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 recognised.
Reinsurance Recoverables
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 in Australia.
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 date.
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.
Now What?
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 December 2008.
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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