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APRA extends capital guidelines for rest of 2020

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The Australian Prudential Regulation Authority (APRA) will this week update its capital management guidance for insurers, extending special COVID guidelines it issued in April to the end of the year, though making the rules more “flexible.”

APRA’s April advice urged that insurers limit their discretionary capital distribution. That included deferral or “prudent reductions” in dividends and “appropriately limiting” executive bonuses.

In a speech to the Trans-Tasman Business Circle last week, Chair Wayne Byres revealed the advice will be “shifting from the immediate, short-term emergency response in April to a setting with a somewhat longer-term outlook”.

“We will modify the guidance, and extend it for the remainder of this calendar year,” he said. APRA’s goal is to “combine ongoing prudence with flexibility.”

Capital management practices should have regard to the continuing uncertainty in outlook and stress scenarios be overcome without having to resort to cutting business activity, Mr Byres said. Insurers “should not be “unduly constrained from raising capital if and when needed”.

“Capital buffers have been built up to be used in times of stress. Now is such a time. However, there is still some uncertainty about how quickly the buffers, once utilised, might need to be rebuilt.

“It is difficult to be precise on this point, but I want to be clear we have no intention of creating a capital cliff face that banks or insurers need to rapidly climb.”

Mr Byres says APRA’s approach will be to allow insurers to “rebuild – to the extent any rebuild is even required – in an orderly manner, and in a way that doesn’t unnecessarily constrain activity or economic growth”.

APRA has suspended some capital adjustments, such as those for disability income cover at life insurers, to ease any capital strain at “an already difficult time.”

He also praised Australia’s “soundly capitalised and highly liquid” insurers for being “willing and able to support customers in times of need”.

They have “proven operationally resilient in the face of severe disruption to many aspects of their business activities”.

APRA has conducted a range of stress tests on insurers to understand how and when pressure will emerge under severely adverse scenarios, including the extent to which the impact of COVID-19 will play out differently for banks and insurers.