Consultation on targeted adjustments to general insurance reinsurance settings
To: All general insurers and reinsurers
The purpose of this letter is to invite feedback from industry and broader stakeholders on ways to promote general insurers’ access to reinsurance, including alternative reinsurance arrangements.
Overview
Reinsurance provides significant benefit to Australian insurers and policyholders. It provides stability to the general insurance (GI) industry by assisting insurers to manage risk and to meet capital requirements.
In recent years, the global reinsurance market has been challenged by a range of factors including the increased impact of severe weather events and rising geopolitical instability. These factors have at times contributed to a significant hardening of the reinsurance market in Australia and globally, reflected in higher retentions and increased reinsurance costs, putting further pressure on GI availability and affordability challenges.
To date, general insurers have largely utilised traditional reinsurance solutions. To continue to access appropriate, cost-effective reinsurance, industry has expressed appetite for alternative reinsurance arrangements. In our August 2023 letter1, APRA reminded insurers that APRA’s prudential standards permit the use of alternative reinsurance arrangements, such as catastrophe bonds and other types of Insurance Linked Securities (ILS), and invited insurers to engage with APRA should they wish to use alternative reinsurance arrangements. Industry feedback has indicated that aspects of APRA’s prudential framework present challenges to accessing the full suite of available reinsurance solutions.
Potential targeted adjustments
APRA is consulting on targeted adjustments to its GI reinsurance framework. APRA seeks:
- general feedback on adjustments to APRA’s GI reinsurance settings and processes that would assist insurers in accessing reinsurance; and
- specific feedback on adjustments in relation to APRA’s GI reinsurance eligibility criteria detailed in Attachment A.
Any adjustment to the prudential framework will be assessed in line with the following objectives:
- promoting access to all forms of reinsurance solutions whilst ensuring insurers’ financial resilience is maintained in alignment with the object of the current insurance capital framework;
- reducing regulatory burden and improving transparency for industry; and
- ensuring consistency with international standards and practice.
APRA is also proposing to make technical updates to the GI reinsurance framework. These updates will in aggregate reduce regulatory burden by streamlining existing processes, improving transparency, clarifying APRA’s expectations and improving consistency across industry. Further detail is outlined in Attachment B.
Next steps
APRA invites feedback on the issues outlined in this letter and is particularly interested in views on the following questions:
- How could APRA adjust its reinsurance settings, or its process for approving the capital benefit of reinsurance arrangements, to improve access to all forms of reinsurance for general insurers?
- What are the likely impacts (including costs and benefits) of APRA adjusting requirements regarding all perils, reinstatement and capital requirements for reinstatement premiums as outlined in Attachment B?
- Are there any further technical refinements to the GI reinsurance framework that APRA should consider?
Written submissions should be sent to PolicyDevelopment@apra.gov.au by 17 February 2025 and addressed to: General Manager, Policy. In addition to seeking written submissions, APRA would welcome engagement with industry and broader stakeholders through workshops during and following the consultation period.
All information in submissions will be available to the public on the APRA website unless a respondent expressly requests that all or part of the submission is to remain in confidence. APRA intends to consult further on specific proposed changes to prudential standards and guidance in the first half of 2025. Commencement of any new standards would be no earlier than June 2026.
Yours sincerely
Suzanne Smith
APRA Member
Attachment A – Reinsurance capital settings
Insurers can obtain significant capital relief by purchasing reinsurance that meets APRA’s criteria. Prudential Standard GPS 116 Capital Adequacy: Insurance Concentration Risk Charge (GPS 116) stipulates that an insurer must hold capital against a 1-in-200 year loss on a whole of portfolio basis. Reinsurance covering events up to the 1-in-200 year loss can reduce this requirement:
- when the reinsurance provides protection against all perils;2
- when the insurer has a contractually agreed reinstatement;3 and
- where reinstatement needs an additional premium to be paid to the reinsurer, that additional reinstatement premium is included in the Insurance Concentration Risk Charge (ICRC).4
APRA is aware that these requirements can constrain access to certain types of reinsurance, particularly alternative reinsurance arrangements (such as catastrophe bonds and other types of ILS) where these features are not commonly available.
The global nature of reinsurance means that consistency with peer jurisdictions is an important consideration, and APRA has examined the position of its key peer regulators. At a high-level, APRA’s 1-in-200 all perils requirement is consistent with peers who generally set requirements of all perils up to a 1-in-200 year loss or at more extreme return periods for specific single perils. APRA’s reinstatement requirements are generally stricter compared to peers, with many jurisdictions not requiring a full reinstatement after a 1-in-200 year loss to be contractually agreed or any additional premium held as part of a capital charge.
APRA has appetite to review the three capital requirements listed above, in alignment with the objectives of this review. Potential adjustments are outlined below.
All perils requirement | Allow insurers to calculate the 1-in-200 year loss for the largest single peril and buy all perils reinsurance to that level. |
|---|---|
Reinstatement requirement | Given that the probability of two 1-in-200 year losses occurring in a 12-month period is statistically very low, the return period for which reinstatement is required could be lowered (for example to 1-in-100 year loss). |
Reinstatement premium requirement | Remove the requirement for reinstatement premium to be held in the natural perils vertical requirement and other accumulations vertical requirement of the ICRC. |
While the potential adjustments detailed above represent an easing of the current requirements, APRA will continue to expect robust reinsurance management practices. Insurers will be expected to demonstrate that the use of non-traditional reinsurance solutions is within risk appetite and that any added risk is considered in each insurer’s Internal Capital Adequacy Assessment Process (ICAAP). APRA will consider extending the role of the Appointed Actuary (AA) to enable the AA to assess the capital treatment of traditional and alternative reinsurance arrangements for compliance with APRA’s prudential requirements. While APRA would still maintain supervisory oversight, this should reduce regulatory burden on industry by reducing the number of reinsurance arrangements that need to be referred to APRA.
Attachment B – Technical refinements
APRA’s GI reinsurance framework has not been updated since it came into force in 2013, and a number of technical issues have been identified with the framework through APRA’s supervisory oversight.
Minor and operational issues that are known to APRA, and proposed potential solutions, are outlined below.
| Issue | Potential solution | Anticipated impact on industry burden |
|---|---|---|---|
Reinsurance Arrangements Statement (ReAS) | Insurers undertake catastrophe modelling but the details may not be provided to APRA as part of the ReAS.5 | Update the ReAS to require insurers to include detail on catastrophe modelling. |
↑ |
Definition of aggregate reinsurance | The definition of aggregate reinsurance means that relatively simple reinsurance arrangements are being referred to APRA.6 | Amend the definition of aggregate reinsurance to reduce the volume of entity referrals to APRA. |
↓ |
APRA approval of capital benefit of reinsurance arrangements | APRA currently needs to approve capital adjustments for certain types of reinsurance arrangements such as Adverse Development Cover and Stop Loss to ensure appropriate capital outcomes.7 | Update the prudential framework with principles for considering reinsurance so that for certain arrangements, the AA can determine the appropriate capital outcome. This reduces the need for those arrangements to be submitted to APRA for approval. |
↓ |
Non-modelled risks | APRA’s requirements are not clear that ‘non-modelled risks’ (such as demand surge) must be considered as part of an entity’s catastrophe modelling process.8 | Clarify that non-modelled risks must be considered as part of an entity’s catastrophe modelling process. |
– |
Reinsurance Contract | The Insurance Act 1973 requires that, under the terms of the contract, payments by way of reinsurance are to be made in Australia.9 However, this may not be reflected in reinsurance contracts. Prudential Standard GPS 230 Reinsurance Management (GPS 230) specifies that any court disputes are to be heard in an Australian court, but does not specify that if a dispute is to be settled via arbitration, the seat of that arbitration should be within Australia.10 | Update GPS 230 reinsurance contract requirements to include the need for arbitration and claim payment to be in Australia. |
– |
'Two month rule' requirement | The ‘two month rule’ requires that contract terms have been signed and stamped by all contracting parties, however 'signing and stamping' is an outdated process.11 | Amend the ‘two month rule’ to refer to contract terms being legally binding and remove the requirement for contracts to be ‘signed and stamped’. |
↓ |
Reinsurance guidance | Prudential Practice Guide GPG 245 Reinsurance Management Strategy (GPG 245) has not been updated since 2008 and will need to align with any changes to APRA's capital requirements for reinsurance. Prudential Practice Guide GPG 220 Credit Risk contains references to reinsurance which should be moved to GPG 245.12 | Update reinsurance PPGs to accurately reflect the latest APRA requirements and expectations, alongside streamlining reinsurance guidance. |
↑ |
Footnotes
1APRA’s reinsurance requirements and the use of insurance linked securities, 3 August 2023: APRA’s reinsurance requirements and the use of insurance linked securities.
2GPS 116 paragraph 21.
3GPS 116 paragraph 15.
4 GPS 116 paragraphs 24 and 34.
5GPS 230 paragraph 31(e).
6GPS 116 paragraph 6(a).
7GPS 116 paragraph 54.
8GPS 116 paragraph 21.
9Insurance Act 1973 section 11A(1c).
10GPS 230 paragraph 34(b).
11GPS 230 paragraph 42.
12GPG 220 paragraph 3.