Australia
Answer ... Capital is a measure of the financial cushion available to an institution to absorb any unexpected losses that it experiences in running its business. For an insurer, this might be an unexpectedly high volume of claims in the wake of a natural disaster, for example. Maintaining and managing capital effectively is thus is an important function of a regulated entity.
The Australian Prudential Regulatory Authority (APRA), as prudential regulator, sets the minimum level of required capital for insurers to ensure a high degree of safety. Prudential Standard GPS 110, Capital Adequacy, requires a general insurer or Level 2 insurance group, among other things, to:
- have an internal capital adequacy assessment process;
- maintain required levels of capital; and
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determine its prescribed capital amount having regard to a range of risk factors that may adversely impact its ability to meet its obligations. These factors include:
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- insurance risk;
- insurance concentration risk;
- asset risk;
- asset concentration risk; and
- operational risk.
Under GPS 110, the required level of capital for regulatory purposes is referred to as the Prudential Capital Requirement (PCR). The PCR for a regulated institution is determined either by:
- applying the standard method set out in the prudential standard;
- using an internal model developed by the regulated institution to reflect the circumstances of its business; or
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using:
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- a combination of the methods specified in either of the bullet points above; and
- any supervisory adjustment determined by APRA under the prudential standard.
APRA will generally not consider applications where the start-up capital is less than the minimum required in Prudential Standard GPS 110 Capital Adequacy, or is likely to fall below this level in the future. For most insurers, this is subject to a minimum of A$5 million, which will require an adequate buffer. For certain captive insurers, a minimum of A$2 million applies.
Australia
Answer ... APRA requires an insurer to have sufficient liquidity to meet all cash outflow commitments to policyholders (and other creditors) as and when they fall due. The nature of insurance activities means that the timing and amount of cash outflows are uncertain. This uncertainty may affect the ability of an insurer to meet its obligations to policyholders or may require insurers to incur additional costs through, for example, raising additional funds at a premium on the market or the sale of assets.
Typically, in relation to liquidity, the risk management framework will include:
- consideration of the level of mismatch between expected asset and liability cash flows under normal and stressed operating conditions;
- the liquidity and realisability of assets;
- commitments to meet insurance and other liabilities;
- the uncertainty of incidence, timing and magnitude of insurance liabilities;
- the level of liquid assets that must be held by the insurer; and
- other sources of funding, including reinsurance, borrowing capacity, lines of credit and the availability of intra-group funding.