LAGIC costs clarified for insurers

Insurance providers have some clarity on capital requirements under new Life and General Insurance Capital (LAGIC) standards after the Australian Prudential Regulation Authority (APRA) nutted out transition arrangements with Challenger and AMP announced the impact of the standards on its capital.

Challenger will self-fund the costs, which are estimated to be between $110 million and $125 million per annum for three years, with the first increase coming into effect on 1 January 2014.

Existing subordinated debt tranches will be eligible as regulatory capital until the first call date after 1 January 2013, when it will amortise over a minimum five-year period.

Challenger's largest subordinated debt tranche will be eligible as Tier 2 capital until 2017, and can remain partially eligible until December 2021. It can remain outstanding until its legal maturity in 2037.

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The company also has three years to transition to the Tier 1 capital minimum requirement of 80 per cent regulatory capital.

AMP expects the impact of LAGIC on its life company statutory funds to be approximately $200 million, which it also intends to self-fund.

AMP's North guarantee product and life company shareholder funds would also be impacted by the revised prudential standards, but the overall impact would be metered out by management actions set for the second half of 2012, it said.

The company had no subordinated debt in its life insurance business and said costs related to asset stresses, operational risk, the treatment of excess policyholder capital and deferred tax assets which would be partially offset by a reduction in insurance risk capital.

Final arrangements will be confirmed in Q4 after APRA releases the remaining prudential LAGIC standards in October. APRA began the LAGIC review in May 2009, releasing a number of standards in May this year.