Insurers should welcome the latest changes to APRA's
package of refinements to the general insurance prudential
framework, as they will allow unsecured reinsurance
recoverables from non-APRA authorised reinsurers to be
In December APRA had proposed that the reinsurance
recoverables charge would be calculated using a 100 percent
capital factor on and after the second balance date after the
date of loss unless the recoverables are from APRA-authorised
reinsurers or are otherwise supported by suitable security
arrangements in Australia.
This would have meant that any reinsurance recoverables from
non-APRA authorised reinsurers from the second balance date
following claim occurrences would not be recognised, except
where the recoverables are supported by security arrangements
APRA has now decided to recognise these recoverables. It
will apply a risk-based scale based on reinsurer ratings. The
lower the rating, the higher the capital factor applicable to
unsecured reinsurance recoverables. So, for example, if the
reinsurer has a rating equivalent to Standard &
Poor's AAA, the capital factor will be 20 percent (the
lowest available). Risks rated BB+ and below will attract a
capital factor of 100 percent. The 100 percent capital factor
will also apply to recoverables that become receivables and are
overdue for more than six months.
Accompanying this however will be greater controls; APRA
will require more consideration of the quality of the
reinsurance recoverables. In practical terms, APRA says it will
expect more "explicit attestation" from the appointed
actuary, management and the board as to the value of the
insurer's reinsurance recoverables at each balance
Some Movement On Investment Capital Factors
December's proposals suggested higher capital
factors for certain classes of investments. While maintaining
higher factors, APRA has reduced the increase:
instead of an increase to 25 percent for listed equities,
the capital factor will be 16 percent
instead of an increase to 30 percent for unlisted
equities, the capital factor will be 20 percent.
The intended starting date of 1 July 2008 remains in place
for the whole package, except for the revisions relating to
reinsurance recoverables which will be introduced on 31
Later in April APRA will release drafts of the prudential
standards incorporating the revised position for public
comment, with final standards expected in early June 2008.
In 2009 APRA is also planning to undertake a wider minimum
capital adequacy recalibration project, so there could be more
changes to the capital required to be held for equity and
property investment risks.
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general guide to the subject matter. Specialist advice should
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