InterpretationInterpretation

Interpretation

6. Terms that are defined in Prudential Standard LPS 001 Definitions appear in bold the first time they are used in this Prudential Standard.
7. Unless otherwise indicated:

(a) the term statutory fund will be used to refer to a statutory fund of a life company other than a friendly society, or an approved benefit fund of a friendly society, as relevant;

(b) the term general fund will be used to refer to the shareholders’ fund of a life company other than a friendly society, or the management fund of a friendly society, as relevant; and

(c) the term ‘fund’ will be used to refer to a statutory fund or a general fund, as relevant.

Responsibility for capital management
8. Capital is the cornerstone of a life company’s financial strength. It supports a life company’s operations by providing a buffer to absorb unanticipated losses from its activities and, in the event of such losses, enables the life company to continue to meet its insurance obligations.
9. As a consequence of the key role played by capital in the financial strength of a life company, the Board of a life company must ensure that:
(a) the life company as a whole; and
(b) each fund

has capital that is adequate for the scale, nature and complexity of its business and its risk profile, such that it is able to meet its obligations under a wide range of circumstances.

Internal Capital Adequacy Assessment Process
10. A life company must have in place an Internal Capital Adequacy Assessment Process (ICAAP) that considers each fund of the life company, as well as the life company as a whole. The ICAAP must:
(a) be adequately documented, with the documentation made available to APRA on request; and
(b) be approved by the Board initially, and when significant changes are made.
11. A life company’s ICAAP must be appropriate to the life company’s size, business mix and the complexity of its operations.
12. A life company that is part of a group may rely on the ICAAP of the group provided that the Board of the life company is satisfied that the group ICAAP meets the criteria in paragraph 13 in respect of the life company.
13. The ICAAP must include at a minimum:
(a) adequate policies, procedures, systems, controls and personnel to identify, measure, monitor and manage the risks arising from the life company’s activities on a continuous basis, and the capital held against such risks;
(b) a strategy for ensuring adequate capital is maintained over time, including specific capital targets set in the context of the life company’s risk profile, the Board’s risk appetite and regulatory capital requirements. This includes plans for how target levels of capital are to be met and the means available for sourcing additional capital where required;
(c) actions and procedures for monitoring the life company’s compliance with its regulatory capital requirements and capital targets. This includes the setting of triggers to alert management to, and specified actions to avert and rectify, potential breaches of the regulatory capital requirements;
(d) stress testing and scenario analysis relating to potential risk exposures and available capital resources;
(e) processes for reporting on the ICAAP and its outcomes to the Board and senior management of the life company, and for ensuring that the ICAAP is taken into account in making business decisions;
(f) policies to address the capital impact of material risks not covered by explicit regulatory capital requirements; and
(g) an ‘ICAAP summary statement’ as defined in paragraph 14.
14. The ICAAP summary statement is a high level document that describes and summarises the capital assessment and management processes of the life company. It must outline at a minimum the aspects of the ICAAP listed in paragraphs 13 (a) to (f) and this paragraph. The ICAAP summary statement must also include:
(a) a statement of the objectives of the ICAAP, the expected level of financial soundness associated with the capital targets and the time horizon over which the ICAAP applies;
(b) a description of the key assumptions and methodologies utilised by the life company in its ICAAP, including stress testing and scenario analysis;
(c) triggers for reviewing the ICAAP in light of changes to business operations, regulatory, economic and financial market conditions, and other factors affecting the life company’s risk profile and capital resources;
(d) a summary of the life company’s policy for reviewing its ICAAP, including who is responsible for the review, details of the frequency and scope of the review, and mechanisms for reporting on the review and its outcomes to the Board and senior management;
(e) a description of the basis of measurement of capital used in the ICAAP, and an explanation of the differences where this basis differs from that used for regulatory capital; and
(f) references to supporting documentation and analysis, as relevant.
15. A life company must ensure its ICAAP is subject to regular and robust review by appropriately qualified persons who are operationally independent of the conduct of capital management. The frequency and scope of the review must be appropriate to the life company, having regard to its size, business mix, complexity of its operations, and the nature and extent of any changes that have occurred or are likely to occur in its business profile or its risk appetite. A review must be conducted at least every three years. The review must be sufficient to reach a view on whether the ICAAP is adequate and effective.
16. A life company must, on an annual basis, provide a report on the implementation of its ICAAP to APRA (ICAAP report). A copy of the ICAAP report must be provided to APRA no later than three months from the date on which the report has been prepared.
17. The ICAAP report must include:
(a) detailed information on current and three\-year projected capital levels relative to minimum regulatory capital requirements and target levels for each fund and the life company as a whole;
(b) detailed information on the actual outcomes of applying the ICAAP over the period, relative to the planned outcomes in the previous ICAAP report (including analysis of the life company’s actual capital position relative to minimum regulatory capital requirements and capital targets and actual-versus\-planned capital management actions);
(c) description of material changes to the ICAAP since the previous ICAAP report;
(d) detail and outcomes of stress testing and scenario analysis used in undertaking the ICAAP;
(e) a breakdown of capital usage over the planning horizon, as relevant, by material:
(i) business activity;
(ii) geographic spread of exposures; and
(iii) risk types;
(f) an assessment of anticipated changes in the life company’s risk profile or capital management processes over the planning horizon;
(g) details of any review of the ICAAP since the previous ICAAP report, including any recommendations for change and how those recommendations have been, or are being, addressed; and
(h) references to supporting documentation and analysis as relevant.
18. The ICAAP report submitted to APRA by the life company must be accompanied by a declaration approved by the Board and signed by the CEO stating whether:
(a) capital management has been undertaken by the life company in accordance with the ICAAP over the period and, if not, a description of, and explanation for, deviations;
(b) the life company has assessed the capital targets contained in its ICAAP to be adequate given the size, business mix and complexity of its operations; and
(c) the information included in the ICAAP report is accurate in all material respects.