Response to finalising amendments to the capital treatment for longevity products

Glossary

Overview

APRA has finalised amendments to its prudential standards relating to the capital treatment for longevity products  to support better retirement outcomes for Australians by fostering a more vibrant and competitive annuity market. These changes are consistent with the Government’s objective of expanding options for retirees to manage longevity risk and a key contribution to APRA’s strategic objective of ‘getting the balance right’ by ensuring our regulation is efficient and proportionate.

The changes are designed to support the market for retirement income products. By better aligning APRA’s capital settings with the long-term nature of longevity liabilities, these reforms will support greater innovation and competition in the market for longevity products, allowing life insurers to offer retirees better retirement income solutions.

The key change is the introduction of the option to use the ‘advanced illiquidity premium’ (AILP), a factor determining capital requirements for longevity products. To support this change, APRA is introducing additional risk controls with respect to the governance, reporting and asset composition of the longevity product portfolio.

Feedback received

Industry feedback strongly supported the reforms, noting the changes represent a significant improvement to the current framework by reducing procyclical risks to life insurers’ capital positions. Stakeholders noted APRA’s reforms represent an important step towards developing Australia’s retirement income market by promoting innovation and expanding options for retirees to manage longevity risk. Respondents largely expect the reforms to improve capital efficiency and stimulate greater market participation.

The final reforms set out in this response paper follow two rounds of consultation. In June 2025, APRA sought feedback on the review's direction, then released draft standards in October 2025. APRA received nine submissions to its consultation on draft prudential standards. Non-confidential submissions are available on APRA’s website.

While overall feedback was positive, many submissions suggested some further refinements to specific parameters of the proposed AILP calculation, notably in relation to the proposed floor for the risk allowance and treatment of the AILP in the credit spread stress charge under Prudential Standard LPS 114 Capital Adequacy: Asset Risk Charge (LPS 114). Mixed views were received in relation to proposed restrictions on assets backing longevity products, ranging from recommending the removal of restrictions to advocating for greater flexibility and higher asset limits.

Summary of APRA’s response

After carefully weighing the feedback received, APRA has determined that the proposed settings for the AILP remain sound and strike the right balance in providing capital efficiency in return for appropriate risk controls.

Insurers are expected to materially benefit from the overall package of APRA’s proposed changes. Features that are expected to greatly reduce procyclicality include changes to the risk allowance to reflect a proportion of the long-term average spread and removal of caps on the AILP. APRA may review the settings and parameters of the AILP at a future date as the market matures.

APRA has issued final prudential standards together with this paper, which include additional changes relating to improvements in clarity for the proposed AILP. Further detail relating to each key issue, and APRA’s response, is set out in the next section of this paper. A summary table of changes is included in the attachment.

Next steps

Final prudential standards, published alongside this paper, will come into effect on 1 July 2026.

To support the implementation process, APRA has also issued a draft reporting template accompanying this response paper for insurers that opt to use the AILP. APRA seeks feedback on the draft reporting template by 12 May 2026.

Response to key issues

1.1 Scope of products eligible for the illiquidity premium

Respondents broadly supported APRA’s principles-based approach to product eligibility for the AILP, noting its flexibility and that it moves Australia’s regime closer to international practice. There was agreement from respondents that the Appointed Actuary should have greater discretion to determine product eligibility and that there should be clearer definitions of ‘longevity products’ and ‘products with material longevity risk’. Stakeholders sought clarification on whether, for example, annuity products with limited death or surrender value impact were in scope of the reforms. For term certain annuities where there is no longevity risk, respondents suggested that, as long as the liability is illiquid, the same principles in setting the AILP should apply.

A common request was for a broader principles-based framework to capture illiquid liabilities not related to longevity. Respondents suggested expanding the eligibility beyond longevity products to include other highly illiquid liabilities, such as disability income disabled lives reserves and single premium whole-of-life business, subject to appropriate risk controls. 

APRA’s response 

APRA confirms that the intended approach from the outset was for a broad set of products to be eligible for the AILP. This includes all annuity products, including term certain annuities, as well as lifetime income products and innovative retirement income stream products that meet the eligibility requirements. Consequential amendments have been made to the prudential standards to improve the clarity of the AILP eligibility criteria.

The rationale for broadening the eligibility criteria – relative to the existing framework – is to facilitate the development of a variety of life insurance products that can better support retirement outcomes for Australians. Given the abovementioned focus and a desire from industry for a timely adoption, extending the application to other liabilities such as disability income disabled lives reserves and single premium whole-of-life business remains out of scope.

Collectively, products eligible for the AILP are referred to as ‘longevity products’ for the purposes of this paper. To enhance technical clarity, the amended prudential standards use the term ‘illiquid liabilities’ to refer to these products.

1.2 Factor applied to spread 

Many stakeholders viewed APRA’s proposed risk allowance floor equal to 45% of the long-term average spread to be overly conservative. They argued that international benchmarks such as Solvency II use a lower 35% floor. Many suggested that a 45% floor would significantly reduce the benefits of the AILP and limit capital relief.

Several submissions argued that data and historical default experience support a lower risk allowance, and that misestimation and basis risk are already addressed through other controls and adjustment factors. Some concerns were also expressed that an excessively high floor could lead to unintended consequences, such as convergence of investment strategies and reduced responsiveness to market conditions.

APRA’s response 

APRA considers that the proposed 45% floor remains appropriate.

In APRA’s view, the current parameter settings are proportionate to the level of risk within the package of reforms. In comparing the AILP parameters against other jurisdictions, there are significant differences in broader risk controls tied to the illiquidity premium. In many respects, the AILP settings are more principles-based and flexible, with a higher risk allowance floor while overseas regimes generally apply tighter regulatory constraints, and a lower risk allowance floor. This issue should be considered separately from the LPS 114 stressed illiquidity premium adjustment factors, which address the risks that may arise in a severe 1 in-200 year credit spread stress scenario (see section 1.3).

APRA acknowledges industry concerns that the 45% floor can reduce the capital benefit for insurers, particularly in periods when credit spreads are very narrow. In such circumstances, which include the current market environment, the benefit obtained as a result of applying the AILP may be equivalent to the Standard Illiquidity Premium. However, APRA’s historical analysis indicates that these market conditions occur infrequently and as a result there is insufficient evidence to support lowering the 45% floor.

1.3 LPS 114 stressed illiquidity premium

Stakeholders generally opposed APRA’s proposed adjustment factor that limits how much of the increase in the AILP flows through to the credit spread stress charge under LPS 114. They responded that this proposal is overly conservative, risks double-counting default and downgrade risk already captured in the AILP framework, and reduces risk sensitivity and countercyclicality.

Respondents noted that the AILP already incorporates prudent allowances for defaults, downgrades, currency risk, and stress testing, and that international standards allow the full change in spreads to be reflected. Several submissions recommended removing the adjustment factor entirely or equivalently, increasing it to 100%, emphasising that existing safeguards and risk controls should make the additional constraint unnecessary.

APRA’s response 

In APRA’s view, the proposed adjustment factor under LPS 114 remains prudent and appropriate.

The rationale underlying the adjustment factor remains unchanged; during a stress scenario, increases in credit spreads may be partly driven by higher default premia, leading to an overstatement of the illiquidity premium. In addition, there may be material basis risk between the chosen reference portfolios and the insurer’s actual asset holdings that is not present in other jurisdictions. While respondents pointed to specific international frameworks that allow the full change in spreads to be reflected, other regulators, including the UK and Singapore, apply similar reduction factors.

1.4 Restrictions on assets backing longevity products

APRA received mixed feedback on proposed restrictions on assets backing longevity products. Some respondents requested their removal while others did not object to them. Some respondents argued that restrictive requirements on alternative (unrated) assets would inappropriately constrain investment strategies for assets backing longevity products, noting the benefits such assets can provide through higher yields, diversification benefits and longer durations that support asset/liability matching.

However, most respondents supported APRA’s proposal to allow higher limits for unrated and privately rated assets where insurers can demonstrate sophisticated risk management approaches. Respondents also provided a range of examples to illustrate how insurers would satisfy such criteria.

For privately rated assets, some respondents recommended relaxing APRA’s proposed conditions for using private ratings, such as allowing private ratings for securitisation exposures and unsolicited private ratings. They also argued that expanding APRA’s list of eligible credit rating agencies would support insurers and enable access to a broader set of assets.

Most respondents expressed limited capability and resourcing for using internal credit ratings.

APRA’s response

APRA’s proposed limits on alternative (unrated) assets and privately rated assets remain an important risk control measure, given the current risk insensitivity of the capital requirement for these assets leading to a potential understatement of the asset risk charge under LPS 114. Unrated assets are currently assigned a counterparty grade of 5, even though these assets can vary considerably in their underlying risk profiles due to bespoke structures, complex terms and conditions, and opaque features.

APRA notes that allowing private ratings already represents a material degree of flexibility. APRA has decided to retain all proposed conditions accompanying the use of private ratings, such as requiring private ratings to be solicited and disallowing private ratings for securitised exposures. Such ratings carry a higher risk of not being credible, as they may be based on limited information and/or lack transparency and market-wide scrutiny. Relaxing these conditions would represent a significant policy shift, which is outside the scope of this consultation.

APRA agrees with submission feedback that expanding the list of eligible credit rating agencies would enhance the risk sensitivity of the capital framework. Insurers are encouraged to engage with these agencies and request that they apply for APRA accreditation covering both short-term and long-term ratings.

APRA approvals for higher asset limits

APRA may, in exceptional circumstances, consider applications for small to moderate increases in alternative (unrated) and privately rated asset limits where an insurer can provide strong justification with reference to current and projected assets, liabilities and regulatory capital profiles. APRA would also need to be satisfied with the risk profile and quality of the underlying assets, and the insurer must be able to demonstrate sophisticated risk management approaches to managing assets and longevity products. As a guide, and consistent with submission feedback received, examples of sophisticated risk management approaches may include, but are not limited to:

• strong governance, oversight and risk awareness where the Board and management approve all material aspects relating to assets and longevity products and the insurer has well-documented policies, procedures, roles and responsibilities that reflect actual frameworks in place;
• adequate staff with experienced specialists within a structured asset management and credit risk control unit(s);
• ongoing monitoring and analysis of key risks and exposures relating to assets and longevity products against risk appetite and limits utilising a range of technology and tools;
• thorough initial and ongoing due diligence over assets, investment managers and platforms, especially over alternative (unrated) assets;
• robust valuation processes and controls over assets, including having regular independent valuations, especially over alternative (unrated) assets;
• in-depth and regular experience studies on longevity risks and asset performance;
• strong capabilities in managing interlinkages between assets and longevity products covering cashflows, durations and liquidity needs;
• mature stress‑testing framework, which incorporates a range of scenarios that enable the insurer to develop a comprehensive understanding of the impact of stresses on cashflows, asset valuation, capital and key risks relating to assets and longevity products; and
• demonstrated strong connections between stress tests and strategic, capital and risk management decisions. 

1.5 Additional reporting

To support the implementation process, APRA has issued a draft reporting template accompanying this response paper for insurers that opt to use the AILP. APRA seeks feedback on the draft reporting template by 12 May 2026.

In support of APRA’s strategic objective ‘getting the balance right’, the reporting approach has been designed to minimise compliance burden while allowing APRA to adequately oversee and measure the implementation of the AILP.  The reporting template is intended to provide information on the methodology and assumptions used by insurers in determining the AILP, monitor developments in the longevity product market, better understand asset quality and inform any future post-implementation reviews of the AILP settings. The reporting template also gathers information on the potential impact of the reforms on capital outcomes and annuity pricing, to support APRA’s assessment of the effects of the regulatory reforms.

APRA proposes that the data collection be incorporated into APRA’s reporting standards in due course. Incorporating this collection into a formal reporting standard approach will be subject to further industry consultation.

1.6 First time applying the AILP

If an insurer applies the AILP from a date well in advance of the Financial Condition Report (FCR) submission due date (e.g. from 1 July 2026), APRA requests that the insurer submit the Appointed Actuary’s declaration to APRA separately after the AILP has been applied. The insurer should also provide supporting documents that describe the methodology and assumptions used in determining the AILP. This enables APRA to obtain timely visibility of the insurer’s AILP methodology and assumptions, ahead of formal submission of the FCR and Actuarial Valuation Report.

Insurers are encouraged to engage with APRA in advance of applying the AILP.

Next steps

Moving forward

The new prudential standards will come into effect on 1 July 2026.

APRA invites written submissions on the proposed reporting approach set out in section 1.5 of this paper. Written submissions should be sent to policydevelopment@apra.gov.au by 12 May 2026 and addressed to:

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.

Attachment: Summary of changes to the prudential standards

This attachment summarises the key changes to the prudential standards compared with the versions released in October 2025. In addition to the changes listed below, further minor changes have been made to clarify and standardise wording and formatting.