The Australian Prudential Regulation Authority (APRA) has updated its guidance on capital adequacy for insurers and authorised deposit-taking institutions (ADIs).
The revisions include a new frequently asked question (FAQ), updates to 19 FAQs, and the removal of 11 others to align with changes in Prudential Standards.
The revised FAQs clarify requirements across general insurance, life insurance, and private health insurance sectors, covering standards APS 111, GPS 112, LPS 112, and HPS 112. These standards address regulatory capital instruments such as Common Equity Tier 1 (CET1), Additional Tier 1 (AT1), Tier 2 (T2), and Mutual Equity Interests (MEIs).
The updates incorporate changes to the following Prudential Standards:
APRA emphasised that the FAQs are intended to provide clarity for regulated entities and are not exhaustive or legally binding. This move comes as the regulator calls for stronger insurance foundations to manage future challenges.
Entities are advised to seek professional advice for specific circumstances and adhere to the requirements of the relevant standards.
APRA’s guidance addresses the treatment of capital instruments issued by fully consolidated subsidiaries of insurers and ADIs. Eligible capital may be recognised at the Level 2 group, subject to deductions for surplus amounts exceeding minimum requirements.
For general insurers, the rules on minority interest apply solely to CET1 capital. For ADIs, these restrictions extend to CET1, AT1, Tier 2, and total capital.
APRA requires an analysis of how these rules affect eligible capital at each tier and compliance with the relevant prudential standards.
Additionally, subsidiaries’ instruments must address regulatory adjustments and provisions for conversion or write-off under APS 111 and APS 222.
Where capital instruments issued by subsidiaries of insurers or ADIs are excluded from the Level 2 group, they do not need to include a non-viability trigger event tied to the Level 2 group.
However, such exclusion from trigger terms would make the instruments ineligible for future inclusion in Level 2 capital.
For life insurers, APRA outlined specific expectations for AT1 and Tier 2 instruments:
AT1 instruments must convert or be written off before Tier 2 instruments tied to a statutory fund. Conversion or write-off must be limited to the amount needed to restore the viability of the company or fund, and partial write-offs are not permitted in cases requiring public sector intervention.
Instruments issued by life insurers must comply with subordination requirements under LPS 112 and the Life Insurance Act 1995.
APRA expects mechanisms to ensure subordinated noteholders do not receive payments ahead of senior creditors, including policyholders in other statutory funds.
For general insurers, capital instruments must be subordinate to all senior creditors, including those in overseas jurisdictions.
Mechanisms must be in place to ensure subordinated noteholders in Australia are not prioritised over offshore senior creditors, consistent with the Insurance Act 1973.
