each insurer 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 MCR is likely to vary from the use of the ECM by the insurer for its own risk and capital management purposes.
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The ECM and RCM must meet the criteria specified in this Standard and the RCM must be approved by APRA before it can be used for the purpose of determining the insurer’s MCR. Paragraph 30 of this Standard 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 an insurer has and maintains an advanced and stable approach to risk management, including operational risk management. APRA will make an assessment of the insurer’s approach to risk management at the time of application under this Standard and on subsequent review of the RCM. This assessment will be based on information provided as part of the application under this Standard, as well as the information available through APRA’s normal supervisory processes.
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APRA will not provide approval for use of the IMB Method unless an insurer has and maintains a prudent approach to capital management. The insurer must have an internal measure of target capital that is higher than the MCR determined using the RCM. APRA will make an assessment of the adequacy of the insurer’s approach to capital management, including target capital, at the time of application under this Standard and on subsequent review of the RCM. This assessment will be based on information provided as part of the application under this Standard as well as the information available through APRA’s normal supervisory processes, including the insurer’s business plan.[7]