The Australian Prudential Regulation Authority (APRA) has today provided its Submission to the HIH Royal Commission on Future Policy Directions for prudential regulation of the general insurance industry.

This is APRAs response to a request by the Commission to provide its views on improvements in the regulation of insurance. While the recommendations centre upon the general insurance industry, many of the initiatives can be appropriately applied across the financial services industry in line with the integrated regulatory model adopted by APRA.

Recommendations in the Submission build upon the substantial progress made by the General Insurance Reform Act 2001and the associated APRA Prudential Standards that came into effect in July this year and which were the result of four years consultation with industry and Government.

When coupled with the improvements being made to APRAs internal supervisory processes, these new Prudential Standards significantly reduce the possibility of further failures in the general insurance sector. They greatly strengthen the prudential regime compared with that applied to the Australian insurers in the HIH group.

The three main areas where APRA proposes further improvements are:

1. Consolidated supervision  it is essential that prudential supervision be applied across the whole of insurance groups on a consolidated basis, including their international operations, as well as focusing on the individual Australian insurers that are members of these groups;

2. Disclosure  APRA is committed to improving the quality of insurance companies disclosure to the market about their risk-adjusted financial strength and performance relevant to their ability to pay policy claims;

3. Corporate governance and risk management  the Submission identifies areas for potential governance reform which aim to keep Boards and others honest, open, diligent and accountable by upgrading their responsibilities. Such measures could include:

• Personal attestations by directors and senior executives  requiring annual sign-off by individual directors and senior executives of regulatory compliance;

• Peer review of actuarial reports  the development of a process by which actuarial reports are subject to independent review to ensure appropriate standards are maintained;

• Separation of audit and actuarial firms  consideration will be given to prohibiting the use of actuaries and auditors from the same firm;

• Financial condition reports  a requirement for an Approved Actuary to carry out an overview of a companys financial soundness, not just its insurance liabilities;

• Whistle-blowing protection  protection for company directors and officers that advise APRA of issues they consider have the potential to damage policyholders interests.

In addition, APRA recommends amendments to legislation to increase its enforcement powers; its operational independence; and its ability to deal with insurance-type activities that do not presently come under the Insurance Act.

In its Submission, APRA also canvasses options for a compensation scheme that would be activated in the event that a general insurer, or other regulated entity, fails.

Mr Graeme Thompson, APRAs Chief Executive Officer, believes its proposals will further enhance a much-improved regulatory framework resulting from the General Insurance Reform Act 2001.

"The reforms that APRA put into effect in July 2002 have substantively strengthened the regulatory landscape for general insurance, particularly in the areas of liability valuation, capital adequacy, risk management, reinsurance and regulatory reporting. Coupled with our improved supervisory processes, we now have a far greater capacity to prevent serious problems and to address them earlier and more effectively when they do arise," Mr Thompson said.

He added: "However, the evolving and increasingly complex insurance market demands that APRA acquires better tools to protect policyholders whilst not stifling an efficient insurance industry. Our proposals are on the table and we welcome the opportunity to discuss them with the Commission and other stakeholders".

Some areas where further strengthening of the regulatory framework is warranted lie within the province of APRA while others, where legislative change would be required, are ultimately matters for the Government to decide upon. In the case of the former, APRA intends to move ahead with necessary reforms. In the case of the latter, APRA will work in close cooperation with the Government.

A copy of APRAs Submission is available here.

APRA is the prudential regulator of the financial services industry including banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry. It currently regulates $1.5 trillion in assets for 20 million Australians.