Prudential Standard GPS 230
Reinsurance Arrangements for General Insurers
Objective and Key Requirements of this Standard
This Prudential Standard aims to ensure that a general insurer has in place prudent reinsurance arrangements, contributing to a high likelihood that the insurer is able to meet its obligations to policyholders.
Reinsurance management refers to the selection, monitoring, review and control of reinsurance arrangements – that is, where some part of individual or aggregate insurance risks are ceded to other insurers, including from direct writing insurers to reinsurers or other direct writing insurers (cessions) as well as from reinsurers to their parent companies or other reinsurers (retrocessions). Reinsurance is fundamental to the management of risk within, and hence the financial soundness of, every insurer. It is important, therefore, that the Board of Directors (Board) and senior management of an insurer recognise that they have the prime responsibility for the sound and prudent management of an insurer’s reinsurance arrangements.
The key requirements of this Prudential Standard are:
- The Board and senior management of an insurer must develop, implement and maintain a Reinsurance Management Strategy (REMS), appropriate for the operations of that insurer, to ensure that the insurer has sufficient capacity to meet obligations as they fall due. The REMS must be approved by the Board of the insurer, and by APRA.
- An insurer must adhere to its REMS at all times and must advise APRA if it intends to undertake activities in a manner that represent a material deviation from its REMS. Any such activities must first be approved by the insurer’s Board.
- An insurer must inform APRA immediately if there is a likelihood of a problem arising with its reinsurance arrangements that is likely to materially detract from its current or future capacity to meet its obligations, and discuss with APRA its plans to redress this situation.
Details on these requirements are contained below, and in Guidance Note GGN 230.1, which forms part of this Standard.
Prudential Standard
- This Prudential Standard, made under section 32 of the Insurance Act 1973 (the Act), applies to all general insurers authorised under the Act.
- The prime responsibility for the sound and prudent management of an insurer rests with the Board of Directors (Board) and senior management of that insurer. The Board and senior management of an insurer must develop, implement and maintain a Reinsurance Management Strategy, appropriate for the operations of that insurer, to ensure that the insurer has sufficient capacity to meet obligations as they fall due.
Reinsurance Management
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Reinsurance management refers to the selection, monitoring, review and control of reinsurance arrangements – that is, where some part of individual or aggregate insurance risks are ceded to other insurers, including from direct writing insurers to reinsurers or other direct writing insurers (cessions) as well as from reinsurers to their parent companies or other reinsurers (retrocessions). For this purpose, reinsurance arrangements will also extend to cover financial reinsurance and alternative risk transfer products. Reinsurance management is a critical component of an insurer’s ability to meet its obligations to policyholders.
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An insurer must inform APRA immediately if there is a likelihood of a problem arising with its reinsurance arrangements that is likely to materially detract from its current or future capacity to meet its obligations, and discuss with APRA its plans to redress this situation.
Reinsurance Management Strategy (REMS)
- Each insurer is required to maintain at all times a written REMS that has been:
(a) approved by the Board (or in the case of foreign insurers, by a senior officer from outside Australia with requisite Board delegation);[63] and
(b) approved by APRA.
The REMS must be appropriate to the size, business mix and complexity of operations of the insurer and must define and document the insurer’s objectives and strategy for reinsurance management.
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Each insurer must review its REMS regularly (at least annually) to take account of changing operating circumstances. The REMS must also be amended where material change to the operations of an insurer warrants modification. An updated copy of the REMS, approved by the Board, must be provided to APRA for approval within 14 days after Board approval.
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An insurer must substantially adhere to its REMS at all times and must advise APRA if it intends to undertake activities in a manner that represent a material deviation from its REMS. Any such activities must first be approved by the Board. Should the REMS then require amendment, a revised REMS must be approved by the Board and submitted to APRA for approval within 14 days of Board approval.
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An insurer’s REMS must, at a minimum, include the following elements:
(a) sound systems for selecting and monitoring reinsurance programs;
(b) clearly defined managerial responsibilities and controls; and
(c) clear methodologies for determining all aspects of a reinsurance program, including:
(i) identification and management of aggregations of risk;
(ii) identification and management of upper bounds of programs; and
(iii) selection of participants including consideration of diversification and creditworthiness.
- The REMS must cover both the Australian and, where relevant, the overseas operations of the insurer. Further detail on the content of the REMS is contained in Guidance Note GGN 230.1 Reinsurance Management Strategy.