With the Australian reinsurance market facing more frequent and severe weather disasters, the war in Ukraine, and the continued impacts of the COVID-19 pandemic, The Australian Prudential Regulation Authority (APRA) has reminded general insurers that they can use traditional and alternative reinsurance arrangements when calculating the insurance concentration risk charge (ICRC).
“In the current reinsurance environment, insurers may wish to consider both traditional and ILS [Insurance Linked Securities] options. Insurers considering ILS options should engage with APRA early (prior to a formal approval request) to discuss their feasibility and potential impact on the insurer's ICRC,” said APRA executive board member Suzanne Smith in a letter to the general insurance industry.
APRA's reinsurance requirements are outlined in Prudential Standard GPS 116 Capital Adequacy: Insurance Concentration Risk Charge (GPS 116) and Prudential Practice Guide GPG 116 Insurance Concentration Risk (GPG 116).
GPS 116's reinstatement requirements for catastrophe reinsurance favour traditional reinsurance solutions, which have been adopted by many insurers. However, GPS 116 allows insurers to use catastrophe bonds and other forms of ILS that may not have a reinstatement.
“For these to be approved, the insurer must demonstrate to APRA why their use is practical and appropriate,” Smith said. “While traditional reinsurance arrangements will remain an integral part of an insurer's overall reinsurance strategy, we recognise the benefit to considering a range of reinsurance solutions.
“Any ILS options, such as catastrophe bonds, will be carefully assessed by APRA to understand the impact on the ICRC. As previously noted, we encourage insurers to engage with APRA early and prior to any formal approval request when considering these.”
APRA will review the reinsurance setting in the prudential framework this year and the first half of 2024 to ensure reinsurance requirements remain fit-for-purpose.
APRA also recently released the new requirements for insurers and other regulated entities to publicly disclose information on their remuneration practices.
