The Australian Prudential Regulation Authority (APRA) today issued its second consultation package on proposed refinements to the general insurance prudential framework to recognise the differing risk profiles of insurers. The package comprises a response paper and draft prudential standards and prudential practice guides. The proposed refinements have been developed in the context of the Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Act 2007, enacted on 24 September 2007. The refinements are expected to apply from 1 July 2008.
The response paper outlines APRA’s response to submissions received on the discussion paper released by APRA on 31 July 2007. It contains proposals for the categorisation of insurers that are largely aimed at clarifying and simplifying APRA’s requirements of branches and subsidiaries of foreign insurers. The proposals will also scale back some of the requirements of smaller insurers and captives while maintaining the integrity of APRA’s prudential framework.
The paper also contains a number of proposals applying to all insurers. They include the recognition of ‘kangaroo bonds’, the measurement of capital and, importantly, certain reinsurance and investment-related measures. On reinsurance, the paper contains a proposal aimed at encouraging foreign reinsurers not authorised by APRA to lodge security in Australia, after a grace period, in respect of amounts recoverable by APRA-authorised insurers from these reinsurers. In cases where these reinsurers do not lodge security, APRA-authorised insurers will be required, after the grace period, to hold capital to match the unsecured recoverables.
APRA Member Mr John Trowbridge said that "reinsurance is effectively a substitute for capital and it is in the interests of all policyholders and claimants that the funds to support insurers’ claims liabilities, including amounts recoverable from reinsurers, be properly secured in Australia."
On investment risks, APRA is proposing revised capital requirements that better reflect the volatility of equity and property investments. The required capital would be higher except in cases where insurers use derivatives to hedge their risks, when the required capital would be lower. APRA will also ‘look through’ unit trusts to the underlying investments to ensure the required capital responds to the risk of those investments.
The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry. APRA is funded largely by the industries that it supervises. It was established on 1 July 1998. APRA currently supervises institutions holding approximately $3 trillion in assets for 21 million Australian depositors, policyholders and superannuation fund members.
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