On 12 June 2025, the Australian Prudential Regulation Authority (APRA) issued a consultation paper on modifying the capital framework for annuities.
In summary the proposals redesign the illiquidity premium in Prudential Standard LPS 112 Capital Adequacy: Measurement of Capital (LPS 112). Specifically, APRA proposes to allow a bigger liquidity premium where cash flows from assets backing annuities are more closely matched to liabilities. Under this approach, the size of the illiquidity premium for a product could reflect the characteristics of the relevant asset portfolio. Closer matching of assets and liabilities would result in a higher discount rate and hence lower capital requirements.
Tables
The consultation paper has two tables:
- Table A sets out potential changes to the components of the current formula in LPS 112 that is used to calculate the illiquidity premium.
- Table B outlines the introduction of proposed risk controls that would have to be satisfied by life insurers that use the redesigned illiquidity premium in LPS 112.
Next steps
The deadline for comments on the consultation paper is 25 July 2025.