Document ID: chunk:federal_register_of_legislation:F2023L00690:reg:7:p4
Version: federal_register_of_legislation:F2023L00690
Segment Type: reg
Provision Reference: reg 7 (pt 4/9)
Character Range: 36653–39653

to include surety bond exposures within the insurer's assessment of insurance liabilities, as determined under GPS 340, and to apply the relevant capital factors specified in Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Charge. For the purposes of calculating net outstanding claims liabilities and net premiums liabilities (as determined under GPS 340), the regulated institution may treat any risk mitigation arrangement as if it were reinsurance.

    8.             A regulated institution seeking APRA's approval for this approach outlined in paragraph 7 of this Attachment would need to include with its application a written confirmation from the regulated institution's Appointed Actuary that that person is able to appropriately measure the risk of the surety bond business within the regulated institution's insurance liabilities.

Attachment B – Treatment of collateral and guarantees as risk mitigants
     1. The impact of applying the asset risk stresses may be reduced where the regulated institution holds certain types of collateral against an asset, or where the asset has been guaranteed, as a means of reducing risk.
     2. For a regulated institution where the assets in question are reinsurance recoverables due from non-APRA-authorised reinsurers, different rules regarding treatment of collateral and guarantees apply (refer to paragraphs 6 to 10 of this Attachment).

Collateral
3.             Collateral held against an asset may be considered in place of the asset if this would reduce the Asset Risk Charge. Where the fair value of the collateral does not cover the full value of the asset, the collateral must only replace that part of the asset that is covered by the collateral.
4.             Collateral may be recognised in place of an asset only to the extent that it takes the form of a registered charge, registered mortgage or other legally enforceable security interest in, or over, an 'Eligible Collateral Item'. 'Eligible Collateral Items' are cash, government securities, or debt obligations (i.e. loans, deposits, placements, interest rate securities and other receivables) where the counterparty has a counterparty grade of 1, 2 or 3. The Eligible Collateral Item must also be held for a period not less than that for which the asset is held.

Guarantees
5.             The stresses applied in the credit spreads and default stresses may be determined using the counterparty grade of a third-party guarantor if the guarantee is explicit, unconditional, irrevocable and legally enforceable for the remaining term to maturity of the related asset. The guarantor must have a counterparty grade (or for governments, a long-term foreign currency credit rating) of 1, 2 or 3. Guarantees provided by the regulated institution's parent or a related entity are not eligible for this treatment.

Collateral, guarantees and letters of credit in respect of reinsurance recoverables due from non-APRA authorised reinsurers[11]
    6.             Where a