The Australian Prudential Regulation Authority (APRA) has released a letter to all general insurers, proposing amendments to the prudential framework to support the operation of the government’s cyclone and cyclone related flood damage reinsurance pool.
The legislation was passed through in March 2022, which enabled the government to begin to deliver on its commitment of establishing a cyclone reinsurance pool by July 2022, to help support and protect Australians in areas that are vulnerable to extreme weather.
In its letter, APRA proposes to clarify that reinsurance contracts purchased by insurers from the Australian Reinsurance Pool Corporation (ARPC), are to be treated as an exposure guaranteed by the Australian government.
The APRA’s proposed amendments include, amending 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.
The last amendment proposed was removing footnotes which were added in 2017 to recognise the ARPC terrorism insurance scheme and references to the Terrorism Insurance Act (which will be superseded) in GPS 114 Capital Adequacy Asset Risk Charge and GPS 117 Capital Adequacy Asset Concentration Risk Charge, with the APRA noting that these will be redundant due to the proposed amendment to GPS 001.
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 has 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 the 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.”
Furthermore, APRA noted that any industry feedback on its proposed amendments are to be sent to [email protected] by June, 1 2022. The APRA also added that it expects to finalise the framework changes before the reinsurance pool commences on July, 1 2022.
