The prudential regulator has finalised capital and reporting framework changes in response to the introduction of Australian Accounting Standards Board 17 Insurance Contracts (AASB 17), the new accounting rule that will take effect next year.

The Australian Prudential Regulation Authority (APRA) says it is also conducting a “targeted” consultation on additional requirements to ensure regulatory capital levels are sufficient to protect the prudential soundness of insurers and encourage “appropriate” accounting decisions.

APRA says the “targeted” consultation follow-up reflects the changes that the new accounting standard may have on the balance sheet of insurers depending on accounting decisions they make.

The regulator says its 2020 and 2021 quantitative impact studies identified instances where an insurer’s accounting equity – or net assets – under AASB 17 was significantly lower than the capital base.

“APRA is seeking to address this issue through a targeted consultation on proposed additional requirements to ensure that regulatory capital levels are sufficient to protect the prudential soundness of insurers while incentivising them to make appropriate accounting decisions,” the regulator said.

Closing date for submissions to the consultation is October 31.

The regulator says the finalisation of the capital and reporting framework changes include clarifications of the regulatory capital calculation given the introduction of the new accounting standard.

It also made clarifications to enable insurers to use the AASB 17 accounting policies and principles to report financial statement information as well as additional data reporting requirements to ensure APRA continues to have adequate details for capital assessments and profitability monitoring.

APRA says the revised prudential and reporting standards will come into effect from July 1 next year.

Click here for the APRA response paper.