The Australian Prudential Regulation Authority (APRA) has concluded its investigation into a set of improper financial reinsurance transactions entered into by General Reinsurance Australia Limited (GRA), the Australian subsidiary of General Reinsurance Corporation (Gen Re), between 1997 and 2001.
APRA appointed an industry expert under the Insurance Act 1973 to act as Inspector and provide APRA with a report investigating financial reinsurance. This report has now been released to GRA after obtaining the Attorney General’s advice. Part 1 of this report is also being released today by APRA. It is available on the APRA website at http://www.apra.gov.au/General/Other-Information-for-GIs.cfm.
The Inspector found that GRA engaged in “questionable behaviour” by issuing to certain insurance companies financial reinsurance contracts which enabled those insurance companies to falsely state their profits and/or solvency position. The Inspector also found that “GRA knew that the intended purpose of these transactions was improper, and did nothing to prevent or discourage the improper use. In fact, GRA structured these transactions in a way which assisted in the improper use of the arrangement.”
The Inspector’s report was critical of numerous aspects of GRA and its affiliates, including failure to fully and completely disclose all relevant information to APRA about particular transactions. Of the six financial reinsurance arrangements entered into by GRA, three transactions were found to have been designed and used for improper purposes by the following counterparties: Zurich Australian insurance Limited (Zurich); FAI Insurance Group; and New Cap Reinsurance Corporation Ltd. APRA has already investigated Zurich and its findings were announced recently (see http://www.apra.gov.au/media-releases/07_10.cfm).
APRA is currently undertaking enforcement action against a number of individuals in connection with these transactions. In October 2004, APRA announced the disqualification of six individuals who had been employed by the General Reinsurance group of reinsurers who were involved in an improper financial reinsurance transaction between GRA and FAI (see http://www.apra.gov.au/Media-Releases/04_37.cfm). APRA has also disqualified a number of former Zurich employees while others are still subject to potential enforcement action. APRA had earlier disqualified four former employees of FAI and is currently preparing enforcement action against certain former New Cap Reinsurance employees.
Following the investigation, APRA has imposed a condition on GRA’s authorisation under the Insurance Act 1973 that requires GRA to maintain a majority of independent directors on its local board. The condition was gazetted on 27 June 2007 and means that GRA is not entitled to rely on a special dispensation in Prudential Standard GPS 510 Governance, which allows subsidiaries of overseas prudentially regulated parent institutions to count directors or officers of that parent or its subsidiaries as if they were independent. The purpose of the condition imposed by APRA is to strengthen the role of the local board in the governance and oversight of the local operations of Gen Re, and to help ensure appropriate attention is paid to local interests vis-a-vis broader interests and activities of the Gen Re group. GRA has already acted to meet this condition.
APRA has decided to release Part 1 of the Inspector’s report as a detailed excerpt, as it believes that it is in the public interest to describe the nature and complexity of these types of improper reinsurance transactions which have been subject to considerable scrutiny both in Australia and globally for several years. Part 2 of the Report is not being released: it relates to investigations of other reinsurance transactions which the inspector did not find to be improper financial reinsurance arrangements.
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 $2.5 trillion in assets for 20 million Australian depositors, policyholders and superannuation fund members.
Media and industry inquiries only:
Stuart Snell , Head of Public Affairs
Australian Prudential Regulation Authority
Telephone: 02 9210 3384
Mobile: 0407 250 276
All other inquiries:
APRA Contact Centre 1300 131 060
