Objective and key requirements of this Prudential Standard
This 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.