Who does this affect?

General insurance groups headed by an APRA authorised insurer or an APRA authorised NOHC.

What do you need to do?

Consider whether you wish to respond to APRA's draft prudential standards for general insurance groups by 9 June 2008.

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Philip Ward  
Partner
T +61 2 9296 2213

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On Tuesday, 15 April 2008 APRA released three draft Prudential Standards and a Discussion Paper in connection with its proposed prudential framework for supervision of Level 2 general insurance groups (L2 groups). Once implemented, this prudential framework will require L2 groups to satisfy prudential standards specific to L2 groups.

APRA’s proposed draft Prudential Standard GPS 001 defines an L2 group as a consolidated group of companies, headed by either an APRA authorised general insurer or an APRA authorised non-operating holding company (NOHC), and the general insurance subsidiaries of that insurer or NOHC (whichever applies), whether those insurer subsidiaries are in Australia or overseas, and other controlled entities which are integral to the L2 group’s general insurance business.

Non-consolidated subsidiaries, being subsidiaries which are not involved with the L2 group’s general insurance business which constitute more than 5% of the net assets of the group, will be excluded from the consolidated group for L2 group prudential supervision. An L2 group may, therefore, not be the same as a consolidated group for financial reporting purposes.

The proposed prudential supervision regime for L2 groups is closely aligned to the prudential supervision regime applicable to individual locally authorised general insurers (Level 1 general insurers), subject to some requirements in the areas of capital adequacy, risk management and audit and actuarial reporting and valuation which are specific to L2 groups.

Requirements specific to L2 groups include:

Capital Adequacy (draft GPS 111)

• Responsibility for capital management will rest with the Board of directors of the parent entity of the L2 group.
• APRA may exclude from the L2 group’s capital base capital arising from intra-group transactions if APRA takes the view that such capital does not contribute to the group’s financial strength.
• Individual components of capital measured in the capital base of a locally authorised general insurer comprised within the L2 group cannot be upgraded to a higher category of capital in the measurement of the L2 group’s capital base.
• Where a non-consolidated subsidiary is under capitalised, APRA may require the L2 group to deduct an amount from its capital base to cover the deficiency.
• Some capital adequacy requirements that apply to locally authorised general insurers would not be replicated for L2 groups in respect of the business of overseas subsidiaries.

Risk Management (draft GPS 221)

• The parent entity of the L2 group will have to have an overarching group wide risk management framework. However, individual locally authorised general insurers within the L2 group will be able to rely on the group’s risk management strategy (CRMS) subject to the group RMS being sufficient to cover the risk management framework of each locally authorised general insurer within the group.
• No requirement that an L2 group complete a reinsurance declaration.
• L2 groups will be required to provide, as part of their risk management declaration, an attestation that each of their overseas subsidiaries comply with local capital requirements.

Audit and Actuarial Reporting and Valuation (draft GPS 311)

• Group appointed experts (Group Auditor and Group Actuary) required to be appointed who may be the Appointed Auditor or Appointed Actuary of any locally authorised general insurer within the L2 group.
• Audit and actuarial reporting and valuation requirements apply for L2 groups but in certain respects these are less detailed and require less assurance than the requirements for individual locally authorised general insurers within the L2 group.

APRA has requested any responses to its recently released draft prudential framework for L2 groups by 9 June 2008. At this stage APRA anticipates that the draft prudential standards will come into effect on 1 January 2009.