Australia: Fighting Contagious Issues: APRA Releases New Prudential Framework For General Insurance Groups

Last Updated: 8 January 2009

Just in time for Christmas (17 December 2008), the Australian Prudential Regulation Authority (APRA) released its finalised prudential standards to apply to all Level 2 insurers. These are general insurance groups with either an APRA-authorised general insurer or an APRA-authorised non-operating holding company as the parent entity.

The standards aim to ensure that insurance groups are financially sound and that the financial soundness of insurers within a group is not compromised by group inter-relationships.

The standards will become effective on 31 March 2009.

The new standards are substantially the same as the draft standards published in April 2008. However, there have been some amendments in response to submissions made regarding the earlier draft. Accordingly, some insurers may have a busier than expected start to the year implementing the changes.

Prudential Standard GPS 001 Definitions

This standard defines key terms applicable to general insurers and Level 2 insurance groups.

In response to concern about the types of entities that could be consolidated and the definition of subsidiary, APRA has aligned the concept of consolidation with the requirements of Australian Accounting Standards Board (AASB) 127.

APRA has discretion to determine additional entities to be consolidated. Typically, these will be insurance intermediaries, service companies or entities providing a financing role to the insurance business.

Regarding concern that non-insurance subsidiaries currently consolidated for accounting purposes under Australian Accounting Standards would attract capital charges, APRA notes that applying such charges allows the determination of a minimum capital requirement for the whole group. This is in line with APRA's goal of assessing contagion risk.

The implementation date was extended to 31 March 2009 to allow for discussions between Level 2 insurance groups and APRA regarding group composition, and also to deal with the implementation of any new internal policies required.

Respondents were also concerned that Australian insurance groups would be at a competitive disadvantage compared to overseas insurance groups operating in the Australian market. APRA notes that there are no significant disadvantages from implementing group supervision as it allows sufficient capital for a group's global operations to be maintained and risks to be managed appropriately. Also, any foreign groups operating in Australia must meet APRA's requirements.

APRA has introduced supervisory discretions, rather than specific transitional arrangements, in response to concern about transitional arrangements for acquisitions. APRA does not intend for a newly acquired company to be fully consolidated from its date of acquisition but envisages a transition period.

Prudential Standard GPS 111 Capital Adequacy

This standard aims to ensure that the group maintains an appropriate level of capital to preserve financial soundness and protect policyholder interests. The key requirements relate to the minimum level of capital to be maintained, the risk factors to be considered, as well as disclosure and APRA-approved reductions in capital.

Key issues raised related to conservative liability valuations, classification and upgrading of capital, securitisation, reinsurance recoverables, capital reductions and intra-group capital transactions. Generally, APRA's original proposal remains unchanged but some amendments have been made regarding minority interests, asset and counterparty exposures, disclosure requirements, undercapitalised non-consolidated subsidiaries and whole of portfolio approach.

Significantly, APRA has now included a transition provision whereby the group may apply for a period of transitional relief from the requirements. Any relief granted will not extend beyond 31 December 2009.

Prudential Standard GPS 221 Risk Management

This standard aims to ensure that the group has a group-wide risk control framework to ensure that insurers within the group meet their obligations to policyholders. The requirements relate to the review and reporting of the group's risk management and reinsurance management frameworks, business continuity management and outsourcing.

Respondents indicated that compliance would be difficult where the group contains consolidated entities over which it has no financial and operational control.

The standard has not changed significantly. Key changes include enabling the group to apply to adjust or exclude a particular requirement in GPS 221 from applying to a specific entity. In doing so, the insurance group must demonstrate how it has dealt with the risks from a group risk perspective.

Prudential Standard GPS 311 Audit and Actuarial Reporting and Valuation

This standard aims to ensure that the Board and senior management of the group's parent entity are provided with impartial advice to assist them in soundly and prudently managing the group.

Respondents sought clarification regarding the group actuary and the documentation that APRA may request. There was also concern about the costs of reporting insurance liabilities to APRA.

In response, APRA has included a provision whereby the group may apply for a period of transition before being required to comply. Although APRA will not mandate who the group actuary may be, it provides a set of eligibility criteria that the group actuary must satisfy. In addition, while there is no requirement to prepare or submit a mid-year Insurance Liability Valuation Report (ILVR), the group actuary will be required to comment in the ILVR.

APRA notes it has no intention of applying its Governance and Fit and Proper Standards beyond the entities it directly authorises.

Next Steps

The finalised standards have been some time in the making and most affected insurers will have already implemented most of the proposals. Nevertheless, all Level 2 insurance groups should familiarise themselves with the new standards and ensure they are fully compliant. In particular, insurers should consider whether they require a period of transitional relief and apply to APRA accordingly.

The finalised standards are just one of a number of APRA proposals foreshadowed for 2009, which is shaping up to be another busy year for those charged with implementing regulatory changes.

The final package can be viewed at

Ray Giblett t (02) 9931 4833 e
Wendy Blacker t (02) 9931 4922 e
David Slatyer t (07) 3231 1532 e
Jim Demack t (07) 3231 1570 e

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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