Guidance Note GGN 230.1
Reinsurance Management Strategy
- Insurers may purchase reinsurance to provide security and liquidity, and to increase their own capacity to underwrite new insurance business. Weaknesses in an insurer’s reinsurance arrangements may therefore impair that company’s capital or liquidity position.
- APRA follows a systems-based approach in supervising the reinsurance arrangements of insurers. This approach recognises that primary responsibility for reinsurance management rests with the Board and senior management of an insurer, and focuses on the quality of the processes and controls adopted by that insurer. While the Board retains the primary responsibility for reinsurance management, it may also seek the advice of its Approved Auditor, Approved Actuary, or other relevant expert, in relation to the appropriateness, adequacy and effectiveness of its reinsurance arrangements.
- APRA recognises that the scope of the Reinsurance Management Strategy (REMS) will vary among insurers depending on the size, business mix and complexity of their operations.
- The REMS must document in detail the strategy adopted for managing reinsurance.
- Foreign insurers should identify in their REMS where responsibility resides for monitoring the reinsurance arrangements of their operations. Where control mechanisms for reinsurance are in place, and these include reporting to home office or are the responsibility of home office, the REMS should also identify these mechanisms and detail the reporting arrangements.
- If the insurer in Australia is part of a global insurance group or operates as a foreign insurer, APRA expects the REMS to include information on the global reinsurance policy. This may include policy objectives and strategies in respect of reinsurance management, but would particularly include the reporting arrangements between Australian and overseas operations, the monitoring of Australian operations by the overseas parent or home office and the home regulator’s supervisory arrangements regarding reinsurance. Where elements of the REMS are controlled by home office, these should be identified and detailed.
- If the insurer in Australia is part of an Australian insurance group, APRA expects the REMS to include information on the group’s reinsurance policy. This may include policy objectives and strategies in respect of reinsurance management, but would particularly include the reporting arrangements between the insurer’s operations and the monitoring of operations by the parent of the group. Where elements of the REMS are controlled by another company in the group, for instance the parent, these should be identified and detailed.
- As part of its normal supervisory activities, APRA will review the appropriateness, adequacy and effectiveness of an insurer’s REMS. In doing so, APRA will distinguish between insurers having regard to:
(a) the size, business mix and complexity of the insurer’s operations, including both domestic and (where relevant) overseas activities;
(b) the classes of insurance business in which the insurer is engaged;
(c) the availability and resilience of intra-group funding;
(d) staff expertise and depth; and
(e) the quality of policies and systems for managing reinsurance arrangements.
- In addition, APRA will take into account those elements of an insurer’s risk management system that address the potential risks arising out of the insurer’s reinsurance arrangements.
Systems for Selecting Reinsurance Programs
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An insurer, as part of its REMS, must put in place sound systems for the selection of reinsurance programs.
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While the sophistication of an insurer’s systems is specific to the insurer, at a minimum the system must consist of policies and procedures that:
(a) identify the insurer’s tolerance for risk;
(b) identify the level of cessions appropriate to the insurer’s tolerance for risk (for direct insurers and reinsurers, APRA would normally allow an insurer to cede up to 60% of the insurer’s total business underwritten. In the case of captive insurers, APRA would typically allow an insurer to cede up to 90%);
(c) determine what type of reinsurance arrangements are most appropriate to limit risks to the company’s level of tolerance (separately documenting traditional reinsurance contracts, financial reinsurance and alternative risk transfer products);
(d) set out principles for the selection of reinsurance counterparties including formal evaluation procedures to assess the diversification and creditworthiness of reinsurance counterparties;
(e) set out how liquidity will be managed where there is a timing mismatch between the payment of claims and the receipt of reinsurance recoveries; and
(f) set concentration limits for credit risk exposure to reinsurance counterparties and appropriate systems for monitoring these exposures.
- The REMS must include provisions to regularly review these systems to take account of changes in business profile and other available information.
Systems for Setting the Maximum Event Retention
- An insurer, as part of its REMS, must put in place sound systems for the setting, monitoring and altering of its Maximum Event Retention (MER). At a minimum, these systems must consist of policies and procedures that detail:
(a) the insurer’s willingness to take on catastrophic risks;
(b) how the insurer’s financial resources cover its calculated MER;
(c) the regular process by which the policies are reviewed by senior management, and (if relevant) by the Approved Actuary, in the light of the insurer’s results by class of business and geographical region, as well as current market conditions eg availability of adequate catastrophe reinsurance cover;
(d) the regular process by which the policies are approved by the directors; and
(e) the regular process by which the insurer’s compliance with its policies is independently reviewed.
- GPS 110 Capital Adequacy sets out the required level of capital for regulatory purposes. GPS 110 and Guidance Note GGN 110.5 Concentration Risk Capital Charge also set out specific issues that an insurer should consider in calculating its MER.
Responsibilities and Controls
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An insurer must have appropriate control mechanisms in place to ensure that the policies and procedures established for managing reinsurance arrangements are adhered to at all times.
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At the core of an insurer’s REMS must be a well-defined management responsibility and control structure for monitoring, reporting and responding to an insurer’s reinsurance arrangements in a timely and effective manner. Senior management must be responsible for reviewing an insurer’s reinsurance management systems on a regular basis. The review must cover:
(a) the identification and recording of policies underwritten to which reinsurance is attached;
(b) the identification of dates when an obligation to pay reinsurance premiums arises;
(c) the identification of cases where a company has suffered a loss under a policy against which a reinsurance recovery can be made;
(d) the management of the timing of payments to, and collection from, reinsurance counterparties;
(e) the credit standing and capacity of reinsurance counterparties to meet obligations;
(f) any concentration of reinsurance programs with reinsurance counterparties which would create large exposures or detract from diversification benefits;
(g) the accessibility of intra-group funding under a range of conditions; and
(h) the impact of adverse trends in estimated insurance liabilities on reinsurance and implications for the capacity of the insurer to meet its future policyholder obligations.