Document ID: chunk:federal_register_of_legislation:F2023L00733:reg:7:p2
Version: federal_register_of_legislation:F2023L00733
Segment Type: reg
Provision Reference: reg 7 (pt 2/7)
Character Range: 29020–31863

to be performed four times – once for each combination of stresses. If all three of the bidirectional stresses have a non-zero risk charge component for stresses in both directions, the aggregation will need to be performed eight times.

Adjustments and exclusions
79.         APRA may, by notice in writing to a private health insurer, adjust or exclude a specific requirement in this Prudential Standard in relation to that private health insurer.

Attachment A – Off-balance sheet exposures
     1. A fund may be exposed to various asset risks through transactions or dealings other than those reflected on its balance sheet.
2.             The principle of considering the effective exposure of a fund to asset risks must be applied to any off-balance sheet exposures of the fund. Changes to the capital base arising from off-balance sheet exposures must be recognised in each of the asset risk stresses.
3.             As a general rule, a private health insurer must not be exposed to a counterparty for an unlimited amount and any exposure must be for a finite period. An exception to this rule is where a potential credit exposure results from reinsurance of an insurance contract that is required by law to be unlimited. Before a private health insurer does enter into an arrangement with a counterparty that does not have appropriate limits, it must:
(a)          notify APRA;
(b)          explain how this arrangement complies with its Risk Management Strategy; and
(c)          explain how it will be valued for the purposes of capital adequacy calculations.
    Such an exposure may cause APRA to apply a supervisory adjustment in accordance with HPS 110.

Direct credit substitutes
4.             To the extent that a private health insurer has issued instruments of the following kind:
(a)          guarantees (including written put options serving as guarantees); or
(b)          letters of credit; or
(c)          any other credit substitute (other than insurance) in favour of another party,
    the private health insurer is exposed to the risk of having to make payment on these instruments should a default event occur that requires the private health insurer to pay an amount under the instrument. The risk of such events occurring must be considered in the default stress. The default factors must be applied to the face value of each exposure. Where the credit substitute is supported by collateral or a guarantee, the provisions of relevant paragraphs from Attachment B may be applied.

Attachment B – Treatment of collateral and guarantees as risk mitigants
     1. The impact of applying the asset risk stresses may be reduced where the fund holds certain types of collateral against an asset, or where the asset has been guaranteed, as a means of reducing risk.
2.             For a private health insurer where the