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Life Insurance (prudential standard) determination

No. 8 of 2023

Prudential Standard LPS 114 Capital Adequacy: Asset Risk Charge

Life Insurance Act 1995

I, Helen Rowell, a delegate of APRA:

    (a)          under subsection 230A(5) of the Life Insurance Act 1995 (the Act) revoke Life Insurance (prudential standard) determination No. 4 of 2012, including Prudential Standard LPS 114 Capital Adequacy: Asset Risk Charge made under that Determination; and

    (b)          under subsection 230A(1) of the Act determine Prudential Standard LPS 114 Capital Adequacy: Asset Risk Charge, which applies to all life companies, including friendly societies.

This instrument commences on 1 July 2023.
Dated: 24 May 2023

[Signed]

Helen Rowell
Deputy Chair

Interpretation

In this instrument:

APRA means the Australian Prudential Regulation Authority.

friendly society has the meaning given in section 16C of the Act.

life company has the meaning given in the Schedule to the Act.

Schedule

Prudential Standard LPS 114 Capital Adequacy: Asset Risk Charge, comprises the document commencing on the following page.

Prudential Standard LPS 114

Capital Adequacy: Asset Risk Charge
Objectives and key requirements of this Prudential Standard
This Prudential Standard requires a life company to maintain adequate capital against the asset risks associated with its activities.
The ultimate responsibility for the prudent management of capital of a life company rests with its Board of directors. The Board must ensure the life company maintains an adequate level and quality of capital commensurate with the scale, nature and complexity of its business and risk profile, such that it is able to meet its obligations under a wide range of circumstances.
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 fund's on-balance sheet and off-balance sheet exposures. Asset risk can be derived from a number of sources, including market risk and credit risk.
This Prudential Standard sets out the method for calculating the Asset Risk Charge. This charge is one of the components of the Standard Method for calculating the prescribed capital amount for life company statutory funds and general funds.

Table of Contents
Authority
Application and commencement
Interpretation
Asset Risk Charge
Asset Risk Charge calculation
Assets and liabilities to be stressed
Management actions
Real interest rates stress
Expected inflation stress
Currency stress
Equity stress
Property stress
Credit spreads stress
Default stress
Aggregation formula
Adjustments and exclusions
Previous exercise of discretion
Attachment A - Off-balance sheet exposures
Attachment B - Extended Licensed Entity

Authority
     1. This Prudential Standard is made under paragraph 230A(1)(a) of the Life Insurance Act 1995 (the Act).

Application and commencement
2.             This Prudential Standard applies to all life companies including friendly societies (together referred