The Australian Prudential Regulation Authority (APRA) today released for comment a draft Prudential Standard on Capital Adequacy for General Insurers. The draft Standard forms part of APRAs current review of prudential supervisory arrangements for the general insurance industry - its finalisation will depend on legislative change to give APRA a formal standards making power in general insurance.
APRA proposes, subject to Government approval, that the Standard replace the current solvency test for general insurers set out in the Insurance Act 1973. The existing requirement is blunt, inflexible and out of step with modern methods for measuring and managing risk. The draft Standard is designed to relate regulatory capital more closely to risks on the asset and liability sides of the balance sheet and contains explicit capital charges against particular risks such as insurance, investment and concentration risk.
An optional solvency test based on companies internally generated risk analysis is proposed under the draft Standard. This internal model option will encourage general insurers to adopt approaches to the calculation of capital needs which are more sophisticated and more attuned to their particular business circumstances.
This is the first draft of the Standard. It is APRAs intention that the draft Standard be released a number of times for iterative consultation. Submissions on the current draft will be taken into consideration in the preparation of future drafts. Further, while APRA has calibrated the Standard to the extent possible on the basis of past data, in order to further refine the Standard, an extensive road-testing exercise with industry will be conducted later this year to identify and remedy any anomalies and unintended consequences.
In recognition of the changes that industry will be required to make to accommodate the new Standard, appropriate transitional periods are proposed (up to 5 years).
Comments on this draft of the Standard are invited by 8 September 2000. A copy of the draft Standard and a Discussion Paper concerning this and other proposed reforms to the prudential supervision of general insurance companies in Australia, can be found on the APRA web site http://www.apra.gov.au
Comments in writing can be made to:
Brian Gray
Executive General Manager
Policy, Research and Consulting
Australian Prudential Regulation Authority
GPO Box 9836
Sydney NSW 2001
For further information:
Wayne Byres
General Manager
Capital & Risk Analysis
02 9210 3146
