Selected feature: Investments and the asset
risk charge
December 2016 (released 16 February 2017)
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Investments and the asset risk charge
This feature describes emerging trends in general insurers’ investments and the implications
on capital adequacy. It also highlights how newly released statistics in the Quarterly General
Insurance Performance Statistics publication can be interpreted and used for analysis.
Findings

General insurers have slightly shifted the risk profile of their investment portfolio in recent
years. However, the total asset risk charge has remained relatively stable.

In 2013 and 2014, the counterparty quality of direct interest bearing investments for
general insurers gradually decreased, with a small shift from grade 2 to grades 3 and 4.
The distribution of the counterparty grades has remained largely unchanged in 2015 and
2016 (see appendix for definitions of the counterparty grades).

General insurers have recently increased their direct holdings in equity. Indirect equity
holdings had been on a decreasing trend in 2014 and 2015, but this trend was no longer
observed in 2016.

Whilst property investments remain a relatively low proportion of the investment portfolio
for general insurers, this has increased in recent years, particularly for indirect holdings.
Understanding the asset risk charge
The asset risk charge is the minimum amount of capital required to be held against asset
risks. The asset risk charge relates to the risk of adverse movements in the value of an
institution’s on-balance sheet and off-balance sheet exposures. Asset risk can be derived
from a number of sources, including market risk and credit risk. The asset risk charge is
determined by the impact on capital base as a result of the following stresses:







Real interest rate stress
Expected inflation stress
Foreign exchange (currency) stress
Equity stress
Property stress
Credit spread stress
Default stress
Negative capital base impacts from each stress are then aggregated allowing for
diversification impacts, with tax benefit deductions and adjustments approved by APRA to
calculate the asset risk charge. Details of the asset risk charge calculation are outlined in
GPS 114 Capital Adequacy: Asset Risk Charge.
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1. Asset risk charge
The total asset risk charge has remained relatively stable over time (figure 1). However, there
have been trends in the risk profile of investments of general insurers which have led to a
redistribution of a number of its components.
Figure 1: Components of the asset risk charge
Notes:

The black line represents the total asset risk charge

Currency, expected inflation and real interest rate stress components include both upwards and downwards components,
which contribute to the overall risk charge

‘Other components’ includes tax benefit deductions and adjustments to the asset risk charge approved by APRA
The main components of the asset risk charge that have shifted as a result of the movements
in investment risk profile are the property, equity and credit spread stress components (figure
2). The value of these stress components can be interpreted as the magnitude that the capital
base falls under a given stress.
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Figure 2: Property, equity and credit spread stress components of the asset risk charge
Credit spread stress mostly impacts interest bearing investments compared to other balance
sheet items. The trend of an increasing credit spread stress component has been largely
associated with the counterparty grade distributions of direct interest bearing investments
from grade 2 to grades 3 and 4. This is reflective of the changes in default risk associated with
the credit spread stress1.
The trends in the equity stress component have largely aligned with the trends of total equity
investments. However, the trends in the equity stress component have been further
exacerbated by the movements in dividend yields. An increasing trend in dividend yields up
until the end of 2015 had contributed to lower adverse stress test outcomes, which contributed
to the decreasing trend in the equity stress component.
The increase in the property stress component for general insurers was largely related to the
increase in total property investments. To a lesser extent, this was also impacted by declines
in rental yields, which led to larger negative stress test outcomes on property investments.
Additional details on the changes in the investment portfolio for general insurers are explored
in the next section.
1
The credit spread stress component measures the impact on the capital base of an increase in credit spreads
and risk of default. However, the default stress component applies to all credit or counterparty exposures that
have not been affected by the credit spread stress.
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2. Changes in investment portfolio for general insurers
a) Direct interest bearing investments
Interest bearing investments continue to make up most of the investment portfolio for general
insurers, particularly in direct holdings. As at 31 December 2016, direct interest bearing
investments was $51.0 billion, which was 74.8 per cent of total investments.
Whilst this component of the investment portfolio has shown relatively little variability over
time, there were shifts in the underlying counterparty composition (see appendix for
definitions of the counterparty grades).
The proportion of direct interest bearing investments with counterparty grade 1 for general
insurers remained relatively stable in recent years. However, the composition of interest
bearing investments has shifted from counterparty grade 2 to grades 3 and 4 for a number of
institutions. This trend has since stabilised in 2015 and 2016 (figure 3).
Figure 3: Direct interest bearing investments by counterparty grade
As at 31 December 2016, there were 26.1 per cent of direct interest bearing investments in
counterparty grade 2, down from 33.8 per cent as at 31 December 2013. In contrast, 20.0 per
cent of direct interest bearing investments were with counterparty grades 3 and 4 as at 31
December 2016, up from 13.9 per cent as at 31 December 2013.
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b) Equity investments
Total equity investments (direct and indirect) for general insurers was $3.2 billion as at 31
December 2016, which represented 4.8 per cent of total investments. Of this, 50.7 per cent
were indirect holdings. Whilst total equity investments had no clear trend in recent years,
there were different trends for direct and indirect holdings (figure 4).
Figure 4: Equity investments by direct and indirect holdings
Direct equity investments has steadily trended upwards in recent years. As at 31 December
2016, direct equity investments was $1.6 billion, an increase of 47.6 per cent from 31
December 2013 ($1.1 billion). In contrast, indirect equity investments trended downwards in
2014 and 2015, but this trend was no longer observed in 2016. These trends were largely
associated with investment reallocations from large insurance groups.
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c) Property investments
Property investments remain a relatively low proportion of the investment portfolio for
general insurers. However, there has been growth overall in this component in recent years
(figure 5). As at 31 December 2016, property investments made up 1.3 per cent of the total
investment portfolio, which was up from 0.8 per cent as at 31 December 2013.
Figure 5: Property investments by direct and indirect holdings
As at 31 December 2016, total property investments (direct and indirect) for general insurers
was $0.9 billion. This was an increase of 77.4 per cent compared to 31 December 2013 ($0.5
billion). The increase in total property investments was largely associated with a number of
institutions increasing their holdings of indirect property investments. Indirect property
investments made up 85.6 per cent of total property investments as at 31 December 2016,
which was up from 53.5 per cent as at 31 December 2013.
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Appendix – Counterparty grade definitions
The following table shows long-term counterparty grade definitions according to agency
ratings. Additional detail can be found in GPS 001 – Definitions.
Table 6: Long-term counterparty grade definitions according to agency ratings as per GPS 001
Grade
1
2
3
4
5
6
7
Standard
& Poor’s
Moody’s
AM Best
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBBB+
BB
BBB+
B
B-
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Debt
aaa
aa+
aa
aaa+
a
abbb+
bbb
bbbbb+
bb
bbb+
b
b-
Below B-
Below B3
Below b-
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FSR
A++
A+
A
AB++
B+
B
BC++
C+
C
CBelow C-
Fitch
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBBB+
BB
BBB+
B
BBelow B-
9
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