The Australian Prudential Regulation Authority (APRA) has been focused on the adequacy of insurers’ reinsurance arrangements following a summer of extreme weather events that are projected to cause industry losses of around AU $5 billion (US $3.35 billion).
Addressing the Senate Economics Legislation Committee today, APRA Chairman Wayne Byres explained that the Authority’s work in recent months has been revolved around the resilience of Australia’s financial system in the wake of a challenging disaster season.
Since November, extreme weather events in the form of bushfires, storms, hail and floods have severely impacted homes, businesses and communities across Australia, with the threat of a major COVID-19 outbreak now also looming.
“Insurance is critical to the recovery effort, and one important role played by APRA is making sure that the insurance sector has the financial wherewithal to cover insured losses,” Byres said in a statement to the Committee.
“In doing so, we have been particularly focussed on the adequacy of insurers’ own reinsurance arrangements, given international reinsurance provides critical insurance capacity for the Australian market.”
The APRA considers the re/insurance sector well-placed to absorb the estimated $5 billion losses from recent disasters, due to its capital strength and liquidity.
“The insurance industry’s ability to respond to the recent disasters highlights the importance of the work APRA undertakes in relatively benign times to build and maintain strength in the financial system,” Byres noted.
However, he added the summer’s events will undoubtedly have an impact on the price and availability of insurance coverage going forward.
In terms of the coronavirus spread and its potential impact on the Australian financial system, the APRA has initiated its own crisis management arrangements and has been engaging with institutions to understand how the virus might affect their operational ability.
Additionally, it has been assessing the potential for any specific or broader economic impacts to affect the Australian financial system, particularly given recent volatility and stress in global financial markets.
At this point, the regulator believes core financial institutions are alert to the risks and have initiated comprehensive contingency plans.
It added that the financial system is also well-positioned to handle short-term volatility in financial markets, but that navigating any period of extended stress could prove more challenging.
