APRA releases discussion paper to update general and life insurance capital standards

The Australian Prudential Regulation Authority (APRA) has today released a discussion paper describing its proposals to update the capital standards for general insurers and life insurers.

APRA’s intention is to make its capital requirements more risk-sensitive and to improve the alignment of its capital standards across regulated industries, where appropriate. For general insurance, APRA is completing the refinements commenced in 2008. For life insurance, APRA is fully reassessing the capital standards in light of industry changes over the last 15 years.

The proposed changes for general insurers are relatively modest and ensure that all material types of risks, including asset/liability mismatch, asset concentration and operational risks, are adequately catered for within the capital standards.

More fundamental changes are proposed to the capital standards for life insurers. APRA proposes to simplify the current dual reporting requirements for solvency and capital adequacy and align the capital structure for life insurers more closely with the capital structure for authorised deposit-taking institutions and general insurers in Australia. This improved alignment of capital requirements will also facilitate adoption of APRA’s proposed supervisory framework for conglomerate groups.

APRA Executive Member John Trowbridge said the proposed changes are expected to result in a number of benefits to the general and life insurance industries. ‘The proposed new capital requirements for life insurers are simpler and more risk-sensitive than the current arrangements, as well as easier for all stakeholders to understand and work with in both substance and presentation. For general insurers, the benefits of this review also include more risk-sensitive capital standards, to the benefit of insurers with assets well matched to their liabilities and with well constructed reinsurance protection.’

In commencing this review, APRA’s position was not that current capital requirements for the general and life insurance industries were, overall, either too low or too high. ‘APRA has not set out to achieve any material change in overall industry capital levels. We will not finalise our proposals without assessing carefully their likely effect on capital at an individual insurer level and across the two industries,’ Mr Trowbridge said.

APRA is publishing this discussion paper today as the first major outcome of its review process, and will release three supplementary technical papers in June 2010. APRA will also evaluate its proposals by conducting a quantitative impact study (QIS) on the impact of the proposed changes on the general and life insurance industries.

APRA expects to release draft capital standards by the end of 2010 and final capital standards in mid-2011, to take effect in 2012. The discussion paper is available on APRA's website.