Life insurers are expected to need serious increases in capital levels to meet the proposed requirements of the Australian Prudential Regulation Authority (APRA).

Analysis of the life insurance returns – 77 companies took part in the survey, representing 97% of the industry – show the proposed insurance, asset and operational risks are driving the need for higher capital for most insurers.

APRA looked at the capital requirements for these three areas of risk for investment-linked funds and non-investment linked funds. 

“For the investment-linked statutory funds, the introduction of the operational risk charge was largely offset by the removal of the requirement to apply an investment-linked risk margin to the solvency minimum termination value,” the regulator says in its survey report.

“However, the requirement to determine an asset risk charge in respect of all admissible assets resulted in an overall increase in required capital.”

Required capital also increased for the non-investment-linked statutory funds, the survey says.

This was due to some funds being impacted by the proposed requirement to apply the termination value minimum at the proposed APRA product group level.

“APRA also observed wide variation in the margins applied for the morbidity event stress, with some insurers adopting margins similar to those prescribed for Solvency II,” the report said.

“The use of a much higher margin was comparable to the prescribed pandemic minimum for the mortality event stress and others assuming nil morbidity event stress.”

APRA admits this variation may have distorted the survey and resulted in overstatement of the proposed insurance risk charge for some insurers.

As a result APRA is revising its capital requirements for life insurers and further adjustments will be made when it conducts another quantitative impact survey.

For general insurers, the main driver for increased capital reserves was asset concentration risk.

“The asset risk charge was also greater than the existing investment risk, but this change was not as material as for asset concentration and insurance concentration risk.

“The explicit operational risk also increased required capital. The increases in required capital were partly offset by the new aggregation benefit.”

APRA is not expecting any major changes in the capital required by general insurers when it undertakes a second survey.

The technical specifications of the second survey will be released later this month with submissions from insurers due by July 31.