Document ID: chunk:federal_register_of_legislation:F2023L00675:body:0:p2
Version: federal_register_of_legislation:F2023L00675
Segment Type: other
Provision Reference: 
Character Range: 2783–5957

capital amount for general insurers and Level 2 insurance groups.

Table of Contents
Authority
Application and commencement
Interpretation
Operational Risk Charge
Calculation of the Operational Risk Charge
Adjustments and exclusions
Previous exercise of discretion

Authority
     1. This Prudential Standard is made under section 32 of the Insurance Act 1973 (the Act).

Application and commencement

2.             This Prudential Standard applies to each:

(a)          general insurer authorised under the Act (insurer); and

(b)          Level 2 insurance group as defined in Prudential Standard GPS 001 Definitions (GPS 001).

    Where a requirement is made in respect of a Level 2 insurance group, the requirement is imposed on the parent entity of the Level 2 insurance group.

3.             This Prudential Standard applies to insurers and Level 2 insurance groups (regulated institutions) from 1 July 2023.

Interpretation

4.             Terms that are defined in GPS 001 appear in bold the first time they are used in this Prudential Standard.

Operational Risk Charge

5.             This Prudential Standard sets out the method for calculating the Operational Risk Charge for a regulated institution using the Standard Method to determine its prescribed capital amount.

6.             The Operational Risk Charge is the minimum amount of capital a regulated institution must hold against the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.

Calculation of the Operational Risk Charge

    7.             The Operational Risk Charge for a regulated institution is calculated as the sum of:

       (a)          the Operational Risk Charge for inwards reinsurance business (ORCI) defined in paragraph 9; and

       (b)          the Operational Risk Charge for business that is not inwards reinsurance business (ORCNI) defined in paragraph 10.

    The Operational Risk Charge for a Level 2 insurance group is calculated after consolidation of intra-group exposures.

    8.             For the purposes of paragraphs 9 and 10:

       (a)          GP1 is written premium revenue (gross of reinsurance) for the 12 months ending on the reporting date;
       (b)          GP0 is written premium revenue (gross of reinsurance) for the 12 months ending on the date 12 months prior to the reporting date;
       (c)          Written premium revenue is the amount charged in relation to accepting risk from the insured. For the purposes of the Operational Risk Charge calculation, this includes levies imposed by state and territory governments, and revenue relating to portfolio transfers and unclosed business;
       (d)          NL is the central estimate of insurance liabilities (net of reinsurance) determined in accordance with Prudential Standard GPS 340 Insurance Liability Valuation (GPS 340), at the reporting date[1]; and
       (e)          |GP1 – GP0| is the absolute value of the difference between GP1 and GP0.
    All transfers of insurance business made in accordance with the Act must be recognised in line with the corresponding requirements under Australian