The Australian Prudential Regulation Authority (APRA) has today released a consultation package that sets out its draft prudential requirements for the use of the Internal Model-based Method (IMB Method) for determining the Minimum Capital Requirements (MCR) of general insurers.
The consultation 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 (ADIs) 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. The use of internal models to assess risk and economic capital can be a valuable tool for this purpose.
'The underlying purpose of allowing an insurer to determine its MCR 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.'
APRA invites interested parties to comment on the proposed package by 15 August 2008.
APRA intends that the final prudential standards implementing the IMB Method for general insurers will be released 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 1 January 2009.
The consultation package can be found on the APRA website at: http://www.apra.gov.au/policy/
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 $3 trillion in assets for 21 million Australian depositors, policyholders and superannuation fund members.
Media and industry inquiries only:
Andrew McCutcheon, Public Affairs Manager
Australian Prudential Regulation Authority
Telephone: 02 9210 3384
Mobile: 0417 528 660
All other inquiries:
APRA Contact Centre 1300 131 060.
