APRA releases risk requirements for general insurers

Australian regulator out with consultation package on internal model-based method for calculating general insurers’ capital requirements

SYDNEY – The Australian Prudential Regulation Authority (APRA) has released a consultation package that sets out its draft prudential requirements for the use of the internal model-based method (IMB method) of determining the minimum capital requirements for general insurers.

The package consists of a draft prudential standard, a prudential practice guide and a related discussion paper. The draft Prudential Standard GPS 113, Capital Adequacy: Internal Model-based Method, reflects developments in relation to the use of internal models that have occurred since APRA's internal model requirements for general insurers were first introduced in 2002. It also follows the principles and concepts developed for internal models in authorised deposit-taking institutions under the Basel II Framework. There are, however, differences of detail and emphasis because the nature and significance of the risks in the two industries are not the same. APRA's proposed approach is also consistent with the guidelines issued by the International Association of Insurance Supervisors, which supports the use of internal models for determining regulatory capital requirements.

APRA member John Trowbridge said a key element of APRA's supervision is to encourage better risk management, and that the use of internal models to assess risk and economic capital can be a valuable tool for this. “The underlying purpose of allowing an insurer to determine its minimum capital requirement based on its internal model is to have capital requirements that better reflect the nature and extent of risks in the insurer's particular business structure and business mix. From a supervisory perspective, the objective is for insurers to understand and manage their risks better, and thereby reduce the risk of failure.”

Comments are requested by August 15, 2008. APRA intends to release the final prudential standards implementing the IMB method for general insurers at the same time as its final prudential standards for the supervision of consolidated general insurance groups. Both the packages are expected to be released in the fourth quarter of 2008 and will become effective on January 1, 2009.