The Australian Prudential Regulation Authority (APRA) has aligned its general insurance prudential framework with International Financial Reporting Standards (IFRS).
The new prudential standards, issued today, relate to capital requirements for general insurers. The changes have been finalised after extensive industry consultation.
As part of this package of reforms, APRA has 'de-coupled' both the definition of Tier 1 capital instruments and the assessment of securitised assets for capital adequacy purposes from Australian Accounting Standards. In the first case, the de-coupling was necessary as the adoption of IFRS definitions would mean that a significant portion of the current stock of capital instruments of general insurers might no longer have been eligible for inclusion in Tier 1 capital.
A key change is the introduction of new definitions of Tier 1 capital instruments and new limits on Tier 1 capital. These changes are consistent with the changes introduced on 31 May 2006 for authorised deposit-taking institutions.
APRA has been consulting with industry on these changes since 2005 and the final requirements reflect the outcome of this consultation process. In addition to changes arising from the adoption of IFRS, some technical amendments have also been made to Prudential Standard GPS 110 Capital Adequacy and Prudential Standard GPS 120 Assets in Australia.
APRA Member John Trowbridge said that APRA has aligned its prudential and reporting frameworks with IFRS-based financial reports, except where this would not be consistent with the intent and integrity of the APRA frameworks.
"The aim is to align as closely as possible financial reporting and prudential reporting for general insurers and, consequently, to reduce the degree of dual reporting. However, some differences to IFRS are necessary to ensure that there are no substantial adverse prudential implications for the capital base of general insurers.
"Overall, APRA's approach to IFRS is intended to ensure that the financial position of general insurers continues to be underpinned by adequate levels of high quality capital. The feedback received during the consultation was particularly useful in ensuring that APRA's approach is appropriate to the realities of the general insurance industry."
Transition arrangements will be made available where appropriate. The revised standards will apply from 1 January 2007. They are located on the APRA website at: http://www.apra.gov.au/General/General-Insurance-Prudential-Standards-and-Guidance-Notes.cfm.
Summary of main changes to prudential standards
Tier 1 major changes
- Decoupling of the definition of capital instruments eligible for Tier 1 capital from Australian Accounting Standards;
- Amended definitions of Tier 1 capital categories with 3 components and revised limits. The new categories and limits will be:
- Fundamental Tier 1 – 75 per cent of net Tier 1 capital;
- Non-innovative Residual Tier 1 – limited to 25 per cent of net Tier 1 capital composed of non-cumulative irredeemable preference shares without innovative capital features. This includes instruments that contain conversion features that are set at the time of issuance; and
- Innovative Tier 1 – This component of Residual Tier 1 capital is limited to 15 per cent of net Tier 1 capital.
- Enhanced loss absorption criteria for Innovative Tier 1 capital instruments;
- Direct issuance of Innovative Tier 1 capital instruments now allowable. Issuers may use Special Purpose Vehicles (SPVs) but all instruments issued through an SPV will be classified as Innovative Tier 1 capital;
- Decoupling of securitised assets for capital adequacy purposes from the accounting treatment of these assets.
Other technical changes
- Adjustments to the calculation of the Investment Risk Capital Charge, a component of the minimum capital requirement for general insurers;
- Providing an incentive for general insurers to formalise their reinsurance arrangements by ensuring that only reinsurance recoveries from properly documented reinsurance arrangements may be included in a general insurer’s regulatory capital ; and
- Refinement of the application of the assets in Australia test.
The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry. APRA is funded largely by the industries that it supervises. It was established on 1 July 1998. APRA currently supervises institutions holding approximately $2.5 trillion in assets for 20 million Australian depositors, policyholders and superannuation fund members.
Media and industry inquiries only:
Stuart Snell, Head of Public Affairs
Australian Prudential Regulation Authority
Telephone: 02 9210 3384
Mobile: 0407 250 276
All other inquiries:
APRA Contact Centre
1300 131 060
