The Australian Prudential Regulation Authority, APRA, continues to build on and refine its prudential regulation of general insurers - sharpening the focus of its capital requirements, harmonising standards across the industries it supervises and extending its reach beyond individual insurers and immediate corporate groups.

There are currently five proposals at various stages of consultation and implementation:

Review of capital standards for general insurers and life insurers

The aims of this review include improving the risk sensitivity of the standards and achieving better alignment across APRA regulated industries (see our previous article for the details of the proposal).  APRA’s proposals were set out in a discussion paper and three technical papers issued between May and September 2010.  Insurers also participated in a quantitative impact study (QIS) of the proposals in late 2010.

APRA published a response paper on 31 March 2011 to summarise the results of the QIS and submissions and outline the changes APRA is intending to make in response.

The QIS indicated that APRA’s proposals would increase overall capital requirements and, even allowing for the offsets expected as insurers revise their business and capital management strategies, the increases were higher than APRA’s intended outcome (particularly for life insurers).  Submissions, while supportive, also raised the complexity of the proposals and pro-cyclicality of some capital charges.  APRA has revised aspects of the proposals to address some of these concerns but warns that some insurers will continue to see substantial increases in their capital requirements, reflecting the enhanced risk sensitivity of the standards. 

The proposals for Level 1 general insurers will be implemented for Level 2 insurance groups with some modifications.

APRA intends to undertake a second QIS (QIS2) with submissions on the response paper and responses to QIS2 due at the end of July.  APRA will issue a further response paper and draft prudential standards in late 2011.

Consolidating prudential standards

To date, APRA has developed and administered prudential standards and associated guidance material on an industry-by-industry basis, covering authorised deposit-taking institutions (“ADIs”), general insurers, life companies and authorised or registered non-operating holding companies (“NOHCs”).  In a discussion paper released in December 2010, APRA has indicated it proposes to harmonise and consolidate twelve of its current prudential standards into four new cross-industry standards: CPS 231 Outsourcing, CPS 232 Business Continuity Management, CPS 510 Governance and CPS 520 Fit and Proper.

APRA states that its purpose is to ensure that identical behavioural risks across prudentially regulated industries are subject, to the extent appropriate, to identical prudential requirements, saying this approach will improve industry’s ability to understand and comply with the prudential requirements and improve APRA’s efficiency and effectiveness in supervising the relevant behaviour.

The main change relevant to general insurance is the requirement for responsible auditors of authorised NOHCs to meet specific independence requirements.  Other proposed changes include:

  • The outsourcing prudential standard would include new provisions that refer specifically to the role of the Board in complying with CPS231 to emphasise the Board’s ultimate responsibility.
  • The business continuity management prudential standard would empower APRA to request the external auditor (or an external expert) to undertake an assessment of the company’s BCM (business continuity management) arrangements.
  • The provisions allowing the Board of an APRA-regulated entity that is part of a corporate group to use group policies and functions would be modified to clarify that the Board must approve any use of a group policy or function ie the choice must be explicitly and appropriately documented.

Feedback has been confined to ‘minor technical and wording matters’.  APRA intends to release the final cross-industry prudential standards by August 2011 and the standards will be effective from 1 July 2012.  This transition period will give entities time to make any necessary changes to their policy frameworks and other documentation according to their regular practice and timetable.  Guidance notes associated with the standards will also be revoked and draft PPGs (prudential practice guides) will be released for consultation later in 2011. 

APRA intends that when the Level 3 group supervision regime is established, these four cross-industry standards will also apply to Level 3 groups.  APRA will consult separately on these.

Refinements to the prudential framework for general insurance groups

On 16 May 2011, APRA released a discussion paper proposing refinements to the prudential and reporting framework for general insurance groups (Level 2 groups).  It also proposes to align aspects of the reporting framework between Level 2 groups and individual APRA-authorised general insurers (Level 1 insurers).

The proposals include:

  • expanding the scope of APRA’s prudential supervision to capture, as a Level 2 group, legal structures where there is a single Level 1 insurer as part of a wider group and the group has other insurance-related entities in Australia.  This is limited to where the entities have similar ownership and conduct insurance or insurance-related business;
  • giving APRA the ability to request a Level 2 group report on- and off-balance sheet intra-group transactions;
  • restricting the Group Actuary from being the Chief Executive or director of any entity within the Level 2 group or wider corporate group;
  • giving APRA the discretion to have the Group Actuary’s advice subject to peer review;
  • requiring Level 2 groups to deduct from capital any reinsurance assets that do not meet any relevant governing law requirements in a foreign jurisdiction;
  • restricting the circumstances in which reserves from equity-settled share-based payments (shares or options) granted to employees as part of their remuneration packages may be included in a Level 2 group’s capital base - specifically by requiring that new ordinary shares must be issued for the reserves to be eligible for inclusion in the Level 2 groups capital base. (APRA also intends for this treatment to be implemented for Level 1 insurers and will include it for consultation when it releases draft prudential standards in conjunction with the general and life insurance capital review.)

APRA has also released its prudential framework applicable to ADIs giving effect to enhancements to the Basel II Framework in Australia.  APRA has flagged it will be proposing revisions to the capital base for insurers to give effect to its intention to seek broad consistency between the definition and measurement of the capital base for insurers and ADIs.  These will be released for consultation.

Supervision of conglomerate groups (Level 3 Framework)

APRA recognises that these consultations and proposed changes will impact the policy proposals of the proposed Level 3 Framework.  In light of this, APRA has pushed back the project schedule for implementation of the Level 3 project (see our previous article for the details of the proposal).  It proposes to release its response to submissions and draft prudential standards during the first quarter of 2012 with a view to implementation in the second quarter of 2013.

Proposal to publish intermediated insurance data

Since December 2009, general insurance intermediaries have been required to report all insurance contracts and provide additional details on insurance placed with unauthorised foreign insurers (UFIs) - including class of business, UFI name, country of UFI and exemption type.  This data collection requirement was introduced to enable policy-makers and regulators to monitor insurance business flowing offshore under exemption arrangements and to assist in the modification of those arrangements over time.

APRA proposes to publish intermediated insurance statistics based on data submitted by insurance intermediaries.  The statistics will contain aggregate data only.  APRA seeks guidance on the most useful treatment of intermediated insurance premium: to publish either premium invoiced during the period, or premium effective during the period.  Presenting premium effective for the period would allow comparison to the gross written premium of APRA-authorised general insurers, but will require some estimation for the most recent period.

APRA applies a set of confidentiality protection measures to its statistical publications to ensure that individual entity data are not disclosed.  APRA has identified that applying these measures may result in the publication of incomplete and therefore less informative statistics.  APRA will therefore be seeking affected general insurance intermediaries’ consent to publish data as an aggregate item.  In addition to the nature of their own business, intermediaries will need to consider their relationship with the entities on whose behalf they act - in most cases, they will be acting as agents.  The consequences of providing consent in this context will require careful consideration.  Confidentiality arrangements with insureds, insurers and third parties will also need to be considered.

Responses to APRA’s Discussion Paper are due by 12 July 2011.  The first release of the new statistics is expected later in 2011.  In addition to this consultation process, APRA will be seeking intermediary consent.