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Commonwealth legislation
This Act has been repealed and is no longer in force. It is retained for historical reference.
This rule requires Australian general insurers to maintain robust, loss‑absorbing capital buffers so they can pay claims through disasters or market stress. It affects domestic and foreign insurers, and specialized lenders’ mortgage insurers, by defining acceptable capital, risk measures, and how shortfalls are treated.
APRA oversees compliance, must approve weakening capital actions, and insurers must disclose their capital positions annually — strengthening policyholder protection and system resilience.
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Zoe can write the in-depth analysis on top of the summary above: how it works, who it affects and what each part actually does.
Direct links to the current provisions in Insurance (prudential standard) determination No. 7 of 2006 - Prudential Standard GPS 110 - Capital Adequacy.
Sourced from the Federal Register of Legislation (legislation.gov.au), CC BY 4.0.
| Objective and key requirements of this Prudential StandardThis Prudential Standard aims to ensure that the security of policyholder obligations of all insurers is established at an appropriate level by requiring that each general insurer maintain at least a minimum amount of capital.Capital is the cornerstone of a general insurer’s strength. It provides a buffer against losses that have not been anticipated and, in the event of problems, enables the general insurer to continue operating while those problems are addressed or resolved. In this way, the maintenance of an adequate capital base can engender confidence, on the part of policyholders, creditors and the market more generally, in the financial soundness and stability of the general insurer.Beyond the minimum levels of capital specified by this Prudential Standard, it is the responsibility of a general insurer’s Board and senior management to ensure that the general insurer’s capital base is appropriate to the size, business mix, complexity and risk profile of its business. Accordingly, the general insurer must have suitable systems in place to identify, manage and monitor the risks associated with its business activities, and to hold capital commensurate with its overall risk profile. Such capital must, of course, be no less than the minimum specified by this Prudential Standard.The key requirements of this Prudential Standard are:A general insurer may choose one of two methods for determining its Minimum Capital Requirement. General insurers with sufficient resources are permitted to develop an in-house capital adequacy model to determine their own Minimum Capital Requirement (this is referred to as the Internal Model Based Method). Use of this method will, however, need APRA’s approval and the Treasurer’s agreement and will require a general insurer to satisfy a range of qualitative and quantitative criteria. General insurers that do not use the Internal Model Based Method must use the Prescribed Method described in this Prudential Standard.Regardless of which method is used to calculate the Minimum Capital Requirement, a general insurer’s Minimum Capital Requirement is determined having regard to a range of risk factors that may threaten the ability of the general insurer to meet policyholder obligations. Under the Prescribed Method, these fall under three broad types: insurance risk (the risk that the actual value of net insurance liabilities could be greater than the value determined under Prudential Standard GPS 310 Audit and Actuarial Reporting and Valuation); investment risk (the risk of an adverse movement in the value of a general insurer’s assets or off-balance sheet exposures); and concentration risk (the risk associated with an accumulation of exposures to a single catastrophic event or multiple catastrophic events if a whole of portfolio approach to catastrophe risk is applied). A general insurer using the Internal Model Based Method will be expected to include at least these risks, but also all other relevant risk factors, within its method of calculation.A general insurer must, at all times, maintain a capital base in excess of its Minimum Capital Requirement. To achieve this APRA expects the general insurer to maintain a buffer above the Minimum Capital Requirement. An insurer’s capital base is comprised of Tier 1 and Tier 2 capital.Foreign incorporated general insurers authorised to operate in Australia as branches have slightly different requirements from those applied to locally incorporated general insurers. Specifically, foreign incorporated general insurers are required to maintain assets in Australia that exceed their liabilities in Australia, by an amount that is greater than their Minimum Capital Requirement. For the definition of assets in Australia, refer to the Insurance Act 1973 and Prudential Standard GPS 120 Assets in Australia.Disclosure and transparency are important allies of the supervisory process. To improve policyholder and market understanding of its capital adequacy position, a general insurer must disclose, in its published annual report, details of its capital base and Minimum Capital Requirement. |
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Index
This document consists of the following:
Prudential Standard GPS 110 Capital Adequacy
Attachment A – Measurement of Capital Base
Attachment B – Internal Model Based Method
Attachment C – Insurance Risk Capital Charge
Attachment D – Investment Risk Capital Charge
Attachment E – Concentration Risk Capital Charge
Attachment F – Concentration Risk Capital Charge for Lenders Mortgage Insurers
Attachment G – Reductions in Capital
Attachment H – Transition Provisions
Authority
Application
This Prudential Standard applies to general insurers (insurers) authorised under the Act.F[1]F
Further details of the requirements outlined below are specified in the Attachments to this Prudential Standard.
Subject to any specific transition rules set out in Attachment H, an insurer must:
(a) comply with this Prudential Standard from 1 January 2007 (effective date); and
(b) continue to comply with:
(i) Prudential Standard GPS 110 Capital Adequacy for General Insurers made on 7 February 2002 (previous GPS 110);F[2]F
(ii) Guidance Note GGN 110.1 Measurement of Capital Base made on 7 February 2002 (GGN 110.1);
(iii) Guidance Note GGN 110.2 Internal Model Based Method made on 7 February 2002 (GGN 110.2);
(iv) Guidance Note GGN 110.3 Insurance Risk Capital Charge made on 7 February 2002 (GGN 110.3);
(v) Guidance Note GGN 110.4 Investment Risk Capital Charge made on 7 February 2002 (GGN 110.4);F[3]F
(vi) Guidance Note GGN 110.5 Concentration Risk Capital Charge made on 7 February 2002 (GGN 110.5); and
(vii) Guidance Note GGN 110.6 Concentration Risk Capital Charge for Lenders Mortgage Insurers made on 6 September 2005 (GGN 110.6)
until the effective date.
Interpretation
Definition of capital base
(a) provides a permanent and unrestricted commitment of funds;
(b) is freely available to absorb losses from business activities;
(c) does not impose any unavoidable servicing charges against earnings; and
(d) ranks behind the claims of policyholders and creditors in the event of the winding-up of the insurer.
Not all types of capital instruments meet these criteria equally. Due to the need to ensure that the capital base of an insurer provides adequate support, APRA imposes some restrictions on the composition of capital eligible to meet the MCR. The capital instruments deemed eligible for inclusion in an insurer’s capital base, and the conditions as to their inclusion, are specified in Attachment A.
An insurer’s balance sheet may contain certain assets (such as deferred tax assets, goodwill and other intangibles) that are acceptable from an accounting perspective, but for supervisory purposes are either generally not available, or of questionable value, should the insurer encounter difficulties. Insurers are therefore required to deduct from their capital base any holdings in these types of assets. Details of these deductions are provided in Attachment A.
An insurer must maintain a capital base sufficient to enable its insurance obligations to be met under a range of circumstances. An insurer must, at all times, hold eligible capitalF[4]F (after deductions) in excess of its MCR. Where an insurer proposes any reduction in its capital base, it must obtain APRA’s prior written consent (refer to Attachment H).
Foreign insurers
By the nature of its Australian balance sheet, a foreign general insurer (foreign insurer) will not typically have capital instruments of the type specified in Attachment A. Foreign insurers are nevertheless required to meet a variant of the MCR. Specifically, foreign insurers are required to maintain assets in AustraliaF[5]F that exceed their liabilities in AustraliaF[6]F, by an amount that is greater than the MCR determined by this Prudential Standard.
References to the capital base of an insurer elsewhere in this Prudential Standard are, where they are intended to apply to a foreign insurer, to be read as referring to ‘net assets in Australia’ of that insurer.
For further detail regarding the treatment of foreign insurers, refer to Prudential Standard GPS 120 Assets in Australia.
Minimum Capital Requirement (MCR)
An insurer’s capital base must be adequate for the size, business mix, complexity and risk profile of its business. To this end, this Prudential Standard establishes a risk-based approach to the measurement of capital adequacy of an insurer. The MCR is intended to be broadly commensurate with the full range of risks to which an insurer is exposed (including risks relating to insurance claims, investments, counterparty default, asset-liability mismatches, catastrophic events, and operational errors and problems).
The MCR may be determined using either:
(a) an internal model developed by the insurer to reflect the circumstances of its business the Internal Model Based (IMB) Method;F[7]F
(b) the standardised framework detailed in this Prudential Standard – the Prescribed Method; or
(c) a combination of the methods specified in subparagraphs (a) and (b).
Regardless of the outcome of the method used for determining the MCR, an insurer’s MCR cannot be less than $5 million.
APRA recognises that any measure of the adequacy of an insurer’s capital base involves judgement and estimation, and requires the quantification of risks that may be difficult to quantify. As a result, APRA may adjust an insurer’s MCR where it believes that the amount determined under this Prudential Standard does not adequately reflect the risk profile of the insurer.F[8]F In exercise of this discretion to adjust an insurer’s MCR, APRA will have regard to the following:
(a) the length of time the insurer has been operating;
(b) whether the insurer is in or appears likely to be in financial or operational difficulty;
(c) whether the insurer is deemed by APRA to have a disproportionate exposure to a particular type of risk;
(d) whether particular risks faced by an insurer are adequately dealt with by the prudential standards; and
(e) any other relevant matters.
Internal Model Based Method
This is an opening excerpt, not the complete document.