APRA has set out draft prudential requirements for the use of the internal model-based method in the calculation of insurers’ minimum capital requirements.

A consultation package released last week reflects developments in the use of internal models since APRA’s first requirements were introduced in 2002.

Guidelines follow concepts developed for internal models in authorised deposit-taking institutions under the Basel II framework, but tailor certain risk aspects to insurance.

APRA’s approach concurs with guidelines of the International Association of Insurance Supervisors. APRA Executive Member John Trowbridge says the move will encourage better risk management.

Submissions to the package close on August 15.

APRA will release final prudential standards for the supervision of insurers in the fourth quarter, with an effective date of January 1 next year.