APRA warns group insurers on offshore reinsurance

Australia’s major group insurers have received a cautionary letter from the Australian Prudential Regulation Authority (APRA) about their use of offshore reinsurers.

APRA has written to the insurers outlining a review of the sector, stating that it is being “undertaken in the context of APRA’s observation of a recent increase in the use of offshore reinsurers, particularly in the group risk market”.

“If the use of offshore reinsurers continues to increase, APRA's ability to effectively supervise the Australian life insurance industry as a whole could be put at risk,” the letter said.

It said this situation “gives rise to prudential concerns for APRA, and these concerns are particularly heightened in relation to the group risk market, which plays an important role in Australia’s superannuation system”.

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“In light of these prudential concerns, APRA is now commencing consultation on options for revising the existing restrictions on exposures to offshore reinsurers in LPS 117 to ensure that the risks are constrained within APRA’s appetite,” APRA said.

It said the letter was seeking feedback from stakeholders on APRA’s prudential concerns relating to offshore reinsurers, matters that APRA should consider when balancing the different aspects of the APRA mandate in the context of the review, and views on a set of policy responses that APRA was considering.

“This input is intended to assist APRA in further developing a set of policy proposals for a second round of consultation in the second half of 2019,” the letter said.

The background information provided by APRA and attaching to the letter pointed out that, historically, offshore reinsurers had predominantly assumed niche risks not supported by the local reinsurance market.