The Australian Prudential Regulation Authority (APRA) has confirmed that life insurers may begin using a new capital calculation method for longevity products from July 1, 2026, after finalising prudential standards and a reporting template for which no industry submissions were received during consultation. The draft reporting template will proceed without changes. The reforms centre on the Advanced Illiquidity Premium (AILP), an optional factor life insurers can apply when calculating capital requirements for longevity products. The July 1 effective date has been confirmed.
The AILP is designed to bring capital settings into closer alignment with the long-term nature of longevity liabilities. Eligible products include all annuity types – among them term certain annuities – as well as lifetime income products and retirement income stream products meeting specified criteria. The amended prudential standards use the term “illiquid liabilities” to describe this product group collectively. The reforms also introduce controls over governance, reporting, and the composition of assets backing longevity product portfolios. APRA conducted two rounds of consultation before issuing the final standards. The first sought feedback on the review’s direction in June 2025. Draft standards followed in October 2025. Nine submissions were received in response to the draft standards.
Industry submissions strongly supported the reforms overall, though several respondents raised concerns about specific parameters – and APRA held its position on each. The risk allowance floor of 45% of the long-term average spread drew the most criticism. Respondents said the figure exceeded international norms, pointing to the European Union’s Solvency II framework, which sets its equivalent floor at 35%. Submissions argued that historical default data supported a lower figure and that other mechanisms within the framework already accounted for misestimation and basis risk.
APRA kept the 45% floor, stating that direct comparisons with overseas regimes are difficult given structural differences across regulatory frameworks. The regulator acknowledged that in environments where credit spreads are particularly narrow — as they currently are — the additional capital benefit from applying the AILP over the Standard Illiquidity Premium may be limited. APRA attributed this to the infrequent occurrence of such conditions historically, which it said was insufficient grounds to lower the floor.
The second area of concern involved the adjustment factor governing how increases in the AILP flow through to the credit spread stress charge under LPS 114. Respondents argued the factor was redundant given existing protections built into the AILP calculation, and that international standards allow the full change in spreads to be reflected. APRA disagreed, stating that during stress periods, rising credit spreads can inflate the illiquidity premium, and that basis risk between reference portfolios and actual asset holdings remains a genuine concern. APRA noted that regulators in the UK and Singapore apply comparable reduction factors.
On assets backing longevity products, industry views were mixed. Some respondents sought the removal of limits on unrated and privately rated assets, while others accepted the restrictions but pushed for greater flexibility. APRA retained the limits, citing the risk insensitivity of current capital requirements for unrated assets. Such assets are assigned a counterparty grade of 5 under LPS 114 regardless of their underlying risk profile, which APRA said can lead to an understatement of the asset risk charge.
Life companies that opt into the AILP should submit data quarterly and annually. Quarterly filings, prepared on an unaudited basis, are due within 20 business days of the end of the relevant reporting period. Annual filings, prepared on an audited basis, should be lodged within three months of the financial year end. Reporting is at Level 1 consolidation. The template spans seven data tables covering:
APRA said the collection was structured to keep the compliance load manageable while giving the regulator visibility over how the AILP is applied across the industry. The data will also be used to track developments in the longevity product market and to support future reviews of AILP calibration. APRA said it intends to incorporate the reporting requirements into its formal standards framework through a separate consultation process.
Life companies planning to adopt the AILP from July 1 should contact their APRA supervisor before doing so. Where a company applies the AILP ahead of its Financial Condition Report (FCR) submission deadline, APRA has asked that the Appointed Actuary’s declaration be filed separately, along with supporting documents setting out the methodology and assumptions used to determine the AILP. This gives APRA visibility of the insurer’s approach ahead of the formal FCR and Actuarial Valuation Report submission. Insurers wishing to provide feedback on the reporting approach may send written submissions to [email protected]. The consultation deadline of May 12, 2026, has now passed. APRA noted it may revisit the AILP’s parameters at a later stage as activity in the longevity products market develops.
