31 December deadline for comment on APRA changes

The Australian Prudential Regulation Authority ("APRA") has released a flurry of draft and finalised prudential standards in the last 10 days. Particularly for general insurers and life insurers, the changes should ease the compliance burden. We look briefly at the key changes below.

Consolidated general insurance groups - prudential supervision "refined"

Reforms to the prudential supervision of consolidated general insurance groups is closer, with APRA responding to industry feedback on its draft standards from May 2005.

A major change from last year's paper is the system of capital adequacy. APRA had proposed a three tier system:

• Level 1, applying to each general insurer in the group including any APRA-approved extended licence entity, on a stand-alone basis.
• Level 2, for the consolidated general insurance group, incorporating all general insurers (both domestic and international) within the group and, if any, the immediate locally incorporated non-operating holding company.
• Level 3, applying to a conglomerate group involving general insurers where prescribed by APRA and would cover the entire conglomerate group headed by an APRA-regulated entity at the widest level, but it would not apply to corporate groups headed by commercial entities or non-APRA regulated entities.

APRA is going ahead with the two tiers of capital adequacy, but has deferred implementing the third level until a later date. The full response is available here.

Comment is due by 31 December 2006. After that, APRA expects to finalise the prudential standards in the third quarter of 2007 and taking effect from 1 October 2007, with a transition for existing groups until 1 July 2008.

Draft prudential package released for life insurance industry

Following the harmonisation of standards between ADIs and general insurers (see here), APRA is now reforming the prudential supervision of the life insurance industry and friendly societies to bring them broadly into line with ADIs and general insurers.

It's released a discussion paper and draft prudential standards, covering business continuity management and risk management (risk management, operational risk, reinsurance management, asset and liability management, and conflicts of interest).

APRA's intention is to establish prudential standards which are, wherever possible, principles-based and flexible. Prudential standards, which set out minimum standards with which all life companies must comply, are supplemented by prudential practice guides.

While much of the proposed standards will be familiar from the equivalents which apply to ADIs and general insurers, there are some differences, such as the approach used to combine insurance risk and reinsurance management. This has to be different from the other standards because:

• reinsurance contracts in the life sector are usually longer-term than those in general insurance; and
• statutory provisions requiring the Appointed Actuary to approve life insurers' reinsurance arrangements.

Comment on the draft prudential package must be emailed to APRA by 31 December 2006.

Outsourcing prudential standards finalised

The finalised prudential standards on outsourcing for general insurers and ADIs will come into effect on 1 January 2007. As with other harmonised standards, these are principles-based and APRA intends them to be flexible enough to allow regulated entities to tailor their own policies to suit their specific needs.

APRA will have a veto over offshoring arrangements, and requires regulated entities to notify it of all existing outsourcing agreements involving material business activities both within and outside Australia within 20 business days of the effective date.

Finalised prudential standards: general insurers and IFRS

Capital requirements for general insurers are now in line with International Financial Reporting Standards following the release of APRA's finalised prudential standards. These new standards are similar to those for ADIs in their definitions of Tier 1 capital instruments and their limits on Tier 1 capital. In particular, the definition of Tier 1 capital instruments and the assessment of securitised assets for capital adequacy purposes have been decoupled from Australian Accounting Standards.