Impact of draft prudential capital standards for insurers operating in Australia
Friday, 9 December 2011— EY has examined the likely impact of today’s APRA draft prudential capital standards release for insurers operating in Australia.
The draft standards are the next step in APRA’s harmonisation of the basis for determining regulatory capital requirements right across the financial services industry in Australia.
The proposals will also see the requirements for Australian insurers more closely aligned with developments within the European insurance industry, in particular Solvency II, which is an important step as the insurance industry continues to globalise.
The key implications for Australian insurers include:
- Increased capital requirements, leading to additional pressure on shareholder returns
- Greater scope for supervisory adjustment
- Increased reporting requirements
EY’s Actuarial Services leader for Oceania, Grant Peters says insurance companies will need to assess the business impacts of these changes and respond accordingly.
“As a result of the proposed standards announced by APRA today, we expect to see capital requirements increase across the Australian insurance industry, with some companies and product lines being impacted more than others,” Peters said.
“The impact of the new requirements is likely to be more significant for life insurers than general insurers, due to the type of risks undertaken and the differing level of the existing standards.
“These increased capital requirements come at a time when shareholder returns are already under pressure from higher than average claim levels, the impact of current economic conditions on customer retention levels and a range of broader reforms, such as the government’s financial advice changes.”
The draft prudential capital standards also require increased levels of reporting, both to APRA itself and within the public domain.
“Insurers will need to dedicate critical resources to implement process and technology changes to meet these requirements over the next 12 months,” Peters said.
“The proposed standards also allow for greater supervisory adjustments, introducing the ability for APRA to impose additional levels of capital based on their view of the risk profile of individual companies.
“This new level of regulatory engagement will require companies to upgrade risk management processes and systems, and the industry is likely to seek further guidance from APRA on how this process will work in practice.
“While the changes in APRA’s draft standards have been well signaled and are broadly in line with expectations, the insurance industry still has a lot of work ahead to ensure it is able to meet the new risk management requirements and capital standards.
“Australian insurers will need time to assess the consolidated impact of the changes from today’s announcement and other recent reforms within the sector.
“In the coming months we may see some insurers revisiting their business models and mix, adjusting investment and reinsurance strategies, and potentially increasing consumer prices in some segments of the market to reduce the impact of these changes.”
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