Insurance (prudential standard) determination No. 8 of 2012 - Prudential Standard GPS 118 - Capital Adequacy: Operational Risk Change

Link to law: https://www.comlaw.gov.au/Details/F2012L02364

Insurance (prudential standard) determination No. 8 of 2012
Prudential Standard GPS 118 Capital Adequacy: Operational Risk Charge
Insurance Act 1973
 
I, Ian Laughlin, delegate of APRA, under subsection 32(1) of the Insurance Act 1973 (the Act) DETERMINE Prudential Standard GPS 118 Capital Adequacy: Operational Risk Charge, in the form set out in the Schedule, which applies to
 
(a)                all general insurers and authorised NOHCs; and
 
(b)               a subsidiary of a general insurer or authorised NOHC, where that subsidiary is a parent entity of a Level 2 insurance group.  
 
This instrument takes effect on 1 January 2013.
 
Dated: 30 November 2012
 
[Signed]
 
 
Ian Laughlin
Member
 
 
Interpretation
In this Determination:
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 made by Insurance (prudential standard) determination No. 1 of 2012 or, if that prudential standard is revoked, the meaning given in the replacement prudential standard. 
parent entity has the meaning given in Prudential Standard GPS 001 Definitions made by Insurance (prudential standard) determination No. 1 of 2012 or, if that prudential standard is revoked, the meaning given in the replacement prudential standard. 
replacement prudential standard means any prudential standard made under section 32 of the Act which replaces Prudential Standard GPS 001 Definitions made by Insurance (prudential standard) determination No. 1 of 2012.
subsidiary has the meaning given in Prudential Standard GPS 001 Definitions made by Insurance (prudential standard) determination No. 1 of 2012 or, if that prudential standard is revoked, the meaning given in the replacement prudential standard. 
 
 
Schedule
 
Prudential Standard GPS 118 Capital Adequacy: Operational Risk Charge comprises the 3 pages commencing on the following page.

Prudential Standard GPS 118
Capital Adequacy: Operational Risk Charge
Objectives and key requirements of this Prudential Standard
This Prudential Standard requires a general insurer or Level 2 insurance group to maintain adequate capital against the operational risks associated with its activities.
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.
The Operational Risk Charge is the minimum amount of capital required to be held against operational risks. The Operational Risk Charge relates to the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
 
This Prudential Standard sets out the method for calculating the Operational 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.
 
 
Authority
1.             This Prudential Standard is made under section 32 of the Insurance Act 1973 (the Act).
Application
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 is made in respect of 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 January 2013.
Interpretation
4.             Terms that are defined in GPS 001 appear in bold the first time they are used in this Prudential Standard.
Operational Risk Charge
5.             This Prudential Standard sets out the method for calculating the Operational Risk Charge for a regulated institution using the Standard Method to determine its prescribed capital amount. 
6.             The Operational Risk Charge is the minimum amount of capital a regulated institution must hold against the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
Calculation of the Operational Risk Charge
7.             The Operational Risk Charge for a regulated institution is calculated as the sum of:
(a)           the Operational Risk Charge for inwards reinsurance business (ORCI) defined in paragraph 9; and
(b)          the Operational Risk Charge for business that is not inwards reinsurance business (ORCNI) defined in paragraph 10. 
The Operational Risk Charge for a Level 2 insurance group is calculated after consolidation of intra-group exposures.
 
8.             For the purposes of paragraphs 9 and 10:
(a)           GP1 is written premium revenue (gross of reinsurance) for the 12 months ending on the reporting date;
(b)          GP0 is written premium revenue (gross of reinsurance) for the 12 months ending on the date 12 months prior to the reporting date;
(c)           Written premium revenue includes fire services levy, other levies imposed by state and territory governments, and revenue relating to portfolio transfers and unclosed business;
(d)          NL is the central estimate of insurance liabilities (net of reinsurance) at the reporting date[1]; and
(e)           |GP1 – GP0| is the absolute value of the difference between GP1 and GP0.
All of the values determined under this paragraph should correspond to the value in the regulated institution’s statutory accounts. All transfers of insurance business made in accordance with the Act must be recognised in line with the corresponding requirements under Australian Accounting Standard AASB 1023 General Insurance Contracts.
9.             The ORCI is calculated as follows:
ORCI = 2% × {maximum(GP1, NL) + maximum(0, |GP1–GP0| – 0.2 x GP0)}
10.         The ORCNI is calculated as follows:
ORCNI = 3% × {maximum(GP1, NL) + maximum(0, |GP1–GP0| – 0.2 x  GP0)}
Adjustments and exclusions
11.         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.
Transition
12.         On application by a regulated institution, APRA may grant transitional relief from the obligation for the regulated institution to comply with any requirement in this Prudential Standard. Any relief granted by APRA under this paragraph will have effect up until no later than 31 December 2014.

[1]           Under Prudential Standard GPS 320 Actuarial and Related Matters, a Level 2 insurance group may use accounting entries to determine its premiums liabilities. Where accounting entries have been used to determine net premiums liabilities, the Level 2 insurance group must use the accounting net premiums liabilities instead of the net central estimate.
 
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