Capital Adequacy Calculation Workbook Level 1 general insurers

Transcription

1 Capital Adequacy Calculation Workbook Level 1 general insurers Instruction Guide Introduction APRA released revised capital standards for Level 1 general insurers on 31 May The main changes specified in the revised capital standards are: Capital base: The definitions of capital base and the categories of capital included in the capital base of Level 1 general insurers have been revised to reflect the changed terms and definitions, consistent with those for authorised deposit-taking institutions (ADIs). Prudential Capital Requirement (PCR): The PCR is the required level of capital for regulatory purposes. It is calculated as the sum of the prescribed capital amount and any supervisory adjustment determined by APRA. Prescribed capital amount: The amendments to the methodology for calculating the prescribed capital amount include: o introducing an explicit operational risk charge; o significant revisions to the calculation of the asset risk and insurance concentration risk charges; o revisions to the specified limits for calculating the asset concentration risk charge; and o minor modifications to the factors and class of business groupings used to calculate the insurance risk charge. These changes have necessitated changes to the reporting forms and instructions for Level 1 general insurers and drafts of the revised reporting forms are being released for consultation in June Together with the draft reporting forms, APRA is releasing capital adequacy calculation workbooks and instruction guides. The purpose of these documents is to assist insurers in understanding the revisions to the methodology of calculating the risk charges included in the prescribed capital amount and components of capital base. 1 See: May-2012.aspx Page 1 of 61

2 This instruction guide will also assist Level 1 general insurers in estimating their capital adequacy position under the revised capital standards. Level 1 general insurers will be able to use these workbooks to support any requests for transitional relief which should be made no later than 30 September This guide is designed to assist with the completion of the workbook for Level 1 general insurers. Page 2 of 61

3 General guidance Unit of measurement The workbook should be prepared in thousands of Australian dollars (AUD). Amounts denominated in foreign currency are to be converted to AUD in accordance with AASB 121 The Effects of Changes in Foreign Exchange Rates. Reporting date Where the workbook is prepared for the purpose of application for transitional arrangement with APRA, the reporting information used should be consistent with the projection basis on which the transitional application is made. The relevant date of the information used in preparing this capital workbook is referred to in this guide as reporting date. Basis of preparation The workbook is to be, unless otherwise stated, completed using the basis that would have been used for the preparation of the financial statements in accordance with the Australian accounting standards, specifically in regard to the: interpretation/definition of specific asset, liability and equity items; appropriate measurement basis for asset, liability and equity items; and netting of financial assets and financial liabilities. The use of estimates should only be used as consistent with the principles as set out the in relevant prudential standards. Greater diligence must be employed where the capital workbook is prepared for the purpose of applying for transitional relief, so as to ensure to the extent possible that the representation of capital position is neither materially overstated nor understated. Inside Australia Section 28 of the Act requires all general insurers to maintain assets in Australia (excluding goodwill and other amounts excluded by Prudential Standard GPS 120 Assets in Australia (GPS 120)) of a value that equals or exceeds the total amount of the general insurer s liabilities in Australia. This requirement is designed to ensure that the total value of assets held within the jurisdictional reach of APRA and the Australian courts is sufficient to meet a general insurer s Australian liabilities. It assists in the application of subsection 116(3) of the Insurance Act 1973 (the Act), which provides that in the winding up of a general insurer, the assets in Australia shall not be applied Page 3 of 61

4 in the discharge of its liabilities other than its liabilities in Australia unless all the Australian liabilities have first been discharged. The Act sets out a number of assets and liabilities, which are to be treated as assets or liabilities in Australia. However, the Act does not provide an exhaustive definition. The primary purpose of GPS 120 is to specify certain assets that will not be counted as assets in Australia for the purposes of section 28 of the Act. GPS 120 excludes certain assets which would otherwise fall within the definition of assets in Australia under section 28 of the Act but which APRA considers to have doubtful value in the event of an insurer becoming insolvent. Structure of the capital workbook The capital workbook contains 9 worksheets. The objectives of these are summarised below: Prudential Capital Requirement Capital Base Adjusted Net Assets in Australia insurers Asset Risk Charge Insurance Risk Charge ICRC LMICRC Asset Concentration Risk Charge Operational Risk Charge Components of Prudential Capital Requirement Derivation of capital base and regulatory adjustments Derivation of net assets in Australia for Category C Derivation of Asset Risk Charge Derivation of Insurance Risk Charge Derivation of Insurance Risk Charge Derivation of LMI Concentration Risk Charge Derivation of Asset Concentration Risk Charge Derivation of Operational Risk Charge To provide input guidance for the preparer, the colour coding systems for using these workbooks is: Orange cells: cells requiring input by the preparer; Green cells: cells that are calculated automatically based on the relevant orange cell inputs; and Blue cells: cells that contain factors and parameters that are used in green cell calculations. Page 4 of 61

5 Specific guidance PCR worksheet This section provides specific definitions and instructions for the items in the PCR worksheet. Summary of Prudential Capital Requirement PCR worksheet 1.0. Is the general insurer an LMI? If the reporting insurer is a lenders mortgage insurer as defined in Prudential Standard GPS 001 Definitions (GPS 001), select 'Yes' from the drop-down box Insurance Risk Charge [Derived item] The Insurance Risk Charge relates to the risk that the value of net insurance liabilities determined in accordance with Prudential Standard GPS 320 Actuarial and Related Matters (GPS 320) is insufficient to cover associated net claim payments and associated claim expenses as they fall due. This is automatically derived from Item 27.0 in the Insurance Risk Charge worksheet Insurance Concentration Risk Charge [Derived item] The Insurance Concentration Risk Charge for a regulated institution is intended to represent the net financial impact on the regulated institution from either a single large event, or a series of smaller events, within a one year period. The determination of the Insurance Concentration Risk Charge is based on the formulae and requirements set out in Prudential Standard GPS 116 Capital Adequacy: Insurance Concentration Risk Charge (GPS 116). This is automatically derived from Item 38.0 in the Insurance Concentration Risk Charge worksheet Asset Risk Charge [Derived item] The Asset Risk Charge is the minimum amount of capital required to be held against asset risks. The Asset Risk Charge relates to the risk of adverse movements in the value of a general insurer s onbalance sheet and off-balance sheet exposures. The determination of the Asset Risk Charge is based on the formulae and requirements set out in Prudential Standard GPS 114 Capital Adequacy: Asset Risk Charge (GPS 114). This is automatically derived from Item 15.0 in the Asset Risk worksheet. Page 5 of 61

6 5.0. Asset Concentration Risk Charge [Derived item] The Asset Concentration Risk Charge is the minimum amount of capital required to be held against asset concentration risks. The Asset Concentration Risk Charge relates to the risk resulting from investment concentrations in individual assets or large exposures to individual counterparties or groups of related counterparties. The determination of the Asset Concentration Risk Charge is based on the requirements set out in Prudential Standard GPS 117 Capital Adequacy: Asset Concentration Risk Charge (GPS 117). This is automatically derived from Item 23.0 in the Asset Concentration Risk Charge worksheet Operational Risk Charge [Derived item] The Operational Risk Charge is the minimum amount of capital required to be held against operational risks. The Operational Risk Charge relates to the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The determination of the Operational Risk Charge is based on the formulae and requirements set out in Prudential Standard GPS 118 Capital Adequacy: Operational Risk Charge (GPS 118). This is automatically derived from Item 11.0 in the Operational Risk Charge worksheet Less: Aggregation benefit [Derived item] The aggregation benefit makes an explicit allowance for diversification between asset risk and the sum of insurance risk and insurance concentration risk in the calculation of the prescribed capital amount. The aggregation benefit is determined in accordance with the formulae set out in Prudential Standard GPS 110 Capital Adequacy (GPS 110). This is automatically derived in the worksheet Adjustments to prescribed capital amount as approved by APRA This is the amount of adjustments and exclusions to the overall prescribed capital amount of the Level 1 general insurer that have been approved by APRA. Adjustments that result in an increase in the prescribed capital amount are to be reported as positive values. Page 6 of 61

7 9.0. Prescribed capital amount [Derived item] The prescribed capital amount is intended to be sufficient, such that if the insurer was to start the year with a capital base equal to the prescribed capital amount, and losses occurred at the 99.5 per cent confidence level, then the assets remaining would be at least sufficient to provide for the central estimate of the insurance liabilities and other liabilities at the end of the year. This is automatically derived as the sum of Items 2.0 to 6.0 less Item 7.0 plus Item 8.0. Where the reporting insurer is a Category D or E insurer, the prescribed capital amount is subject to a minimum of $2 million, with a $5 million minimum applying to all other insurers Supervisory Adjustment If APRA is of the view that the Standard Method for calculating the prescribed capital amount does not produce an appropriate outcome in respect of an insurer, or an insurer has used inappropriate judgement or estimation in calculating the prescribed capital amount, APRA may adjust the prescribed capital amount calculation for that insurer. Approved adjustments are to be reported at this item. An increase in the prescribed capital amount is to be reported as a positive value Prudential Capital Requirement [Derived item] The Prudential Capital Requirement (PCR) is the required level of capital for regulatory purposes. The PCR for a regulated institution equals the prescribed capital amount plus any supervisory adjustment as determined by APRA. This is automatically derived as Item 9.0 plus Item Capital adequacy assessment (Non Category C Insurers) PCR worksheet Capital base [Derived item] The capital base relates to the amount of capital eligible, as determined by Prudential Standard GPS 112 Capital Adequacy: Measurement of Capital (GPS 112), for the purpose of meeting the Prudential Capital Requirement as set out in GPS 110. The reporting insurer's capital base represents the sum of total Tier 1 Capital and Tier 2 Capital, net of any regulatory adjustments to capital. This is automatically derived from Item 19.0 in the Capital Base worksheet. Page 7 of 61

8 13.0. Capital in excess of prescribed capital amount [Derived item] This is the surplus or deficit of a reporting insurer's capital base over its prescribed capital amount. This is automatically derived as Item 12.0 minus Item Common Equity Tier 1 Capital ratio (%) [Derived item] This is the ratio of the reporting insurer's Common Equity Tier 1 capital to its prescribed capital amount. This is automatically derived as Item 8.0 in the Capital Base worksheet divided by Item Tier 1 Capital ratio (%) [Derived item] This is the ratio of the reporting insurer's Tier 1 capital to its prescribed capital amount. This is automatically derived as Item 14.0 on the Capital Base worksheet divided by Item Prescribed capital amount coverage (%) [Derived item] This represents the coverage provided by the reporting insurer's capital base over the prescribed capital amount. This is automatically derived as Item 12.0 divided by Item Capital in excess of Prudential Capital Requirement [Derived item] This is the surplus or deficit of a reporting insurer's capital base over its Prudential Capital Requirement. This is automatically derived as Item 12.0 minus Item Prudential Capital Requirement coverage (%) [Derived item] This represents the coverage provided by the reporting insurer's capital base over the Prudential Capital Requirement. This is automatically derived as Item 12.0 divided by Item Page 8 of 61

9 Capital adequacy assessment (Category C Insurers) PCR worksheet Net Assets in Australia in excess of prescribed capital amount [Derived item] This is the amount of net assets that are deemed as being inside Australia, after any deductions excluded for capital adequacy purposes and determined in accordance with Prudential Standard GPS 120 Assets in Australia (GPS 120). This is automatically derived from Item 11.0 on the Adjusted Net Assets in Australia worksheet Net Assets in Australia in excess of prescribed capital amount [Derived item] This is the amount of net assets in Australia that are in excess of the prescribed capital amount. This is automatically derived as Item 19.0 minus Item Prescribed capital amount coverage (%) [Derived item] This represents the coverage provided by the Category C insurer's net assets in Australia over the prescribed capital amount. This is automatically derived as Item 19.0 divided by Item Net Assets in Australia in excess of Prudential Capital Requirement [Derived item] This represents the coverage provided by the Category C insurer s net assets in Australia that are in excess of the Prudential Capital Requirement. This is automatically derived as Item 19.0 minus Item Prudential Capital Requirement coverage (%) [Derived item] This represents the coverage provided by the Category C insurer s net assets in Australia over the Prudential Capital Requirement. This is automatically derived as Item 19.0 divided by Item Page 9 of 61

10 Capital Base worksheet This section provides specific definitions and instructions for the items in the Capital Base worksheet. Capital base summary Capital Base worksheet 1.0. Paid-up ordinary shares This represents paid-up ordinary shares issued by the insurer that meet the criteria for classification as ordinary shares for regulatory purposes in accordance with Attachment A of GPS Retained earnings This is the value, as at the end of the reporting period, of retained earnings calculated in accordance with GPS 112. The retained earnings reported here should not include the amount of undistributed current year earnings in Item Undistributed current year earnings This is the value of the undistributed current year earnings. Reported amounts must account for (where applicable) negative goodwill, expected tax expenses, and dividends when declared in accordance with the Australian Accounting Standards Accumulated other comprehensive income and other disclosed reserves This is the aggregate of all other comprehensive income and disclosed reserves Net surplus / (deficit) relating to insurance liabilities This is the total technical provisions in surplus or deficit of those required by GPS 320, net of any tax effect in relation to this surplus or deficit. Do not deduct the tax effect if a deferred tax asset has been recognised in relation to the net surplus / (deficit). Page 10 of 61

11 6.0. Less: Regulatory adjustments to Common Equity Tier 1 Capital [Derived item] Updated - July 2012 This is the total of all regulatory adjustments applied to Common Equity Tier 1 Capital specified in GPS 112. This is automatically derived from Item Other approved adjustments to Common Equity Tier 1 Capital This is the amount of adjustments applied to the Common Equity Tier 1 Capital that are specific to the application of the requirements in paragraph 33 of GPS 112. Adjustments that would result in an increase to Common Equity Tier 1 Capital should be reported as a positive value Total Common Equity Tier 1 Capital [Derived item] This is the highest quality component of capital held by the insurer as determined under the eligibility characteristics set out in GPS 112, net of all regulatory adjustments. This is automatically derived as the sum of Items 1.0 to 5.0, less Item 6.0, plus Item Additional Tier 1 Capital instruments This is the total amount of capital instruments issued by the reporting insurer that meet the eligibility criteria for Additional Tier 1 Capital but not the criteria for the higher quality capital, i.e. Common Equity Tier 1 Capital Less: Holdings of own Additional Tier 1 Capital instruments This is the total effective own holdings of Additional Tier 1 Capital instruments issued by the reporting insurer. Holdings of own Additional Tier 1 Capital instruments should be entered as a positive value Less: Adjustments to Additional Tier 1 Capital due to shortfall in Tier 2 capital This is the value of any deductions (refer to Attachment B of GPS 112) from Additional Tier 1 Capital due to a shortfall in Tier 2 Capital to absorb required deductions from this category of Capital. Page 11 of 61

12 Adjustments to Additional Tier 1 Capital due to shortfall in Tier 2 Capital that result in a deduction to Tier 1 Capital should be entered as a positive value Other approved adjustments to Additional Tier 1 Capital This is the amount of adjustments applied to the Additional Tier 1 Capital that are specific to the application of the requirements in paragraph 33 of GPS 112. Adjustments that would increase the amount of Additional Tier 1 Capital recognized should be reported as a positive value Total Additional Tier 1 Capital [Derived item] This is the value of equity capital instruments issued by the reporting insurer that meet the criteria for inclusion in Additional Tier 1 Capital in accordance with the relevant prudential standard, and which are not included in Common Equity Tier 1 Capital. This is net of regulatory adjustments specified in the relevant prudential standard. This is automatically derived as Item 9.0 less Item 10.0, less Item 11.0, plus Item Total Tier 1 Capital [Derived item] Tier 1 Capital provides loss-absorption on a going-concern basis and it is comprised of Common Equity Tier 1 Capital and Additional Tier 1 Capital. This is the total amount of capital instruments that meet the eligibility criteria for Tier 1 Capital, either in the form of Common Equity Tier 1 Capital or Additional Tier 1 Capital. This is automatically derived as Item 8.0 plus Item Tier 2 Capital instruments This is the total amount of capital instruments issued by the reporting insurer that meet the eligibility criteria for Tier 2 capital but not the criteria for a higher quality capital Less: Holdings of own Tier 2 Capital instruments This is the total effective holdings of own eligible Tier 2 Capital instruments that were issued by the reporting insurer. Page 12 of 61

13 This item is to be reported as a positive amount where the insurer has holdings of their issued Tier 2 instruments Approved adjustments to Tier 2 Capital This is the amount of adjustments applied to the Tier 2 Capital that are specific to the application of the requirements in paragraph 33 of GPS 112. Adjustments that would increase the amount of Tier 2 Capital recognised should be reported as a positive value Total Tier 2 Capital [Derived item] This is the total amount of capital instruments that meet the eligibility criteria for Tier 2 capital but not the criteria for the higher quality capital, net of all adjustments. This is automatically derived as Item 15.0 less Item 16.0, plus Item Capital base [Derived item] The capital base relates to the amount of capital eligible, as defined in GPS 112, for the purpose of meeting the prudential capital requirement as set out in GPS 110. This is automatically derived as Item 14.0 plus Item Regulatory adjustments to Common Equity Tier 1 Capital Capital Base worksheet Holdings of own Common Equity Tier 1 Capital instruments This is the value, as at the relevant date, of the reporting insurer's holdings of its own Common Equity Tier 1 Capital instruments unless exempted by APRA or eliminated under Australian Accounting Standards. This item must also include: capital instruments the reporting insurer could be contractually obliged to purchase; and unused portion of the limits agreed with APRA as per GPS 112. Page 13 of 61

14 21.0. Cash flow hedge reserves relating to hedging of items not recorded at fair value Updated - July 2012 This is the value of cash flow hedge reserves that relate to the hedging items that are not recorded at fair value on the balance sheet (including projected cash flows) Excess of deferred tax assets over deferred tax liabilities This is the amount of deferred tax assets in excess of deferred tax liabilities within the reporting insurer. Where the deferred tax liabilities exceed the deferred tax assets, this value should be reported as zero. Note that the netting of deferred tax assets and deferred tax liabilities must only be applied where the reporting insurer has a legally enforceable right to set-off current tax assets against current tax liabilities Fair value gains and losses from changes in own credit worthiness This is the unrealised gains (or losses) from changes in the fair values of the liabilities that arose due to changes in creditworthiness of the reporting insurer. This amount is to be reported as a positive value where there are unrealised gains or a negative value for unrealised losses Goodwill and other intangible assets [Derived item] This is the value of goodwill and any other intangible assets as defined in Attachment B of GPS 112, net of adjustments to profit or loss reflecting changes arising from any impairment and amortisation. The amounts reported must be net of any associated deferred tax liability that would be extinguished if the assets involved become impaired or derecognised under Australian Accounting Standards. This also includes that component of investments in certain categories of subsidiaries, associates and joint ventures (as per GPS 112) that represents goodwill and any other intangible assets. This is automatically derived as Item Surplus in defined benefit superannuation fund This is the amount of surplus (if any) in defined benefit superannuation funds where the reporting insurer is an employer-sponsor, net of any associated deferred tax liabilities that would be Page 14 of 61

15 extinguished if the assets involved become impaired or derecognised under Australian Accounting Standards. Where the extinguished deferred tax liability of the defined benefit superannuation fund exceeds the reported surplus, this value should be reported as zero Deficit in defined benefit superannuation fund This is the amount of deficit (if any) in a defined benefit superannuation fund where the reporting insurer is an employer-sponsor. This Item only needs to be reported where the deficit is not already reflected in the Common Equity Tier 1 Capital. The deficit (if any) should be reported as a positive number Reinsurance assets related to reinsurance contracts that do not meet the reinsurance documentation test This is the value of the reinsurance assets in relation to each reinsurance arrangement that does not meet the reinsurance document test as per Prudential Standard GPS 230 Reinsurance Management (GPS 230) Reinsurance assets receivable under reinsurance contracts that do not meet governing law requirements This is the value of all reinsurance assets reported in relation to each reinsurance contract entered into by the reporting insurer incepting on or after 31 December 2008 that does not meet the governing law requirements in GPS Regulatory capital requirement of investments in subsidiaries, associates and JVs [Derived item] This is the deduction for the regulatory capital requirement for investments in subsidiaries, joint ventures and associates as detailed in Attachment B of GPS 112. The deduction should be taken as the lesser of the insurer's share of regulatory capital requirements and the value of the investment that is recorded on the insurer's balance sheet after adjusting for any intangible component as reported in Item 24.0 Page 15 of 61

16 If the investment subject to this deduction is a non-operating holding company, a look-through approach must be applied. This is automatically derived as Item Assets under a fixed or floating charge This is the value of assets of the reporting insurer that are under a fixed or floating charge, mortgage or other security. This deduction may be reduced by the amount of any liability for the charge that is recognised on the reporting insurer s balance sheet. Where the security exclusively supports a reporting insurer s insurance liabilities, the deduction only applies to the amount by which the fair value of the charged assets exceeds the reporting insurer s supported insurance liabilities Fair value adjustments This is the amount to be deducted as required by APRA in writing where APRA considers that fair values on the balance sheet are not prudent or reliable Adjustments to Common Equity Tier 1 Capital due to shortfall in Additional Tier 1 and Tier 2 Capital This is the value, as at the relevant date, of any deductions (refer to Attachment B of GPS 112) from Common Equity Tier 1 Capital due to a shortfall in Additional Tier 1 Capital to absorb required deductions from this category of capital. Where the amount of Tier 2 Capital is insufficient to cover the amount of deductions required to be made from this category of capital, the shortfall must first be deducted from Additional Tier 1 Capital and, if Additional Tier 1 Capital is insufficient to cover the amount of deductions required, the remaining amount must be deducted from Common Equity Tier 1 Capital Other Common Equity Tier 1 Capital adjustments This is the value of deductions from Common Equity Tier 1 Capital that the reporting insurer must make as required under any other prudential standards. Page 16 of 61

17 34.0. Total regulatory adjustments to Common Equity Tier 1 Capital [Derived item] Updated - July 2012 This is the total of all regulatory adjustments applied to Common Equity Tier 1 Capital specified in Attachment B of GPS 112. This is automatically derived as the sum of Item 20.0 to Item Related entity interests contributing to regulatory adjustments Capital Base worksheet Name This column reports the registered business name of the subsidiary, associate or joint venture of the insurer Category This column reports the appropriate category of the related entity i.e. select whether it is a subsidiary, joint venture or associate by using the drop-down boxes Ownership percentage (%) This is the percentage of the insurer's ownership of shares or units of the subsidiary, associate or joint venture Value of investment This column reports the value of the insurer s investment in the subsidiary, joint venture or associate as reported on the balance sheet, adjusted for goodwill and intangible assets Regulatory capital requirement This column reports, where applicable, the regulatory capital requirement of the subsidiary, joint venture or associate. Where such capital requirements do not exist, this item should be reported as zero. Page 17 of 61

18 40.0. Adjustment for regulatory capital requirements [Derived item] This column reports the regulatory adjustment to Common Equity Tier 1 for investments in subsidiaries, joint ventures and associates that are subject to regulatory capital requirements. As per Attachment B of GPS 112, this adjustment is determined as the lesser of the insurer's share of the regulatory capital requirements and the value of the investment that is recorded on the insurer's balance sheet after adjustment for any intangible component. This regulatory adjustment does not apply to an investment in a subsidiary, associate or joint venture that: is operationally independent; and represents a genuine arm s-length investment; and is not subject to prudential capital requirements; and does not undertake insurance business or business related to insurance business. This is automatically derived as the minimum of Item 38.0, and Item 37.0 multiplied by Item Goodwill and other intangibles This is the value of goodwill and any other intangible assets reported on the balance sheet of the subsidiary, joint venture or associate, net of adjustments to profit or loss reflecting changes arising from any impairment and amortisation. The amounts reported must be net of any associated deferred tax liability that would be extinguished if the assets involved become impaired or derecognised under Australian Accounting Standards Adjustment for goodwill / other intangibles [Derived item] This column reports the amount of regulatory adjustments applied in respect of the goodwill and other intangible assets (net of impairment) in relation to the investment in the subsidiary, joint venture or associate. This is automatically derived as Item 37.0 times Item Total adjustment for regulatory capital requirement of investments in subsidiaries, associates and JVs [Derived item] This Item is the total value of adjustments for regulatory capital requirement of investments in subsidiaries, associates and JVs. This is automatically derived as the sum of Item Page 18 of 61

19 44.0. Goodwill and intangibles specific to interests in subsidiaries, associates and JVs [Derived item] This item is the total value of goodwill and intangibles specific to interests in subsidiaries, associates and JV. This is automatically derived as the sum of Item Goodwill and intangibles specific to the general insurer This is the value of goodwill and any other intangible assets as defined in Attachment B of GPS 112, net of adjustments to profit or loss reflecting changes arising from any impairment and amortisation. The amounts reported must be net of any associated deferred tax liability that would be extinguished if the assets involved become impaired or derecognised under Australian Accounting Standards. This does not include that component of investments in certain categories of subsidiaries, associates and joint ventures (as per GPS 112) that represents goodwill and any other intangible assets Total adjustment for goodwill and other intangible asset [Derived item] This item is the total adjustment for goodwill and other intangible assets. This is automatically derived as Item 44.0 plus Item Page 19 of 61

20 Adjusted net assets in Australia worksheet Adjusted Net Assets in Australia summary Adjusted net assets in Australia worksheet 1.0. Assets in Australia This represents the reporting insurer's assets which are to be treated as assets in Australia under the Insurance Act 1973 (the Act) Liabilities in Australia This represents the reporting insurer's liabilities which are to be treated as liabilities in Australia under the Act OCL surplus / (deficit) inside Australia This is the amount, that is deemed to be inside Australia, by which the outstanding claims liabilities, net of any recoveries, determined in accordance with AASB 1023 exceeds (or is in deficit of) the equivalent figure determined in accordance with GPS 320. This is the inside Australia amount which corresponds to Item 21: Total of the Insurance Risk Charge worksheet Premium liabilities surplus / (deficit) inside Australia This is the amount, that is deemed to be inside Australia, by which the premium liability proxy calculated from figures determined in accordance with accounting standards exceeds (or is in deficit of) the equivalent figure determined in accordance with prudential standards. This item is calculated after adjusting for the deferred reinsurance expense for future policies. This is the inside Australia amount which corresponds to Item 24: Total of the Insurance Risk Charge worksheet Tax effect of net OCL and PL surplus / (deficit) inside Australia This is the amount of the tax effect relating to the OCL surplus/deficit and premiums liabilities surplus/deficit that are deemed to be inside Australia (i.e. the corporate tax rate multiplied by the net amount). Page 20 of 61

21 6.0. Net surplus / (deficit) relating to insurance liabilities inside Australia [Derived item] This is the amount of the OCL surplus/deficit and premiums liabilities surplus/deficit that are deemed to be inside Australia, adjusted for tax effect. This is automatically calculated as Item 3 plus Item 4 less Item Liabilities in Australia net of surplus / (deficit) relating to insurance liabilities [Derived item] This is automatically calculated as Item 2 less Item Net assets in Australia (before deductions) [Derived item] This is the amount of net assets that are deemed as being inside Australia, after adding or deducting the net surplus/deficit related to insurance liabilities, but before any deductions excluded for capital adequacy purposes and determined in accordance with GPS 120. This is automatically calculated as Item 1 less item Total deductions for assets specifically excluded from being considered inside Australia [Derived item] This is the sum of deductions for assets specifically excluded from being considered inside Australia in accordance with GPS 120, and presented in the Assets excluded from being Inside Australia section of this worksheet. It is automatically derived from Item 23 of this worksheet Approved adjustments to net assets in Australia This is the amount of regulatory adjustments applied to the adjusted net assets in Australia that are specific to the application of the requirements in GPS 120. Adjustments that would result in an increase to adjusted net assets in Australia should be reported as a positive value. Page 21 of 61

22 11.0. Adjusted net assets in Australia [Derived item] This is the amount of net assets that are deemed as being inside Australia, after any deductions excluded for capital adequacy purposes and determined in accordance with GPS 120. This is automatically calculated as Item 8 less Item 9 plus Item 10. Assets excluded from being Inside Australia Adjusted net assets in Australia worksheet Cash flow hedge reserves relating to hedging of items not recorded at fair value This is the value of cash flow hedge reserves that relate to the hedging items that are not recorded at fair value on the balance sheet (including projected cash flows) Excess of deferred tax assets over deferred tax liabilities This is the amount of deferred tax assets in excess of deferred tax liabilities within the reporting insurer. Where the deferred tax liabilities exceed the deferred tax assets, this value should be reported as zero. Note that the netting of deferred tax assets and deferred tax liabilities must only be applied where the reporting insurer has a legally enforceable right to set-off current tax assets against current tax liabilities Net unrealised fair value gains / (losses) from changes in own credit worthiness This is the unrealised gains (or losses) from changes in the fair values of the liabilities that arose due to changes in creditworthiness of the reporting insurer. This amount is to be reported as a positive value where there are unrealised gains or a negative value for unrealised losses Goodwill and other intangible assets [Derived item] This is the value of goodwill and any other intangible assets as defined in Attachment B of GPS 112, net of adjustments to profit or loss reflecting changes arising from any impairment and amortisation. The amounts reported must be net of any associated deferred tax liability that would be extinguished if the assets involved become impaired or derecognised under Australian Accounting Standards. Page 22 of 61

23 This also includes that component of investments in certain categories of subsidiaries, associates and joint ventures (as per GPS 112) that represents goodwill and any other intangible assets. This is automatically derived as Item Surplus in defined benefit superannuation fund This is the amount of surplus (if any) in defined benefit superannuation funds where the reporting insurer is an employer-sponsor, net of any associated deferred tax liabilities that would be extinguished if the assets involved become impaired or derecognised under Australian Accounting Standards. Where the extinguished deferred tax liability of the defined benefit superannuation fund exceeds the reported surplus, this value should be reported as zero Deficit in defined benefit superannuation fund This is the amount of deficit (if any) in a defined benefit superannuation fund where the reporting insurer is an employer-sponsor. This Item only needs to be reported where the deficit is not already reflected in the profit and loss of the insurer. The deficit (if any) should be reported as a positive number Reinsurance assets related to reinsurance contracts that do not meet the reinsurance documentation test This is the value of the reinsurance assets in relation to each reinsurance arrangement that does not meet the reinsurance document test as per GPS Reinsurance assets receivable under reinsurance contracts that do not meet governing law requirements This is the value of all reinsurance assets reported in relation to each reinsurance contract entered into by the reporting insurer incepting on or after 31 December 2008 that do not meet the governing law requirements in GPS 230. Page 23 of 61

24 20.0. Regulatory capital requirement component of investments in subsidiaries, associates and JVs [Derived item] This is the deduction for the regulatory capital requirement for investments in subsidiaries, joint ventures and associates as detailed in Attachment B of GPS 112. The deduction should be taken as the lesser of the insurer's share of regulatory capital requirements and the value of the investment that is recorded on the insurer's balance sheet after adjusting for any intangible component as reported in Item 30.0 If the investment subject to this deduction is a non-operating holding company, a look-through approach must be applied. This is automatically derived as Item Assets under a fixed or floating charge This is the value of assets of the reporting insurer that are under a fixed or floating charge, mortgage or other security. This deduction may be reduced by the amount of any liability for the charge that is recognised on the reporting insurer s balance sheet. Where the security exclusively supports a reporting insurer s insurance liabilities, the deduction only applies to the amount by which the fair value of the charged assets exceeds the reporting insurer s supported insurance liabilities Fair value adjustments This is the amount to be deducted as required by APRA in writing where APRA considers that fair values on the balance sheet are not prudent or reliable Total deductions for assets specifically excluded from being considered inside Australia [Derived item] This is the sum of deductions for assets specifically excluded from being considered inside Australia in accordance with GPS 120. It is automatically calculated as the sum of Items 12 to 22. Page 24 of 61

25 Related entity interests contributing to regulatory adjustments Adjusted net assets in Australia worksheet Name This column reports the registered business name of the subsidiary, associate or joint venture of the insurer Category This column reports the appropriate category of the related entity i.e. select whether it is a subsidiary, joint venture or associate by using the drop-down boxes Ownership percentage (%) This is the percentage of the insurer's ownership of shares or units of the subsidiary, associate or joint venture Value of investment This column reports the value of the insurer s investment in the subsidiary, joint venture or associate as reported on the balance sheet, adjusted for goodwill and intangible assets Regulatory capital requirement This column reports, where applicable, the regulatory capital requirement of the subsidiary, joint venture or associate. Where such capital requirements do not exist, this item should be reported as zero Adjustment for regulatory capital requirements [Derived item] This column reports the regulatory adjustment to net assets in Australia for investments in subsidiaries, joint ventures and associates that are subject to regulatory capital requirements. As per Attachment B of GPS 112, this adjustment is determined as the lesser of the insurer's share of the regulatory capital requirements and the value of the investment that is recorded on the insurer's balance sheet after adjustment for any intangible component. This regulatory adjustment does not apply to an investment in a subsidiary, associate or joint venture that: Page 25 of 61

26 is operationally independent; and represents a genuine arm s-length investment; and is not subject to prudential capital requirements; and does not undertake insurance business or business related to insurance business. Updated - July 2012 This is automatically derived as the minimum of Item 27.0, and Item 26.0 multiplied by Item Goodwill and other intangibles This is the value of goodwill and any other intangible assets reported on the balance sheet of the subsidiary, joint venture or associate, net of adjustments to profit or loss reflecting changes arising from any impairment and amortisation. The amounts reported must be net of any associated deferred tax liability that would be extinguished if the assets involved become impaired or derecognised under Australian Accounting Standards Adjustment for goodwill / other intangibles [Derived item] This column reports the amount of regulatory adjustments applied in respect of the goodwill and other intangible assets (net of impairment) in relation to the investment in the subsidiary, joint venture or associate. This is automatically derived as Item 26.0 multiplied by Item Total adjustment for regulatory capital requirement of investments in subsidiaries, associates and JVs [Derived item] This Item is the total value of adjustments for regulatory capital requirement of investments in subsidiaries, associates and JVs. This is automatically derived as the sum of Item Goodwill and intangibles specific to interests in subsidiaries, associates and JVs [Derived item] This item is the total value of goodwill and intangibles specific to interests in subsidiaries, associates and JV. This is automatically derived as the sum of Item Page 26 of 61

27 34.0. Goodwill and intangibles specific to the general insurer This is the value of goodwill and any other intangible assets as defined in Attachment B of GPS 112, net of adjustments to profit or loss reflecting changes arising from any impairment and amortisation. The amounts reported must be net of any associated deferred tax liability that would be extinguished if the assets involved become impaired or derecognised under Australian Accounting Standards. This does not include that component of investments in certain categories of subsidiaries, associates and joint ventures (as per GPS 112) that represents goodwill and any other intangible assets Total adjustment for goodwill and other intangible asset [Derived item] This item is the total adjustment for goodwill and other intangible assets. This is automatically derived as Item 33.0 plus Item Page 27 of 61

28 Asset Risk Charge worksheet This section provides specific definitions and instructions for the items in the Asset Risk Charge worksheet. Balance Sheet Assets and Liabilities Pre-stress values of the assets and liabilities should be as per the values reported in the statutory accounts. Post-stress values of assets and liabilities should be determined at fair value. Assets and liabilities may be stressed via a look-through basis. The effect of derivatives is to be reported separately via the derivatives items in the modules. Real Interest Rate Stress (RIR) Asset Risk Charge worksheet 1.0. RIR Module This section details the calculation of the impact on capital base arising from the real interest rate stress Assets Subject to RIR Stress and 1.6. Liabilities Subject to RIR Stress This reports the fair value of the assets and liabilities that are sensitive to the real interest rate stress Value of Assets post RIR - Up Stress and 1.7. Value of Liabilities post RIR - Up Stress This reports, after the application of the prescribed upwards real interest rate stress, the fair value of the assets and liabilities that are sensitive to real interest rates Capital Base Impact - Up RIR Stress and 1.8. Capital Base Impact - Up RIR Stress [Derived item] This reports the impact on capital base arising from changes in the fair values of assets and liabilities due to the upwards real interest rate stress. It is calculated as Item 1.2 less Item 1.1, and Item 1.6 less Item 1.7 respectively. This also includes any impact on capital base from off-balance sheet assets and liabilities to the extent they affect the value of on-balance sheet assets and liabilities. Page 28 of 61

29 1.4. Value of Assets post RIR-Down Stress and 1.9. Value of Liabilities post RIR-Down Stress This reports, after the application of the prescribed downwards real interest rate stress, the fair value of the assets and liabilities that are sensitive to real interest rates Capital Base Impact - Down RIR Stress and Capital Base Impact - Down RIR Stress [Derived item] This reports the impact on capital base arising from changes in the fair values of assets and liabilities due to the downwards real interest rate stress. It is calculated as Item 1.4 less Item 1.1, and Item 1.6 less Item 1.9 respectively. This also includes any impact on capital base from off-balance sheet assets and liabilities to the extent they affect the value of on-balance sheet assets and liabilities Total Capital Impact [Derived item] This item determines the overall capital base impact from the upwards and downwards real interest rate stress. It is calculated as: upwards real interest rate stress: Item 1.3 plus Item 1.8; and downwards real interest rate stress: Item 1.5 plus Item Expected Inflation Rate Stress (INF) Asset Risk Charge worksheet 2.0. INF Module This section is structured in a similar manner to the real interest rate module. Refer to Item 1.0 for details on instructions. Currency Stress (CUR) Asset Risk Charge worksheet 3.0. CUR Module This section is structured in a similar manner to the real interest rate module. Refer to Item 1.0 for details on instructions. Page 29 of 61

30 Equity Stress (EQT) Asset Risk Charge worksheet 4.0. EQT Module This section details the calculation of the impact on capital base arising from the prescribed equity stress. It is structured to determine the change in capital base in respect of assets and liabilities arising from the equity stress. These are reported under the items: 4.1. Assets Subject to EQT Stress 4.2. Value of Assets post EQT Stress 4.3. Capital Base Impact - EQT Stress 4.4. Liabilities Subject to EQT Stress 4.5. Value of Liabilities post EQT Stress 4.6. Capital Base Impact - EQT Stress 4.7. Total Capital Impact These items are defined in a similar way to Item 1.0. Key assets items stressed include: Listed equities; Unlisted equities; and Risky assets not considered in other risk modules. Property Stress (PROP) Asset Risk Charge worksheet 5.0. PROP Module This section details the calculation of the impact on capital base arising from the prescribed property stress. It is structured to determine the change in capital base in respect of assets and liabilities arising from the property stress. These are reported under the items: 5.1. Assets Subject to PROP Stress 5.2. Value of Assets post PROP Stress 5.3. Capital Base Impact - PROP Stress 5.4. Liabilities Subject to PROP Stress 5.5. Value of Liabilities post PROP Stress 5.6. Capital Base Impact - PROP tress 5.7. Total Capital Impact Page 30 of 61

31 These items are defined in a similar way to Item 1.0. Key asset items stressed include: Property assets; and Infrastructure assets. Updated - July 2012 Credit Spread Stress (CSP) Asset Risk Charge worksheet 6.0. CSP Module This section details the calculation of the impact on capital base arising from the prescribed credit spread stress. The module reports the fair value of the assets and liabilities sensitive to credit spread risks, the value of the assets and liabilities post credit spread stress, and their resultant impacts on capital by their respective counterparty grades. This is further broken down into the following categories for the purpose of applying the credit spread stress per GPS 114. Bonds and non-securitised assets; Securitised assets; and Re-securitised assets. Default Stress (DFT) Asset Risk Charge worksheet 7.0. DFT Module This section details the calculation of the impact on capital base arising from the prescribed default stress. The section reports the fair value of the various assets that are subject to default risks but are not stressed under the credit spread module, by the default factors applicable to them, as determined in accordance with GPS 114. The default factors will be applied on the fair value of the asset exposure. The resultant figure is the default risk charge for the specific asset exposure. Asset Risk Charge summary Asset Risk Charge worksheet 8.0. Risk Charge Components [Derived item] This item summarises risk charge components associated with the undiversified impact on capital base under the various asset stress scenarios where the stress has a negative impact on the capital base. Where there is a positive impact on capital base, the risk charge component would equate to zero. Page 31 of 61

32 9.0. Diversification Factor [Derived item] This is the diversification factor assumed between the different asset risk stresses, for the purposes of calculating the tax benefits to be deducted from the aggregated risk charge component as per GPS 114. It is calculated as Item 12.0 divided by Item Balance before stress 9.2. Real interest rate stress 9.3. Expected inflation stress 9.4. Currency stress 9.5. Equity stress 9.6. Property stress 9.7. Credit spread stress 9.8. Default stress Items reported here are to be presented on a fair value basis. For Item 9.2 to Item 9.4, select the direction of the stress that results in the most severe capital impact. For Item 9.2 to Item 9.8, report the figures on a fair value basis Deferred tax assets Report the value of the deferred tax assets post the application of the asset stresses. Only include additional deferred tax assets if tax legislation allows them to be absorbed by the existing deferred tax liabilities that remain after netting off the deferred tax assets and liabilities in the calculation of the deductions from Tier 1 Capital Deferred tax liabilities Report the value of the deferred tax liabilities post the application of the asset stresses Tax benefits (pre diversification) [Derived item] This is the overall tax benefit arising from movements in deferred tax assets and deferred tax liabilities as a result of applying the asset stresses. The figures are reported prior to the application of the diversification factor. For each stress, it is automatically calculated as the sum of: Page 32 of 61

33 each of the stressed values in Items 9.2 to 9.8 less Item 9.1 for deferred tax assets (Item 9.9); and each of the stressed values in Items 9.2 to 9.8 less Item 9.1 for deferred tax liabilities (Item 9.10) Tax benefits (post diversification) [Derived item] This is the overall tax benefit arising from movements in deferred tax assets and deferred tax liabilities as a result of applying the asset stresses. The figures are reported post the application of diversification factor. It is calculated as Item 9.0 multiplied by Item Sum of Risk Charge Components [Derived item] This is the sum of the undiversified impacts on capital under the selected combination of scenarios representing the worst case situation for the reporting insurer. It is automatically calculated as the sum of the undiversified impacts on capital under the selected combination of scenarios representing the worst case situation for the insurer Less: Asset Risk Aggregation Benefit [Derived item] This is the amount of diversification benefits recognised amongst the asset stresses that the insurer is exposed to. It is automatically calculated as Item 10.0 less Item Aggregate Risk Charge Components [Derived item] This is the aggregate risk charge derived through the application of the prescribed correlation matrix. The formula and methodology is set out in GPS Less: Tax benefits [Derived item] This is the amount of tax benefits (if any) that would arise out of the losses from the asset stresses. All of the tax benefits here are assumed to be admissible for the purpose of determining the asset risk charge. This is automatically calculated as the sum of Item Adjustments to Asset Risk Charge as approved by APRA Report the amount of adjustments and exclusions to the Asset Risk Charge as approved by APRA. An increase in the risk charge is to be reported as a positive amount. Page 33 of 61

34 15.0. Asset Risk Charge [Derived item] This is automatically calculated as Item 12.0 less Item 13.0 plus Item Page 34 of 61

35 Insurance Risk Charge worksheet Insurance Risk Charge calculation Insurance Risk Charge worksheet 1.0. OCL The outstanding claims liabilities (OCL) relates to all claims incurred prior to the valuation date, whether or not they have been reported to the insurer. The value of the OCL must include an amount in respect of the expenses that the insurer expects to incur in settling these claims. The value of OCL must not include any Government charges directly imposed on the insurer such as levies, duties and taxes, but must be gross of input tax credit recoveries Direct business This refers to insurance business written directly by the insurer and is to be reported in accordance with the direct classes of business in Attachment B of GPS Reinsurance business - Proportional This refers to inwards reinsurance business written by the insurer where the reinsurer and reinsured share, in proportion, the premium and losses of the reinsured. It is to be reported in accordance with the Attachment B of GPS Reinsurance business - Non-proportional This refers to inwards reinsurance business written by the insurer where the reinsurer pays losses only above an agreed retention / deductible up to an agreed maximum limit. It is to be reported in accordance with the Attachment B of GPS Class of business The direct or reinsurance classes of business are outlined in Attachment B of GPS 001. For the purpose of calculating the Insurance Risk Charge in respect of the Other class of business as per GPS 001 (whether it is direct or reinsurance business), the Appointed Actuary or Group Actuary (as appropriate) is required to determine the most appropriate category (i.e. category A, B or C) in Table 1 and Table 2 of Attachment A of GPS 115 that this business falls within. The choice must be based on the underlying risk characteristics of the business being written. This is to be reported in the Other direct - category A, Other direct - category B, Other direct - category C, Other Page 35 of 61

36 reinsurance - category A, Other reinsurance - category B, and Other reinsurance - category C line items Net OCL This is the total OCL, net of any reinsurance and non-reinsurance recoveries OCL capital factor % This is the outstanding claims risk capital factor applicable to each class of business as per Attachment A of GPS OCL Insurance Risk Charge [Derived item] This is the Insurance Risk Charge in respect of outstanding claims risk, which relates to the risk that the value of the net outstanding claims liabilities is greater than the value determined in accordance with GPS 320. It is automatically calculated as Item 6.0 multiplied by Item Net OCL per Balance Sheet This is the value, as at the relevant date, of the outstanding claims liabilities (OCL), net of any recovery assets that relate to the gross OCL (including reinsurance recoveries, GST recoveries and other recoveries), determined in accordance with AASB OCL surplus / (deficit) [Derived item] This is the amount by which the OCL, net of any recoveries, determined in accordance with AASB 1023 exceeds (or is in deficit of) the equivalent figure determined in accordance with GPS 320. It is automatically calculated as Item 9.0 less Item Premiums liabilities (PL) PL relate to all future claim payments arising from future events post the valuation date that will be insured under the reporting insurer's existing policies that have not yet expired. The value of the premiums liabilities must include an amount in respect of the expenses that the reporting entity expects to incur in administering and settling the relevant claims and allow for expected premium refunds. The value of premiums liabilities must not include any Government charges directly Page 36 of 61

37 imposed on the reporting insurer such as levies, duties and taxes, and must be gross of input tax credit recoveries. Also a deferred acquisition cost asset must not be reported Net PL This is the total PL, net of any expected reinsurance and non-reinsurance recoveries PL capital factor % This is the premiums liabilities risk capital factor applicable to each class of business as per Attachment A of GPS PL Insurance Risk Charge [Derived item] This is the component of the Insurance Risk Charge which relates to the risk that the value of the net premiums liabilities is greater than the value determined in accordance with GPS 320. It is automatically calculated as Item 12.0 multiplied by Item AASB Net PL This is the value of expected future cash flows, net of recoveries, relating to future claims arising from the rights and obligations under current general insurance contracts as determined in accordance with AASB 1023 for the purposes of the liability adequacy test PL surplus / (deficit) [Derived item] This is automatically calculated as Item 15.0 less Item Net written premium This is the value of future net written premium income for contracts for which the insurer is already committed that will expose the insurer to material risks in the subsequent relevant period, but are not otherwise recognised within the capital requirements. This premium income is net of: levies that are included in the gross premium and would be payable on the business (in particular fire service levy); reinsurance costs that would arise in respect of the premium income and would be payable under treaty arrangements to protect the business; and commission that would be payable to secure the business once it is written (such as brokerage or reinsurance exchange commission). Page 37 of 61

38 Typically this will be for policies for which a written premium is not yet recognised under accounting standards, and have not been included in the premium liabilities, but for which the insurer has already committed to cover. The materiality of the business that incepts in the next reporting period should be determined in accordance with the Australian accounting and auditing standards subject to APRA s discretion PL capital factor % This is the premiums liabilities risk capital factor applicable to each class of business as per Attachment A of GPS Additional policies risk charge [Derived item] This is the component of the Insurance Risk Charge which relates to the risk that material net written premium, as defined in GPS 115, will be insufficient to fund the liabilities arising from that business. It is automatically calculated as Item 17.0 multiplied by Item Insurance Risk Charge summary Insurance Risk Charge worksheet OCL Insurance Risk Charge [Derived item] This is automatically calculated as the sum of Item 8.0 across the direct and reinsurance classes of business OCL surplus / (deficit) [Derived item] This is automatically calculated as the sum of Item 10.0 (and the corresponding items for reinsurance business) across the direct and reinsurance classes of business PL Insurance Risk Charge [Derived item] This is automatically calculated as the sum of Item 14.0 (and the corresponding items for reinsurance business) across the direct and reinsurance classes of business Additional policies risk charge [Derived item] This is automatically calculated as the sum of Item 19.0 (and the corresponding items for reinsurance business) across the direct and reinsurance classes of business. Page 38 of 61

39 24.0. PL surplus / (deficit) [Derived item] This is automatically calculated as the sum of Item 16.0 (and the corresponding items for reinsurance business) across the direct and reinsurance classes of business, for all rows except the Total. The Total also includes Item DRE for future business not yet written This is the component of reinsurance paid or payable which is available for future business written up to the end of the reinsurance contract and is determined in accordance with GPS 320. Amounts cannot be included in this item where the underlying reinsurance arrangements do not comply with the reinsurance documentation test or governing law requirements under GPS Adjustments to Insurance Risk Charge as approved by APRA Report the amount of adjustments and exclusions to the Insurance Risk Charge as approved by APRA. An increase in the risk charge is to be reported as a positive amount Insurance Risk Charge [Derived item] This is automatically calculated as the sum of the totals for Items 20.0, 22.0, 23.0 and Net surplus / (deficit) relating to insurance liabilities [Derived item] This is automatically calculated as the sum of the totals for Items 21.0 and 24.0 Page 39 of 61

40 Insurance Concentration Risk Charge (ICRC) worksheet This section provides specific definitions and instructions for the items in the ICRC worksheet. ICRC calculation ICRC worksheet 1.0. Natural perils vertical requirement (NP VR) 2.0. Basis for determination of NP VR NP VR may be determined on a Gross or Net basis. Report the components of the NP VR in the Gross column where the NP VR is determined based on NP PML (as defined under Item 3.0). Report the components of the NP VR in the Net column where the NP VR is determined based on Net whole-of-portfolio loss (as defined under Item 5.0). At a minimum, the basis for determination of the NP VR that produces the greatest NP VR must be reported. The NP VR may be reported on both a Gross and Net basis NP PML NP PML is the gross loss arising from the occurrence of a single event, where that loss is not less than the whole-of-portfolio annual loss with a 0.5 per cent probability of occurrence. This item must only be reported in the Gross column Less: NP reinsurance recoverables NP reinsurance recoverables is the level of potential reinsurance recoverables should there be the occurrence of the event that gives rise to NP PML. This Item must not include any amounts due from aggregate reinsurance cover which, if applicable, are to be reported in Item 8.0. Reinsurance recoverables may be included at this Item if the Reinsurance Arrangements meet the requirements set out in GPS 116. This item must only be reported in the Gross column. Page 40 of 61

41 5.0. Net whole-of-portfolio loss Net whole-of-portfolio loss is the net loss arising from the occurrence of a single event, where that net loss is not less than the whole-of-portfolio annual net loss with a 0.5 per cent probability of occurrence (the net loss is the gross loss less potential reinsurance recoverables). This Item must not include any amounts due from aggregate reinsurance cover which, if applicable, are to be reported in Item 8.0. This item must only be reported in the Net column Less: NP reinstatement premiums NP reinstatement premiums relates to inwards reinsurance premiums received from cedants as a result of the event that gives rise to NP PML or Net Whole-of-portfolio loss. NP reinstatement premiums must only be reported in this item if the reinsurance contract specifically stipulates that offsetting with the cedant will occur at the time of the payment of the reinsurance claim. This item must be reported as a positive amount Plus: NP reinstatement cost NP reinstatement cost is the cost (if any) of reinstating all catastrophe reinsurance cover relating to the reinsurance recoverables reported in Item 4.0 or the reinsurance recoverables relating to the Net whole-of-portfolio loss reported in Item 5.0. Where there are no contractually agreed rates for reinsurance cover, the cost of the reinstatement must be estimated based on current reinsurance market conditions. This amount must not be less than the full original cost of the cover with no deduction for the expiry of time since the inception of the reinsurance arrangements Less: Other adjustments Other adjustments include potential reinsurance recoverables from aggregate reinsurance cover. Aggregate reinsurance cover is eligible to be considered for inclusion in the NP VR once the aggregate reinsurance cover has reached its attachment point, or will as a result of the occurrence of NP PML (reported in Item 3.0), or net whole-of-portfolio loss (reported in Item 4.0), as appropriate. The reinsurance recoverables from aggregate reinsurance cover must then be applied up until the cover has been exhausted by claims by the insurer or the date that the aggregate reinsurance treaty expires, whichever occurs first. Page 41 of 61

42 This item must be reported as a positive amount NP VR [Derived item] This item determines the NP VR. It is automatically calculated by the worksheet for the Gross column as Item 3.0 less Item 4.0 less Item 6.0 add Item 7.0 less Item 8.0 and for the Net column as Item 5.0 less Item 6.0 add Item 7.0 less Item 8.0. The NP VR is the greater of the Gross basis NP VR and the Net basis NP VR Natural perils horizontal requirement (NP HR) H3 requirement [Derived item] The H3 requirement is automatically calculated as the total H3 loss in Item Basis for determination of H3 requirement Select gross or net from the drop-down box. Select gross if the H3 requirement would be greater, if it is based on the gross loss arising from the occurrence of a single event, than the net loss arising from the occurrence of a single event. Select net if the H3 requirement would be greater, if it is based on the net loss arising from the occurrence of a single event, than the gross loss arising from the occurrence of a single event Single event loss from H3 event This item is the gross or net loss from the occurrence of a single event, where that loss is not less than the whole-of-portfolio annual (gross/net) loss with a 10 per cent probability of sufficiency. Report this as the gross single event loss if Gross has been selected in Item 12.0 or the net single event loss if Net has been selected in Item H3 reinsurance recoverables H3 reinsurance recoverables is the level of potential reinsurance recoverables should there be the occurrence of three single event H3 losses over the catastrophe reinsurance program treaty year. H3 reinsurance recoverables must not include any amounts due from aggregate reinsurance cover which are to be reported in Item Page 42 of 61

43 Reinsurance recoverables may be included at this Item if the Reinsurance Arrangements meet the requirements set out in GPS 116. This item must only be reported if the insurer has selected gross in Item H3 aggregate offset H3 aggregate offset is the amount of potential reinsurance recoverables from aggregate reinsurance cover that can be used to reduce the H3 requirement. The retention of the aggregate reinsurance cover can be reduced for any portion of paid and outstanding claims and premiums liabilities that contribute to retained losses, provided it does not result in a double-count between this offset and the PL offset H3 reinstatement premiums H3 reinstatement premiums relates to inwards reinsurance premiums received from cedants as a result of the event that gives rise to the single event loss H3 event (as reported in Item 13.0). H3 reinstatement premiums must only be reported in this item if the reinsurance contract specifically stipulates that offsetting with the cedant will occur at the time of the payment of the reinsurance claim. This item must be reported as a positive amount H3 reinstatement cost H3 reinstatement cost is the cost (if any) of reinstating all catastrophe reinsurance cover relating to the reinsurance recoverables reported in Item 14.0 or the reinsurance recoverables relating to the single event loss H3 event, if Net has been selected in Item Where there are no contractually agreed rates for reinsurance cover, the cost of the reinstatement must be estimated based on reinsurance market conditions that would prevail after the occurrence of the events. This amount must not be less than the full original cost of the cover with no deduction for the expiry of time since the inception of the reinsurance arrangements. An H3 reinstatement cost after the third event is not required to be reported. Page 43 of 61

44 18.0. H3 loss per event [Derived item] The H3 loss per event is automatically calculated for each H3 event as Item 13.0 less Item 14.0 less Item 15.0 less Item 16.0 plus Item The total H3 loss is automatically calculated as the sum of the three H3 losses per event in this Item H4 requirement [Derived item] The H4 requirement is automatically calculated as the total H4 loss per event in Item Basis for determination of H4 requirement Select gross or net from the drop-down box. Select gross if the H4 requirement would be greater, if it is based on the gross loss arising from the occurrence of a single event, than the net loss arising from the occurrence of a single event. Select net if the H4 requirement would be greater, if it is based on the net loss arising from the occurrence of a single event, than the gross loss arising from the occurrence of a single event Single event loss from H4 event This item is the gross or net loss from the occurrence of a single event, where that loss is not less than the whole-of-portfolio annual (gross/net) loss with a 16.7 per cent probability of sufficiency H4 reinsurance recoverables H4 reinsurance recoverables is the level of potential reinsurance recoverables should there be the occurrence of four single event H4 losses over the catastrophe reinsurance program treaty year. H4 reinsurance recoverables must not include any amounts due from aggregate reinsurance cover which are to be reported in Item Reinsurance recoverables may be included at this Item if the Reinsurance Arrangements meet the requirements set out in GPS 116. This item must only be reported if the insurer has selected gross in Item Page 44 of 61

45 23.0. H4 aggregate offset H4 aggregate offset is the amount of potential reinsurance recoverables from aggregate reinsurance cover that can be used to reduce the H4 requirement. The retention of the aggregate reinsurance cover can be reduced for any portion of paid and outstanding claims and premiums liabilities that contribute to retained losses, provided it does not result in a double-count between this offset and the PL offset H4 reinstatement premiums H4 reinstatement premiums relates to inwards reinsurance premiums received from cedants as a result of the event that gives rise to the single event loss H4 event (as reported in Item 21.0). H4 reinstatement premiums must only be reported in this item if the reinsurance contract specifically stipulates that offsetting with the cedant will occur at the time of the payment of the reinsurance claim. This item must be reported as a positive number H4 reinstatement cost NP reinstatement cost is the cost (if any) of reinstating all catastrophe reinsurance cover relating to the reinsurance recoverables reported in Item 22.0 or the reinsurance recoverables relating to the single event loss H4 event, if Net has been selected in Item Where there are no contractually agreed rates for reinsurance cover, the cost of the reinstatement must be estimated based on reinsurance market conditions that would prevail after the occurrence of the events. This amount must not be less than the full original cost of the cover with no deduction for the expiry of time since the inception of the reinsurance arrangements. An H4 reinstatement cost after the fourth event is not required to be reported H4 loss per event [Derived item] The H4 loss per event is automatically calculated for each H4 event as Item 21.0 less Item 22.0 less Item 23.0 less Item 24.0 plus Item The total H4 loss is automatically calculated as the sum of the four H4 losses per event in this Item. Page 45 of 61

46 27.0. PL offset Report PL offset as the portion of the net premiums liability provision which relates to catastrophic losses (those that give rise to a relatively significant number of claims and occur no more frequently than every three months), as determined by the Appointed Actuary. The method for determining the PL offset is outlined in GPS NP HR [Derived item] This item determines the NP HR. It is automatically calculated by the worksheet as the greater of Item 11.0 and Item 19.0, less Item Other accumulations vertical requirement (OA VR) OA PML OA PML is the gross loss arising from the occurrence of a single event, where that loss has 0.5 per cent probability of occurrence over 12 months. All classes of business and all business underwritten in those classes must be considered in determining the largest loss Less: PL adjustment to OA PML Report this item as the losses within the other accumulation scenario that are already specifically allowed for in the premiums liabilities of the insurer. This item must be reported as a positive amount Less: OA reinsurance recoverables OA reinsurance recoverables is the level of potential reinsurance recoverables should there be the occurrence of OA PML. This Item may include amounts due from aggregate reinsurance cover if the cover has reached its attachment point, or will as a result of the occurrence of OA PML. The reinsurance recoverables from aggregate reinsurance cover must then be applied up until the cover has been exhausted or the date that the aggregate reinsurance treaty expires, whichever occurs first. Reinsurance recoverables may be included at this Item if the Reinsurance Arrangements meet the requirements set out in GPS 116. This item must be reported as a positive amount. Page 46 of 61

47 33.0. Plus: OA reinstatement cost OA reinstatement cost is the cost (if any) of reinstating all catastrophe reinsurance cover relating to the reinsurance recoverables reported in Item Where there are no contractually agreed rates for reinsurance cover, the cost of the reinstatement must be estimated based on current reinsurance market conditions. This amount must not be less than the full original cost of the cover with no deduction for the expiry of time since the inception of the reinsurance arrangements OA VR [Derived item] This item determines the OAVR. It is automatically calculated by the worksheet as Item 30.0 less Item 31.0 less Item 32.0 plus Item LMI Concentration Risk Charge [Derived item] This item is automatically derived from Item 39: Total in the LMI Concentration Risk Charge worksheet. ICRC summary ICRC worksheet Insurance Concentration Risk Charge (before approved adjustments) [Derived item] This item determines the Insurance Concentration Risk Charge (before approved adjustments) and is automatically calculated as the greater of Item 9.0, Item 28.0, Item 34.0 and Item Adjustments to Insurance Concentration Risk Charge as approved by APRA Report any APRA-approved adjustments, if applicable, to the calculation of the Insurance Concentration Risk Charge. An increase in the risk charge is to be reported as a positive amount Insurance Concentration Risk Charge [Derived item] This item is automatically calculated by the form as Item 36.0 plus Item Page 47 of 61

48 LMI Concentration Risk Charge (LMICRC) worksheet PML calculation LMICRC worksheet 1.0. Standard loans - 100% and top cover A standard loan one which meets the following criteria: (a) APRA has given a direction that the loan should be classified as a standard loan; or (b) The loan is predominantly secured by residential property and: (i) the LMI or lender has formally verified the borrower s income and employment; and (ii) the borrower passes standard credit checks and income requirements as documented in the LMI or lender s underwriting or credit policies and procedures. 100% cover provides insurance for 100% of the loan amount. Top cover provides insurance for less than 100% of the loan amount LVR The Loan-to-Valuation Ratio (LVR) is the ratio of the amount of the loan to the value of the secured residential property, as at the date of origination of the loan. Where the mortgage insurance premium is capitalised in the loan amount, the LVR must be calculated including the premium; that is, the loan amount must be increased by the amount of the capitalised premium, irrespective of whether the premium is insured. The inclusion of a First Home Owners Grant in the deposit for a mortgaged property will not otherwise increase the LVR of a loan. LMIs are required to report the sum insured according to the following categories using the dropdown box: LVR of less than 60%, 60 to 70%, 70 to 80%, 80 to 85%, 85 to 90%, 90 to 95%, 95 to 100%, and greater than 100 per cent Coverage proportion This is the percentage of cover for which the insurance provides over the loan amount. Select from the appropriate coverage proportion percentage using the drop-down box: 20, 25, 30, 35, 40 or 100% Sum insured by age The sum insured is the original exposure amount for an LMI as stated in the mortgage insurance policy. Report this by age, which is the length of time from the date of origination of the loan to the Page 48 of 61

49 date of calculation for the purposes of determining the seasoning factors in Attachment A of GPS 116. Report according to the following categories: age of less than three years, three to less than five years, five to less than 10 years, and more than 10 years Total sum insured [Derived item] This is automatically calculated as the sum of the sums insured for each age category in Item 4.0 multiplied by the corresponding seasoning factor in Attachment A of GPS PD factor [Derived item] The Probability of default (PD) is the risk of default by the borrower. It varies according to LVR as per Attachment A of GPS 116. This is automatically determined from the list in Item 27.0 based on the LVR selected in Item LGD factor (100% cover) [Derived item] Loss given default (LGD) is the loss to the LMI upon default by the borrower. It varies according to LVR as per Attachment A of GPS 116. The LGD factors are for 100% cover. This is automatically determined from the list in Item 28.0 based on the LVR selected in Item LGD factor (after top cover adjustment) [Derived item] This is the LGD factor for top cover. It is automatically calculated as Item 7.0 divided by Item 3.0, subject to a maximum of 100% PML [Derived item] For each individual LMI policy, the PML is the sum insured multiplied by the seasoning, PD and LGD factors applicable to the policy. It is determined in accordance with Attachment A of GPS 116. This is automatically calculated as Item 5.0 multiplied by Item 6.0 multiplied by Item 8.0. Page 49 of 61

50 10.0. Standard loans - pool cover A pooled LMI policy, or pool cover, is lenders mortgage insurance underwritten and issued in respect of a pool of loans. For clarity, each loan is not individually insured Weighted-average LVR Select the LVR range the weighted-average LVR for the pool of loans belongs in using the dropdown box Weighted-average age (years) Select the age range the weighted-average age for the pool of loans belongs in using the drop-down box Seasoning factor [Derived item] This is the seasoning factor corresponding to the weighted-average age of the pool. This is automatically determined based on the selection made in Item Sum insured Report the sum insured for pools of loans. The sum insured is the original exposure amount for an LMI as stated in the mortgage insurance policy PD factor [Derived item] This is the PD corresponding to the weighted-average LVR of the pool. This is automatically determined from the list in Item 27.0 based on the weighted-average LVR selected in Item LGD factor (100% cover) [Derived item] This is the LGD corresponding to the weighted-average LVR of the pool. This is automatically determined from the list in Item 28.0 based on the weighted-average LVR selected in Item Page 50 of 61

51 17.0. PML [Derived item] This is automatically calculated as Item 14.0 multiplied by Item 13.0 multiplied by Item 15.0 multiplied by Item Non-standard loans - 100% and top cover A non-standard loan is a loan predominantly secured by residential property which does not meet the criteria for a standard loan as defined in Attachment A of GPS 116, and/or where APRA has given a direction that the loan should be classified as a non-standard loan PD factor [Derived item] This is automatically determined from the list in Item 29.0 based on the LVR selected LGD factor (100% cover) [Derived item] This is automatically determined from the list in Item 30.0 based on the LVR selected PD factor [Derived item] This is automatically determined from the list in Item 29.0 based on the weighted-average LVR selected LGD factor (100% cover) [Derived item] This is automatically determined from the list in Item 30.0 based on the weighted-average LVR selected Commercial Loans A commercial loan is a loan that is not predominantly secured by a registered mortgage over residential property, and/or where APRA has given a direction that the loan should be classified as a commercial loan Factor This is the factor used in the calculation of the PML for a commercial loan and is 8%. Page 51 of 61

52 25.0. Sum insured The sum insured is the original exposure amount for an LMI as stated in the mortgage insurance policy PML [Derived item] The PML for a commercial loan is automatically calculated as Item 24.0 multiplied by Item PD & LGD factors LMICRC worksheet PD factor This is the list of PD factors for standard loans as per Attachment A of GPS LGD factor (100% cover) This is the list of LGD factors for standard loans (for 100% cover) as per Attachment A of GPS PD factor This is the list of PD factors for non-standard loans as per Attachment A of GPS LGD factor (100% cover) This is the list of LGD factors for non-standard loans, (for 100% cover) as per Attachment A of GPS 116. LMICRC summary LMICRC worksheet PML [Derived item] This represents the total PML across all loan types, coverage types and origination channels. This is automatically calculated as the sum of the total PMLs for Standard loans - 100% and top cover, Standard loans - pool cover, Non-standard loans - 100% and top cover, Non-standard loans - pool cover and Commercial Loans. Total PML is automatically allocated in the proportions of 25% to year one, 50% to year two and 25% to year three of the Prescribed Stress Scenario as per Attachment A of GPS 116. Page 52 of 61

53 32.0. Adjustment to the PML For an LMI no longer writing new business (i.e. in run-off), the sum insured is expected to decrease over the three-year scenario and it may be appropriate for an LMI in run-off to adjust its PML downwards. The methodology for adjusting an LMI s PML in a run-off situation must be approved by APRA and documented in the LMI s ReMS. A reduction in PML is to be entered as a positive amount. Do not enter any other adjustments to PML in this field Adjusted PML [Derived item] This is automatically calculated as Item 31.0 less Available reinsurance Report the amount of available reinsurance for each of the three years of the Prescribed Stress Scenario. The methodology for calculating available reinsurance is detailed in Attachment A of GPS Allowable reinsurance [Derived item] This is the lesser of Available reinsurance in Item 34.0 and 60 per cent of the Adjusted PML in Item It is automatically calculated PML net of reinsurance [Derived item] This is automatically calculated as Item 33.0: Total less Item Net premiums liability deduction In determining the LMICRC, this is the value of the deduction from the PML, allowed under the GPS 116, for net premiums liability of the LMI that relates to an economic downturn. It is to be reported as a positive amount Adjustments to LMICRC as approved by APRA Report the amount of adjustments and exclusions to the LMICRC as approved by APRA. An increase in the risk charge is to be reported as a positive amount. Page 53 of 61

54 39.0. LMI Concentration Risk Charge [Derived item] The LMI Concentration Risk Charge must not be less than 10 per cent of the PML in Item 33.0 in accordance with Attachment A of GPS 116. This is automatically calculated as the greater of Item 33.0 multiplied by 0.1, and Item 36.0 less Item 37.0 plus Item Page 54 of 61

55 Asset Concentration Risk Charge worksheet This section provides specific definitions and instructions for the items in the Asset Concentration Risk Charge worksheet. Asset Concentration Risk limits Asset Concentration Risk Charge worksheet 1.0. Capital base [Derived item] This item is automatically derived from Item 19 of the Capital Base worksheet and is only applicable for non Category C insurers for the purposes of this worksheet Adjusted net assets in Australia [Derived item] This item is automatically derived from Item 11 of the Adjusted Net Assets in Australia worksheet and is only applicable for Category C insurers for the purposes of this worksheet Type of exposure The Asset Concentration Risk Charge calculations are separated into those for: Reinsurance exposures: exposures of the reporting insurer to reinsurance assets. Non-reinsurance exposures: on- and off- balance sheet exposures of the reporting insurer other than exposures to a reinsurer Asset exposure category For reinsurance and non-reinsurance exposures, these are the categories of exposure in accordance with Tables 1 and 2 respectively in Attachment A of GPS % of capital base limit These are the percentage of capital base limits as provided in Attachment A of GPS 117. For nonreinsurance exposure limits which consist of both percentage of capital base and dollar amount parts, only the percentage of capital base limit is provided in this item. Refer to Item 7 for the dollar amount limit. Page 55 of 61

56 6.0. $ capital base limit [Derived item] This expresses the percentage of capital base limits provided in Item 5 as a dollar amount based on the capital base or adjusted net assets in Australia amounts provided in Items 1 and 2 respectively. It is automatically calculated as Column 5 multiplied by the greater of Items 1 and $ limit For non-reinsurance exposure limits provided in Attachment A of GPS 117 which consist of both percentage of capital base and dollar amount limits, this is the dollar amount limit in AUD Limit [Derived item] This represents the limits for the non-reinsurance exposures calculated in accordance with Attachment A of GPS 117 and is automatically calculated as the greater of Items 6 and 7. Asset exposures subject to Asset Concentration Risk Charge Asset Concentration Risk Charge worksheet The definitions for Items 9 to 17, excluding 15, also apply to the corresponding items for the nonreinsurance exposures table Counterparty group This is the name of the group to which the counterparty to the reinsurance exposure belongs Asset exposure category after collateral and guarantees Select from the drop-down box the category of the exposure in accordance with Attachment A of GPS 117, and after the application of any collateral or guarantees for the exposure Total exposure This represents the fair value of the exposure, net of provision for doubtful debts, and includes both on-balance sheet and off-balance sheet amounts. Page 56 of 61

57 12.0. Deductible components of exposure Report any amount of the exposure that is currently deducted from the capital base. This allows the capital charge to be calculated net of amounts that do not meet the requirements of eligible capital and which have already been deducted from the capital base. The deductible component for reinsurance exposures would consist of reinsurance assets that do not meet the reinsurance documentation test and the governing law requirements Net exposure [Derived item] This is the fair value of the exposure, net of provision for doubtful debts, and after amounts that are deducted from the capital base. It is automatically calculated as Item 11 less Item Total exposure limit [Derived item] This is the Asset Concentration Limit calculated in Item 8 which corresponds to the category selection made in Item Adjustment for cumulative exposures In accordance with GPS 117, for reinsurance exposures to a group of counterparties, the reinsurance exposures of grade 5 and below that are not part of the Asset Concentration Risk Charge are added to those with a grade of 4 and compared to the grade 4 limit. The reinsurance exposures of grade 4 and below that are not part of the Asset Concentration Risk Charge are then added to those with a counterparty grade above 4 and compared to the corresponding limit. Report these adjustments to the Grade 4 and Grade 1, 2 or 3 exposures in this item Adjusted exposure [Derived item] For Grade 4 and Grade 1, 2 or 3 exposures, this is the exposure after the adjustments made in Item 15, for the purpose of comparing against the Asset Concentration Limits. It is automatically calculated as Item 13 plus Item 15. For Grade 5, 6, or 7, this will be the same as the net exposure in Item 12. Page 57 of 61

58 17.0. Excess over Asset Concentration Limit [Derived item] This is the excess of the Adjusted exposure in Item 16 over the Total exposure limit in Item 14 and is automatically calculated Of which: long-term exposure For non-reinsurance exposures categorised as 'Unrelated parties part of APRA-regulated group', report the fair value of the long term exposure, net of provision for doubtful debts. Long term exposures are those assets with a residual maturity of greater than one year Long-term exposure limit [Derived item] This is the Asset Concentration Limit for long term exposures determined in accordance with Attachment A of GPS 117. It is automatically derived from the corresponding limit in Item Excess over Asset Concentration Limit [Derived item] For non-reinsurance exposures, except for those categorised as 'Unrelated parties part of APRAregulated group', this is the excess of the Net exposure over the Total exposure limit and is automatically calculated. For exposures categorised as 'Unrelated parties part of APRA-regulated group', the excess is calculated as the greater of: the excess of the Net exposure over the Total exposure limit ; and the excess of the Long-term exposure in Item 18 over the Long term exposure limit in Item 19. This is automatically calculated. Asset Concentration Risk Charge summary Asset Concentration Risk Charge worksheet Aggregate of excess over Asset Concentration Limit [Derived item] This is the total of the Excess over Asset Concentration Limit amounts in Items 17 and 20 and is automatically calculated. Page 58 of 61

59 22.0. Adjustments to Asset Concentration Risk Charge as approved by APRA Updated - July 2012 Report the amount of adjustments and exclusions to the Asset Concentration Risk Charge as approved by APRA. An increase in the risk charge is to be reported as a positive amount Asset Concentration Risk Charge [Derived item] This automatically calculates the Asset Concentration Risk Charge as the sum of Items 21 and 22. Page 59 of 61

60 Operational Risk Charge worksheet This section provides specific definitions and instructions for the items in the Operational Risk Charge worksheet. Operational Risk Charge calculation Operational Risk Charge worksheet 1.0. Inwards reinsurance business This refers to insurer s inwards reinsurance business Direct business This refers to the direct business written by the insurer GWP for Current Year 12-Month Period (GP 1 ) This is the value of gross written insurance premium revenue recognised for the 12 months ending on the reporting date, as determined in accordance with relevant accounting standards. This item includes any fire service levy or other levies imposed by state and territory governments, and revenue related to transfers of insurance business made in accordance with the Insurance Act 1973 and unclosed business. This is gross of any associated outwards reinsurance expense GWP for 12 Months prior to Current Year 12-Month Period (GP 0 ) This is the value of gross written insurance premium revenue recognised for the 12 months ending on the date that is 12 months prior to the reporting date, as determined in accordance with relevant accounting standards. This item includes any fire service levy or other levies imposed by state and territory governments, and revenue related to transfers of insurance business made in accordance with the Insurance Act 1973 and unclosed business. This is gross of any associated outwards reinsurance expense Absolute value of difference between GP 1 and GP 0 [Derived item] This is automatically calculated as the absolute value of Item 3 less Item 4. Page 60 of 61

61 6.0. Central estimate of net OCL and PL This is the value of the central estimate component of outstanding claims liabilities (OCL) and premiums liabilities, net of any recoveries that relate to the gross OCL and gross premiums liabilities, determined in accordance with GPS Calculation parameter This parameter is used in the calculation of the Operational Risk Charge in Item 8 and is 2% for inwards reinsurance business, and 3% for direct business Operational Risk Charge calculation [Derived item] This is automatically calculated for direct business and inwards reinsurance business using the following formulae in accordance with GPS 118: Direct business: 3% x {maximum(item 3, Item 6) + maximum(0, Item x Item 4)} Inwards reinsurance business: 2% x {maximum(item 3, Item 6) + maximum(0, Item x Item 4)} Operational Risk Charge summary Operational Risk Charge worksheet 9.0. Operational Risk Charge (before approved adjustments) [Derived item] This is the minimum amount of capital a reporting insurer must hold against the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. It is automatically calculated as the sum of the Operational Risk Charge calculations in Item 8 for direct and inwards reinsurance business Adjustments to Operational Risk Charge as approved by APRA Report the amount of adjustments and exclusions to the Operational Risk Charge as approved by APRA. An increase in the risk charge is to be reported as a positive amount Operational Risk Charge [Derived item] This is automatically calculated as the sum of Items 9 and 10. Page 61 of 61