APRA proposes reinsurer security lodgements
John Trowbridge
The Australian Prudential Regulation Authority (APRA) is proposing that foreign re-insurers be required to lodge security in Australia to cover any amounts recoverable from APRA-authorised insurers.
The proposal represents a central element of a second consultation package released this week 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, which was enacted on September 24, 2007. The refinements are expected to apply from July 1, 2008.
On the question of 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.
It suggests that 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.
Commenting on the proposal, APRA member 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.
Interested parties, including foreign insurers and reinsurers, have until February 22, next year, to respond to the proposals.
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