The Australian Prudential Regulation Authority (APRA) has issued a cautionary letter to Australia’s life insurers, outlining a review it plans to undertake concerning the industry’s use of offshore reinsurance.
APRA explained that the review would be made in light of a recent increase in the use of offshore reinsurers, particularly in the group risk market, and would ensure that industry standards remain in line with APRA’s mandate.
“If the use of offshore reinsurers continues to increase, APRA’s ability to effectively supervise the Australian life insurance industry as a whole could be put at risk,” the regulator stated in its letter.
“This gives rise to prudential concerns for APRA,” it added, “and these concerns are particularly heightened in relation to the group risk market, which plays an important role in Australia’s superannuation system.”
In light of these concerns, APRA has begun exploring options for revising the existing restrictions on exposures to offshore reinsurers that ensure that risks are constrained within its appetite.
The letter also sought feedback from stakeholder on APRA’s concerns, matters that APRA should consider when balancing the different aspects of its mandate, and views on a set of policy responses that APRA is considering.
“This input is intended to assist APRA in further developing a set of policy proposals for a second round of consultation in the second half of 2019,” APRA said.
The letter noted that, historically, offshore reinsurers had predominantly assumed niche risks not supported by the local reinsurance market.
APRA defines offshore reinsurers as life insurance companies not registered under the Life Insurance Act 1995 (Life Act) who reinsure risk for life companies registered under the Life Act.
It does not classify appropriate retrocessionaires of specialist reinsurers as offshore reinsurers.
