Insurance (prudential standard) determination No. 11 of 2010
Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Capital Charge
Insurance Act 1973
 
I, John Roy Trowbridge, a delegate of APRA:
 
(a)    under subsection 32(4) of the Insurance Act 1973 (the Act), REVOKE Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Capital Charge made by Insurance (prudential standard) No. 5 of 2008; and
 
(b)   under subsection 32(1) of the Act, DETERMINE Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Capital Charge in the form set out in the Schedule, which applies to all general insurers.
 
This determination takes effect from 1 July 2010.
 
Dated   18 June 2010
 
[Signed]
 
John Trowbridge
Member
Interpretation
In this instrument:
 
APRA means the Australian Prudential Regulation Authority.
general insurer has the meaning given in section 11 of the Act.
 
Schedule          
 
Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Capital Charge comprises the 5 pages commencing on the following page.

Prudential Standard GPS 115
Capital Adequacy: Insurance Risk Capital Charge
Objective and key requirements of this Prudential Standard
This Prudential Standard sets out the calculation of the Insurance Risk Capital Charge under the Prescribed Method of calculating the Minimum Capital Requirement applicable to a general insurer.
 
A general insurer is required to calculate its insurance liabilities in accordance with the requirements of Prudential Standard GPS 310 Audit and Actuarial Reporting and Valuation.  The Insurance Risk Capital Charge relates to the risk that the value of the net insurance liabilities is greater than the value determined under Prudential Standard GPS 310 Audit and Actuarial Reporting and Valuation. There are two components to the Insurance Risk Capital Charge:
 
·               the charge with respect to Outstanding Claims; and
·               the charge with respect to Premium Liabilities (or unexpired risk).
The prescribed charges with respect to particular classes of business are set out in Attachment A.
This Prudential Standard forms part of a comprehensive set of prudential standards that deal with the measurement of a general insurer’s capital adequacy.
 
 
 Authority
1.             This Prudential Standard is made under section 32 of the Insurance Act 1973 (the Act).
Application
2.             This Prudential Standard applies to insurers authorised under the Act.[1]
3.             Subject to any specific transition rules, this Prudential Standard applies to insurers from 1 July 2010.
4.             As a consequence of the key role played by capital in the financial health of an insurer, every insurer must maintain sufficient capital to enable its insurance obligations to be met under a wide range of circumstances.  This required level of capital for regulatory purposes is referred to as the Minimum Capital Requirement (MCR).
Interpretation
5.             Unless otherwise defined in this Prudential Standard, expressions in bold are defined in Prudential Standard GPS 001 Definitions.
Insurance Risk Capital Charge
6.             This Prudential Standard sets out the calculation of the Insurance Risk Capital Charge for an insurer using the Prescribed Method to determine its MCR.
7.             The Insurance Risk Capital Charge relates to the risk that the value of net insurance liabilities is greater than the value determined in accordance with Prudential Standard GPS 310 Audit and Actuarial Reporting and Valuation (GPS 310).  It has two components:
(a)           a charge in respect of Outstanding Claims Risk; and
(b)          a charge in respect of Premiums Liability Risk. 
The total Insurance Risk Capital Charge is the sum of the capital charge for each of the two components.
Outstanding Claims Risk
8.             The capital charge for Outstanding Claims Risk relates to the risk that the value of the net outstanding claims liabilities is greater than the value determined in accordance with GPS 310.
9.             For the purposes of the Prescribed Method, Outstanding Claims Risk is to be measured as a percentage of the value of the net outstanding claims liabilities.  Because Outstanding Claims Risk will vary by class of business, different capital charges for Outstanding Claims Risk must be calculated for each class of business.
10.         The capital charge for each class of business is calculated by multiplying the net outstanding claims liabilities for that class (as determined in accordance with GPS 310) by the relevant Outstanding Claims Risk Capital Factor.  For these purposes, classes of business have been divided into three categories with respect to direct insurance business and a matrix of three classes with four types of business with respect to inwards reinsurance business (as set out in the tables at Attachment A).  Classes of business within the same category are regarded as having broadly similar levels of Outstanding Claims Risk.  The total capital charge for Outstanding Claims Risk is the sum of the capital charges for each class of business.
Premiums Liability Risk
11.         The capital charge for Premiums Liability Risk relates to the risk that premiums relating to post calculation date exposures, including premiums written before but incepting after the calculation date, will be insufficient to fund the liabilities arising from that business.
12.         For the purposes of the Prescribed Method, the capital charge for Premiums Liability Risk is calculated as a percentage of the sum of:
·        Net premiums liabilities as determined in accordance with GPS 310; and
·        Net written premium for material business that incepts in the next reporting period and inwards proportional reinsurance contracts where the treaty extends beyond the end of the current reporting period but revenue has not yet been recognised (material net written premiums).
13.         As in the case of Outstanding Claims Risk, the extent of Premiums Liability Risk will vary by class of business.  However, in a stable portfolio, Premiums Liability Risk is likely to be greater than Outstanding Claims Risk for the same class of business.  A separate capital charge for Premiums Liability Risk must be calculated for each class of business.
14.         The capital charge for each class of business is calculated by multiplying the sum of the net premiums liabilities and material net written premiums, as set out in paragraph 12, for that class by the relevant Premiums Liability Risk Capital Factor (using the same categories as for Outstanding Claims Risk – see the tables at Attachment A).  The total capital charge for Premiums Liability Risk is the sum of the capital charges for Premiums Liability Risk for each class of business.
Business covering multiple classes
15.         Where an insurer underwrites an inwards reinsurance contract and is unable to split this business into the classes and types listed below, it must use the highest factors specified in Table 2[2] at Attachment A on its outstanding claims liabilities and its premiums liabilities.
16.         Where an insurer underwrites an inwards reinsurance contract which spans multiple classes and the insurer cannot readily split the contract between classes, the contract must be allocated by using an appropriate method (provided the same method is used for all contracts and all subsequent periods), including the following methods:
(a)           allocate the contract to the category which represents the greatest exposure; or
(b)          allocate the contract to the category representing the greatest premium income.
 
Attachment A
 
Table 1:  Direct insurance business
Class of business
Outstanding
Claims Risk
Capital Factor
Premiums Liability Risk Capital Factor

Householders
Commercial Motor
Domestic Motor
Travel
9%
 
13.5%

Fire and ISR
Marine and Aviation
Consumer Credit
Mortgage
Other Accident
Other
11%
16.5%

CTP
Public and Product Liability
Professional Indemnity
Employers’ Liability
15%
22.5%

 
Table 2:  Inwards reinsurance business

Class of business
Outstanding
Claims Risk
Capital Factor
Premiums Liability Risk Capital Factor

Property
-                Facultative Proportional
-                Treaty Proportional
-                Facultative Excess of Loss
-                Treaty Excess of Loss
 
9.0%
10.0%
11.0%
12.0%
 
13.5%
15.0%
16.5%
18.0%

Marine & Aviation
-                Facultative Proportional
-                Treaty Proportional
-                Facultative Excess of Loss
-                Treaty Excess of Loss
 
11.0%
12.0%
13.0%
14.0%
 
16.5%
18.0%
19.5%
21.0%

Casualty
-                Facultative Proportional
-                Treaty Proportional
-                Facultative Excess of Loss
-                Treaty Excess of Loss
 
15.0%
16.0%
17.0%
18.0%
 
22.5%
24.0%
25.5%
27.0%

 
 

[1]            Refer to sections 32 and 35 of the Act.
[2]        That is, those set for casualty business.