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    APRA Proposes New Capital Framework for Private Health Insurance

    December 03, 2019

    APRA launched a consultation on updating and strengthening the capital framework for the private health insurance (PHI) sector. The changes in the capital framework are aimed at improving the sensitivity of prudential capital requirements to the risks private health insurers face and improving the comparability of performance between insurers. The consultation will close on March 27, 2020, with APRA expected to release draft updated prudential standards in the second half of next year for further consultation. APRA intends to implement the finalized PHI capital framework from July 01, 2023 to align with its proposed adoption of Australian Accounting Standards Board (AASB) 17 on Insurance Contracts, for prudential purposes.

    The discussion paper describes the proposed structure for the capital framework for private health insurers. The proposals aim to increase the risk-sensitivity of capital requirements to the activities of insurers and to improve the alignment of capital standards across the insurance industries it regulates. The proposals in the discussion paper are aimed to:

    • Align the PHI capital framework with the framework applicable to life and general insurers, unless characteristics of the industry warrant a different approach
    • Integrate changes stemming from AASB 17
    • Apply the capital framework to the entire business of an insurer, rather than just the health benefits fund

    APRA’s proposals have been developed from the basis of the existing capital standards applying to the life and general insurance industries (known as the LAGIC framework). The LAGIC framework reflects the overall approach  of APRA to capital. By starting with the LAGIC framework, APRA aims to strengthen prudential outcomes for policy holders and improve the resilience of the PHI industry to financial stresses. Consistency of capital frameworks across the insurance sectors would allow for a common language for capital and support discussions (about capital) between APRA and insurers and within groups that contain multiple APRA-regulated insurers. This will also improve alignment with the international prudential regulation of insurance, as established through the Insurance Core Principles (ICPs) developed by IAIS.

    The review of the PHI capital framework represents the third and final phase of the PHI Policy Roadmap, which was released in 2016. Phase 1 (risk management) and Phase 2 (governance) of the Roadmap are complete. Although these proposals are expected to increase minimum capital requirements for insurers once implemented, the current strong capital levels mean APRA does not expect a material need to raise additional capital across industry. The impact of these reforms on premiums is expected to be immaterial, given that capital requirements are not a material driver of PHI premiums. 


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    Comment Due Date: March 27, 2020

    Effective Date: July 01, 2023 (proposed)

    Keywords: Asia Pacific, Australia, Insurance, Private Health Insurers, Capital Requirements, PHI Roadmap, LAGIC, AASB 17, Insurance Contracts, IFRS 17, ICPs, APRA

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