Reinsurance News

APRA finalises prudential framework changes to support cyclone reinsurance pool

29th June 2022 - Author: Kassandra Jimenez-Sanchez

The Australian Prudential Regulation Authority (APRA) has finalised amendments to the prudential framework for general insurers, to support the operation of the government’s cyclone and related flood damage reinsurance pool.

The legislation was passed through in March 2022 and will be administered by ARPC.

Changes to GPS 001, GPS 114, GPS 116 and GPS 117 were done to clarify the treatment of reinsurance recoverables from the ARPC and will take effect on 1 July.

No submissions were received in response to the regulator’s consultation package, which closed on 1 June 2022.

APRA Deputy Chair, Helen Rowell wrote in a letter: “On 28 April 2022, APRA commenced a consultation on proposed amendments to GPS 001, GPS 114, GPS 116 and GPS 117 to clarify the treatment of reinsurance recoverables from the ARPC.

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“These changes ensure that the reinsurance recoverables from the ARPC are not subject to a capital charge in recognition of the Australian Government guarantee that supports the scheme.”

She added: “APRA has finalised the amendments without further revision, and has incorporated them into GPS 001, GPS 114, GPS 116 and GPS 117 as proposed.”

APRA’s changes include, amendments to the definition of an APRA authorised reinsurer in GPS 001 Definitions (GPS 001) to include the ARPC, and adding clarification that a reinstatement is not required in GPS 116 Capital Adequacy Insurance Concentration Risk Charge.

Other amendments included removing footnote 7 in paragraph 73 in GPS 114 Capital Adequacy Asset Risk Charge and footnote 1 in paragraph 26 in GPS 117 Capital Adequacy Asset Concentration Risk Charge, as these will be redundant due to the change in the GPS 001 definition of APRA-authorised reinsurer.

Back in May 2021, the Australian Government announced its intention to establish a reinsurance pool covering the risk of property damage caused by cyclone and cyclone related-flood damage.

However, APRA stated that the reinsurance pool’s capital implications required it to make minor amendments to the prudential framework.

APRA Deputy Chair, Helen Rowell, wrote in a previous letter: “As the prudential regulator, APRA is primarily focused on the capital treatment of funds payable from the pool to insurers, and the reinsurance pool’s capitalisation plans.

“As the legislation includes a requirement for the pool to meet all obligations, APRA intends to allow insurers to fully recognise the risk transfer provided by the reinsurance pool.”

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