This instrument, Prudential Standard GPS 116 Capital Adequacy: Insurance Concentration Risk Charge (GPS 116), prescribes a method for calculating a specific capital add-on, the Insurance Concentration Risk Charge, for authorised general insurers and Level 2 insurance groups. The instrument revokes the prior Prudential Standard (No. 3 of 2022) and takes effect 1 July 2023 (preamble; Application and commencement, paras 1-3). It is made under section 32 of the Insurance Act 1973 (Authority, para 1), and applies to general insurers authorised under the Act and Level 2 insurance groups as defined in GPS 001, with requirements imposed on the parent entity where applicable (paras 2-4).

Mechanically, GPS 116 defines the Insurance Concentration Risk Charge for an insurer as the greatest of four component calculations: the natural perils vertical requirement, the natural perils horizontal requirement, the other accumulations vertical requirement, and, where applicable, the lenders mortgage insurer concentration risk charge (LMICRC) (para 9). The standard sets out formulae and calculation timing, explicit boundaries on what may and may not be included (for example, no tax adjustments, para 11), and detailed treatment of reinsurance recoverables, reinstatements and aggregate reinsurance (paras 13-17, 26, 33, 40, 49). For Level 2 groups, Attachment B applies and requires consolidation of intra‑group reinsurance for the calculation (Attachment B para 3) and allows a regional or agreed whole‑of‑portfolio approach (Attachment B paras 7-8).

The instrument assigns specific roles to internal governance and actuarial sign‑offs. The Board retains ultimate responsibility for capital management as a general proposition stated in the Objectives and key requirements (Schedule header). Operationally GPS 116 requires insurers to document methodology in their Reinsurance Management Strategy (ReMS) and Internal Capital Adequacy Assessment Process (ICAAP) (paras 16, 56). The Appointed Actuary must calculate the PL offset and comment on adequacy as part of the Financial Condition Report; for Level 2 groups the Group Actuary plays equivalent roles (paras 43, 58; Attachment B paras 17-18).

meta-content-style-type: text/css meta-content-type: application/xhtml+xml; charset=utf-8 meta-generator: Aspose.Words for .NET 22.10.0 meta-keywords: "[SEC=UNOFFICIAL]" title: Prudential Standard GPS 116

Commonwealth Coat of Arms

Insurance (prudential standard) determination

No. 6 of 2023

Prudential Standard GPS 116 Capital Adequacy: Insurance Concentration Risk Charge

Insurance Act 1973

I, Helen Rowell, a delegate of APRA:

(a) under subsection 32(4) of the Insurance Act 1973 (the Act), revoke Insurance (prudential standard) determination No. 3 of 2022, including Prudential Standard GPS 116 Capital Adequacy: Insurance Concentration Risk Charge, made under that Determination; and

(b) under subsection 32(1) of the Act determine Prudential Standard GPS 116 Capital Adequacy: Insurance Concentration Risk Charge, in the form set out in the Schedule, which applies to:

(i) all general insurers and authorised NOHCs; and

(ii) a subsidiary of a general insurer or authorised NOHC, where that subsidiary is a parent entity of a Level 2 insurance group.

This instrument commences on 1 July 2023.

Dated: 24 May 2023

[Signed]

Helen Rowell

Deputy Chair

Interpretation

In this instrument:

APRA means the Australian Prudential Regulation Authority.

authorised NOHC has the meaning given in section 3 of the Act.

general insurer has the meaning given in section 11 of the Act.

Level 2 insurance group has the meaning given in Prudential Standard GPS 001 Definitions.

parent entity has the meaning given in Prudential Standard GPS 001 Definitions.

subsidiary has the meaning given in Prudential Standard GPS 001 Definitions.

Schedule

Prudential Standard GPS 116 Capital Adequacy: Insurance Concentration Risk Charge, comprises the document commencing on the following page.

Commonwealth Coat of Arms

Prudential Standard GPS 116

Capital Adequacy: Insurance Concentration Risk Charge

Objectives and key requirements of this Prudential Standard<br>This Prudential Standard requires a general insurer or Level 2 insurance group to maintain adequate capital against the risks associated with insurance concentration in its activities.<br>The ultimate responsibility for the prudent management of capital of a general insurer or Level 2 insurance group rests with its Board of directors. The Board must ensure that the general insurer or Level 2 insurance group maintains an adequate level and quality of capital commensurate with the scale, nature and complexity of its business and risk profile, such that it is able to meet its obligations under a wide range of circumstances.<br>The Insurance Concentration Risk Charge is the minimum amount of capital required to be held against insurance concentration risks. The Insurance Concentration Risk Charge relates to the risk of an adverse movement in the general insurer’s or Level 2 insurance group’s capital base due to a single large loss or series of losses.<br>This Prudential Standard sets out the method for calculating the Insurance Concentration Risk Charge. This charge is one of the components of the Standard Method for calculating the prescribed capital amount for general insurers and Level 2 insurance groups.

Table of Contents

Authority

Application and commencement

Level 2 insurance groups

Interpretation

Insurance Concentration Risk Charge

Insurance Concentration Risk Charge formula

Reinsurance arrangements

Natural perils vertical requirement

Natural perils horizontal requirements

Other accumulations vertical requirement

Lenders mortgage insurer concentration risk charge

Use of alternative capital and risk mitigants

Catastrophe models

Review and reporting

Adjustments and exclusions

Previous exercise of discretion

Attachment A – Lenders mortgage insurer concentration risk charge

Attachment B – Level 2 insurance groups

Authority

This Prudential Standard is made under section 32 of the Insurance Act 1973 (the Act).

Application and commencement

2. This Prudential Standard applies to each:

(a) general insurer authorised under the Act (insurer); and

(b) Level 2 insurance group as defined in Prudential Standard GPS 001 Definitions (GPS 001).

Where a requirement applies to a Level 2 insurance group, the requirement is imposed on the parent entity of the Level 2 insurance group.

3. This Prudential Standard applies to insurers and Level 2 insurance groups (regulated institutions) from 1 July 2023.

Level 2 insurance groups

4. Paragraphs 9 to 59 and Attachment A apply to insurers only. The remaining paragraphs apply to all regulated institutions. Attachment B sets out additional requirements for Level 2 insurance groups.

Interpretation

5. Terms that are defined in GPS 001 appear in bold the first time they are used in this Prudential Standard.

6. For the purposes of this Prudential Standard:

(a) ‘aggregate reinsurance cover’ includes:

(i) aggregate reinsurance cover that protects the regulated institution from an accumulation of retained losses from multiple events of a certain size; and

(ii) aggregate stop-loss reinsurance cover that protects the regulated institution from an accumulation of retained losses from multiple events on a part or totality of its portfolio;

(b) ‘natural perils’ are all natural events, including, but not limited to, earthquakes, storms and conflagration as well as fire or surge following a natural peril, that affect property risks and other classes of business to which a regulated institution is exposed; and

(c) ‘whole-of-portfolio’ is an estimation approach that takes into account all possible perils in all regions to determine the size of loss that could occur from a single event at a certain exceedance probability for a regulated institution’s portfolio. The time horizon to be considered is one year. For clarity, this does not assume that two or more events occur in the same year.

Insurance Concentration Risk Charge

7. This Prudential Standard sets out the method for calculating the Insurance Concentration Risk Charge for a regulated institution using the Standard Method to determine its prescribed capital amount.

8. The Insurance Concentration Risk Charge for a regulated institution is intended to represent the net financial impact on the regulated institution from either a single large event, or a series of smaller events, within a one year period. The determination of the Insurance Concentration Risk Charge is based on the formulae and requirements set out in this Prudential Standard.

Insurance Concentration Risk Charge formula

9. The ‘Insurance Concentration Risk Charge’ for an insurer is the greatest of the following amounts:

(a) the natural perils vertical requirement determined in accordance with paragraphs 18 to 26;

(b) the natural perils horizontal requirement determined in accordance with paragraphs 27 to 43;

(d) where applicable[1], the lenders mortgage insurer concentration risk charge determined in accordance with paragraph 53.

An insurer does not need to calculate amounts for each of sub-paragraphs (a) to (d) above if it is able to demonstrate that the amount determined for one or more of those sub-paragraphs is always expected to be materially lower than the amount determined for one of the other sub-paragraphs.

10. The Insurance Concentration Risk Charge calculated in paragraph 9 must not be less than zero.

11. An insurer must not make tax adjustments to the amounts calculated in paragraph 9.

12. Where there is a change in the insurer’s business (for example, due to a material purchase or sale of a portfolio of business) or reinsurance program (for example, due to material cancellations or additions to reinsurance layers), the insurer must recalculate all applicable components of the Insurance Concentration Risk Charge. The insurer must consult with APRA to determine the approach to recalculate the natural perils horizontal requirement in paragraph 9.

Reinsurance arrangements

13. In calculating potential reinsurance recoverables in any component of the Insurance Concentration Risk Charge[2], an insurer may take into account potential reinsurance recoverables receivable from a reinsurance arrangement to which it is a party only if the reinsurance arrangement:

(a) complies with the inception date and two month rules imposed under Prudential Standard GPS 230 Reinsurance Management (GPS 230);

(b) fails to comply with those rules as at the date of the relevant deadline, but subsequent to the deadline specified under the two month rule, the reinsurance arrangement is documented in accordance with the requirements of the two month rule; or

14. In calculating potential reinsurance recoverables in any component of the Insurance Concentration Risk Charge[3], an insurer may take into account potential reinsurance recoverables receivable from a reinsurance arrangement only if the reinsurance arrangement meets the ‘governing law’ and ‘dispute’ requirements of GPS 230.

15. Subject to paragraph 16, an insurer must have, at the inception date of its catastrophe reinsurance program, a contractually agreed reinstatement, of its catastrophe reinsurance arrangements that reduces its natural perils vertical requirement (determined in accordance with paragraph 18). An insurer with multiple inception dates for its catastrophe reinsurance program must consult with APRA to determine the approach to the relevant inception date in this paragraph.

16. An insurer that does not have a contractually agreed reinstatement of its catastrophe reinsurance program as required by paragraph 15 must demonstrate to APRA that it is not practical or appropriate given the nature of its reinsurance arrangements. The insurer must set out its approach to the placement of reinstatement of cover in its Reinsurance Management Strategy (ReMS). If APRA is not satisfied with the approach taken by the insurer, APRA may apply a supervisory adjustment to the prescribed capital amount in accordance with paragraph 35 of Prudential Standard GPS 110 Capital Adequacy (GPS 110).[4]

17. During the period of the catastrophe reinsurance program, an insurer must review and consider the adequacy of reinstatements of all or parts of its reinsurance program, including the requirements of paragraph 16. This review must also consider the financial and operational implications of not having a sufficient number of contractually agreed reinstatements during the period of cover. Details of this review must be included in the insurer’s ReMS and Internal Capital Adequacy Assessment Process (ICAAP).

Natural perils vertical requirement

18. The natural perils vertical requirement (NP VR) for an insurer that has exposures to natural perils is calculated as:

(a) the greater of:

(i) ‘NP PML’ defined in paragraph 21 less ‘NP reinsurance recoverables’ defined in paragraph 22; and

(ii) the ‘net whole-of-portfolio loss’ defined in paragraph 23;

less

(b) ‘NP reinstatement premiums’ defined in paragraph 24; plus

(d) any other adjustments to NP VR in accordance with paragraph 26.

An insurer does not need to calculate amounts for sub-paragraphs 18(a)(i) and 18(a)(ii) if it is able to demonstrate that one of these amounts is expected to be materially lower than the amount determined for the other.

19. Subject to paragraphs 9 and 12, NP VR must be calculated and reported to APRA as at each reporting date. The calculation of NP VR, at a reporting date, must take into account the reinsurance program in place for the next reporting period. The NP VR calculation at each reporting date must only include potential reinsurance recoverables that were contractually agreed on or before the reporting date.

20. An insurer must regularly monitor the level of NP VR during the reporting period, including determining the impact of a catastrophic event. Where an event occurs during the reporting period, the insurer must determine the impact of that event on the level of the NP VR. Any changes made to the NP VR as a result of the catastrophic event are then to be applied until the end of the current reinsurance treaty or the occurrence of another event that impacts the NP VR, whichever occurs first.

NP PML

21. An insurer that has exposures to natural perils must determine a Probable Maximum Loss (PML) for its portfolio (NP PML). NP PML is the gross loss arising from the occurrence of a single event, where that loss is not less than the whole-of-portfolio annual loss with a 0.5 per cent probability of occurrence. NP PML must not include any allowance for potential reinsurance recoverables. The calculation of NP PML must include:

(a) the impact of the event on all classes of business of the insurer;

(b) an allowance for non-modelled perils[5]; and

NP reinsurance recoverables

22. An insurer that has exposures to natural perils must determine the level of potential reinsurance recoverables should there be the occurrence of the event that gives rise to NP PML (NP reinsurance recoverables). NP reinsurance recoverables must not include any amounts due from aggregate reinsurance cover.

Net whole-of-portfolio loss

23. An insurer that has exposures to natural perils must determine the net loss[6] arising from the occurrence of a single event, where that net loss is not less than the whole-of-portfolio annual net loss with a 0.5 per cent probability of occurrence (net whole-of-portfolio loss).

NP reinstatement premiums

24. An insurer that writes reinsurance may receive inwards reinstatement premiums from cedants as a result of the event that gives rise to its NP PML or the net whole-of-portfolio loss determined in paragraph 23, as appropriate (NP reinstatement premiums). NP reinstatement premiums must only be included in NP VR if the reinsurance contract specifically stipulates that offsetting with the cedant will occur at the time of the payment of the reinsurance claim.

NP reinstatement cost

25. An insurer that has exposures to natural perils must determine the cost (if any) of reinstating all catastrophe reinsurance cover relating to the reinsurance recoverables determined in paragraph 22 or paragraph 23, as appropriate (NP reinstatement cost). In determining this cost, if the insurer does not have contractually agreed rates for the reinsurance cover, the insurer must estimate the cost based on current reinsurance market conditions. The amount must not be less than the full original cost of the cover with no deduction for the expiry of time since the inception of the reinsurance arrangements, unless the insurer is able to demonstrate to APRA that the amount materially overstates the cost that would prevail.

Other adjustments to NP VR

26. An insurer may apply to APRA to recognise potential reinsurance recoverables from aggregate reinsurance cover. Aggregate reinsurance cover is eligible to be considered for inclusion in the NP VR once the aggregate reinsurance cover has reached its attachment point, or will as a result of the occurrence of NP PML or net whole of portfolio loss, as appropriate. The reinsurance recoverables from aggregate reinsurance cover must then be applied up until the cover has been exhausted by claims by the insurer or the date that the aggregate reinsurance treaty expires, whichever occurs first. The reinsurance arrangements must meet the requirements of paragraphs 13 and 14 to be considered under this paragraph. The insurer must agree with APRA a methodology for the determination of the adjustment that may be made for this type of reinsurance arrangement.

Natural perils horizontal requirements

27. The natural perils horizontal requirement (NP HR) for an insurer that has exposures to natural perils is calculated as:

(a) the greater of ‘H3 requirement’ and ‘H4 requirement’ defined in paragraphs 29 and 36, respectively; less

(b) ‘PL offset’ (if any) defined in paragraph 43.

An insurer does not need to calculate both H3 requirement and H4 requirement if it is able to demonstrate that one of these amounts is expected to be materially lower than the amount determined for the other.

28. Subject to paragraphs 9 and 12, NP HR must be calculated at the reporting date on or prior to the inception date of the insurer’s catastrophe reinsurance program and then held constant for the remaining duration of the catastrophe reinsurance program.[7] If the catastrophe reinsurance program of an insurer has multiple inception dates, the insurer must agree with APRA the reporting date that will apply to the calculation of NP HR. The NP HR calculation must only include potential reinsurance recoverables that were contractually agreed on or before the relevant reporting date.

H3 requirement

29. The H3 requirement is calculated as:

(a) the greater of:

(i) three times the ‘H3 loss’ defined in paragraph 30 less ‘H3 reinsurance recoverables’ defined in paragraph 31; and

(ii) three times the ‘net H3 loss’ defined in paragraph 32;

less

(b) ‘H3 aggregate offset’ defined in paragraph 33; less

(d) ‘H3 reinstatement cost’ defined in paragraph 35.

An insurer does not need to calculate amounts for sub-paragraphs 29(a)(i) and 29(a)(ii) if it is able to demonstrate that one of these amounts is expected to be materially lower than the amount determined for the other.

30. An insurer that has exposures to natural perils must determine the gross loss arising from the occurrence of a single event, where that loss is not less than the whole-of-portfolio annual loss with a 10 per cent probability of occurrence (H3 loss). This amount must not include any allowance for potential reinsurance recoverables. The calculation of H3 loss must include:

(a) the impact of the event on all classes of business of the insurer;

(b) an allowance for non-modelled perils[8]; and

31. An insurer that has exposures to natural perils must determine the level of potential reinsurance recoverables should there be the occurrence of three H3 losses over the catastrophe reinsurance program treaty year (H3 reinsurance recoverables). The reinsurance recoverables must not include any amounts due from aggregate reinsurance cover as this is provided for under paragraph 33.

32. An insurer that has exposures to natural perils must determine the net loss[9] arising from the occurrence of a single event, where that net loss is not less than the whole-of-portfolio annual net loss with a 10 per cent probability of occurrence (net H3 loss).

33. An insurer may reduce its H3 requirement for potential reinsurance recoverables from aggregate reinsurance cover (H3 aggregate offset). The insurer must not allow for any reinstatements of aggregate reinsurance cover unless these have been contractually agreed with the reinsurer(s). If reinstatements are included, the cost of reinstatement must be netted from the offset. The insurer must agree with APRA a methodology for the determination of this adjustment. This methodology may allow for any portion of paid and outstanding claims and premiums liabilities that contribute to the insurer’s retained losses for the purposes of the retention on any aggregate reinsurance cover, provided it does not result in a double-count between this offset and the PL offset determined in accordance with paragraph 43.

34. An insurer that writes reinsurance may receive inwards reinstatement premiums from cedants as a result of the events that give rise to three H3 losses or three net H3 losses, as appropriate (H3 reinstatement premiums). H3 reinstatement premiums must only be included in the H3 requirement if the reinsurance contract specifically stipulates that offsetting with the cedant will occur at the time of the payment of the reinsurance claim.

35. An insurer that has exposures to natural perils must determine the cost (if any) of reinstating catastrophe reinsurance cover after the occurrence of the first two H3 losses or the first two net H3 losses, as appropriate (H3 reinstatement cost). The cost (if any) must reflect the cost of reinstating reinsurance cover up to the size of the third event. In determining this cost, if the insurer does not have contractually agreed rates for the reinsurance cover, the insurer must estimate the cost based on the reinsurance market conditions that would prevail after the occurrence of the events. The amount must not be less than the full original cost of the cover, with no deduction for the expiry of time since the inception of the reinsurance arrangements, unless the insurer is able to demonstrate to APRA that the amount materially overstates the cost that would prevail in the market after the occurrence of the events.

H4 requirement

36. The H4 requirement is calculated as:

(a) the greater of:

(i) four times ‘H4 loss’ defined in paragraph 37 less ‘H4 reinsurance recoverables’ defined in paragraph 38; and

(ii) four times the net ‘H4 loss’ defined in paragraph 39;

less

(b) ‘H4 aggregate offset’ defined in paragraph 40; less

(d) ‘H4 reinstatement cost’ defined in paragraph 42.

An insurer does not need to calculate amounts for sub-paragraphs 36(a)(i) and 36(a)(ii) if it is able to demonstrate that one of these amounts is expected to be materially higher than the amount determined for the other.

37. An insurer that has exposures to natural perils must determine the gross loss arising from the occurrence of a single event, where that loss is not less than the whole-of-portfolio annual loss with a 16.7 per cent probability of occurrence (H4 loss). This amount must not include any allowance for potential reinsurance recoverables. The calculation of H4 loss must include:

(a) the impact of the event on all classes of business of the insurer;

(b) an allowance for non-modelled perils[10]; and

38. An insurer that has exposures to natural perils must determine the level of potential reinsurance recoverables should there be the occurrence of four H4 losses over the catastrophe reinsurance program treaty year (H4 reinsurance recoverables). The reinsurance recoverables must not include any amounts due from aggregate reinsurance cover as this is provided for under paragraph 40.

39. An insurer that has exposures to natural perils must determine the net loss[11] arising from the occurrence of a single event, where that net loss is not less than the whole-of-portfolio annual net loss with a 16.7 per cent probability of occurrence (net H4 loss).

40. An insurer may reduce its H4 requirement for potential reinsurance recoverables from aggregate reinsurance cover (H4 aggregate offset). The insurer must not allow for any reinstatements of aggregate reinsurance cover unless these have been contractually agreed with the reinsurer(s). If reinstatements are included, the cost of reinstatement must be netted from the offset. The insurer must agree with APRA a methodology for the determination of this adjustment. This methodology may allow for any portion of paid and outstanding claims and premiums liabilities that contribute to the insurer’s retained losses for the purposes of the retention on any aggregate reinsurance cover, provided it does not result in a double-count between this offset and the PL offset determined in accordance with paragraph 43.

41. An insurer that writes reinsurance may receive inwards reinstatement premiums from cedants as a result of the event that gives rise to four H4 losses or four net H4 losses, as appropriate (H4 reinstatement premiums). H4 reinstatement premiums must only be included in the H4 requirement if the reinsurance contract specifically stipulates that offsetting with the cedant will occur at the time of the payment of the reinsurance claim.

42. An insurer that has exposures to natural perils must determine the cost (if any) of reinstating catastrophe reinsurance cover after the occurrence of the first three H4 losses or the first three net H4 losses, as appropriate (H4 reinstatement cost). The cost (if any) must reflect the cost of reinstating reinsurance cover up to the size of the fourth event. In determining this cost, if the insurer does not have contractually agreed rates for the reinsurance cover, the insurer must estimate the cost based on the reinsurance market conditions that would prevail after the occurrence of the events. The amount must not be less than the full original cost of the cover, with no deduction for the expiry of time since the inception of the reinsurance arrangements, unless the insurer is able to demonstrate to APRA that the amount materially overstates the cost that would prevail in the market after the occurrence of the events.

PL offset

43. The Appointed Actuary of the insurer must determine the portion of the net premiums liability provision which relates to catastrophic losses[12] (PL offset). PL offset by class of business is determined by:

(a) calculating the amount of the insurer’s net premiums liability central estimate provision[13] that relates to catastrophic losses;

(b) annualising the amount from sub-paragraph (a);

(d) adding the Premiums Liability Risk Charge[15] to the amount from sub-paragraph (c).

The Appointed Actuary must then sum the outcomes from sub-paragraph (d) by class of business to determine the total PL offset. The Appointed Actuary must provide this determination to the insurer in a timely manner that allows the insurer to lodge reporting forms to APRA within the timeframes specified by the Reporting Standards made under the Financial Sector (Collection of Data) Act 2001. The Appointed Actuary must include details of the determination of the PL offset for the reporting year and the estimated PL offset to be utilised in the upcoming year in the Actuarial Valuation Report (AVR).

Other accumulations vertical requirement

44. The other accumulations vertical requirement (OA VR) for an insurer that has exposures to other accumulations is calculated as:

(a) ‘OA PML’ defined in paragraphs 47 and 48; less

(b) ‘OA reinsurance recoverables’ defined in paragraph 49; plus

45. An insurer must regularly monitor the level of its OA VR, including determining the impact of the occurrence of an event. Where an event occurs during the reporting period, the insurer must determine the impact of that event on the level of OA VR. Any changes made to the OA VR as a result of the event are then to be applied until the end of the current reinsurance treaty or the occurrence of another event that impacts OA VR, whichever occurs first.

46. Subject to paragraphs 9 and 12, OA VR must be calculated and reported to APRA at each reporting date. The calculation of OA VR, at the reporting date, must take into account the reinsurance program in place for the next reporting period. The OA VR calculation at each reporting date must only include potential reinsurance recoverables that were contractually agreed on or before the reporting date.

OA PML

47. An insurer that has exposures to accumulations of losses arising from a common dependent source or non-natural perils (other accumulations) must determine a PML for its portfolio (OA PML).[16] OA PML is the gross loss arising from the occurrence of a single event, where that loss has 0.5 per cent probability of occurrence over 12 months. An insurer must consider all classes of business and all business underwritten in those classes in determining the largest loss. OA PML must not include any allowance for potential reinsurance recoverables.

48. An insurer that has exposures to other accumulations may reduce OA PML for any losses within the other accumulations scenario that are already specifically allowed for in the premiums liability[17] of the insurer. This amount must be determined by the Appointed Actuary and included in the AVR. APRA may require the insurer to modify the adjustment to OA PML.

OA reinsurance recoverables

49. An insurer that has exposures to other accumulations must determine the level of potential reinsurance recoverables[18] should there be the occurrence of OA PML (OA reinsurance recoverables). OA reinsurance recoverables may include any amounts due from aggregate reinsurance cover if the cover has reached its attachment point, or will as a result of the occurrence of OA PML.[19] The reinsurance recoverables must then be applied up until the cover has been exhausted by claims by the insurer or the date that the aggregate reinsurance treaty expires, whichever occurs first.

50. An insurer may discount the retention on any aggregate reinsurance cover for the time value of money if the retention is fixed and not indexed for inflation. The discount period must not be greater than the average period of discount in determining the premiums liability provision. The discount rate must be the relevant risk-free discount rates used by the Appointed Actuary in the AVR.

51. An insurer must only apply the premiums liability adjustment in paragraph 48 or paragraph 49. The insurer must not apply the adjustment from both paragraphs 48 or 49 as this will result in the premiums liability provisions being deducted twice.

OA reinstatement cost

52. An insurer that has exposures to other accumulations must determine the cost (if any) of reinstating all catastrophe reinsurance cover relating to the reinsurance recoverables determined in paragraph 49 (OA reinstatement cost). In determining this cost, if the insurer does not have contractually agreed rates for the reinsurance cover, the insurer must estimate the cost based on current reinsurance market conditions. The amount must not be less than the full original cost of the cover, with no deduction for the expiry of time since the inception of the reinsurance arrangements, unless the insurer is able to demonstrate to APRA that the amount materially overstates the cost that would prevail.

Lenders mortgage insurer concentration risk charge

53. A lenders mortgage insurer must determine the lenders mortgage insurer concentration risk charge (LMICRC) by applying Attachment A.

Use of alternative capital and risk mitigants

54. If an insurer is considering the use of protections including alternative capital or risk mitigants to reduce the Insurance Concentration Risk Charge, the insurer must apply to APRA for approval to include that mitigant in the calculation of the Insurance Concentration Risk Charge. This includes, but is not limited to, the use of securitisation and catastrophe bonds.

Catastrophe models

55. It is common practice for an insurer to use computer-based modelling techniques, developed either in-house or by external providers, to estimate likely losses under different catastrophe scenarios. If an insurer uses such a model, the model must be conceptually sound and capable of consistently producing realistic calculations. An insurer must be able to demonstrate:

(a) that the model has been researched and tested;

(b) that the insurer has taken measures to ensure that the data used to estimate its losses is sufficiently consistent, accurate and complete, and there is appropriate documentation of any estimates of data used; and

(i) perils and elements that are not included in the model;

(ii) assumptions and any estimates used in the modelling process; and

(iii) the sensitivity of the model outputs as a result of the factors in (i) and (ii).

Review and reporting

56. An insurer must document in its ReMS the process and methodologies for setting and monitoring its Insurance Concentration Risk Charge. This must also include justification for any adjustments or assumptions made, such as all allowances made for aggregate reinsurance cover and adjustments to OA VR. GPS 230 sets out further details on this requirement.

57. In addition to the requirements of paragraph 56, an insurer that writes lenders mortgage insurance business must outline in its ReMS how it manages the exposures and mitigants in place for the risk in relation to future placement of reinsurance arrangements.

58. The Appointed Actuary of an insurer must review and comment on the adequacy of the calculation of the Insurance Concentration Risk Charge as part of the Financial Condition Report. For an insurer that has other accumulations exposures, the Appointed Actuary must consider the impact on the Insurance Concentration Risk Charge of the occurrence of multiple events in a year.

59. An insurer must inform APRA within 20 business days of any material changes to its Insurance Concentration Risk Charge that results from any changes in its ReMS, risk profile, classes of business underwritten or reinsurance program.

Adjustments and exclusions

60. APRA may, by notice in writing to a regulated institution, adjust or exclude a specific requirement in this Prudential Standard in relation to that regulated institution.

Previous exercise of discretion

61. A regulated institution must contact APRA if it seeks to place reliance, for the purposes of complying with this Prudential Standard, on a previous exemption or other exercise of discretion made by APRA under a previous version of this Prudential Standard.

Attachment A – Lenders mortgage insurer concentration risk charge

This Attachment applies to a lenders mortgage insurer (LMI) for the purposes of determining the lenders mortgage insurer concentration risk charge (LMICRC).
For the purposes of this Attachment:

(a) ‘Loans’ are loans secured by an insured mortgage over residential or other property;

(b) ‘Sum insured’ is the original exposure amount for an LMI as stated in the mortgage insurance policy;

(c) ‘Loan-to-Valuation Ratio’ (LVR) is the ratio of the amount of the loan to the value of the secured residential property, as at the date of origination of the loan. Where the mortgage insurance premium is capitalised in the loan amount, the LVR must be calculated including the premium; that is, the loan amount must be increased by the amount of the capitalised premium, irrespective of whether the premium is insured. The inclusion of a First Home Owners Grant in the deposit for a mortgaged property will not otherwise increase the LVR of a loan;

(d) ‘Probability of default’ (PD) is the risk of default by the borrower;

(e) ‘Loss given default’ (LGD) is the loss to the LMI upon default by the borrower;

(f) ‘Age’ is the length of time from the date of origination of the loan to the date of calculation for the purposes of determining the seasoning factors in Table A of this Attachment;

(g) A ‘standard loan’ is a loan predominantly secured by residential property and meets the following criteria:

(i) the LMI or lender has formally verified the borrower’s income and employment; and

(ii) the borrower passes standard credit checks and income requirements as documented in the LMI or lender’s underwriting or credit policies and procedures;

(h) A ‘non-standard loan’ is a loan predominantly secured by residential property which does not meet the criteria in paragraph 2(g) of this Attachment;

(i) A ‘commercial loan’ is a loan that is not predominantly secured by a registered mortgage over residential property;

(j) ‘Coverage type’ refers to whether the ‘LMI policy’ of insurance provided is for 100 per cent of the loan or pool amount, or less than 100 per cent of the loan amount or pool amount. The latter is referred to as top cover for ‘individual LMI policies’ and partial cover for ‘pooled LMI policies’;

(k) ‘Individual LMI policy’ is lenders mortgage insurance underwritten and issued in respect of an individual loan. Bulk and/or tranche transactions associated with securitisations, where each loan is individually insured, falls into this category;

(l) ‘Pooled LMI policy’ is lenders mortgage insurance underwritten and issued in respect of a pool of loans. For clarity, each loan is not individually insured;

(m) ‘Premiums liability’ is calculated in accordance with Prudential Standard GPS 340 Insurance Liability Valuation (GPS 340). ‘Net premiums liability’ is the premiums liability after netting of reinsurance recoverables and non-reinsurance recoveries. Net premiums liability is also calculated in accordance with GPS 340; and

(n) ‘Outstanding claims liabilities’ are as calculated in accordance with GPS 340.

PML and Prescribed Stress Scenario

3. For the purpose of this Attachment, the ‘Probable Maximum Loss’ (PML) is assumed to arise from a catastrophic event such that the size of loss from the three year event is equal to a loss with a 0.5 per cent probability of occurrence. APRA requires the PML to be determined on the basis of a Prescribed Stress Scenario as defined in paragraph 4 of this Attachment.

4. The ‘Prescribed Stress Scenario’ is in the form of a three-year economic or property downturn, and is applied to the business in force as at the calculation date. The LMI must assume a constant aggregate sum insured over the three-year scenario (except for LMIs in run-off as provided in paragraph 18 of this Attachment).

5. The modelled losses must be allocated in the proportion of 25 per cent to year one, 50 per cent to year two and 25 per cent to year three of the downturn. These losses include future claim payments in the lenders mortgage insurer’s premiums liability that relate to an economic downturn.

Determining the lenders mortgage insurer concentration risk charge

6. Subject to paragraph 7 of this Attachment, the LMICRC is calculated by:

(a) working out the PML in accordance with paragraphs 8 to 18 of this Attachment;

(b) deducting the amount of Allowable Reinsurance in accordance with paragraphs 19 to 24 of this Attachment; and

(c) deducting the amount of net premiums liability relating to an economic downturn, in accordance with paragraph 25 of this Attachment.

7. LMICRC must not be less than 10 per cent of the PML as determined in paragraph 6(a) of this Attachment. This means that the sum of the deductions in 6(b) and 6(c) of this Attachment must not exceed 90 per cent of the PML.

Prescribed calculation of PML

8. The PML of an LMI is calculated by the addition of the amounts calculated in paragraphs 9 to 18 of this Attachment for all LMI policies in force at the calculation date.

9. For each individual LMI policy, the PML is the sum insured multiplied by all of the relevant factors that apply to the policy loan type as set out in Table A of this Attachment.

10. Where a policy or loan has characteristics of more than one loan and/or coverage type, the exposure must be recognised in the category that produces the highest PML for that exposure.

11. For each pooled LMI policy, the PML is calculated by applying the principles in paragraphs 9 and 10 of this Attachment and then applying the terms of the pool cover to the calculated PML amount.[20]

12. For an LMI writing inwards reinsurance on a non-proportional basis, the PML for each of these contracts is calculated by:

(a) determining the impact of the Prescribed Stress Scenario on the business that is reinsured by applying the rules in paragraphs 8 to 11 of this Attachment; and

(b) determining under the terms of the inwards reinsurance contract, the amount of claim by the cedant against the LMI that will arise under (a) above.

This amount becomes the LMI’s PML.

13. For an LMI writing coverage for an additional loan, or otherwise changing or extending an individual LMI policy, the LMI must determine the PML based on the total sum insured to which it is exposed and the LVR must be based on the total loan as at the most recent date of underwriting (and in accordance with paragraph 2(b) of this Attachment). The age of the individual LMI policy must be based on the origination date of the original loan and not the date of the extension to the individual LMI policy, unless a different methodology has been agreed with APRA.

14. For an LMI writing any other lenders mortgage insurance business not captured in paragraphs 9 to 13 of this Attachment, the LMI must consult with APRA. APRA must approve the method for calculating the PML in these instances.

15. APRA may direct an LMI to assume that the sum insured, LVR or age of a particular loan or group of loans is either:

(a) the sum insured, LVR or age as specified in APRA’s direction; or

(b) the sum insured, LVR or age worked out by applying instructions contained in APRA’s direction.

16. APRA may determine a formula for the calculation of the PML in relation to an exposure that does not readily fit into the definitions of loans and / or coverage types.

17. APRA may direct an LMI to reclassify a loan where it considers the relevant factor(s) in Table A of this Attachment of the original classification do not reflect the inherent risk of the loan.

LMIs in run-off

18. For an LMI no longer writing new business (i.e. in run-off), the sum insured is expected to decrease over the three-year scenario and it may be appropriate for an LMI in run-off to adjust its PML downwards. The methodology for adjusting an LMI’s PML in a run-off situation must be approved by APRA and documented in the LMI’s ReMS.

Available Reinsurance

19. In addition to the requirements on potential reinsurance recoverables in this Prudential Standard (refer to paragraphs 13 and 14 of this Prudential Standard), only reinsurance arrangements that are contractually committed may be applied during the Prescribed Stress Scenario.

20. APRA recognises that the business that is covered by an LMI’s reinsurance arrangements and therefore relevant to the Available Reinsurance calculation will vary for each LMI. In some cases, the level of paid claims, Outstanding Claims Liability and/or Premiums Liability[21] for the period of the Prescribed Stress Scenario may need to be allowed for in determining how much reinsurance will be available to meet claims arising from the Prescribed Stress Scenario. If an LMI allows for any of these amounts in its Available Reinsurance calculation, the level must be subject to review by the Appointed Actuary, as part of prescribed actuarial advice[22] or through other written advice.

21. An LMI must allocate the PML, and any addition to this in accordance with paragraph 20 of this Attachment, over each year of the prescribed three-year stress scenario and then apply its reinsurance program(s) to the resulting projected claims. To the extent that approximations are necessary, a best estimate approach must be used.

22. In calculating Available Reinsurance, the LMI must consider the impact of the Prescribed Stress Scenario on its overall reinsurance arrangements and take account of all the relevant financial impacts.[23]

23. APRA may require the LMI to vary the amount of Available Reinsurance applied in the LMI's calculation of its LMICRC.[24]

Allowable Reinsurance

24. The amount of Available Reinsurance to be deducted from the PML in determining the LMICRC is limited to a maximum of 60 per cent of the PML, irrespective of the amount available under paragraphs 19 to 23 of this Attachment. This amount of Available Reinsurance is referred to as ‘Allowable Reinsurance’.

Net premiums liability deduction

25. Net premiums liability of the LMI that relate to an economic downturn may be deducted from the PML in determining the LMICRC. The percentage of total net premiums liability of the LMI that is deducted must be determined by the Appointed Actuary. The methodology for the determination of the percentage must be included in the AVR.

Table A - PD, LGD and seasoning factors to be applied in determining the PML of LMIs

Standard loans

The aggregate PD and LGD factors by LVR, over the three-year scenario, for standard loans are:

LVR	PD factor	LGD factor – 100 per cent cover	LGD factor – top cover
Greater than 100%	14.0%	40%
95.01 – 100%	8.2%	40%
90.01 – 95%	5.1%	40%	Minimum of:
85.01 – 90%	3.2%	30%	100%; or
80.01 – 85%	2.0%	30%	LGD factor /
70.01 – 80%	1.9%	30%	Top cover %[25]
60.01 – 70%	0.9%	20%
Less than 60.01%	0.6%	20%

The seasoning factors by age for standard loans are:

Age of loan	Seasoning factor
Less than 3 years	100%
3 years to less than 5 years	75%
5 years to less than 10 years	25%
10 years or more	5%

Non-standard loans

The aggregate PD and LGD factors by LVR, over the three-year scenario, for non‑standard loans are:

LVR	PD factor	LGD factor – 100 per cent cover	LGD factor – top cover
Greater than 100%	31.5%	40%
95.01 – 100%	18.5%	40%
90.01 – 95%	11.5%	40%	Minimum of:
85.01 – 90%	7.2%	30%	100%; or
80.01 – 85%	4.5%	30%	LGD factor /
70.01 – 80%	4.3%	30%	Top cover %[26]
60.01 – 70%	2.0%	20%
Less than 60.01%	0.9%	20%

The seasoning factors by age for non-standard loans are:

Age of loan	Seasoning factor
Less than 3 years	100%
3 years to less than 5 years	75%
5 years to less than 10 years	25%
10 years or more	5%

Commercial loans

The PML for the three-year scenario is the sum insured multiplied by 8 per cent. No seasoning factor applies to commercial loans.

Attachment B – Level 2 insurance groups

A Level 2 insurance group must comply with paragraphs 1 to 8 and 60 to 61 of this Prudential Standard and the requirements of this Attachment to determine its Insurance Concentration Risk Charge.

Insurance Concentration Risk Charge formula

2. The Insurance Concentration Risk Charge for a Level 2 insurance group is the greatest of the following amounts:

(a) the natural perils vertical requirement determined in accordance with the principles of paragraphs 18 to 26 of this Prudential Standard;

(b) the natural perils horizontal requirement determined in accordance with the principles of paragraphs 27 to 43 of this Prudential Standard;

(c) the other accumulations vertical requirement determined in accordance with the principles of paragraphs 44 to 52 of this Prudential Standard; and

(d) where applicable[27], the lenders mortgage insurer concentration risk charge determined in accordance with the principles of Attachment A.

A Level 2 insurance group does not need to calculate amounts for each of sub-paragraphs (a) to (d) above if it is able to demonstrate that the amount determined for one or more of those sub-paragraphs is always expected to be materially lower than the amount determined for one of the other sub-paragraphs.

3. Each component of the Insurance Concentration Risk Charge in paragraph 2 of this Attachment must be determined after consolidation of intra-group reinsurance arrangements.

4. The Insurance Concentration Risk Charge determined in paragraph 2 of this Attachment must not be less than zero.

5. A Level 2 insurance group must not make tax adjustments to the amounts calculated in paragraph 2 of this Attachment.

6. Where there is a change in the Level 2 insurance group’s business (for example, due to a material purchase or sale of a portfolio of business) or reinsurance program (for example, due to material cancellations or additions to reinsurance layers), the Level 2 insurance group must consult with APRA to determine the approach to recalculate all applicable components of the Insurance Concentration Risk Charge in paragraph 2 of this Attachment.

7. In the application of paragraph 2 of this Attachment, a Level 2 insurance group must either:

(a) undertake the calculations by applying a regional approach where the regions are to be agreed with APRA and are expected to be consistent with the regions used for the Level 2 insurance group’s accounts[28]; or

(b) apply to APRA to use a different method that is consistent with a whole-of-portfolio approach and achieves at least the same level of security to policyholders as the calculation of the relevant gross and net losses on a whole-of-portfolio basis. The application to APRA must include a detailed description of the method and how the resulting Insurance Concentration Risk Charge provides at least the same level of security to policyholders.

8. A Level 2 insurance group must not apply to APRA, under paragraph 7(b), to use an alternative method to determine the lenders mortgage insurer concentration risk charge in paragraph 2 of this Attachment.

Reinsurance arrangements

9. In calculating potential reinsurance recoverables in any component of the Insurance Concentration Risk Charge[29], a Level 2 insurance group may take into account:

(a) potential reinsurance recoverables receivable from a reinsurance arrangement to which a Level 1 insurer is a party only if the reinsurance arrangement meets the requirements of paragraphs 13 and 14 of this Prudential Standard; and

(b) potential reinsurance recoverables receivable from a reinsurance arrangement to which any other consolidated entity carrying on insurance business in a foreign jurisdiction is a party only if the reinsurance arrangement meets the requirements (if any) for documentation of reinsurance contracts applicable in that jurisdiction.[30]

10. Subject to paragraph 11 of this Attachment, a Level 2 insurance group must have, at the inception date of its catastrophe reinsurance program, a contractually agreed reinstatement of its catastrophe reinsurance arrangements that reduces its natural perils vertical requirement. A Level 2 insurance group with multiple inception dates for its catastrophe reinsurance program must consult with APRA to determine the approach to the inception date in this paragraph.

11. A Level 2 insurance group that does not have a contractually agreed reinstatement of its catastrophe reinsurance program as required by paragraph 10 of this Attachment must demonstrate to APRA that it is not practical or appropriate given the nature of its reinsurance arrangements. The Level 2 insurance group must set out its approach to the placement of reinstatement of cover in its ReMS. If APRA is not satisfied with the approach taken by the insurer, it may apply a supervisory adjustment to the prescribed capital amount in accordance with paragraph 35 of GPS 110.[31]

12. During the period of the catastrophe reinsurance program, a Level 2 insurance group must review and consider the adequacy of reinstatements of all or parts of its reinsurance program, including the requirements of paragraph 11 of this Attachment. This review must also consider the financial and operational implications of not having a sufficient number of contractually agreed reinstatements during the period of cover. Details of this review must be included in the Level 2 insurance group’s ReMS and ICAAP.

Use of alternative capital and risk mitigants

13. If a Level 2 insurance group is considering the use of protections including alternative capital or risk mitigants to reduce the Insurance Concentration Risk Charge, the insurer must apply to APRA for approval to include that mitigant in the calculation of the Insurance Concentration Risk Charge. This includes, but is not limited to, the use of securitisation and catastrophe bonds.

Catastrophe models

14. It is common practice for a Level 2 insurance group to use computer-based modelling techniques, developed either in-house or by external providers, to estimate likely losses under different catastrophe scenarios. If a Level 2 insurance group uses such a model, the model must be conceptually sound and capable of consistently producing realistic calculations. A Level 2 insurance group must be able to demonstrate:

(a) that the model has been researched and tested;

(b) that the Level 2 insurance group has taken measures to ensure that the data used to estimate its losses is sufficiently consistent, accurate and complete, and there is appropriate documentation of any estimates of data used; and

(i) perils and elements that are not included in the model;

(ii) assumptions and any estimates used in the modelling process; and

(iii) the sensitivity of the model outputs as a result of the factors in (i) and (ii).

Review and reporting

15. A Level 2 insurance group must document in its ReMS the process and methodologies for setting and monitoring its Insurance Concentration Risk Charge. This must also include justification for any adjustments or assumptions made, such as all allowances made for aggregate reinsurance cover and adjustments to OA VR. GPS 230 sets out further details on this requirement.

16. In addition to the requirements of paragraph 15 of this Attachment, a Level 2 insurance group that writes lenders mortgage insurance business must outline in its ReMS how it manages the exposures and mitigants in place for the risk in relation to future placement of reinsurance arrangements.

17. The Group Actuary of a Level 2 insurance group, must review and comment on the adequacy of the calculation of the Insurance Concentration Risk Charge for the Level 2 insurance group as part of the Level 2 insurance group’s AVR. For a Level 2 insurance group that has other accumulations exposures, the Group Actuary must consider the impact on the Insurance Concentration Risk Charge of the occurrence of multiple OA events in a year.

18. The Group Actuary of a Level 2 insurance group must submit the review of the Insurance Concentration Risk Charge to the Board when substantive changes are made or at least annually.

19. A Level 2 insurance group must inform APRA within 20 business days of any material changes to its Insurance Concentration Risk Charge that results from any changes in its ReMS, risk profile, classes of business underwritten or reinsurance program.

[1] Only a lenders mortgage insurer must calculate (d). The definition of lenders mortgage insurer in GPS 001 includes a reinsurer that writes lenders mortgage insurance. Therefore, a reinsurer that provides reinsurance on lenders mortgage insurance must calculate (d).

[2] This includes the determination of reinsurance for lenders mortgage insurance in Attachment A.

[3] This includes the determination of reinsurance for lenders mortgage insurance in Attachment A.

[4] For the purposes of this requirement, reinsurance from the Australian Reinsurance Pool Corporation can be treated as having a contractually agreed reinstatement.

[5] Where certain perils are material to an insurer but not included in its computer-based modelling techniques, an allowance for losses in respect of these perils would need to be estimated and added to the NP PML.

[6] The net loss is the gross loss less potential reinsurance recoverables.

[7] The first reporting period after the effective date of this Prudential Standard may be part way through the catastrophe reinsurance program treaty year. If this is the case, the insurer must determine NP HR as if the requirement to determine NP HR applied at the inception date of the catastrophe reinsurance program (ignoring any events that may have occurred between the inception date of the current catastrophe reinsurance program and the effective date of this Prudential Standard).

[8] Where certain perils are material to an insurer but not included in its computer-based modelling techniques, an allowance for losses in respect of these perils would need to be estimated and added to the H3 loss.

[9] The net loss is the gross loss less potential reinsurance recoverables.

[10] Where certain perils are material to an insurer but not included in its computer-based modelling techniques, an allowance for losses in respect of these perils would need to be estimated and added to the H4 loss.

[11] The net loss is the gross loss less potential reinsurance recoverables.

[12] Catastrophic losses are those that give rise to a relatively significant number of claims and occur no more frequently than every three months. The Appointed Actuary needs to consider historical data over an appropriate period of time.

[13] Net premiums liability central estimate provision will be determined in accordance with Prudential Standard GPS 340 Insurance Liability Valuation (GPS 340).

[14] The diversified risk margin will already be determined in accordance with GPS 340 and does not need to be split into a catastrophic and attritional loss component. The diversified risk margin will be a dollar amount determined by applying the percentage risk margin to the amount determined in sub-paragraph (b).

[15] The Premiums Liability Risk Charge will be the prescribed ‘Premiums Liability Risk Capital Factor’ for that class of business from Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Charge multiplied by the amount determined in sub-paragraph (c).

[16] The determination of OA PML must consider the nature of products provided, losses that may lead to an aggregation of multiple per-risk or per-policy losses arising from a common dependent source, the potential for multiple classes of insurance and/or portfolios to be impacted from this common dependent source and whether the upper limit of reinsurance cover purchased is sufficiently high to cover the OA PML.

[17] ‘Premiums liability’ is determined in accordance with GPS 340.

[18] For the purposes of this paragraph, ‘potential reinsurance recoverables’ include reinsurance assets receivable from the Commonwealth Government in respect of:

(a) a high cost claim indemnity as defined under the Medical Indemnity Act 2002 (Medical Indemnity Act); and

(b) amounts payable under the High Cost Claims Protocol as defined under the Medical Indemnity Act.

[19] The attachment point in this calculation may allow for any portion of paid and outstanding claims and premiums liabilities that contribute to the retained losses. APRA may require the insurer to modify the adjustment made in accordance with this paragraph.

[20] For example, reducing the PML amount by any aggregate deductible, applying a maximum cover limit or other partial cover factors, if applicable.

[21] Outstanding claims liability and premiums liability provisions in excess of a 75 per cent level of sufficiency must not be recognised.

[22] The Actuarial Valuation Report or Financial Condition Report that are required to be completed by the Appointed Actuary in accordance with CPS 320.

[23] This might include, for example, allowing for reversing accruals for experience bonus or other financial adjustments.

[24] APRA will review the allowable reinsurance calculation as set out in the ReMS when making this determination.

[25] Top cover % is the percentage of the loan amount covered by the lenders mortgage insurance.

[26] Top cover % is the percentage of the loan amount covered by the lenders mortgage insurance.

[27] A Level 2 insurance group that includes a lenders mortgage insurer must calculate (d). The definition of lenders mortgage insurer in GPS 001 includes a reinsurer that writes lenders mortgage insurance. Therefore, a Level 2 insurance group with a reinsurer that provides reinsurance on lenders mortgage insurance must calculate (d).

[28] Australia must be treated as a single region for the purposes of this sub-paragraph.

[29] This includes the determination of reinsurance for lenders mortgage insurance in Attachment A.

[30] For avoidance of doubt, this paragraph excludes intra-group reinsurance arrangements as these are consolidated in accordance with paragraph 3 of this Attachment.

[31] For the purposes of this requirement, reinsurance from the Australian Reinsurance Pool Corporation can be treated as having a contractually agreed reinstatement.

meta-content-style-type: text/css meta-content-type: application/xhtml+xml; charset=utf-8 meta-generator: Aspose.Words for .NET 22.10.0 meta-keywords: "[SEC=UNOFFICIAL]" title: Prudential Standard GPS 116

Insurance (prudential standard) determination

No. 6 of 2023

Prudential Standard GPS 116 Capital Adequacy: Insurance Concentration Risk Charge

Insurance Act 1973

I, Helen Rowell, a delegate of APRA:

(b) under subsection 32(1) of the Act determine Prudential Standard GPS 116 Capital Adequacy: Insurance Concentration Risk Charge, in the form set out in the Schedule, which applies to:

(i) all general insurers and authorised NOHCs; and

(ii) a subsidiary of a general insurer or authorised NOHC, where that subsidiary is a parent entity of a Level 2 insurance group.

This instrument commences on 1 July 2023.

Dated: 24 May 2023

[Signed]

Helen Rowell

Deputy Chair

Interpretation

In this instrument:

APRA means the Australian Prudential Regulation Authority.

authorised NOHC has the meaning given in section 3 of the Act.

general insurer has the meaning given in section 11 of the Act.

Level 2 insurance group has the meaning given in Prudential Standard GPS 001 Definitions.

parent entity has the meaning given in Prudential Standard GPS 001 Definitions.

subsidiary has the meaning given in Prudential Standard GPS 001 Definitions.

Schedule

Prudential Standard GPS 116 Capital Adequacy: Insurance Concentration Risk Charge, comprises the document commencing on the following page.

Prudential Standard GPS 116

Capital Adequacy: Insurance Concentration Risk Charge

GPS 116 builds its technical approach around a small set of core concepts that determine how concentration risk is measured and what items can reduce the calculated charge. Those core concepts are: Insurance Concentration Risk Charge; natural perils vertical and horizontal requirements; other accumulations vertical requirement; LMICRC for lenders mortgage insurers; potential reinsurance recoverables; aggregate reinsurance; reinstatement premiums and costs; whole‑of‑portfolio PMLs and net losses; and governance inputs (Appointed/Group Actuary, ReMS, ICAAP).

Insurance Concentration Risk Charge: Defined by the maximum of component requirements (paras 7-9). Purpose claimed: to represent the net financial impact from either a single large event or a series of smaller events within one year (para 8). The standard operationalises that purpose into separate component calculations for different accumulation types and frequencies (para 9).

Natural perils vertical requirement (NP VR): Measures the insurer’s probable maximum loss (NP PML), net reinsurance recoverables, net whole‑of‑portfolio loss (a 0.5 per cent one‑year exceedance), and adds reinstatement costs less reinstatement premiums where applicable (paras 18-26). NP PML is defined as the gross loss at not less than a 0.5 per cent annual exceedance for the whole portfolio and must include non‑modelled peril allowances and portfolio growth (para 21). NP VR must be calculated at each reporting date, taking into account the reinsurance program in place for the next reporting period and only recognising potential reinsurance recoverables that were contractually agreed on or before the reporting date (paras 19-20).

Natural perils horizontal requirement (NP HR): Covers lower probability but more frequent event sequences, operationalised via H3 and H4 requirements which use 10 per cent and 16.7 per cent annual exceedance loss levels respectively, multiplied by factors (three times for H3, four times for H4), net of reinsurance, aggregate offsets, reinstatement premiums and costs, and reduced by a PL offset where applicable (paras 27-43). NP HR is calculated at or prior to the inception date of the catastrophe reinsurance program and then held constant for the treaty year (para 28).

Other accumulations vertical requirement (OA VR): Targets accumulations from common dependent sources and non‑natural perils, with an OA PML at a 0.5 per cent one‑year exceedance, net of reinsurance recoverables (which may include aggregate cover if it reaches attachment), less premiums liability adjustments and plus reinstatement cost (paras 44-52, 47-51). Appointed Actuary adjustments to avoid double counting with premiums liability are explicitly contemplated (para 48; footnotes).

Lenders mortgage insurer concentration risk charge (LMICRC): For LMIs, Attachment A prescribes a specialised PML and a three‑year Prescribed Stress Scenario with a specified loss allocation (25/50/25) and factors for PD, LGD and seasoning for different loan types and LVR bands. Deductible items are Allowable Reinsurance (capped at 60 per cent of PML) and net premiums liability relating to an economic downturn; the LMICRC has a floor of 10 per cent of the PML (Attachment A paras 3-7, 8-25, Table A).

Reinsurance and recoverables: Only contractually committed reinsurance recoverables that meet GPS 230 inception, two‑month and legal/dispute requirements may be recognised unless APRA grants special treatment (paras 13-16). Aggregate reinsurance is treated specially: APRA approval and agreed methodologies are required before aggregate covers can be included in NP VR or as aggregate offsets for H3/H4 and OA VR (paras 26, 33, 40, 49).

Reinstatement elements: GPS 116 requires insurers to have contractually agreed reinstatements for catastrophe reinsurance that reduce NP VR at inception (para 15), or to demonstrate impracticality and include the approach in ReMS; APRA may apply supervisory adjustments under GPS 110 if not satisfied (para 16). Insurers must consider reinstatement adequacy and costs during the treaty year (para 17). Reinstatement premiums and reinstatement costs are discrete items that increase or decrease the NP VR and horizontal requirements depending on the clause (paras 24-25, 34-35, 41-42, 52).

Model architecture and validation: Where computer models are used, GPS 116 requires conceptual soundness, testing, data governance and understanding of model limitations and sensitivities (paras 55; Attachment B para 14). These model requirements are prescriptive on validation and documentation rather than on specific modelling techniques.

Governance and actuarial involvement: The standard requires documentation in ReMS and ICAAP of methodologies and adjustments (paras 56-57), timely actuarial determinations (PL offset, AVR inputs; para 43), actuarial review and sign‑off in Financial Condition Reports and AVRs (paras 58; Attachment B paras 17-18), and notification to APRA within 20 business days of material changes (paras 59; Attachment B para 19).

Supervisory discretion and cross‑references: APRA may adjust or exclude specific requirements by notice (para 60), and GPS 116 cross‑references GPS 001 for definitions, GPS 110 for capital interactions and supervisory adjustments, GPS 230 for reinsurance documentation rules, GPS 340 and GPS 115 for liabilities and capital factors, and CPS 320 for actuarial reporting (multiple paragraphs and footnotes).

These main concepts are implemented through explicit arithmetic rules, reporting timing rules and a set of limitations on what mitigants can be recognised without APRA agreement. The standard therefore translates a conceptual purpose (capital for concentration risk, para 8) into discrete, audit‑ready calculation steps and governance obligations (paras 9-16, 43, 56-59).

GPS 116 applies by text to three overlapping populations. First, all general insurers authorised under the Insurance Act 1973 are within scope (Application and commencement, para 2(a)). Second, Level 2 insurance groups must comply: where a requirement applies to a Level 2 group the requirement is imposed on the parent entity (paras 2(b), 4). Third, a subsidiary of a general insurer or authorised NOHC is captured where that subsidiary is the parent entity of a Level 2 insurance group (preamble).

Within those populations several subgroups are subject to particular rules or additional attachments:

Lenders mortgage insurers (LMIs): LMIs must calculate the LMICRC under Attachment A and are subject to the Prescribed Stress Scenario and Table A factorisation (Attachment A paras 1-7, 8-25, Table A). Footnotes clarify that the GPS 001 definition of LMI extends to a reinsurer that writes lenders mortgage insurance, so reinsurers providing LMI cover may also need to calculate LMICRC (footnotes [1], [27]).
Level 2 insurance groups: must apply Attachment B, which requires consolidation of intra‑group reinsurance, allows regional or whole‑of‑portfolio approaches subject to APRA agreement, and imposes Group Actuary and ReMS/AVR responsibilities (Attachment B paras 1-8, 3, 7-8, 15-19). Australia is treated as a single region for regional approaches (Attachment B footnote [28]).
Insurers writing other accumulations: those with exposures to non‑natural peril accumulations (for example, cyber, product defect aggregations or medical indemnity) must compute OA VR, including OA PML and actuarial adjustments, and may need to coordinate with APRA on methodology (paras 44-52, footnote [16]).
Insurers using aggregate reinsurance or alternative capital: those seeking to recognise aggregate reinsurance recoverables, securitisation, catastrophe bonds or other risk mitigants must apply to APRA for approval before including such mitigants in the calculation (paras 26, 33, 40, 49; para 54).
Insurers with catastrophe reinsurance programs spanning multiple treaty inception dates: such insurers must consult APRA to determine applicable reporting dates and approaches for NP HR and NP VR (paras 15, 28).

Operational roles inside affected entities are also clearly specified. The Board holds ultimate responsibility for prudent capital management as stated in the Standard's objectives and key requirements (Schedule header). The Appointed Actuary (for insurers) must determine PL offsets, include them in the AVR, and comment on adequacy in the Financial Condition Report (paras 43, 58). For Level 2 groups the Group Actuary has equivalent duties, including an annual or more frequent Board submission when substantive changes occur (Attachment B paras 17-18). Reinsurance managers must ensure documentation meets the inception and two‑month rules of GPS 230 for recoverables to be recognised (paras 13-14).

APRA is a central decision maker for several discretional points: agreeing methodologies for aggregate reinsurance recognition or offsets (paras 26, 33, 40, 49), consulting on recalculation approach after material business or reinsurance change (para 12), determining acceptable reporting dates for multi‑inception treaties (paras 15, 28), approving alternative methods for Level 2 groups (Attachment B para 7(b)), and adjusting or excluding requirements by written notice (para 60). APRA may also apply supervisory adjustments under GPS 110 where required reinstatements are not in place or the ReMS approach is unsatisfactory (paras 16, Attachment B para 11).

Those who will bear compliance cost burdens therefore include boards (oversight and sign‑off), appointed or group actuaries (calculations, AVR commentary), risk/reinsurance managers (contractual reinstatements, documentation, model inputs), finance teams (capital calculation and reporting), and legal teams (ensuring reinsurance contract wording meets GPS 230 governing law and dispute requirements, paras 13-14).

Entities not within scope are not named in the text, but the standard is explicitly addressed only to authorised general insurers and Level 2 insurance groups (paras 1-4). The standard does not on its face require non‑insurer financial intermediaries or pure life insurers to comply, unless included within GPS 001’s definitions of Level 2 groups or specific activities.

GPS 116 imposes specific duties on regulated institutions and assigns procedural rights and obligations vis‑à‑vis APRA. The duties are both calculative and documentary, and attach to specific roles within the insurer.

Calculation duties

Compute the Insurance Concentration Risk Charge via the Standard Method using the formula in paragraph 9: the greatest of NP VR, NP HR, OA VR, and LMICRC where applicable (para 9). The resulting charge must not be less than zero (para 10).
Do not make tax adjustments to amounts in paragraph 9 (para 11). For Level 2 groups the same prohibition applies (Attachment B para 5).
For natural perils exposures: calculate NP PML at the whole‑of‑portfolio 0.5 per cent annual exceedance and NP reinsurance recoverables and net whole‑of‑portfolio loss (paras 21-23). For horizontal measures, calculate H3 and H4 losses at 10 per cent and 16.7 per cent exceedances respectively and apply multipliers and offsets as prescribed (paras 29-39). For other accumulations, determine OA PML at 0.5 per cent over 12 months and associated recoverables (paras 44-49).
Lenders mortgage insurers must follow the prescriptive PML and Prescribed Stress Scenario methodology in Attachment A, including use of Table A PD, LGD and seasoning factors, allocation of losses across a three‑year downturn, and application of Allowable Reinsurance and net premiums liability deductions (Attachment A paras 3-25; Table A).

Timing, reporting and monitoring duties

NP VR must be calculated and reported at each reporting date, taking into account the reinsurance program for the next reporting period (para 19). NP HR is to be calculated on or prior to the inception date of the catastrophe reinsurance program and then held constant for the treaty year (para 28).
Regular monitoring is required during the reporting period and recalculation in the event of (or following) catastrophic events or material business or reinsurance changes (paras 20-21, 59). Insurers must notify APRA within 20 business days of material changes to the Insurance Concentration Risk Charge arising from changes in ReMS, risk profile, classes underwritten or reinsurance program (para 59; Attachment B para 19).

Documentation and governance duties

Document processes and methodologies for setting and monitoring the Insurance Concentration Risk Charge in the Reinsurance Management Strategy (ReMS) and ICAAP, including justification for assumptions and adjustments, with GPS 230 cross‑reference for further detail (paras 56-57; Attachment B paras 15-16).
The Appointed Actuary must determine PL offset amounts, include details in the AVR, and review/comment on adequacy in the Financial Condition Report; Group Actuaries perform similar roles for Level 2 groups (paras 43, 58; Attachment B paras 17-18).

Reinsurance and contract duties

Only recognise potential reinsurance recoverables where the reinsurance meets GPS 230 inception and two‑month rules and governing law/dispute requirements, or where APRA treats an arrangement as complying (paras 13-14; footnote [4] on ARPC). Insurers must have contractually agreed reinstatements at inception of catastrophe programs that reduce NP VR unless demonstrably impractical, in which case they must document the approach in ReMS and may face supervisory adjustment (paras 15-16).

Rights and consultative mechanisms

Insurers and Level 2 groups can apply to APRA to recognise aggregate reinsurance or alternative methods, but approval or an agreed methodology is required before such items can be included in the calculation (paras 26, 33, 40, 49; Attachment B para 7(b); para 54 for alternative capital).
APRA may, by notice in writing, adjust or exclude specific requirements for a regulated institution (para 60). That written notice mechanism is the formal right for tailored relief.

Supervisory enforcement mechanisms (powers available to APRA)

APRA may apply supervisory adjustments to the prescribed capital amount under GPS 110 where insurers do not meet reinstatement expectations or APRA is not satisfied with their approaches documented in ReMS (para 16; references to GPS 110 para 35).
APRA may require insurers to consult before recalculating natural perils horizontal requirements after material changes (para 12) and to agree methodologies for aggregate reinsurance offsets (paras 26, 33, 40, 49).

Prohibitions and constraints

Insurers must not make tax adjustments to component amounts (para 11). They must not apply the premiums liability adjustment in both OA PML reduction and OA reinsurance recoverables (para 51). For OA PML and OA reinsurance recoverable adjustments, the insurer must not double‑count (para 51).
Where a Level 2 insurance group seeks to use alternative methods for LMICRC it must not; Attachment B para 8 expressly prohibits applying for an alternative method for the lenders mortgage insurer concentration risk charge.

Record keeping and actuarial evidence

For LMIs the Appointed Actuary must include prescribed actuarial advice (AVR or FCR) where Available Reinsurance assumptions include amounts from outstanding claims liability or premiums liability (Attachment A para 20; footnote [22]).

Taken together, GPS 116 creates calculative duties with discrete timing rules, documentary requirements for ReMS/ICAAP/AVR, contractual expectations for reinsurance reinstatements and recoverables, and an APRA consultation and approval pathway when insurers wish to recognise aggregate reinsurance, alternative capital or deviate from the standard timing/methods.

GPS 116 does not itself set out explicit criminal penalties, civil fines or graduated monetary sanctions within the text provided. The instrument operates as a prudential standard made under section 32 of the Insurance Act 1973 (Authority, para 1) and therefore sits within APRA’s prudential supervisory framework. Enforcement and remedial measures available to APRA under that framework are signalled through multiple provisions in the standard and cross‑references to related prudential standards.

Supervisory adjustments and APRA discretion

APRA may apply a supervisory adjustment to the prescribed capital amount where an insurer does not have the required contractually agreed reinstatements and cannot demonstrate that such reinstatements are impractical (para 16). The supervisory adjustment is to be applied in accordance with paragraph 35 of Prudential Standard GPS 110 Capital Adequacy (GPS 110) (para 16; cross‑ref). While GPS 116 does not recite GPS 110 para 35 textually, the referral indicates APRA can adjust the prescribed capital amount upward to reflect its supervisory view.
APRA may, by notice in writing, adjust or exclude a specific requirement in GPS 116 in relation to a regulated institution (para 60). This provision operates as a delegated discretion to tailor or relax individual obligations, and represents an administrative enforcement/resolution lever.

Reporting, consultation and remedial expectations

GPS 116 imposes reporting duties (for example, notification within 20 business days of material changes, para 59; Attachment B para 19). Repeated or persistent non‑compliance with such reporting obligations would situationally engage APRA’s supervisory toolkit under the Insurance Act and related instruments, though GPS 116 does not set out the downstream enforcement steps.

Contractual and market consequences

Several calculation rules depend on reinsurance being contractually agreed and meeting GPS 230 rules (paras 13-14). If recoverables are not recognised because documentation does not meet GPS 230, this will mechanically increase the calculated charge and hence the prescribed capital amount. The supervisory consequence is indirect: failure to secure compliant reinsurance raises capital requirements.

Cross‑references to other standards with enforcement provisions

GPS 116 cross‑references GPS 110 for supervisory adjustments (para 16) and GPS 230 for reinsurance documentation requirements (paras 13-14). Enforcement mechanisms and penalties that apply under those instruments and the Insurance Act are outside GPS 116’s text but may include directions, enforceable undertakings, restrictions on business, or other supervisory sanctions administered by APRA pursuant to the Act. The standard therefore sits within a broader enforcement architecture rather than creating separate statutory penalties.

Remedial procedures implied by the standard

APRA is given a consultative and certifying role: insurers must consult APRA for recalculation approaches following material business or reinsurance changes (para 12), and for methodologies to recognise aggregate reinsurance (paras 26, 33, 40, 49), and for Level 2 groups that want alternative methods to be accepted (Attachment B para 7(b)). Failure to obtain APRA agreement prior to recognising mitigants or using alternative calculation approaches will lead to non‑recognition of those mitigants and potentially larger capital requirements.

Absence of explicit civil penalty clauses

GPS 116 does not specify monetary penalties, criminal offences, or civil liability provisions in its text. Enforcement is therefore effected through APRA’s supervisory levers and cross‑reference to GPS 110 and the Insurance Act 1973. The standard provides APRA with discretion to adjust capital outcomes and require documentation and remediation; it does not purport to replicate statutory penalty provisions.

In practical terms, the standard’s enforcement mechanics are therefore a mixture of (1) direct computational consequences where non‑compliance reduces the scope for recoverable offsets; (2) APRA’s supervision and discretionary adjustments under GPS 110; and (3) APRA’s administrative powers to issue written notices to adjust or exclude requirements (para 60). Entities should therefore treat non‑compliance as likely to produce supervisory remediation rather than a schedule of fines within GPS 116 itself.

GPS 116 is explicitly cross‑referential and constructed to sit within APRA’s suite of prudential standards and other statutory instruments. The standard both borrows definitions and relies on procedural mechanics from other prudential instruments and statutes.

Statutory basis and authorising law

Authority: GPS 116 is made under section 32 of the Insurance Act 1973 (Authority, para 1). The preamble shows it revokes an earlier determination and replaces the content, which is a statutory exercise of power under the Act (preamble).

Definitions and group boundaries

GPS 001: GPS 116 uses definitions from Prudential Standard GPS 001 Definitions for terms such as Level 2 insurance group, parent entity and subsidiary; those definitions determine the population and consolidation boundaries (Interpretation, paras 4-5; Attachment B para 1).

Reinsurance documentation and recognition

GPS 230 Reinsurance Management: GPS 116 conditions the recognition of potential reinsurance recoverables on compliance with the inception date and two‑month rules and the governing law and dispute requirements of GPS 230 (paras 13-14). APRA may treat ARPC reinsurance as having reinstatement (footnote [4]; Attachment B footnote [31]).

Capital adequacy and supervisory adjustment framework

GPS 110 Capital Adequacy: GPS 116 calls on GPS 110 for supervisory adjustments to the prescribed capital amount where insurers lack required reinstatements or where APRA is not satisfied with an insurer’s ReMS approach (para 16; Attachment B para 11). That links the GPS 116 calculation to APRA’s broader prescribed capital regime and supervisory toolkit under GPS 110.

Liability valuation and premium offsets

GPS 340 Insurance Liability Valuation and GPS 115 Capital Adequacy: Insurance Risk Charge: The PL offset calculation and related actuarial determinations rely on GPS 340 for net premiums liability central estimate and diversified risk margin (para 43; footnotes [13], [14], [15]), and GPS 115 supplies the Premiums Liability Risk Capital Factor used in the PL offset (footnote [15]). The standard also restricts recognition of outstanding claims liability and premium liability in aggregate reinsurance quantification to levels of sufficiency (Attachment A footnote [21]).

Actuarial reporting standards

CPS 320 and Financial Sector (Collection of Data) Act 2001 Reporting Standards: The standard references CPS 320 for prescribed actuarial advice obligations and the data collection Reporting Standards for timeframes for lodging reporting forms (para 43; Attachment A footnote [22]). AVRs and Financial Condition Reports are key documents where actuarial opinions on the Insurance Concentration Risk Charge must appear (paras 56, 58; Attachment B paras 17-18).

Medical indemnity and government recoverables

Medical Indemnity Act 2002: Footnote [18] confirms that in determining OA reinsurance recoverables, insurers may include reinsurance assets receivable from the Commonwealth under defined high cost claim indemnities and amounts payable under the High Cost Claims Protocol of the Medical Indemnity Act. That is a statutory recognition of Commonwealth recoverables in the reinsurance calculus.

Consolidation and accounting regimes

Attachment B requires Level 2 insurance groups to consolidate intra‑group reinsurance for purposes of GPS 116 (Attachment B para 3), and regional approaches for Level 2 groups must be consistent with regions used for the Level 2 group’s accounts (Attachment B para 7(a); footnote [28] treats Australia as a single region). This cross‑ties GPS 116 calculations to accounting and group consolidation rules at Level 2.

Cross‑references to other APRA standards as operational constraints

GPS 230, GPS 110, GPS 340, GPS 115 and CPS 320 are invoked multiple times and impose external documentary, valuation and supervisory rules that affect what can be recognised in GPS 116 calculations (paras 13-16, 43, 56; Attachment A paras and footnotes). Because GPS 116 depends on compliance with those instruments, non‑compliance in those regimes will have direct effects on allowable offsets under GPS 116.

Practical consequence of interactions

The standard’s use of those cross‑references creates a networked compliance burden: an insurer must comply not only with GPS 116’s arithmetic but also with GPS 230 evidentiary and contract standards, actuarial reporting standards under CPS 320, and valuation rules in GPS 340 to achieve favourable treatment for offsets and deductions. APRA’s supervisory discretion under GPS 110 then overlays remedial powers where contractual or documentation expectations are not met (paras 13-16; footnotes).

In aggregate, GPS 116 is not an isolated rule but a component of APRA’s prudential architecture. Compliance requires co‑ordination across legal, actuarial, risk and reinsurance functions to ensure that reinsurance documentation, actuarial valuations, reporting timings and remedial consultations align with the cross‑referenced standards.

The instrument expressly revokes the prior Insurance (prudential standard) determination No. 3 of 2022, including Prudential Standard GPS 116 Capital Adequacy: Insurance Concentration Risk Charge, and replaces it with the standard set out in the Schedule (preamble). The delegate of APRA, Helen Rowell, signed the instrument on 24 May 2023 and the instrument is identified as Insurance (prudential standard) determination No. 6 of 2023 (preamble). The new standard commenced on 1 July 2023 (preamble; Application and commencement, para 3).

Textual replacement and continuity

The instrument revokes the prior GPS 116 and re‑determines GPS 116 in the Schedule (preamble). The new text contains detailed calculation rules, attachments and footnotes. Where GPS 116 references GPS 001, GPS 230, GPS 110, GPS 340, GPS 115 and CPS 320, those cross‑references suggest either continuity or updating of the regulatory network compared to the deleted version, although the instrument as provided does not set out an amendment history table or compare specific clause changes to the previous Determination.

Footnotes and clarifications

The standard contains multiple footnotes clarifying operation and scope (for example, footnote [1] on which entities must calculate LMICRC, footnote [4] treating ARPC reinstatement as contractually agreed for the purposes of the requirement, and footnote [27] for Level 2 groups including an LMI). Those footnotes form part of the instrument and therefore are the official clarifications replacing any prior guidance that may have appeared in the revoked Determination.

Commencement and transition

The instrument sets a commencement date (1 July 2023). Paragraphs that could affect transition are present: for instance, footnote [7] gives guidance about NP HR calculation for the first reporting period after the effective date, instructing insurers to determine NP HR as if it applied at the inception date of the catastrophe reinsurance program (footnote [7]). Attachment A para 18 provides a methodology direction for LMIs in run‑off, indicating that APRA must approve any run‑off adjustment (Attachment A para 18).

Discretion and historic exercises

Paragraph 61 requires a regulated institution to contact APRA if it seeks to place reliance on a previous exemption or other exercise of discretion made by APRA under a previous version of this Prudential Standard. This clause indicates continuity in supervisory discretion: historical APRA exemptions do not automatically carry forward; insurers must engage APRA to rely on past discretionary relief (para 61).

Absence of an amendment log

The instrument does not include an amendment log in the provided text beyond the explicit revocation and replacement. It does not list incremental amendments between versions or a schedule of substituted clauses. The text instead supplants the earlier Determination entirely.

In sum, the amendment history that appears in the instrument is limited to a full revocation and re‑determination of GPS 116 effected by Insurance (prudential standard) determination No. 6 of 2023, with commencement 1 July 2023 and transitional guidance for first reporting periods in footnotes and run‑off approaches to be approved by APRA. Any reliance on prior APRA discretions requires renewed contact (para 61).

The text of GPS 116 does not record any litigation history, judicial decisions, or case law interpreting the provisions. The instrument itself is an administrative determination made under section 32 of the Insurance Act 1973 and contains no references to legal challenges, court decisions, or precedent. Paragraph 61 does require regulated institutions to contact APRA regarding reliance on prior exemptions or exercises of discretion but does not reference any litigated matters.

Because GPS 116 cross‑references other prudential instruments and statutory schemes (for example GPS 110, GPS 230, GPS 340, CPS 320 and the Insurance Act 1973), any litigation that touches the application of GPS 116 would likely arise in the broader context of APRA supervision or disputes about the exercise of supervisory discretions under the Act or associated standards. Those instruments and the Insurance Act themselves may have separate litigation histories, but none are cited within GPS 116.

Therefore, based solely on the provided text, there is no recorded litigation history to report. Practitioners seeking to understand judicial treatments of issues that could be related to GPS 116 (for example, disputes about APRA supervisory adjustments, treatment of reinsurance recoverables, or actuarial determinations) would need to consult external jurisprudence or APRA enforcement records beyond the instrument’s text; those sources are not contained in GPS 116.

GPS 116 embeds a number of technical and procedural features that can produce compliance surprises if not anticipated. The following are concrete operational pitfalls drawn from the text.

Recognition of reinsurance recoverables is tightly conditional
- Only potential reinsurance recoverables from reinsurance arrangements that comply with GPS 230 inception and two‑month rules, and the governing law and dispute requirements of GPS 230, may be recognised in any component of the Insurance Concentration Risk Charge (paras 13-14). Recoverables that fail these documentary or timing tests are not eligible. The footnote that reinsurance from the Australian Reinsurance Pool Corporation can be treated as having a contractually agreed reinstatement is a narrow statutory carve‑out (footnote [4]; Attachment B footnote [31]). Practically, this means that a late or informal reinsurance amendment , even if economically agreed , may not count until documentation complies with GPS 230.
Aggregate reinsurance requires APRA agreement and methodology
- Aggregate covers are not automatic offsets. The insurer must apply to APRA and agree a methodology before aggregate reinsurance can be included in NP VR, H3/H4 aggregate offsets or OA VR adjustments (paras 26, 33, 40, 49). Insurers should not assume that economic features of aggregate cover will be accepted for offsets unless an APRA‑agreed method exists.
Timing mismatch risk: NP HR fixed for the treaty year
- NP HR is calculated at the reporting date on or prior to the inception date of the catastrophe reinsurance program and then held constant for the remainder of the treaty year (para 28). If an insurer’s risk profile or reinsurance program materially changes during the treaty year, the standard requires consultation with APRA for recalculation approaches (para 12). This can produce a timing mismatch between risk exposures and capital recognition.
Reinstatement requirements and supervisory consequence
- Insurers are required to have contractually agreed reinstatements of catastrophe reinsurance that reduce NP VR at inception, or to demonstrate impracticality and document the approach in ReMS (paras 15-16). APRA may apply supervisory adjustments under GPS 110 if not satisfied with an insurer’s approach (para 16). The reinstatement cost must be estimated conservatively , not less than full original cost unless demonstrably overstated (para 25). Negotiating reinstatement terms under market stress may therefore increase capital charges if contractual terms are not obtained.
No tax adjustments permitted
- Insurers must not make tax adjustments to amounts in paragraph 9 (para 11), eliminating any relief that might arise from tax loss recognition in capital calculations.
Appointed Actuary duties and the PL offset timing
- The Appointed Actuary must determine the PL offset and include it in the AVR and the insurer must allow sufficient time to lodge reporting forms to APRA (para 43). Failure to coordinate actuarial timings with reporting deadlines may result in an insurer being unable to apply the PL offset when calculating NP HR/NP VR.
LMICRC prescriptive factors and floors
- For LMIs the PML and scenario are prescriptive: a three‑year Prescribed Stress Scenario with specified allocation, PD/LGD/seasoning factors per Table A, Allowable Reinsurance capped at 60% of PML, and a floor that LMICRC must not be less than 10% of PML (Attachment A paras 3-7, 8-25, Table A). LMIs cannot over‑deduct reinsurance and should not expect unlimited recognition of reinsurance recoverables.
Double counting traps in OA adjustments
- Insurers must not apply both the premiums liability adjustment in paragraph 48 and the adjustment in paragraph 49; doing both would double‑count premium liabilities (para 51). Appointed Actuaries must carefully document any reduction to OA PML arising from items already allowed in premiums liability (para 48).
Model validation and limits of models
- Where models are used, insurers must demonstrate conceptual soundness, testing, data governance and an understanding of excluded perils and model sensitivities (para 55; Attachment B para 14). Insurers relying on vendor models must ensure they meet the standard’s documentation and testing expectations or face disallowance of model outputs.
Level 2 consolidation removes intra‑group reinsurance benefits
- For Level 2 groups, intra‑group reinsurance is consolidated for calculation purposes (Attachment B para 3), meaning group members cannot rely on intra‑group contracts to reduce the group Insurance Concentration Risk Charge.
APRA discretion can change outcomes post‑submission
- APRA may adjust or exclude GPS 116 requirements by written notice (para 60) and may require changes to methods described in ReMS when assessing allowable reinsurance (Attachment A para 23-24; footnote [24]). Insurers should expect APRA review of ReMS and allow for rework.
Notification deadlines
- Material changes must be notified to APRA within 20 business days (para 59; Attachment B para 19). Firms that do not have reporting processes aligned to that timescale can breach procedural obligations.

Each of these items is instantiated in the Standard’s text and represents a concrete operational or compliance risk. Organisations should map contractual, actuarial and reporting processes to those clauses to avoid unexpected non‑recognition of recoverables or supervisory adjustments.

Complying with GPS 116 requires integrated action across governance, actuarial, reinsurance, legal and finance functions. Below is a practical compliance checklist mapped to specific provisions of the standard.

Governance and board oversight
- Ensure the Board understands it holds ultimate responsibility for capital (Schedule header). Document Board sign‑off points for the Insurance Concentration Risk Charge methodology, ReMS and any APRA applications.
ReMS and ICAAP documentation
- Update the Reinsurance Management Strategy (ReMS) and Internal Capital Adequacy Assessment Process (ICAAP) to set out processes, methodologies, assumptions and justifications for the Insurance Concentration Risk Charge (paras 56-57; Attachment B paras 15-16). Include explicit documentation for aggregate reinsurance allowances, OA VR adjustments and any instances where reinstatement is not contractually agreed (paras 26, 33, 40, 49, 16).
Actuarial processes and timing
- Appointed Actuary must determine the PL offset and include it in the AVR with sufficient time to meet APRA reporting timeframes; ensure AVR and Financial Condition Report address the adequacy of the Insurance Concentration Risk Charge (para 43; paras 56, 58). For Level 2 groups, ensure the Group Actuary provides the AVR review to the Board at least annually or when substantive changes occur (Attachment B paras 17-18).
Calculation pipeline and data governance
- Implement calculation routines for NP VR, NP HR (H3 and H4), OA VR and LMICRC where applicable, reflecting the exact arithmetic in paragraph 9 and subsequent sections (paras 9, 18-26, 27-43, 44-52, Attachment A). Ensure data capture for whole‑of‑portfolio modelling, non‑modelled perils, portfolio growth, reinstatement premiums and costs, and specific PD/LGD/seasoning factors for LMIs (paras 21, 24-25, 30-39, 47-52; Attachment A Table A).
Model validation and documentation
- If using catastrophe or other models, document conceptual soundness, testing, data sources and sensitivity analysis, and maintain records of perils excluded from models and any non‑modelled allowances (para 55; Attachment B para 14). Keep model validation records available for APRA review.
Reinsurance contracting and evidencing
- Ensure reinsurance contracts comply with GPS 230 inception date and two‑month rules and governing law/dispute requirements so recoverables can be recognised (paras 13-14). Obtain explicit contractual reinstatements where possible for catastrophe reinsurance, and document reinstatement rates if contractually agreed; if not feasible, document impracticality and the ReMS approach and consult APRA (paras 15-16).
Aggregate reinsurance and APRA engagement
- Do not assume aggregate reinsurance is available as an offset. If seeking recognition, prepare and submit a methodology and supporting analysis to APRA and obtain agreement prior to including aggregate recoverables in NP VR or as H3/H4 aggregate offsets (paras 26, 33, 40, 49). For Level 2 groups, coordinate a consolidated methodology consistent with regional approaches agreed with APRA (Attachment B paras 3, 7).
LMICRC compliance for LMIs
- LMIs must adopt the Prescribed Stress Scenario and apply the Table A PD, LGD and seasoning factors unless APRA has approved an alternative (Attachment A paras 3-18; Table A). Calculate the PML per Attachment A paras 8-18, apply Allowable Reinsurance capped at 60 per cent and deduct net premiums liability relating to an economic downturn as determined by the Appointed Actuary, ensuring LMICRC is not less than 10 per cent of PML (Attachment A paras 6-7, 19-25).
Reporting cadence and event monitoring
- Calculate NP VR at each reporting date and NP HR on or prior to the catastrophe program inception date (paras 19, 28). Monitor exposures during the reporting period and recalculate as required after events or material changes (paras 20, 45). Notify APRA within 20 business days of material changes to the Insurance Concentration Risk Charge (para 59; Attachment B para 19).
Internal controls and audit trail
- Maintain an audit trail for all assumptions, market data, model outputs, reinsurance documentation, reinstatement cost estimations and APRA correspondence. Ensure reconciliations between actuarial outputs, finance systems and capital calculations.
Legal review of reinsurance contracts
- Have legal counsel verify that reinsurance documentation meets GPS 230 governing law and dispute clause requirements and document inception and two‑month compliance dates to ensure potential recoverables can be recognised (paras 13-14).
Engage APRA early and document approvals
- For any alternative capital mitigants, securitisations or catastrophe bond treatments, file an application to APRA for approval before inclusion in calculations (para 54). For aggregate reinsurance recognition, LMICRC methodology deviations, run‑off PML adjustments, and multi‑inception treaty reporting choices, consult APRA and retain written agreement (paras 26, 33, 40, 49; Attachment A para 18; Attachment B paras 6-8).
Coordinate with other prudential requirements
- Ensure approaches align with GPS 110 (GPS 116 supervisory adjustments), GPS 230 (reinsurance), GPS 340 (liability valuation), GPS 115 (premium liability risk capital factors), and CPS 320 (actuarial reporting) because GPS 116 depends on these instruments for allowable offsets and actuarial inputs (paras 16, 13-14, 43; footnotes).
Stress testing and scenario analysis
- Run scenario testing that mirrors the standard: whole‑of‑portfolio 0.5 per cent and the H3/H4 levels, three‑year downturn for LMIs with 25/50/25 allocation, and multiple event years for OA exposures per the Appointed Actuary’s considerations (paras 21, 23, 30-39, Attachment A paras 3-5, 58).
Prepare for APRA review and supervisory adjustments
- Anticipate APRA review of ReMS and methodology. If APRA is not satisfied with reinstatement approaches, the insurer may face a supervisory adjustment to the prescribed capital amount (para 16). Maintain contingency plans to adjust capital or reinsurance programs should APRA require remedial measures.

Implementing these steps will align operational practice with GPS 116’s precise calculation, documentation, and supervisory expectations. The precise order of operations typically is: secure reinsurance documentation at inception (or document impracticality), validate models and estimate PMLs and reinstatement costs, obtain Appointed/Group Actuary determinations (PL offset and AVR inputs), finalise capital calculation via prescribed formulae, lodge reporting forms with APRA and retain evidence for any APRA consultations or approvals.

Deep Dive

What it does

Current sections

Insurance (prudential standard) determination No. 6 of 2023

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Authority

Application and commencement

Level 2 insurance groups

Interpretation

Insurance Concentration Risk Charge

Insurance Concentration Risk Charge formula

Reinsurance arrangements

Natural perils vertical requirement

NP PML

NP reinsurance recoverables

Net whole-of-portfolio loss

NP reinstatement premiums

NP reinstatement cost

Other adjustments to NP VR

Natural perils horizontal requirements

H3 requirement

H4 requirement

PL offset

Other accumulations vertical requirement

OA PML

OA reinsurance recoverables

OA reinstatement cost

Lenders mortgage insurer concentration risk charge

Use of alternative capital and risk mitigants

Catastrophe models

Review and reporting

Adjustments and exclusions

Previous exercise of discretion

Attachment A – Lenders mortgage insurer concentration risk charge

PML and Prescribed Stress Scenario

Determining the lenders mortgage insurer concentration risk charge

Prescribed calculation of PML

LMIs in run-off

Available Reinsurance

Allowable Reinsurance

Net premiums liability deduction

Table A - PD, LGD and seasoning factors to be applied in determining the PML of LMIs

Standard loans

Non-standard loans

Commercial loans

Attachment B – Level 2 insurance groups

Insurance Concentration Risk Charge formula

Reinsurance arrangements

Use of alternative capital and risk mitigants

Catastrophe models

Review and reporting

Source text: opening excerpt

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Main concepts

Who it affects

Key duties and rights

Penalties and enforcement

How it interacts with other laws

Amendment history

Litigation history

Gotchas

How to comply

Authority

Application and commencement

Level 2 insurance groups

Interpretation

Insurance Concentration Risk Charge

Insurance Concentration Risk Charge formula

Reinsurance arrangements

Natural perils vertical requirement

NP PML

NP reinsurance recoverables

Net whole-of-portfolio loss

NP reinstatement premiums

NP reinstatement cost

Other adjustments to NP VR