APRA keeping an eye on insurance

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30 August 2010

The Australian Prudential Regulation Authority (APRA) will continue “stress-testing” the general insurance industry as part of its supervision of financial services.

APRA Chairman John Laker says the insurance industry survived the global financial crisis well due to conservative investment strategies and a stronger Australian economy.

“The industry remains profitable and well-capitalised, although the boost to profits over recent years from reserve releases is masking some underlying deterioration in profitability,” he told the American Chamber of Commerce in Melbourne.

“Our thematic focus currently includes stress-testing within the industry, where we have identified room for improvement in the breadth and severity of the tests applied.”

Dr Laker says the authority is also looking at reinsurance counterparty risk and potential exposures of insurers to recent corporate failures.

The regulator has also focused on the impact the global financial crisis has had on the life industry and the need for stress-testing.

“APRA’s supervisory focus has been on the capital strength of the industry and its capacity to withstand adverse financial market movements,” he said.

“That capacity has been subject to detailed stress-testing by APRA and the institutions alike.”

Dr Laker says although the profitability of life insurers has improved, the regulator will keep a watch on the sector.

“Renewed volatility will keep us on alert, but improvements in capital management and reporting have improved the industry’s ability to absorb further shocks,” he said.

“In addition to capital management, thematic issues in life insurance include the operational and pricing risks arising from increasing product complexity, the industry’s capacity to provide group risk insurance to the larger superannuation funds at sustainable prices and the rationalisation of legacy products.”