1 month ago
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Recognising that regulations hinder access to alternative reinsurance solutions including insurance-linked securities (ILS) in the country, the Australian Prudential Regulation Authority is consulting with industry, as participants there want easier access to solutions such as catastrophe bonds.
In a letter to the Australian insurance industry, APRA Member Suzanne Smith explained that the regulator is consulting on targeted adjustments to the general insurance (GI) industry reinsurance settings, and processes that would assist insurers in gaining broader access to a full-range of reinsurance solutions.
In addition, the consultation is also focused on the potential for adjustments in relation to APRA’s GI reinsurance eligibility criteria.
The goal is “to promote general insurers’ access to reinsurance, including alternative reinsurance arrangements,” in the knowledge that reinsurance market conditions have not always been easy for Australian insurers in recent years.
Higher retentions and reinsurance costs have resulted in pressure for the Australian insurance consumer, and the APRA recognises that insurers appetite for access to alternative reinsurance solutions, such as catastrophe bonds and insurance-linked securities (ILS), may assist in relieving some pressure.
“To continue to access appropriate, cost-effective reinsurance, industry has expressed appetite for alternative reinsurance arrangements,” the APRA letter explains.
Adding that, “Industry feedback has indicated that aspects of APRA’s prudential framework present challenges to accessing the full suite of available reinsurance solutions.”
Following this consultation, any changes to the regulatory regime will need to consider the following objectives, “promoting access to all forms of reinsurance solutions whilst ensuring insurers’ financial resilience is maintained in alignment with the object of the current insurance capital framework; reducing regulatory burden and improving transparency for industry; and ensuring consistency with international standards and practice,” the APRA letter further stated.
APRA is asking insurers how it could adjust its reinsurance settings, or its process for approving the capital benefit of reinsurance arrangements, so as to improve access to the full-range of reinsurance solutions.
One key issue is the requirement for reinsurance covering up to the 1-in-200 year loss level to be all-perils in terms of its coverage and also to feature reinstatements.
The APRA said on these factors, “APRA is aware that these requirements can constrain access to certain types of reinsurance, particularly alternative reinsurance arrangements (such as catastrophe bonds and other types of ILS) where these features are not commonly available.”
They suggest options such as lowering the requirement for a reinstatement to up to the 1-in-100 year level, or allowing insurers to calculate the 1-in-200 year loss for their largest single peril and buy all perils reinsurance to that level, or removing the requirement for reinstatement premium to be held in the natural perils vertical requirement and other accumulations vertical requirement of the Insurance Concentration Risk Charge (ICRC).
These would be very positive adjustments for the availability of catastrophe bonds and other insurance-linked securities (ILS) to Australian insurers, potentially opening that market up far more to ILS backed risk transfer and reinsurance arrangements.
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