Document ID: chunk:federal_register_of_legislation:F2023L00690:front:0:p2
Version: federal_register_of_legislation:F2023L00690
Segment Type: other
Provision Reference: 
Character Range: 2712–5833

calculating the Asset Risk Charge. This charge is one of the components of the Standard Method for calculating the prescribed capital amount for general insurers and Level 2 insurance groups.

Table of Contents
Authority
Application and commencement
Level 2 insurance groups
Interpretation
Asset Risk Charge
Asset Risk Charge calculation
Assets and liabilities to be stressed
Real interest rate 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 – Treatment of collateral and guarantees as risk mitigants
Attachment C – Extended Licensed Entity
Attachment D – Level 2 insurance groups

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.

Level 2 insurance groups
    4.             Certain adjustments to the methodologies and calculations in this Prudential Standard apply to Level 2 insurance groups. These adjustments are set out in Attachment D.

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

Asset Risk Charge
    6.             This Prudential Standard sets out the method for calculating the Asset Risk Charge for a regulated institution using the Standard Method to determine its prescribed capital amount.
    7.             The Asset Risk Charge relates to the risk of an adverse movement in a regulated institution's capital base due to credit or market risks. Both assets and liabilities may be affected. Off-balance sheet exposures may also be affected.

Asset Risk Charge calculation
    8.             The Asset Risk Charge is calculated as:
       (a)          the 'aggregated risk charge component' determined in accordance with paragraph 9; less
       (b)          any 'tax benefits' determined in accordance with paragraphs 12 to 14.

Aggregated risk charge component
    9.             A regulated institution must calculate the 'risk charge components', as defined in paragraph 10, by considering the impact on the capital base of the regulated institution of a range of stresses. These risk charge components are then aggregated using the formula set out in paragraphs 78 to 80, which allows for the likelihood of the scenarios modelled by the stress tests occurring simultaneously. The result of applying the formula is defined as the 'aggregated risk charge component'.

Risk