The Australian Prudential Regulation Authority has released the latest tranche of prudential reforms, this time affecting Level 2 insurers, which are general insurance groups that have either an APRA-authorised general insurer or an APRA-authorised non-operating holding company as the parent entity of the group.
General insurance groups have commercial advantages, such as greater pool of resources and risk diversification, but the trade-off is that financially sound insurers can be dragged down by failures in other parts of the corporate group. The new framework attempts to supervise those insurers in a way that will reduce the risk of infection from the financially troubled parts.
The new Prudential Standards are the result of a consultation process that started in 2005 after the HIH collapse. They are substantially the same as the drafts released earlier this year, and come into effect on 31 March 2009.
Broadly, the framework sets out the following:
- Prudential Standard GPS 001 Definitions: Subsidiaries that are not APRA-authorised insurers can be consolidated or treated as non-consolidated subsidiaries, as APRA determines. Consolidated subsidiaries will usually include related service entities, insurance intermediaries and controlled entities that provide a financing role to the insurance business. Unrelated subsidiaries operating in other industries, unrelated to the general insurance business, would usually need to be deconsolidated.
- Prudential Standard GPS 111 Capital Adequacy: Level 2 Insurance Groups: The parent entity's board is responsible for capital management. The Minimum Capital Adequacy and Concentration Risk Capital Charge are determined using prudential requirements similar to those applying to Level 1 general insurers. A Level 2 insurance group's capital base is assessed on a group basis.
- Prudential Standard GPS 221 Risk Management: Level 2 Insurance Groups: The group must have a group-wide framework for risk management and reinsurance, and have adequate rules for outsourcing and business continuity. Annual declarations must be sent to APRA dealing with risk management, financial information, and reinsurance arrangements. A group can apply to APRA to adjust or exclude a prudential requirement in GPS 221 from applying to an entity in the group.
- Prudential Standard GPS 311 Audit and Actuarial Reporting and Valuation: Level 2 Insurance Groups: Each group will need a Group Auditor and a Group Actuary, and report semi-annually to APRA. APRA has made some changes to the draft Standard, in particular to the treatment of insurance liability valuations.
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