The prudential regulator is acting on the increasing use of offshore reinsurers, seeking feedback for its plans to revise a major capital standard following an initial round of consultation in 2019.
In the consultation paper released last week, the Australian Prudential Regulation Authority (APRA) says its proposed amendments for LPS 117 Capital Adequacy: Asset Concentration Risk Charge is required to support the effective supervision of the life industry and protect policyholders.
The proposals recommend revisions to existing restrictions on exposures to offshore reinsurers in LPS 117 to further mitigate the risk presented by the growth in use of foreign reinsurance providers that are not controlled by APRA.
Among these revisions are the introduction of an aggregate limit on exposures to offshore reinsurers and restrictions on the recognition of risk mitigants in certain circumstances.
APRA says its proposed actions on the basis of stakeholder feedback received from the 2019 consultation and represent a balanced approach, that aims at ensuing there are appropriate limits on the use of offshore reinsurers and at the same time continuing to enable their participation in the Australian market.
The regulator expressed its concerns over the increasing use of non-regulated offshore reinsurers in 2017 and 2019, stating that the trend could put at risk its ability to supervise the prudent operation of the life insurance industry.
“The recent growth in life insurers placing business with offshore reinsurers has been a prudential concern, as APRA does not have regulatory authority over these reinsurers,” Deputy Chairman Helen Rowell said.
“This has limited our ability to maintain appropriate oversight of the financial safety and resilience of the market.
“The proposed revisions to the prudential standards for life insurers are necessary to address the potential risks to policyholders from growing use of offshore reinsurance.
“But APRA has also sought to balance this by still enabling the benefits of competition and innovation from the participation of offshore reinsurers in the Australian life insurance market.”
