Performance as important as capital adequacy

The Australian Prudential Regulation Authority intends subjecting insurers to a performance analysis as well as monitoring capital adequacy under changes outlined in a discussion paper dealing with proposed Government changes to Australia’s general insurance prudential framework.

The proposal to impose a performance analysis is included in the discussion paper released this week in response to a Government announcement earlier this year that offshore foreign reinsurers will not need to be authorised in Australia, but direct offshore foreign insurers would need to be authorised by APRA if they wanted to continue working in Australia.

The APRA discussion paper said that current APRA reporting standards focus on capital adequacy and do not facilitate performance analysis and suggests that the regulator’s reporting framework should allow performance analysis capable of enabling early detection of adverse financial performance.

It said that under current arrangements, APRA required reporting to be on a prospective accounting basis and that this resulted in all premium revenue, acquisition costs and reinsurance expenses being recorded directly into profit and loss.

It said there is no deferral and matching of premium revenue, claims expense and reinsurance expense, as required under the Australian Accounting Standards Board standards.

APRA said it proposed to simplify the current claims development table including reducing the period of claims development captured from 10 years to five years, as well as requiring investment income to be allocated between assets supporting insurance liabilities and other net assets.

At the same time it said it would require premiums for bound but not incepted business to be identified as a separate item.