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Revisions to LPS 117 Capital Adequacy

Announcement date
8 March 2022
 

Link to announcement
https://www.apra.gov.au/news-and-publications/apra-releases-updated-prudential-standard-to-enhance-management-of
 

Problem being addressed
The Australian Prudential Regulation Authority (APRA) revised Prudential Standard LPS 117 Capital Adequacy: Asset Concentration Risk Charge (LPS 117), which prescribes the method for calculating the Asset Concentration Risk Charge (ACRC) component of the prescribed capital amount for a life company. The purpose of the standard is to ensure a life insurance company maintains adequate capital against the asset concentration risks associated with its activities. The decision to review LPS 117 follows evidence that registered life companies have increased their use of offshore reinsurers. This prompted APRA to review the asset concentration limits contained in LPS 117 to ensure their continuing appropriateness.
 

Proposal
APRA revised existing asset concentration limits contained in LPS 117 relevant to reinsurance exposures. Most notable, APRA introduced an aggregate limit on exposures to offshore reinsurers to ensure risks associated with these types of reinsurance arrangements are adequately managed. Additionally, APRA made technical amendments to LPS 117 to improve clarity and usability of the standard. 
 

Assessed RIS outcome
Independent review
 

Assessment comments
Consistent with the Government’s Regulation Impact Statement (RIS) requirements, the review of Prudential Standard LPS 117 Capital Adequacy: Asset Concentration Risk Charge (LPS 117) has been certified by APRA as meeting the requirements of a RIS. The Office of Best Practice Regulation (OBPR) does not assess the quality of independent reviews and RIS-like documents used in lieu of a RIS, but does assess whether the options analysed in the independent review are relevant to the regulatory proposal. The OBPR assessed that the options analysed in the independent review are sufficiently relevant to the regulatory proposal.
 

Regulatory burden
APRA estimates an increase in regulatory costs of $0.32 million per year, averaged over ten years.

Attachment File type Size
Certification Letter docx 136.3 KB
Certification Letter pdf 326.07 KB
Consultation Letter docx 929.49 KB
Consultation Letter pdf 420.37 KB
Response Paper docx 377.93 KB
Response Paper pdf 510.01 KB