APRA releases consultation to enhance oversight of life reinsurance market

The Australian Prudential Regulation Authority (APRA) has released for consultation a package designed to address concerns regarding the increased use of offshore reinsurers by life insurers. These concerns are particularly heightened in relation to the group risk market, which plays an important role in Australia’s superannuation system. 

The proposed updates to Prudential Standard LPS 117 Capital Adequacy: Asset Concentration Risk Charge (LPS 117) will impose an aggregate limit on the exposure of life insurers to offshore reinsurers, which are not regulated by APRA. Offshore reinsurers that enter the domestic market and become an APRA-registered entity will not be subject to the aggregate limit. 

APRA Deputy Chair Helen Rowell said the changes are necessary for APRA to effectively supervise the life insurance market and ensure policyholders are adequately protected.

“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. 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,” Mrs Rowell said.  

The consultation also proposes changes that will provide greater clarity on regulatory requirements, facilitate the use of risk mitigation techniques and minimise the regulatory burden associated with bespoke amendments for individual entities.  

APRA is seeking stakeholder feedback on the revised LPS 117 by 25 June 2021. The final standard is expected to be released by the end of 2021. 

A response to submissions paper and draft prudential standard are available on the APRA website at: Offshore reinsurers and the review of prudential standard LPS 117 Capital adequacy: Asset concentration risk charge.

An accessible version of this infographic is available here.