The Australian Prudential Regulation Authority (APRA) today outlined changes to its proposed reforms to the capital and reporting framework for lenders mortgage insurers (LMIs), following extensive industry consultation.

The proposed reforms, released in August 2004, aim to strengthen the capital framework for LMIs and increase its risk-sensitivity, while reducing inconsistencies in prudential requirements.

APRA Member Steve Somogyi said: “APRA expects LMIs to meet the proposed new capital requirements by restructuring reinsurance arrangements and/or through modest increases in capital.”

APRA has also amended the definition of acceptable mortgage insurance for authorised deposit‑taking institutions (ADIs) claiming capital concessions on certain mortgage-insured loans.

According to Mr Somogyi, APRA must ensure the concessional risk weight for ADIs is supported by suitably strong mortgage insurance arrangements. “APRA originally proposed that an acceptable LMI would be one authorised by APRA or domiciled in a country considered to have comparable prudential regulation,” he said. “APRA is also now proposing to consider the powers of the local regulator, the local prudential regulatory regime for LMIs and the characteristics of the LMI itself.”

APRA also confirms that it intends to retain the current mono‑line requirement for LMIs. In its November 2003 discussion paper, Prudential Supervision of General Insurance ‑ Stage 2 Reforms, APRA had proposed removing this requirement as a means of increasing competition and allowing insurers to benefit from diversification. This proposal had little support and the mono‑line restriction itself was not seen as a deterrent by potential entrants to the Australian LMI market.

Subject to consultations, APRA’s intention is that the proposals set out in this paper will be implemented on 1 October 2005 and will apply to all LMIs and ADIs. APRA will consider transitional arrangements for LMIs and ADIs where appropriate.

APRA’s discussion paper outlining amendments to the proposed LMI reforms is available at: http://www.apra.gov.au/RePEc/Home.cfm?ArrayProcessed=True&FileItemID=dp0015&SeriesName=Policy%20Discussion%20Papers

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry.APRA is funded largely by the industries that it supervises. It was established on 1 July 1998.APRA currently supervises institutions holding approximately $2.0 trillion in assets for 20 million Australian depositors, policyholders and superannuation fund members.