APRA proposes changes to capital and reporting frameworks for insurance

The Australian Prudential Regulation Authority (APRA) has proposed amendments to the capital and reporting frameworks for insurance following the introduction of the Australian Accounting Standards Board 17 Insurance Contracts (AASB 17).

APRA's life and general insurance capital (LAGIC) framework and reporting framework are based on the current accounting standards replaced when AASB 17 comes into effect on January 01, 2023. The regulator will also update other aspects of LAGIC, which has not been substantively reviewed since it was implemented in 2013.

APRA's approach to integrating AASB 17 into its capital and reporting frameworks is based on the following principles:

• Maintain the resilience of APRA's capital and reporting frameworks;
• Do not seek to generally increase or reduce capital levels;
• Minimise the regulatory impact for industries; and
• Align the frameworks to AASB 17 where appropriate.

For the capital framework, the regulator will maintain most of the existing requirements for the regulatory capital calculation for general insurers and life insurers. Meanwhile, for the reporting framework, insurers can use the AASB 17 accounting policies and principles to report financial statement information to APRA.

Additional data requirements are proposed to ensure that APRA continues to have appropriate data for capital assessments and profitability monitoring.

APRA warns the industry that failing to update the frameworks in response to the introduced AASB 17 will require insurers to maintain two different valuations, actuarial, accounting, and reporting systems and might result in unintended and unnecessary changes to capital levels.

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The proposals are also relevant for private health insurers, given APRA's intention to align the private health insurance (PHI) capital framework to LAGIC.

Released on the same day as the proposed amendments to the capital and reporting frameworks for insurance, APRA's response paper and draft prudential standards include proposed reforms intended to increase the PHI industry's financial resilience and confidence that private health insurers can continue to pay all legitimate claims from policyholders even under severe stress.

APRA will receive feedback on the new capital framework and draft standards until March 31, 2022. It aims to release the final standards in the second half of 2023.