The Australian Prudential Regulation Authority (APRA) today released a paper setting out its response to industry submissions on its proposed approach to the prudential supervision of insurance groups.
APRA has refined its original proposals after incorporating feedback from industry on the draft prudential framework outlined in its May 2005 discussion paper, Prudential supervision of corporate groups involving authorised general insurers.
APRA Member Mr John Trowbridge said the proposed supervision of general insurance groups meets the HIH Royal Commission’s recommendations for corporate group supervision and ensures that Australia’s prudential regulation regime meets the International Association of Insurance Supervisors’ principles for general insurance group supervision.
"The response paper aims to reduce the compliance burden involved in the initial 2005 discussion paper," Mr Trowbridge said. "Issues raised by industry in relation to asset concentrations, also covered in the May 2005 discussion paper, are still under consideration by APRA and do not form part of the current proposals in the response paper."
APRA had initially proposed a three-level supervision framework for general insurance groups. APRA is now of the view, however, that a staged implementation of corporate group supervision is the best way forward.
APRA will continue to supervise individually licensed insurance companies (known as Level 1 supervision) and proposes to introduce a new level of supervision of the general insurance group, incorporating all general insurers in the group, both domestic and international, on a consolidated basis (Level 2 supervision). Level 3 supervision, which would take into account all entities within the group including those not licensed by APRA, is being deferred.
"APRA has focused its proposed approach on ensuring that contagion risk within a consolidated general insurance group is contained," Mr Trowbridge said. "In the future, APRA will consider further the supervision of contagion risk at the individual authorised insurer level as well as introducing requirements at the wider conglomerate group level.
"This approach to general insurance group supervision is intended to ensure that the minimum capital requirements for consolidated insurance groups are equivalent to those of individual APRA authorised general insurers. These reforms balance the need to protect policyholder interests at an individual entity level with the management and control issues associated with running consolidated general insurance groups."
APRA is now seeking industry comments on the response paper, Prudential supervision of general insurance groups, which is located on the APRA website. The closing date for industry comments is 31 December 2006.
Background
The HIH Royal Commission recommended that APRA develop a system of prudential regulation allowing it to effectively regulate authorised general insurers that operate as part of a corporate group, because current supervisory arrangements do not have explicit regard to activities conducted by the wider insurance group either in Australia or overseas. In addition, the ‘core principle’ of group-wide supervision issued by the International Association of Insurance Supervisors (IAIS) requires supervisory authorities to supervise insurers on both a stand-alone and group-wide basis.
In response to HIH Royal Commission's recommendations and IAIS requirements, APRA released a discussion paper in May 2005 outlining its proposed approach to the supervision of corporate groups involving authorised general insurers. APRA received 20 submissions from industry on this discussion paper. APRA has considered these submissions and the attached paper responds to the issues raised.
APRA intends to release the final prudential standards in the second quarter of 2007, to take effect from 1 July 2007.
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.
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Stuart Snell, Head of Public Affairs
Australian Prudential Regulation Authority
Telephone: 02 9210 3384
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