The Australian Prudential Regulation Authority (APRA) has clarified its expectations for insurers’ calculation of the premium liability offset.

The offset does not include future reinsurance costs, the regulator says. And it is not necessary to split the diversified risk margin into a catastrophic and attritional loss component when calculating the offset.

It comes after the regulator sought feedback on some of its draft prudential practice guides.

Submissions broadly supported the draft guides but requested further information and clarification on certain aspects, APRA says.

The regulator has acted to allow more flexible capital management for insurers after consulting on its guide on the internal capital adequacy assessment process (ICAAP).

Linking trigger levels with related actions to manage the capital position would lead to overly rigid capital management, according to some submissions.

Some submissions suggest a range of actions should be allowed in response to particular triggers, to accommodate flexible and responsive reactive measures.

APRA has amended its wording to allow for sets of potential actions, including changes to product pricing, that will vary according to the nature of the stress.

Some submissions questioned the definition of “minimally compliant”, suggesting a regulated institution is either compliant or non-compliant.

APRA has amended the guide to ensure it captures institutions that are not operating within the “spirit or intent” of applicable prudential standards.

Submissions also requested guidance on the definition of a non-viability trigger event, which APRA has declined to provide.

Some respondents noted information in the ICAAP report was too detailed to be meaningful to boards.

But APRA has decided not to amend the report, saying it provides boards and the regulator with “adequate information”.

The regulator has also consulted on its asset risk charge information paper to gather more information on the practical application of the default stress.

The regulator has clarified the treatment of exchange-traded and over-the-counter derivatives, to ensure assets of this type are appropriately stressed.

It says when derivatives are used for hedging purposes, they can reduce the impact of the asset risk stresses.