Insurance (prudential standard) determination No. 7 of 2006 - Prudential Standard GPS 110 - Capital Adequacy
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Unrated assets or exposures must be classified as Grade 4.
An insurer must, in general, use the same rating agency for determining counterparty grades. An insurer may depart from this general rule where there are good reasons for doing so, such as under the following circumstances:
Where the rating agencies usually monitored by the insurer do not issue a solicited credit rating for a particular debt obligation and only one other rating agency issues a solicited credit rating for that debt obligation, the insurer may use that solicited credit rating.
Where the rating agencies usually monitored by the insurer do not issue a solicited credit rating for a particular debt obligation, the credit ratings issued by all other rating agencies listed in the table above must be reviewed and the rule below must be used to determine which rating agency will be used to determine the counterparty grade and therefore the Investment Risk Capital Factor to be applied.
The rule below may also be applied where the insurer monitors multiple rating agencies that provide different solicited credit ratings for a particular debt obligation.
Rule: Where a counterparty or debt obligation has solicited credit ratings from multiple rating agencies, the following guidelines will be followed in determining the rating to be used for determining the Investment Risk Capital Factor:
(a) if there are two solicited ratings which correspond to different Investment Risk Capital Factors, the higher Investment Risk Capital Factor must be used to determine the Investment Risk Capital Charge of the debt obligation; or
(b) if there are three or more solicited ratings that correspond to different Investment Risk Capital Factors, the ratings corresponding to the second-lowest of those Investment Risk Capital Factors must be used to determine the Investment Risk Capital Charge of the debt obligation.
Part Table 2 - Insurance (prudential standard) determination No. 7 of 2006 - Prudential Standard GPS 110 - Capital Adequacy - Table 2 | Zoe
APRA’s written approval must be sought if an insurer wishes to use the rating determined by a rating agency not included in the table above.
Attachment E
Concentration Risk Capital Charge
This Attachment details the calculation of the Concentration Risk Capital Charge for an insurer using the Prescribed Method to determine its MCR. Specifically, it sets out the issues that an insurer must consider in setting its MER for catastrophe purposes. The Concentration Risk Capital Charge is set equal to an insurer’s Maximum Event Retention (MER), plus the cost of one reinstatement of the catastrophe reinsurance cover in cases where the reinstatement reinsurance cover has not been pre-paid by the insurer. It is the responsibility of the insurer’s Board and senior management to ensure that the MER is set at a level which is consistent with the insurer’s risk profile and its reinsurance program.
Definitions
The MER is the largest loss to which an insurer will be exposed (taking into account the probability of that loss) due to a concentration of policies, after netting out any reinsurance recoveriesF[45]F.
Probable Maximum Loss (PML) is the largest gross loss to which an insurer will be exposed (within the realms of possibility) due to a concentration of policies, without any allowance for reinsurance recoveries.
Return period is the expected average period within which a particular catastrophic event will re-occur. For the purposes of this Attachment, insurers will be required to assume a return period of 1 in 250 years, or greater.
Background
Insurers are exposed to the possibility of very large losses arising from their portfolios as a result of various natural catastrophes or other causes of large losses, e.g. earthquakes, fires, storms, etc. Such catastrophic events will occur only rarely and yet their financial impact on an insurer can be very significant, possibly resulting in the failure of an insurer.
Theoretically, an insurer can calculate the gross maximum limit of its catastrophic losses in a particular geographical region as the total of the individual sums insured under all of its policies under all classes of business exposed to a catastrophic event. Clearly, however, such an approach would require prohibitively large amounts of capital.
In practice, an insurer uses the concept of MER to estimate its exposure to catastrophic events. The use of MER allows the insurer to:
(a) calculate the level of reinsurance cover which the insurer requires;
(b) apportion reinsurance costs fairly among different segments of business; and
(c) control exposures to geographical zones or business types, where the risks of catastrophic loss are higher than acceptable, having regard to the insurer’s risk profile and risk appetite.
Issues affecting the level of MER
In determining the level of MER for a given portfolio, the insurer must consider:
(a) the classes of business in which the insurer is engaged;
(b) the types of catastrophic risk which need to be addressed;
(c) the level of capital available to the insurer;
(d) the geographical zones in which the insurer transacts business;
(e) the effects of combined risks, e.g. where an insurer provides coverage for both workers’ compensation business and building insurance in the same geographical area;
(f) how the geographical zones will be grouped for calculation purposes; and
(g) the insurer’s overall risk appetite and desired probability of ruin.
An insurer must at a minimum adopt an MER which relates to an accumulation of exposures to a single event. However, an insurer with a complex portfolio of insurance risks may be required by APRA to estimate its MER using a whole of portfolio approach.
When calculating the MER, an insurer must have regard to the documentation of reinsurance contracts it has in place. To determine the extent to which reinsurance recoveries expected from reinsurance contracts may be used to offset the PML calculated, refer to paragraph 34 of this Prudential Standard.
Specialist insurers
Specialist insurers, such as providers of medical indemnity, may not be exposed to large losses from natural catastrophes. They may, however, still be exposed to large losses arising from groups of claims resulting from a common dependent source. For example, a medical insurer may face a large number of claims arising from a class action related to a faulty medical procedure.
Determining the level of the MER
The insurer must base the calculation of its MER on:
(a) the relevant area of concentration (e.g. geographic region);
(b) which peril produces the greatest MER;
(c) the return period of the relevant catastrophe and the sensitivity of the MER to changes in the return period;
(d) results produced by modelling the insurer’s own past experience; and
(e) any external, commercially available data and modelling facilities, bearing in mind the appropriateness of these data to the insurer’s portfolio of risks.
The MER must be calculated in a manner consistent with the processes for setting, monitoring and altering the MER outlined in the insurer’s Reinsurance Management Strategy (REMS), as required under GPS 230.
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. Where an insurer uses such a model, the model must be conceptually sound and capable of consistently producing realistic calculations of the MER. APRA will expect the insurer to be able to demonstrate an understanding of the model used in estimating the MER. This understanding will include:
(a) the type of data and assumptions used in the model;
(b) the methodology used to incorporate the data and assumptions into the model; and
(c) the sensitivity of the resulting MER figure to changes in the model’s assumptions.
An insurer must be able to demonstrate that they have thoroughly researched the model and tested at least several different scenarios of return period for each type of catastrophic event that may affect their portfolio of risks. Similarly, an insurer must calculate its MER using data that is consistent, accurate and complete. Where an insurer lacks access to the relevant data, it must be able to explain the rationale for, and details of, any estimates of data that it uses. This would include analysis of the sensitivity of the results to changes in the estimates and assumptions.
In setting an appropriate level of MER, the Board must consider the insurer’s claims history, capital availability and reinsurance arrangements.
The MER for a lenders mortgage insurer must be determined by reference to Attachment F.
Reporting
APRA will review and agree with each insurer the adequacy and appropriateness of the methodology for setting its MER. Where APRA is not satisfied with the methodologies or the assumptions used, it may require the insurer to make adjustments to the calculation of its MER.
An insurer must inform APRA of any changes to its MER arising as a result of changes in its REMS, risk profile, classes of business underwritten or reinsurance program.
Attachment F
Concentration Risk Capital Charge for Lenders Mortgage Insurers
This Attachment applies to a Lenders Mortgage Insurer (LMI), meaning an insurer that has written or reinsured, or proposes to write or reinsure, policies of lenders mortgage insurance. For these purposes, lenders mortgage insurance has its ordinary commercial meaning and includes insurance under a policy which protects a lender from losses in the event of borrower default on a loan secured by mortgage over residential or other property. This Attachment outlines the methodology for the calculation of the MER, and the applicable Concentration Risk Capital Charge, for an LMI that uses the Prescribed Method to determine its MCR. Consistent with this Prudential Standard and Attachment E, the Concentration Risk Capital Charge is set equal to an LMI’s MER, plus the cost of one reinstatement of the catastrophe reinsurance cover in cases where the reinstatement reinsurance cover has not been pre-paid by the insurer.
An LMI must also meet the requirements of Attachment E. Should there be any inconsistency between this Attachment and Attachment E, the requirements in this Attachment take precedence in relation to an LMI.
Definitions
The MER is the largest loss to which an insurer will be exposed (taking into account the probability of that loss) due to a concentration of policies, after netting out any reinsurance recoveries.
PML is the largest loss to which an insurer will be exposed (within the realms of possibility) due to a concentration of policies, without any allowance for reinsurance recoveries. For the purpose of this Attachment, the PML is assumed to arise from a catastrophic event that is expected to re-occur, on average, once in every 250 years.
Loans, as referred to in this Attachment, are loans secured by an insured mortgage over residential or other property.
Sum insured is the original exposure amount for an LMI as stated in the mortgage insurance policy. Further information on sum insured is provided in paragraph 29 of this Attachment.
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. The inclusion of a First Home Owners Grant (FHOG) in the deposit for a mortgaged property will not otherwise increase the LVR of a loan. Further information on LVR is provided in paragraph 29 of this Attachment.
Age is the length of time from the date of origination of the loan to the date of calculation. Further information on age is provided in paragraph 29 of this Attachment.
Loan type refers to whether the loan is a standard, non-standard or commercial loan. Further information on loan types is provided in paragraphs 23 to 28 of this Attachment.
Coverage type refers to whether the insurance provided is for 100 per cent of the loan amount, or less than 100 per cent of the loan amount (top cover), or is coverage in respect of a pool of loans (pool mortgage insurance).
Premiums Liabilities, as referred to in this Attachment, relate to future claim payments arising from future events insured under existing policies, gross of expected reinsurance recoveries and valued at a 75 per cent level of sufficiency.
Outstanding Claims Provision (OCP), as referred to in this Attachment, relates to all claims incurred prior to the calculation date, whether or not they have been reported to the insurer, gross of expected reinsurance recoveries and valued at a 75 per cent level of sufficiency.
Background
Although an LMI may not be exposed to the possibility of large losses due to natural perils, such as those faced by most other general insurers, it will be exposed to large losses resulting from a severe economic or property downturn.
Most natural peril catastrophes are localised and occur at a particular point in time. In contrast, an economic or property downturn can be a prolonged, nationwide event, which may have an impact over several years. APRA considers that a three-year downturn is appropriate for determining the MER of an LMI.
MER model for LMIs
The MER model for LMIs assumes a three-year economic or property downturn. 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 are in addition to future claim payments provisioned for as Premiums Liabilities.
An LMI’s MER is calculated by:
(a) working out the PML (which will comprise the total of all the amounts worked out by applying paragraphs 17 to 22 of this Attachment);
(b) deducting the amount of allowable reinsurance, worked out in accordance with paragraphs 30 to 37 of this Attachment, from the PML; and
(c) adding an allowance of five per cent of the PML for claims handling expenses.
Where an LMI has written one or more policies covering standard or non-standard loans (other than by way of a policy of pool mortgage insurance, or by way of a policy of top cover), its PML will include an amount calculated by:
(a) multiplying the sum insured under each such policy by the appropriate Probability of Default (PD), Loss-Given-Default (LGD) and seasoning factors set out in the Table of this Attachment; and then
(b) adding together the amounts calculated for each policy under subparagraph (a) to produce a total.
Where an LMI has written one or more policies of top cover in respect of standard or non-standard loans, its PML will include an amount calculated by:
(a) multiplying the sum insured under each such policy by:
(i) the appropriate PD factor set out in the Table of this Attachment;
(ii) the appropriate LGD factor set out in the Table of this Attachment, adjusted to reflect the proportion of insurance in place by dividing the LGD percentage by the percentage of top cover (refer to Example below), up to a maximum of 100 per cent; and
(iii) the appropriate seasoning factor set out in the Table of this Attachment; and then
(b) adding together the amounts calculated for each policy under subparagraph (a) to produce a total.
Example: 30 per cent top cover for a loan with an LVR of 65 per cent is subject to an LGD of 67 per cent (which is equal to 20 per cent divided by 30 per cent).
Where an LMI has written one or more policies of pool mortgage insurance covering standard or non-standard loans, its PML will include an amount calculated by:
(a) multiplying the total sum insured under each such policy by the appropriate PD, LGD and seasoning factors (as set out in the Table of this Attachment); and then
(b) adding together the amounts calculated for each policy under subparagraph (a) to produce a total.
For the purposes of subparagraph (a), the PD and seasoning factors are the factors set out in the Table of this Attachment that correspond to the weighted-average LVR and weighted-average age of the pool, and the LGD is 100 per cent.
Where an LMI has written one or more policies covering commercial loans, its PML will include an amount calculated by:
(a) multiplying the sum insured under each such policy by a factor of eight per cent (irrespective of the LVR and age of the loan); and then
(b) adding together the amounts calculated for each policy under subparagraph (a) to produce a total.
Where a policy has characteristics of more than one coverage type, or the insured loan or loans have characteristics of more than one loan type, then the relevant exposure must be recognised in the category which produces the highest PML for that exposure. If paragraphs 17, 18, 19 or 20 of this Attachment do not readily apply to the policy or the loan type, APRA may determine, by instrument in writing, a formula for the calculation of the PML in relation to that exposure (being a formula that is appropriate to the policy or loan type and is broadly consistent with the prudential approach taken in this Attachment).
In calculating the PML in accordance with paragraphs 17 to 21 of this Attachment, the LMI MER model assumes a constant sum insured over the three-year scenario. This recognises that, although the sum insured may decrease as a result of the expiration of existing policies, this may be offset by the LMI writing new business over the three-year scenario. However, 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. Accordingly, it may be appropriate for an LMI in run-off to adjust its PML downwards in years two and three of the scenario for the purpose of calculating its MER. The methodology for adjusting an LMI’s PML must be approved, by APRA, by an instrument in writing.
Criteria for standard loans, non-standard loans and commercial loans
Loans predominantly secured by residential property are generally classified as standard or non-standard. For the purpose of the LMI MER model, a standard loan must meet the following criteria:
(a) the LMI or lender has formally verified the borrower’s income and employment; and
(b) the borrower passes standard credit checks and income requirements as documented in the LMI or lender’s underwriting or credit policies and procedures.
Loans to borrowers with non-saved deposits (e.g. borrowers with deposits partially generated under the FHOG scheme), are to be classified as standard loans, except where the loans do not otherwise meet the criteria in paragraph 23 of this Attachment.
Loans which are predominantly secured by registered mortgage over residential property, but do not meet the criteria set out in paragraph 23 of this Attachment, are to be classified as non-standard loans.
APRA may also, by instrument in writing, direct an LMI to classify a loan as a non-standard loan where APRA considers the PD factors for standard loans do not reflect the inherent risk of the loan.
All loans which are not predominantly secured by registered mortgage over residential property must be classified as commercial loans.
APRA may, by instrument in writing, direct an LMI to reclassify:
(a) a particular standard or non-standard loan; or
(b) each standard or non-standard loan of a particular kind
as a commercial loan. APRA may do this if it is satisfied that the PML that would otherwise apply to the loan would not reflect the inherent risk relating to the loan or related mortgage.
Direction relating to sum insured, LVR and age
Despite paragraphs 6, 7 and 8 of this Attachment, APRA may, by instrument in writing, direct an LMI to assume that the sum insured, LVR or age of:
(a) a particular standard or non-standard loan; or
(b) each standard or non-standard loan of a particular kind
is the sum insured, LVR or age specified in APRA’s direction, or is the sum insured, LVR or age worked out by applying instructions contained in APRA’s direction. APRA may do so if it is satisfied, having regard to the nature of the loan (or kind of loan), that working out the sum insured, LVR or age by applying paragraph 6, 7 or 8 of this Attachment would produce a result that fails to reflect the risks relating to the loan (or kind of loan).F[46]F
Reinsurance
Reinsurance arrangements must be in place for at least a full year in advance, and be fully documented, to be recognised in determining the MER. For example, where an LMI has two and a half years of reinsurance cover remaining, it can only recognise reinsurance in the first two years of the three-year scenario for the purpose of the MER model.
APRA recognises that, as Premiums Liabilities are apportioned over the term of the loan, a proportion of an LMI’s Premiums Liabilities will be recognised as claim payments in the same period as the modelled downturn. Accordingly, for the purpose of calculating available reinsurance for the MER calculation, an LMI with aggregate excess-of-loss or stop-loss reinsurance may assume an appropriate proportion of Premiums Liabilities as being incurred in addition to its PML (refer to paragraphs 32 to 35 of this Attachment).
For an LMI with a quota share reinsurance arrangement, the level of Premiums Liabilities will not impact on the amount of available reinsurance for the MER calculation.
An LMI with aggregate excess-of-loss or stop-loss reinsurance on a claims year basisF[47]F may assume claim payments of up to a maximum of 60 per cent of reported Premiums Liabilities as at the MER calculation date, in determining the amount of available reinsurance for determining the MER.F[48]F A maximum of 15 per cent of Premiums Liabilities may be allocated to year one, 30 per cent to year two and 15 per cent to year three, of the modelled downturn.
Consistent with the assumption of a constant sum insured over the three-year scenario (refer to paragraph 22 of this Attachment), an LMI (that is not in run-off) with aggregate excess-of-loss or stop-loss reinsurance on a claims year basis must assume that the attachment points of reinsurance in years two and three of the modelled downturn are the same as the attachment point determined in year one.
An LMI with aggregate excess-of-loss or stop-loss reinsurance on an underwriting year basisF[49]F may:
(a) determine PML for individual underwriting years by applying the model separately to the sum insured in each underwriting year or allocating total PML (over the three-year scenario) back to each underwriting year in the same proportion as the sum insured for those years;
(b) recognise claims that have already been paid, 90 per cent of OCP and 90 per cent of Premiums Liabilities in calculating the amount of available reinsurance for the MER calculation; and
(c) allocate OCP and Premiums Liabilities to each underwriting year in accordance with a methodology outlined in the LMI’s REMS (refer to paragraph 39 of this Attachment).
An LMI with reinsurance arrangements which are not detailed in paragraphs 32 to 35 of this Attachment must seek APRA’s written approval of the methodology proposed for the calculation of available reinsurance.
The amount of allowable reinsurance to be deducted from the PML in determining the MER is limited to a maximum of 60 per cent of the PML, irrespective of the amount available under paragraphs 30 to 36 of this Attachment.
Reinsurance Management Strategy
An LMI must outline in its REMS all assumptions that have been made in the determination of its MER (as might particularly be the case for LMIs in run‑off), the methodology used in calculating its allowable reinsurance and how allowable reinsurance is applied to its PML in determining its MER.
An LMI with reinsurance on an underwriting year basis must detail in its REMS the reasoning and methodology it has adopted in allocating OCP and Premiums Liabilities to individual underwriting years (refer to paragraph 35 of this Attachment).
Table
The aggregate PD and LGD factors by LVR, over the three-year scenario, for standard loans are:
LVR
PD factor
LGD factor
Greater than 100%
14.0%
40%
95.01 – 100%
8.0%
40%
90.01 – 95%
5.0%
40%
85.01 – 90%
3.2%
30%
80.01 – 85%
1.6%
30%
70.01 – 80%
1.2%
30%
60.01 – 70%
0.8%
20%
Less than 60.01%
0.6%
20%
The aggregate PD and LGD factors by LVR, over the three-year scenario, for non‑standard loans are:
LVR
PD factor
LGD factor
Greater than 100%
21.0%
40%
95.01 – 100%
12.0%
40%
90.01 – 95%
7.5%
40%
85.01 – 90%
4.8%
30%
80.01 – 85%
2.4%
30%
70.01 – 80%
1.8%
30%
60.01 – 70%
1.2%
20%
Less than 60.01%
0.9%
20%
The seasoning factors by age 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%
Attachment G
Reductions in Capital
A reduction in an insurer’s capital includes, but is not limited to:
(a) share buybacks;
(b) the redemption, repurchase or early repayment of any qualifying Tier 1 and Tier 2 capital instruments issued by the insurer or an SPV;
(c) trading in the insurer’s own shares or capital instruments (refer to paragraph 43 of Attachment A); or
(d) payment of dividends on ordinary shares that exceeds an insurer’s after-tax earnings, after including any payments on more senior capital instruments, in the financial yearF[50]F to which they relate;
(e) dividend or interest payments (whether whole or partial) on Upper Tier 2, Innovative Tier 1 and Non-innovative Residual Tier 1 capital that exceed an insurer’s after-tax earnings, including any payments made on more senior capital instruments, calculated before any such payments are applied in the financial yearF[51]F to which they relate.
An insurer must seek APRA’s written approval before making a reduction in its capital. APRA’s approval may be subject to conditions.
Where APRA’s approval is required under paragraph 2 of this Attachment, the insurer must provide APRA with a capital plan extending for at least three years. The insurer will need to satisfy APRA, on the basis of the capital plan provided, that the company’s capital base after the proposed reduction will remain adequate for its future needs. In deciding whether or not to approve a reduction in capital, APRA will have regard to all relevant considerations, including whether the insurer’s capital plan shows that the insurer will maintain an adequate level of capital, taking account of factors such as:
(a) the immediate capital position;
(b) commitments to raise capital; and
(c) core profitability.
Interpretation
Any reference to the earnings or retained earnings of an insurer in this Attachment is a reference to the earnings or retained earnings of the insurer determined in a manner consistent with the insurer’s prudential reporting to APRA under the Collection of Data Act rather than in accordance with Australian Accounting Standards issued by the Australian Accounting Standards Board as required for statutory financial reporting under the Corporations Act.
Reductions in capital for insurers in run-off
This paragraph applies to an insurer which is not writing new business at the time of a request for a reduction in capital and is running off its existing insurance liabilities. The insurer must submit to APRA:
(a) documents clearly setting out and evidencing its current financial position; and
(b) a capital plan required under paragraph 3 of this Attachment with insurance liabilities valued in accordance with the methodology set out in GPS 310, except that the valuation must demonstrate that the tangible assets of the insurer, after the proposed capital reduction, are sufficient to cover its insurance liabilities to a 99.5 per cent level of sufficiency, plus any other liabilities, as calculated by an Approved ActuaryF[52]F as defined under GPS 310.
Foreign insurers
Any repatriation of assets in Australia, whether direct or indirect, by a foreign insurer that will result in a reduction in its net assets in Australia must be subject to APRA’s prior approval consistent with the requirements of paragraphs 1 to 3 of this Attachment.F[53]F
Paragraph 6 of this Attachment does not apply to any repatriation of assets in Australia out of the current year profits of a foreign insurer where the assets being repatriated to the head office of the foreign insurer or any other branch or related entity of the head office of the foreign insurer do not exceed the foreign insurer’s after-tax earnings in the year to which they relate (i.e. a repatriation of assets not wholly or partly funded from retained earnings).
Attachment H
Transition Provisions
Transition rules relating to deductions from Tier 1 capital
For the purposes of subparagraphs 39(m) and 39(n) of Attachment A:
(a) the key dates in the transition periods, in relation to an insurer, are as follows:
Balance Dates
30 June
30 September
30 November
1 December
31 December
31 March
First day of first transition period
30 June 2007
30 September 2007
30 November 2007
1 December 2007
31 December 2007
31 March 2008
Last day of first transition period
29 June 2008
29 September 2008
29 November 2008
30 November 2008
30 December 2008
30 March 2009
First day of second transition period
30 June 2008
30 September 2008
30 November 2008
1 December 2008
31 December 2008
31 March 2009
Last day of second transition period
29 June 2009
29 September 2009
29 November 2009
30 November 2009
30 December 2009
30 March 2010
(b) the threshold levels of reinsurance documentation are as follows:
Threshold level of reinsurance documentation
Application period
60 per cent of reinsurance recoveries receivable by value must be derived from reinsurance arrangements that meet the reinsurance documentation test (see paragraph 2 of this Attachment)
First transition period
80 per cent of the reinsurance recoveries receivable by value must be derived from reinsurance arrangements that meet the reinsurance documentation test (see paragraph 2 of this Attachment)
Second transition period
For the purposes of subparagraph 1(b) of this Attachment and subparagraphs 39(m) and (n) of Attachment A, a reinsurance arrangement meets the reinsurance documentation test if the arrangement:
(a) complies with the two month rule and six month rule under GPS 230;
(b) fails to comply with those rules as at the date of the relevant deadline but:
(i) subsequent to the deadline specified under the two month rule, the reinsurance arrangement is documented in accordance with the other requirements of the two month rule (in which case the reinsurance arrangement is treated as meeting the reinsurance documentation test until the reinsurance arrangements fail the six month rule); or
(ii) subsequent to the deadline specified under the six month rule, the reinsurance arrangement is documented in accordance with the other requirements of the six month rule; or
(c) is otherwise treated by APRA under GPS 230 as complying with the two month rule and six month rule.
Transition rules relating to LMIs
Where an LMI’s capital base does not adequately cover its MCR, and any additional capital requirements imposed by APRA, as a result of the requirements in Attachment F, then the LMI may apply to APRA for a determination (by way of an instrument in writing) allowing the LMI a transition period during which:
(a) the LMI will be required to undertake the calculations and modelling required by Attachment F but will not be required to hold some or all of the capital (as specified in APRA’s determination) which it would otherwise be required to hold because of the application of this Prudential Standard; and
(b) the LMI will be required to take such steps, and meet such interim requirements as are specified in APRA’s determination approving the transition period, to ensure that the LMI satisfies the capital requirements of this Prudential Standard by the end of the transition period.
APRA may make a determination in the terms sought in the LMI’s application under this Attachment, or make a determination on such terms as APRA considers appropriate, or decline to make a determination granting the LMI a transition period.F[54]F
An application under this Attachment must be supported by a capital management plan demonstrating how the LMI will meet its capital requirements before the expiry of the requested transition period. APRA will consider the capital management plan, and any other relevant circumstances, in determining the LMI’s eligibility for a transition period and, if granted, the length of the transition period. Any transition period granted by APRA may not extend beyond 31 December 2008.
IFRS transition arrangements
For the purposes of Attachment A, an insurer may include a specific dollar amount, as agreed upon by APRA, in writing, in its Tier 1 capital or Upper Tier 2 capital or both during the transition period from 1 January 2007 to 31 December 2007. The dollar amount of the adjustment will be based on the difference between the insurer’s total capital base as at 31 December 2006 under the pre-IFRS requirements and its total capital base at 1 January 2007 as would otherwise be reportable under Attachment A. The dollar amount of the adjustment will remain constant over the transition period and will cease to apply on 1 January 2008.
For the purposes of Attachment A, APRA may grant transition relief in writing to an insurer that does not extend beyond 1 January 2010 where its dollar amount of innovative capital instruments exceeds the 15 per cent limit at 1 January 2008. An insurer may include an excess amount agreed upon by APRA as eligible Innovative Tier 1 capital during the transition period. In determining the excess amount for transition, APRA will limit the amount to the difference between the dollar amount of the insurer’s Innovative Tier 1 capital instruments as at 31 August 2005 and the dollar amount of Innovative Tier 1 capital that the insurer would otherwise be entitled to hold had the 15 per cent limit applied to the insurer’s Tier 1 capital as at 1 January 2007. The actual excess amount for transition will be agreed upon with APRA, in writing, based on the insurer’s estimated capital base as at 1 January 2008 and any other factors, including other capital management measures undertaken by the insurer.
Determinations made under the previous standard and guidance notes
An approval, determination, direction or requirement made by APRA under a provision specified in Column 1 of the following table that is in operation immediately prior to the commencement of this Prudential Standard is taken, on and from the effective date, to have been made under the provision of this Prudential Standard specified in the same row of Column 2 of the table.
Column 1: Provision of previous standard or guidance note
Column 2: Provision of this Prudential Standard
Paragraph 10 of previous GPS 110: adjust an insurer’s MCR
Paragraph 17 of this Prudential Standard
Paragraph 24 of previous GPS 110: require adjustments to calculation of MER
Paragraph 19 of this Prudential Standard
Paragraph 6 of GGN 110.1, footnote 1: approve mutual insurer to be exempt from requirement that Tier 1 capital make up 50% of capital base
Subparagraph 44(c) of Attachment A
Paragraph 10 of GGN 110.1: approve dividend or interest payments out of retained earnings.
Paragraph 2 of Attachment G
Paragraph 19 of GGN 110.1: approve purchase of insurer’s own Tier 1 or Tier 2 capital.
Paragraph 43 of Attachment A
Paragraph 21 of GGN 110.1: approve reduction in capital base.
Paragraph 2 of Attachment G
Paragraph 5A of GGN 110.4: determination regarding method of calculation of Investment Risk Capital Charge.
Paragraph 6 of Attachment D
Paragraph 8 of GGN 110.4: approve a related entity as part of insurer’s ELE.
Paragraph 10 of Attachment D
Subparagraph 22(b) of GGN 110.4: approve surety bonds as insurance risk.
Subparagraph 29(b) of Attachment D
Paragraph 28 of GGN 110.4: require insurer to hold additional capital.
Paragraph 17 of this Prudential Standard
Paragraph 29 of GGN 110.4: agree upon capital treatment of derivative transactions.
Paragraph 17 of this Prudential Standard
Last paragraph of Attachment 2 to GGN 110.4: approve rating agency.
Last paragraph under Table 2 of Attachment D
Paragraph 18 of GGN 110.5: review and agree with insurer the adequacy of methodology for setting MER.
Paragraph 18 of Attachment E
Paragraph 21 of GGN 110.6: determine a formula for calculating PML
Paragraph 21 of Attachment F
Paragraph 22 of GGN 110.6: approve downward adjustment to PML
Paragraph 22 of Attachment F
Paragraph 26 of GGN 110.6: direct classification of loan as non-standard loan
Paragraph 26 of Attachment F
Paragraph 28 of GGN 110.6: direct reclassification of loan as commercial loan
Paragraph 28 of Attachment F
Paragraph 29 of GGN 110.6: direct LMI to assume sum insured, LVR or age of loan
Paragraph 29 of Attachment F
Paragraph 36 of GGN 110.6: approve methodology for calculation of available insurance
Paragraph 36 of Attachment F
Paragraph 42 of GGN 110.6: determine a transition period