Adjustments to the capital settings for longevity products

Executive summary

In June 2025, APRA released a consultation paper outlining proposed changes to the prudential framework seeking to facilitate a more favourable environment for the provision of longevity products without unduly increasing risks to policyholders. This is consistent with the Government’s objective of expanding options for retirees to manage longevity risk and supports APRA’s strategic objective of ‘getting the regulatory balance right’.

APRA’s June 2025 consultation sought to address two issues with the prudential framework for longevity products: firstly, that it imposes relatively conservative capital requirements; and secondly, that the framework is insufficiently risk sensitive and may exacerbate procyclicality by requiring life insurers to liquidate assets during a market downturn. APRA proposed to address these issues by redesigning the ‘illiquidity premium’, a key factor determining capital requirements for longevity products. Changes to the illiquidity premium were proposed alongside additional risk controls in respect to the governance, reporting and asset composition of the longevity product portfolio.

In response, APRA received 11 submissions from entities and industry bodies. APRA also undertook additional engagements with several stakeholders. Submissions were generally supportive of APRA’s direction. However, APRA received a range of suggestions to refine the proposal. The main suggestion was that the proposed capital benefit should be better aligned with the level of risk controls proposed.

In response to industry feedback, APRA is proposing a more principles-based approach to the illiquidity premium, including product eligibility under the revised framework. Further, the accompanying risk controls have been adjusted to be more proportionate in some areas, including the Appointed Actuary’s attestation and cashflow matching requirements to support a more adaptive approach as the market matures. 

While APRA broadly supported the suggested changes from industry, a targeted restriction on assets backing longevity products is proposed. APRA is proposing to apply an additional capital charge for holdings of alternative (unrated) assets and privately rated assets that exceed a specified limit.¹ This targeted restriction aims to balance the benefit industry obtains from having access to a wide range of investments to match long-duration liabilities against the additional risks certain asset types may present to longevity product policyholders. APRA welcomes feedback on the proposed treatment of alternative (unrated) assets and privately rated assets.

This response paper summarises the key substantive feedback received from stakeholders and outlines APRA’s response. Alongside this paper, APRA is also releasing draft prudential standards proposed to take effect from 1 July 2026, subject to the nature and extent of feedback received on the current proposals. APRA’s assumption is that transitional arrangements will not be required as the proposals in this response paper introduce an additional option for the calculation of the illiquidity premium (the ‘advanced illiquidity premium’). APRA does not intend to change the existing calculation (‘the standard illiquidity premium’), which remains available to insurers. 

APRA invites submissions on the proposals in this paper and the accompanying draft prudential standards. Feedback is also sought on the potential impacts of the updated proposals on capital, longevity product pricing and incremental costs associated with implementing the proposed reforms. Written submissions in response to this paper are requested by 17 December 2025.

Summary of updated proposals

Glossary

1. Key matters raised in submissions

1.1 Summary of consultation feedback

There was broad support for APRA’s proposal to update the capital framework for longevity products through the introduction of a more risk-sensitive illiquidity premium. Given that weak demand remains the primary constraint, the proposed changes alone are unlikely to transform the longevity market in Australia. Nonetheless, most submissions acknowledged that the proposals would enhance industry-wide capital resilience and support more competitively priced offerings, benefiting both providers and consumers. 

Feedback from consultation also proposed areas for refinement to better support APRA’s objective of facilitating a more favourable environment for the growth of longevity products. The key matters raised in submissions were:

• concerns that certain components of the proposed changes to the illiquidity premium, such as the benchmark, adjustment for risk and cap, may lack flexibility and limit the intended benefits of the proposed changes
• suggestions to expand the scope of products eligible for the illiquidity premium to enhance its impact
• recommendations that the risk controls should be proportionate to the benefits of the proposed changes, noting that overly prescriptive requirements, particularly for cashflow matching, may not suit current market conditions and could be refined to better support practical implementation.

In response to industry feedback, APRA is proposing a more principles-based approach with updated settings and risk controls to support a risk-sensitive illiquidity premium that is more tailored to a life insurer’s risk profile. Appointed Actuary attestations and stress testing are proposed as key risk controls within broader governance processes, ensuring the adoption of the illiquidity premium is appropriate and consistent with prudent risk management practices. Overall, the proposed changes aim to improve capital sensitivity to underlying risks and enhance alignment with comparable peer jurisdictions.

To support sound investment practices, APRA also proposes limiting capital concessions where cashflow matching assets are alternative (unrated) or privately rated. This seeks to balance investment flexibility for industry to match long-duration liabilities with the need to safeguard policyholders from the additional risks (particularly valuation and credit risks) associated with these asset types.

Industry submissions received on this consultation are detailed in this paper together with APRA’s response and updated proposals.

1.2 Proposed changes to redesign the illiquidity premium (‘advanced illiquidity premium’)

APRA proposes to introduce a redesigned method to calculate the illiquidity premium (the ‘advanced illiquidity premium’). The components used to calculate the advanced illiquidity premium, as well as the ‘stressed advanced illiquidity premium’ for the purposes of the Asset Risk Charge, are detailed in this paper.²

Insurers may elect to use the advanced illiquidity premium should they satisfy the proposed risk controls in section 1.3 of this paper. The existing illiquidity premium calculation (the ‘standard illiquidity premium’) will remain available. If an Appointed Actuary assesses that the insurer no longer complies with any one of the risk controls proposed, the calculation method must revert to the standard illiquidity premium.

1.2.1 Factor applied to spread

APRA initially proposed that the factor applied to the spread used to calculate the advanced illiquidity premium be increased from 33% to between 50% and 65%, or alternatively, that the advanced illiquidity premium be calculated by subtracting a risk allowance based on a prescribed percentage of the long-term average spread (LTAS) from the current spread.

Comments received

There was strong support for using a risk allowance based on a prescribed percentage of LTAS, with the advanced illiquidity premium equal to the benchmark spread less the risk allowance. Respondents noted that this approach would improve capital stability and mitigate procyclicality by reducing the risk of insurers being forced to liquidate assets during a market downturn.

Respondents generally agreed that the risk allowance should be based on fundamental credit risk components of the reference portfolio. Most respondents suggested this be calculated as the product of the probability of default and loss given default, though some suggested that allowances should also be made for downgrade risk, currency risks (if applicable), and any other applicable risks.

APRA’s response

APRA acknowledges the strong stakeholder support for using a prescribed percentage of LTAS to calculate the risk allowance when determining the advanced illiquidity premium. 

APRA believes that the Appointed Actuary should consider all risks that the insurer is exposed to when earning the illiquidity premium portion of the spread. This would include the cost of default, downgrade risk and any other risks that are applicable to the insurer, such as currency risk and model risk. 

APRA notes that peer regulators implement a 35% floor of the LTAS to the risk allowance. However, given the potential for misestimation risk and basis risk arising from the mismatch between actual assets and the reference portfolio (as discussed in section 1.2.2), APRA proposes to impose a floor higher than 35% (‘risk allowance floor’).

APRA is proposing that the advanced illiquidity premium is calculated by taking the current spread of the reference portfolio relative to the risk-free discount rate and subtracting a risk allowance as determined by the Appointed Actuary. The risk allowance would be the higher of:

• the cost of default, plus an appropriate allowance for downgrade risk and any other risk which is applicable to the insurer when earning the illiquidity premium portion of the spread. This should be based on long-term statistics relevant for the reference portfolio; or
• the risk allowance floor, which is 45% of the LTAS for the reference portfolio.

1.2.2 Reference portfolio

The initial proposal sought to broaden the universe of credit assets for determining the reference portfolio. This increased the choice from a single index (3-year Australian A-rated spreads) to any Australian investment grade index with tenors up to 10 years as determined by the Appointed Actuary. 

Comments received

There was strong consensus among submissions that reference portfolios should not be restricted to Australian market indices given the limited availability of bonds at longer durations. Instead, global indices should be allowed to help insurers manage duration mismatches and access more diversified credit exposures. To ensure transparency and consistency, indices used should be well-known, published, and easily accessible.

Some respondents recommended that the reference portfolio should reflect the actual asset portfolio held by insurers, with spreads adjusted for default and credit risk exposure, and supported by market data aligned to the characteristics and duration of the underlying assets and liabilities. 

Others proposed that the reference portfolio should replicate the characteristics of the underlying liabilities. Where APRA mandates a single index, simplified adjustments should be allowed to better reflect portfolio-specific features. Others suggested that reference portfolios could go beyond bonds to include traded instruments such as interest rate and inflation derivatives, with a weighted average of benchmarks to support matching objectives.

Respondents also suggested that insurers should not be limited to a single prescribed index, and that multiple (weighted) indices may be appropriate where liability profiles are sufficiently different.

APRA’s response

APRA acknowledges that insurers would benefit from increased flexibility in selecting a reference portfolio. To reflect industry feedback and maintain simplicity, APRA now proposes to permit the Appointed Actuary to select either a single index or a weighted average of up to three indices. These may include international indices but are required to be solely comprised of government or corporate bonds, at least investment-grade-rated by a rating agency recognised by APRA (under Prudential Standard CPS 001 Defined terms (CPS 001)), calculated by an independent index provider and available daily.

APRA proposes that the reference portfolio should reflect the nature and duration of liabilities and align with the life insurer’s investment strategy. The selected reference portfolio should correspond with the Appointed Actuary attestation that based on the insurer’s actual investment portfolio, it is able to earn a spread above the risk-free rate at least equal to the illiquidity premium under normal and severe but plausible scenarios. APRA expects changes to the reference portfolio only in limited circumstances, such as a material shift in asset or liability profiles. Any such changes should be detailed in the Actuarial Valuation Report (AVR), including the reasons for modifying the reference portfolio or its associated adjustments.

APRA acknowledges that in allowing an insurer to select a reference portfolio, there is a potential divergence from the actual portfolio of assets, which introduces a level of misestimation and basis risk. APRA intends to address these risks through the introduction of the risk allowance floor (discussed in section 1.2.1), as well as changes to Prudential Standard LPS 114 Capital Adequacy: Asset Risk Charge (LPS 114) stressed illiquidity premium (discussed in section 1.2.6). Furthermore, APRA expects that insurers’ will account for all relevant risks in their Internal Capital Adequacy Assessment Process (ICAAP) target capital.  

1.2.4 Long-term (ultimate) rate

APRA initially proposed increasing the long-term illiquidity premium (after the cut-off point) from 20 basis points (bps) to between 30 and 45 bps.

Comments received

Respondents expressed a range of views on the appropriate long-term illiquidity premium. Some supported APRA’s proposed range of 30 to 45 bps. Others suggested that even 50 bps would be too conservative, while some suggested a more principles-based approach under which the long-term rate would be determined by the insurer.

Those favouring a more flexible approach argued that the ultimate rate should reflect an insurers’ ability to earn the required spread over time, accounting for stressed market conditions and reinvestment risk. Suggestions included using long-term historical data and stochastic credit models to support replicating portfolios and ensure resilience under stressed conditions.

APRA’s response 

In light of feedback received, APRA now proposes that the long-term (ultimate) rate for the advanced illiquidity premium should be determined by the Appointed Actuary, but that it should not exceed 50 bps. The Appointed Actuary should base their determination on long-term spreads able to be earned by the insurer under normal and severe but plausible scenarios based on a high-quality bond portfolio less a risk allowance that considers all risks that the insurer is exposed to when earning the long-term rate. APRA has prescribed a prudent limit of 50 bps given the uncertainty of the reinvestment assumption past the cut-off point.

1.2.5 Cap

APRA initially proposed that the cap on the advanced illiquidity premium be increased from 150 bps to between 300 and 350 bps. 

Comments received

Most respondents opposed a fixed cap on the advanced illiquidity premium, arguing it could distort liability valuations under stressed market conditions and discourage investment in long-duration assets. They also argued that a cap should not be necessary in stressed scenarios if the risk allowance is set appropriately.

On the other hand, some cautioned that a lower cap could help limit extreme illiquidity premium outcomes if spreads are significantly elevated and the risk allowance is not sufficient. 

If APRA does impose a cap, respondents suggested various measures to ensure the illiquidity premium remains appropriate under extreme conditions. These included a 'pressure-release' mechanism to override arbitrary cap effects, referencing the cap-to-benchmark analysis and statistical risk appetite, as well as using long-term historical data and back-testing to inform setting the cap.

APRA’s response 

After careful consideration of submissions and noting stakeholder views that a cap would materially inhibit establishment of long-term matching requirements and the desired reduction in procyclicality, APRA now proposes that there should be no fixed cap on the advanced illiquidity premium. However, APRA is concerned that a proportion of the widened spreads in a stress event may be attributable to increased default risk. Rather than addressing this implicitly by setting a fixed cap, it is proposed that this risk be addressed explicitly by redesigning the stressed illiquidity premium in LPS 114 as detailed below in section 1.2.6.

APRA’s intention is to ensure that the advanced illiquidity premium is calculated consistently and reasonably across insurers, especially during a stress scenario. In such scenarios, the advanced illiquidity premium could increase substantially, resulting in a material decrease in the prudential liabilities relative to the liabilities determined under the accounting standard. To mitigate this risk, APRA proposes that the advanced illiquidity premium used for prudential purposes must not exceed the corresponding illiquidity premium determined under the accounting standard.

1.2.6 LPS 114 stressed illiquidity premium

In its initial consultation paper, APRA proposed to redesign the calculation of the stressed illiquidity premium in the credit spread stress component in LPS 114 so that it would depend explicitly on the components of the illiquidity premium formula. This was to ensure that the stressed illiquidity premium is consistent with the changes to the illiquidity premium formula under Prudential Standard LPS 112 Capital Adequacy: Measurement of Capital (LPS 112).

Comments received

Some stakeholders noted potential benefits if the allowance for the illiquidity premium in the capital base was a best estimate, with risk sensitivity instead incorporated into the Asset Risk Charge of the Prescribed Capital Amount (PCA). One submission also commented that the treatment of the Asset Risk Charge should be consistent with any allowance for the illiquidity premium. Another respondent expressed concern that setting the illiquidity premium too high alongside similar changes to the stressed illiquidity premium could result in an excessively large capital reduction close to the Solvency II Matching Adjustment, but without the corresponding safeguards and governance mechanisms. 

APRA’s response 

In previous sections of this paper, and in response to feedback from industry, APRA has proposed amendments to make the advanced illiquidity premium more market sensitive. This would include the addition of a risk allowance based on the fundamental credit risk components of the reference portfolio and a long-term view of defaults, downgrades and other risk sources, as well as removal of the proposed cap on the advanced illiquidity premium. Both these changes aim to reduce procyclicality of the new capital framework during a market downturn.

APRA considers that during a stress scenario, increases in credit spreads may be partly driven by increases in default premia, leading to overstatement of the illiquidity premium. This risk could be exacerbated by basis risk between the reference portfolio and the insurer’s assets and may be more severe for lower quality assets.

APRA proposes that insurers adopting the advanced illiquidity premium and the accompanying risk controls should hold capital for this risk within the PCA. This will be implemented through the introduction of an adjustment factor that is applied to the increase in the illiquidity premium under the credit spread charge in LPS 114. Specifically, the stress adjustment will equate to a bonds spread percentage factor outlined in Table 1 of LPS 114 paragraph 62 multiplied by the adjustment factor outlined in the table below, both based on the credit quality of the reference portfolio. The stress adjustment will be lower for reference portfolios with lower counterparty grades. The introduction of this adjustment is in line with peer jurisdictions.

1.3 Proposed risk controls

APRA proposes to proceed with introducing the risk controls discussed in the first consultation paper, with submissions supportive of an illiquidity premium framework with appropriate safeguards to protect policyholders’ interests. This paper expands on the previous consultation by providing further guidance on how an insurer would be expected to satisfy the proposed risk controls and provides an amended set of Appointed Actuary attestations. The amendments include aligning APRA’s expectations for cashflow matching and hold-to-maturity assets closer towards industry practice and reflects industry feedback that a more principles-based approach is preferred. Life insurers adopting the advanced illiquidity premium would be required to comply with the proposed risk controls, which support more risk-sensitive components and provide greater discretion to the Appointed Actuary in determining the illiquidity premium.

1.3.1 Governance processes

In the initial consultation paper, APRA proposed that insurers should demonstrate compatibility between their governance processes and the adoption of the revised illiquidity premium.

Comments received

There was broad agreement among stakeholders that risk controls should be integrated into existing governance frameworks, including investment policy, credit risk management and asset liability management (ALM). Insurers should maintain appropriate management committees, such as ALM, business performance and investment management committees, supported by regular reporting (e.g. experience analysis, liquidity risks, ALM, credit quality, investment risks) to relevant management and Board committees. These governance processes should also include attestations as part of APRA’s year-end reporting processes.

APRA’s response

APRA proposes that insurers should be able to demonstrate compatibility between their governance processes and the adoption of the advanced illiquidity premium. While APRA does not propose to prescribe specific governance processes, better practice risk management approaches include:

• stress testing integrated into the ICAAP to ensure the illiquidity premium is supportable based on the assets backing adjusted policy liabilities and Prudential Capital Requirement (PCR) attributable to longevity products. This should consider how asset values are impacted during stressed market conditions
• effective policies covering liquidity and capital risk management as well as regular monitoring of ALM from a capital and liquidity perspective
• investment decisions considered in relation to achieving the illiquidity premiums and risks involved
• regular reporting of investment performance against the illiquidity premium
• monitoring of cashflow matching and liquidity risks, particularly around surrender and longevity experience compared to best estimates
• alignment between internal risk management and investment strategy policies demonstrating a hold-to-maturity bias.

An insurer is required to notionally allocate its assets backing longevity liabilities to determine cashflow matching (section 1.3.2) and the Appointed Actuary attestations (section 1.3.3). The assets backing longevity liabilities are also required to be separately identifiable. This is intended to help an insurer ensure appropriate governance of its advanced illiquidity premium. It is not intended to constitute strict or legally enforceable ringfencing.

1.3.2 Cashflow matching

APRA proposed that to qualify for the advanced illiquidity premium, insurers must demonstrate close asset and liability cashflow matching within an acceptable level of risk. 

Comments received

While there was no consensus among respondents on cashflow matching requirements, most respondents noted that strict cashflow matching may be impractical at longer tenors and recommended more flexible approaches. Suggestions included alternatives such as accumulated shortfall tests and duration-based matching techniques as well as an investment strategy that considers physical and derivative assets. Overall, respondents emphasised the importance of a proportionate, principles-based framework that reflects the size and complexity of individual insurers.

APRA’s response 

APRA proposes that access to the advanced illiquidity premium is conditional upon maintaining cashflow matching. At a minimum, an insurer must demonstrate, on a risk-adjusted basis, that cashflows from the assets that have been set aside are sufficient to meet the longevity liability cashflows on a cumulative basis. For the purposes of performing the cashflow matching test, APRA proposes that: 

• asset and liability cashflows and the accumulated cashflows must be projected at least at annual timesteps on a best estimate basis
• assets backing longevity liability cashflows must be assumed to be managed in accordance with the insurer’s investment philosophy that is aligned to a hold-to-maturity bias with limited circumstances under which assets are rebalanced or replaced
• any surplus cashflows and proceeds from maturities must be assumed to be reinvested into assets that earn at most the long-term average yields of the reference portfolio over the projection period
• for determining the risk-adjusted basis of the asset cashflows, the insurer must reflect all material risks associated with generating the asset cashflows, including default and reinvestment risk
• an insurer is considered to be cashflow matched if the maximum accumulated shortfall is less than 3% of the present value of longevity liability cashflows on a best estimate basis discounted at the risk-free discount rate. 

Consistent with international practice, the accumulated shortfall threshold has been set to minimise the risk that the insurer is forced to sell hold-to-maturity assets to meet liability payments.

1.3.3 Appointed Actuary attestation

It was initially proposed that the Appointed Actuary should attest that:

• liabilities are cashflow matched with hold-to-maturity assets within an acceptable level of risk over the period that the illiquidity premium is applied
• the insurer can meet benefit payments as they fall due without resorting to selling assets in both a normal and stressed period
• the insurer will attain spread above risk-free rate with a high level of confidence.

Comments received

There was broad support among respondents that an attestation by the Appointed Actuary may be a credible and effective governance mechanism to validate an insurer’s ability to demonstrate cashflow matching and hold-to-maturity intent. Many respondents suggested that the Appointed Actuary attestation could be integrated into existing regulatory documents such as the AVR, Financial Condition Report (FCR), and ICAAP.

Some respondents queried whether the requirement not to sell assets in normal or stressed periods would represent too tight a constraint as it implies that an insurer must be able to meet all benefit payments from cashflows in a stressed scenario. They noted further that an appropriate and prudent approach could involve an insurer purposely holding an allocation of more liquid assets as a safeguard against potentially elevated outflows in a stressed period.

Stress testing was identified by industry as a key risk control. Some respondents recommended aligning stress testing with the insurer’s risk appetite and ICAAP, while others suggested modelling scenarios such as a 1-in-200-year event. Some submissions also proposed that APRA set a standardised baseline stress to ensure consistency across the industry.

APRA’s response

Noting industry feedback, APRA proposes to slightly relax the hold-to-maturity requirement. APRA’s revised proposal is for an insurer to be expected to meet benefit payments as they fall due without being forced to sell illiquid assets in a market downturn and that the insurer’s investment philosophy should be focused on holding assets until they mature. Assets would only be rebalanced or replaced in limited circumstances, which should be clearly explained in the insurer’s risk management framework. 

APRA agrees that stress testing should play a key role in assessing the appropriateness of illiquidity premium. While APRA is not prescribing a baseline stress, as part of the insurer’s ICAAP, scenario analysis should be conducted and consider all material risks (including any risks that relate to assets being liquidated before maturity) to verify that the assets backing adjusted policy liabilities and PCR attributable to longevity products remains sufficient under stress conditions.

APRA proposes that the Appointed Actuary attestations be included in the FCR with supporting information and detail included in the AVR.

APRA proposes that the Appointed Actuary would attest that, at a minimum, the following have been met over the annual period:

• the advanced illiquidity premium has been determined in accordance with LPS 112 and is determined on a reasonable and supportable basis
• the insurer’s governance processes are compatible with the adoption of the advanced illiquidity premium
• a cashflow matching test has been performed as prescribed in LPS 112 and the insurer can demonstrate that it is cashflow matched up to the long-term illiquidity premium implementation based on the assets backing longevity liability cashflows
• based on their actual investment portfolio of the assets backing longevity liability cashflows, the insurer is able to earn a spread above the risk-free discount rate at least equal to the illiquidity premium
• the insurer’s investment philosophy is aligned to a hold-to-maturity bias in managing the assets backing longevity liability cashflows with assets being rebalanced or replaced only in limited circumstances, such as severe market dislocation or disruption. The circumstances must be well defined by the insurer in its risk management framework
• the insurer is expected to meet benefit payments as they fall due without resorting to selling illiquid assets backing longevity liability cashflows in a market downturn
• in relation to the assets backing longevity liability cashflows, the insurer has placed primary reliance on debt instruments with cashflows that are highly predictable in both the amounts and the timing of payments
• assets backing adjusted policy liabilities and PCR attributable to longevity products are separately identifiable
• stress scenario analysis and back-testing has been undertaken as part of the ICAAP that considers all key risks, to verify that at a minimum:
  
  • the assets backing adjusted policy liabilities and PCR attributable to longevity products are sufficient to meet the liabilities
  • based on the assets backing adjusted policy liabilities and PCR attributable to longevity products, the insurer is able to earn a spread above the risk-free discount rate at least equal to the illiquidity premium under severe but plausible scenarios. 

Assets with highly predictable cashflows are those with minimal variability or optionality in the timing and volume of payments. Cashflow variability must not pose a material risk to the insurer meeting its cashflow matching requirements. 

‘Assets backing longevity liability cashflows’ means the assets required to meet best estimate longevity liability cashflows after allowing for all material risks associated with generating the asset cashflows, including default and reinvestment risk. 

If using an advanced illiquidity premium, the insurer should consider the risk that its illiquidity premium reverts to the standard illiquidity premium as part of its ICAAP.

1.3.4 Additional reporting

Additional reporting to APRA related to the illiquidity premium was proposed. Examples included:

• evidence of cashflow matching with hold-to-maturity assets, including under stressed scenarios
• assets supporting longevity risk products must be separately identified.

Comments received

Respondents indicated that the primary safeguard for applying a more risk-sensitive illiquidity premium should be the Appointed Actuary’s attestation, supported by existing frameworks such as the AVR, FCR, and ICAAP.

While some respondents saw value in providing individual asset-level data for assets backing liabilities, others questioned its usefulness, emphasising that evidence of strong governance and risk controls are more important. 

Several responses also noted that the level of reporting should be proportionate to the discretion applied in determining the illiquidity premium. Additional data on hold-to-maturity considerations could also be provided by insurers.

APRA’s response 

APRA agrees that the Appointed Actuary’s attestation in the FCR (with supporting details included in the AVR) should be the primary safeguard for applying a more risk-sensitive illiquidity premium. 

While responses varied on the value of more granular asset data, APRA considers this an important safeguard to support the implementation of the illiquidity premium changes. To balance transparency with proportionality, it is proposed that longevity product providers adopting the advanced illiquidity premium should be required to report some additional information to APRA. APRA intends to issue a reporting template that will include information tailored to the small cohort of longevity product providers, including:

• components of the advanced illiquidity premium formula, including details of the reference portfolio
• identifying classes of assets backing longevity products
• evidence of cashflow matching including key assumptions.

This data collection constitutes an important risk control as it supports APRA’s ability to understand the impact of the proposed changes to the illiquidity premium, monitor developments in the longevity market, better understand asset quality and support targeted supervision. In due course, this data collection will be incorporated into APRA’s reporting standards.

APRA will issue a draft reporting template for longevity product providers for further consultation in early 2026.

1.3.5 Restrictions on assets backing longevity products

The consultation paper asked whether restrictions on assets backing longevity products should form a risk control. A key asset class to consider for backing longevity products is alternative (unrated) assets, which includes private credit and other assets that are assigned a counterparty grade of 5 under CPS 001. APRA’s focus on these assets reflects their anticipated growth in supporting longevity products due to their potential to offer higher yields, diversification benefits and longer durations for asset liability matching. However, these assets come with additional risk, particularly valuation and credit risk. APRA also considers that the current capital treatment for these assets is not adequately risk sensitive.

Comments received

Most responses called for flexibility in relation to asset selection, including access to a wider range of international markets and asset classes to better match long-duration liabilities. There was preference for a principles-based approach to asset restrictions, favouring flexibility over prescriptive rules. A minority of responses also advocated recognition of additional credit rating agencies in APRA’s capital framework and greater allowance for private ratings.

APRA’s response 

APRA recognises the benefit of insurers having access to a variety of assets to better match long-duration liabilities. However, APRA needs to balance this benefit with the risk of insurers investing in significantly lower grade assets. This risk is heightened by a lack of risk sensitivity in the current capital treatment of alternative (unrated) assets. It is particularly significant for policies that are subject to the advanced illiquidity premium, given the proposed capital benefit. APRA seeks feedback on the following proposed position for the treatment of alternative (unrated) assets backing longevity products:

• insurers must assign a counterparty grade of 7 to the amount of alternative (unrated) assets that exceeds 10% of the total assets backing adjusted policy liabilities and PCR attributable to the policies that are subject to the advanced illiquidity premium within a statutory fund. For this purpose, alternative (unrated) assets exclude privately rated assets rated by an APRA-recognised rating agency
• insurers can assign a counterparty grade based on Table 1 and Table 2 of CPS 001 Attachment C for assets that are privately rated by an APRA-recognised rating agency up to 15% of the total assets backing adjusted policy liabilities and PCR attributable to the policies that are subject to the advanced illiquidity premium within a statutory fund (subject to meeting the additional criteria). For those assets that exceed the 15% limit, insurers must assign a counterparty grade of 7.

To provide some flexibility, it is proposed that a life insurer would be able to request APRA approval for higher limits for alternative (unrated) assets and privately rated assets. The insurer would have to demonstrate sophisticated risk management approaches to managing assets and longevity products. Additionally, APRA is considering the criteria to be used in exercising its powers within CPS 001 to recognise additional sources of credit ratings (following application by a life insurer).

APRA welcomes feedback on the above proposals.

1.4 Scope of products eligible for the illiquidity premium

The illiquidity premium currently applies to specific products prescribed in Attachment F of LPS 112.

APRA initially sought industry feedback on broadening the type of longevity products to which the illiquidity premium applies, including those with greater uncertainty in the timing and size of benefit payments, while ensuring it remains appropriate under both normal and stressed conditions.

Comments received

Most submissions considered a principles-based framework to be the preferred approach for determining eligibility for the illiquidity premium under LPS 112, rather than relying on a fixed list of product types.

Submissions noted that while most lifetime income products include death and surrender benefits, they should still be considered illiquid where surrender values, after applying a surrender penalty, are materially lower than the policy liability. However, it was acknowledged that where surrender risk is material, such products may not qualify for the illiquidity premium.

For products with higher liquidity or withdrawal/surrender risks, respondents emphasised the need to adjust the illiquidity premium to reflect these risks and potential policy owner behaviour under stressed conditions, effectively limiting the illiquidity premium to a partial amount.

Several respondents suggested extending the illiquidity premium beyond longevity products to all products with illiquid liabilities. This would include products with illiquid cashflows such as income protection open claim reserves.

APRA’s response

To support the introduction of innovative retirement products, APRA proposes to adopt a principles-based approach for determining a longevity product’s eligibility for both the standard and advanced illiquidity premium. Under this approach, an Appointed Actuary would be permitted to determine a product’s eligibility if its liabilities are demonstrably illiquid under normal and severe but plausible scenarios. The Appointed Actuary must document, as part of the actuarial advice framework under Prudential Standard CPS 320 Actuarial and Related Matters (CPS 320), the criteria used in determining the product eligibility. APRA expects that the Appointed Actuary includes an assessment regarding materiality of the risks in its advice to the Board on product eligibility.

APRA’s proposed changes to the prudential framework are focused on the illiquidity premium application to longevity products and extending the illiquidity premium to products beyond this boundary is currently out of scope.

1.5 Other changes to the capital framework

Beyond the illiquidity premium, APRA invited submissions on potential longer-term changes to the Life and General Insurance Capital (LAGIC) framework that could further address its objective of promoting retirement income products.

To expedite this review, APRA is not considering broader LAGIC changes at this stage. However, these may be explored in the future as part of longer-term enhancements to the capital framework for longevity products.

2. Next steps

Following feedback from stakeholders, APRA has made proposed updates to the prudential standards LPS 112, LPS 114, Prudential Standard LPS 360 Termination Values, Minimum Surrender Values and Paid-up Values (LPS 360), CPS 320 and CPS 001. The amended standards are proposed to take effect from 1 July 2026, with this timeline subject to the nature and extent of feedback received on the current proposals. APRA’s assumption is that transitional arrangements will not be required as the proposals in this response paper introduce an additional option for the calculation of the illiquidity premium (the ‘advanced illiquidity premium’). APRA does not intend to change the existing calculation (‘the standard illiquidity premium’) which remains available to insurers. Feedback is welcome on whether transitional arrangements are required for these proposals.

Finalisation of the prudential standards and further consultation on reporting is expected to occur in H1 2026.

2.1 Request for submissions

APRA invites written submissions on the consultation questions and updated drafted versions of the prudential standards attached to this Paper. Written submissions should be sent to policydevelopment@apra.gov.au by 17 December 2025 and addressed to:

General Manager
Policy Development 
Policy and Advice Division
Australian Prudential Regulation Authority

2.2 Important disclosure information – publication of submissions

All information in submissions will be made available to the public on the APRA website unless a respondent expressly requests that all or part of the submission is to remain in confidence. Automatically generated confidentiality statements in emails do not suffice for this purpose. Respondents who would like part of their submission to remain in confidence should provide this information marked as confidential in a separate attachment.

Submissions may be the subject of a request for access made under the Freedom of Information Act 1982 (FOIA). APRA will determine such requests, if any, in accordance with the provisions of the FOIA. Information in the submission about any APRA-regulated entity that is ‘protected information’ under section 56 of the Australian Prudential Regulation Authority Act 1998 (APRA Act) can only be disclosed or produced for an authorised purpose under s 56 of the APRA Act and is likely to be exempt from production under the FOIA.