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					          Insurance (prudential standard) determination Nos. 3 to 11 of 2010


                           EXPLANATORY STATEMENT

         Prepared by the Australian Prudential Regulation Authority (APRA)

           Insurance Act 1973, paragraphs 32(1)(a) and (b) and subsection 32(4)


Paragraphs 32(1)(a) and (b) of the Insurance Act 1973 (“the Insurance Act”) provide
that APRA may determine, in writing, standards relating to prudential matters that
must be complied with by general insurers and authorised NOHCs. Pursuant to
subsection 32(5A) of the Insurance Act and paragraph 6(d) of the Legislative
Instruments Act 2003 (“the Legislative Instruments Act”), such Prudential Standards
are legislative instruments for the purposes of the Legislative Instruments Act.
Subsection 32(4) of the Insurance Act gives APRA the power to vary Prudential
Standards so determined.

1.       Background

In December 2009, APRA released the discussion paper titled Proposed changes to
general insurance prudential reporting. APRA‟s key proposal was the alignment of
the balance sheet and income statement with the Australian equivalents to
International Financial Reporting Standards (AIFRS). A number of other refinements
were also proposed.

APRA‟s objectives were to refine the prudential reporting requirements to reduce the
reporting obligations for insurers, to align performance measures and to enhance
APRA‟s analysis of the financial performance of general insurers, while maintaining
the current capital framework.

2.       Purpose of the Instruments

The changes to the prudential reporting framework required the introduction of new
and amended reporting requirements. This also required consequential changes to the
terminology used in some general insurance prudential standards.

The purpose of making the instruments is to replace existing prudential standards with
prudential standards that implement the proposals.

Accordingly the Insurance (prudential standard) determination Nos. 3 to 11 of 2010
will revoke the following prudential standards with effect from 1 July 2010:

         General Insurance Prudential Standard GPS 001 Definitions made on 15
          December 2009;
         General Insurance Prudential Standard GPS 110 Capital Adequacy made on
          23 June 2008;




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         General Insurance Prudential Standard GPS 112 Capital Adequacy:
          Measurement of Capital made on 23 June 2008;
         General Insurance Prudential Standard GPS 113 Capital Adequacy: Internal
          model-based method made on 19 December 2008;
         General Insurance Prudential Standard GPS 114 Capital Adequacy:
          Investment Risk Capital Charge made on 23 June 2008 as amended by
          Insurance (prudential standard) No. 1 of 2009 made on 11 May 2009;
         General Insurance Prudential Standard GPS 115 Capital Adequacy:
          Insurance Risk Capital Charge made on 23 June 2008;
         General Insurance Prudential Standard GPS 116 Capital Adequacy:
          Concentration Risk Capital Charge made on 10 March 2010;
         General Insurance Prudential Standard GPS 120 Assets in Australia made on
          23 June 2008; and
         General Insurance Prudential Standard GPS 310 Audit and Actuarial
          Reporting and Valuation made on 23 June 2008.

Additionally the Insurance (prudential standard) determination Nos. 3 to 11 of 2010
will make the following prudential standards to take effect from 1 July 2010:

         General Insurance Prudential Standard GPS 001 Definitions (GPS 001);
         General Insurance Prudential Standard GPS 110 Capital Adequacy (GPS
          110);
         General Insurance Prudential Standard GPS 112 Capital Adequacy:
          Measurement of Capital (GPS 112);
          General Insurance Prudential Standard GPS 113 Capital Adequacy: Internal
          model-based method (GPS 113);
         General Insurance Prudential Standard GPS 114 Capital Adequacy:
          Investment Risk Capital Charge (GPS 114);
         General Insurance Prudential Standard GPS 115 Capital Adequacy:
          Insurance Risk Capital Charge (GPS 115);
         General Insurance Prudential Standard GPS 116 Capital Adequacy:
          Concentration Risk Capital Charge (GPS 116);
         General Insurance Prudential Standard GPS 120 Assets in Australia (GPS
          120); and
         General Insurance Prudential Standard GPS 310 Audit and Actuarial
          Reporting and Valuation (GPS 310).

3.       Operation of the Instruments

    Insurance (prudential standard) determination No. 3 of 2010: General Insurance
     Prudential Standard GPS 001 Definitions

     The following definition has been added to GPS 001:

     1. Deferred reinsurance expense (DRE) represents the amount of reinsurance
        expense which is capitalised as an asset over the life of the reinsurance
        contract in accordance with GPS 310 Audit and Actuarial Reporting and
        Valuation.



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       The following definitions for lenders mortgage insurance and lenders mortgage
       insurer from GPS 116 have now been included in GPS 001.

       2. 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 a mortgage over residential or
          other property.

       3. Lenders mortgage insurer means an insurer that has written or reinsured, or
          proposes to write or reinsure, policies of lenders mortgage insurance.

       The definitions for classes of business as currently set out in general insurance
       reporting instruction guides1 have now been reproduced in GPS 001.

       The following definitions have been amended in GPS 001:

       1. Expected reinsurance recoveries means any amounts due to an insurer, or to
          an entity that carries on international business within a Level 2 insurance
          group, from a reinsurer that arise from the recognition of Premiums Liabilities
          referred to in the capital standards and Prudential Standard GPS 310 Audit
          and Actuarial Reporting and Valuation. This is distinguished from reinsurance
          recoverables.

           The definition for expected reinsurance recoveries has been amended because
           it has been removed as a component of reinsurance assets.

       2. Reinsurance assets in relation to an insurer or an entity that carries on
          international business within a Level 2 group comprises:
          (a) reinsurance recoverables; and
          (b) deferred reinsurance expense.

           One of the reporting simplification measures taken in the project was to risk
           charge „deferred reinsurance expense‟ as a substitute for „expected reinsurance
           recoveries.‟ The definition of reinsurance assets has been used to refer to the
           particular reinsurance-related assets that will have a risk charge applied. This
           definition has been modified to change the terminology from „expected
           reinsurance recoveries‟ to „deferred reinsurance expense‟, as expected
           reinsurance recoveries on premium liabilities will no longer be risk-charged.

These changes in terminology have required other minor consequential amendments
to the following general insurance prudential standards to ensure consistency across
all prudential standards.

          Insurance (prudential standard) determination No. 4 of 2010: General
           Insurance Prudential Standard GPS 110 Capital Adequacy;



1
    Instruction guides form part of the reporting standards as made under the Financial Sector (Collection
     of Data) Act 2001.


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        Insurance (prudential standard) determination No. 5 of 2010: General
         Insurance Prudential Standard GPS 112 Capital Adequacy: Measurement of
         Capital;
        Insurance (prudential standard) determination No. 6 of 2010: General
         Insurance Prudential Standard GPS 113 Capital Adequacy: Internal model-
         based method;
        Insurance (prudential standard) determination No. 7 of 2010: General
         Insurance Prudential Standard GPS 114 Capital Adequacy: Investment Risk
         Capital Charge;
        Insurance (prudential standard) determination No. 11 of 2010: General
         Insurance Prudential Standard GPS 115 Capital Adequacy: Insurance Risk
         Capital Charge;
        Insurance (prudential standard) determination No. 8 of 2010: General
         Insurance Prudential Standard GPS 116 Capital Adequacy: Concentration
         Risk Capital Charge;
        Insurance (prudential standard) determination No. 9 of 2010: General
         Insurance Prudential Standard GPS 120 Assets in Australia; and
        Insurance (prudential standard) determination No. 10 of 2010: General
         Insurance Prudential Standard GPS 310 Audit and Actuarial Reporting and
         Valuation

4.       Consultation

Section 17 of the Legislative Instruments Act 2003 requires consultation when a rule-
maker makes a legislative instrument. APRA undertook consultation with the general
insurance industry from 3 December 2009 to 12 February 2010 on the proposed
changes to the current prudential reporting framework. The consultation process
involved the release of a discussion paper outlining the proposed changes, draft
prudential standards, draft reporting forms and instructions, together with a
quantitative impact study. APRA received submissions that were generally supportive
of the proposals and no material changes have been made to the key proposals. Some
minor modifications have been made to address aspects raised in the submissions.




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