Insurance facts and figures 2007 - PwC

Regulation and supervision
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GPS 110 Capital Adequacy
GPS 110 Capital Adequacy requires that the general insurer’s capital base must exceed
the greater of $5 million and the minimum capital requirement.
As depicted in Figure 2.2, a general insurer’s capital base is made up of Tier 1 and
Tier 2 Capital. Tier 1 Capital comprises the higher quality capital elements. The amount
of Tier 1 Capital to be included in an insurer’s capital base is net of the following
six deductions (the last three of which were introduced under the draft GGN 110.1
Measurement of Capital Base):
• Goodwill;
• Other intangible assets;
• Deferred tax assets (net of provisions for deferred tax liabilities);
• During the second and third transition periods, all recoveries on all
reinsurance contracts if the insurer has not met the transitional reinsurance
documentation requirements;
• After the third transitional period, recoveries under each reinsurance contract that do
not meet the reinsurance documentation test; and
• For reinsurers, the premiums receivable deductions on any proportional
reinsurance treaties.
The main proposed changes in the calculation of the capital base are outlined below.
Insurance risk capital charge: Reinsurance recoveries
Reinsurance recoveries cannot be taken into account in calculating an insurer’s
minimum capital requirement unless the reinsurance contract is appropriately
documented and legally binding. APRA recognises that it may take some time for
insurers to document all reinsurance contracts, and therefore, have introduced transition
provisions. The issue of legally binding contracts is addressed in GPS 230 (refer section
2.7 below). This was the subject of APRA’s targeted reviews in 2006.
Treatment of proportional reinsurance treaties
Net premium receivable in excess of the net premium liability and the capital charge
relating to that net premium liability recorded by a reinsurer on a proportional
reinsurance contract where the underlying risks have not yet been written by the direct
insurer will be inadmissible as an asset. This will be achieved via a deduction from the
reinsurer’s Tier 1 Capital.
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