APRA releases updated prudential standard to enhance management of reinsurance risks

The Australian Prudential Regulation Authority (APRA) has released an updated prudential standard designed to manage risks associated with the growing use of offshore reinsurers by the Australian life insurance industry.

The updated standard includes amendments to ensure that the risks associated with using offshore reinsurers are appropriately managed and mitigated. In an accompanying response paper, APRA has also outlined stakeholder feedback received during a second round of consultation on updates to Prudential Standard LPS 117 Capital Adequacy: Asset Concentration Risk Charge (LPS 117) last April, and additional revisions to address this feedback.

APRA moved to update LPS 117 following increased use of offshore reinsurance by Australian life insurers. APRA’s revisions aim to ensure the risks associated with the use of offshore reinsurers are being appropriately managed, while also allowing the benefits from their use to be realised.

Deputy Chair Helen Rowell said the finalisation of LPS 117 was a significant milestone that would strengthen APRA’s oversight of the life insurance industry.  

“Reinsurance is an important aspect of the Australian life insurance market, and the use of offshore reinsurers brings benefits. They can be a source of extra reinsurance capacity and an avenue to access competitively priced reinsurance support for innovative product designs. However, when risk is placed offshore, APRA has a limited ability to ensure reinsurance arrangements adequately safeguard policyholders and insurer resilience. 

“The updated LPS 117 addresses this by providing a balanced approach to mitigating these risks, setting appropriate limits so that Australian life insurers can continue using the offshore reinsurance market in a prudent manner. LPS 117 supports both financial sustainability and competition in the local reinsurance market, which was a major stakeholder concern,” Mrs Rowell said.

APRA is also seeking feedback on a small number of consequential amendments to LPS 117 arising from APRA’s recent consultation on AASB 17 Insurance Contracts and APRA’s LAGIC updates, along with minor consequential amendments to a related capital standard and reporting form. Consultation on these elements of the draft standards is open until 29 April 2022.

The revised LPS 117 will commence from 1 July 2023. This commencement date aligns with the changes expected to the insurance prudential capital standards due to the introduction of AASB 17 Insurance Contracts.

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