APRA consults on refinements to the general insurance prudential framework

The Australian Prudential Regulation Authority (APRA) has issued its second consultation package 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 to comply with the Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Act 2007. The refinements are expected to apply from 1 July 2008.

Insurers affected by these proposals and by changes to the Insurance Act more generally are:
• all existing APRA-authorised insurers;
• DOFIs that intend to become APRA-authorised insurers;
• Australian-owned sole parent captive insurers that are not APRA-authorised; and
• Australian-owned association captive insurers that are not APRA-authorised.

Topics covered include:

• proposals for the categorisation of insurers that are largely aimed at clarifying and simplifying APRA’s requirements of branches and subsidiaries of foreign insurers.
• The proposals to scale back some of the requirements of smaller insurers and captives while maintaining the integrity of APRA’s prudential framework.
• for all insurers, the recognition of ‘kangaroo bonds’, the measurement of capital and certain reinsurance and investment-related measures.
• On 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. 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.