Proposed reforms to prudential supervision in Australia will have wide ramifications.
In the current strongly competitive environment of the insurance industry, protecting short and longer-term solvency is essential in retaining the trust of policy holders and the confidence of shareholders.
Proposed reforms to the prudential supervision of Australian general insurers will have wide ramifications for the industry and, if adopted in their current form, will lead to significant variations in statutory minimum solvency for many general insurers. The intention of the reforms is to introduce a more sophisticated risk-based measure of solvency. This will include greater transparency in the assessment of the main components of the solvency equation – assets, liabilities, reinsurance protection and operational risk.
It is increasingly important for insurers to understand and measure their solvency, and to stress-test that solvency against various risks facing the business. APRA’s reforms envisage that, as an alternative to a formula-based solvency test, insurers may adopt internal models to determine minimum solvency requirements. For those insurers who choose to adopt internal models, it makes sense to treat statutory minimum solvency as just one part of the whole risk and capital management framework.
Another significant regulatory change that has recently impacted the industry has been the introduction of GST. Due to the particularly complex way in which the new tax system affects various general insurance claim costs and premium components, estimating and accounting for GST-related issues continues to be a challenge for general insurers.
