The Australian Prudential Regulation Authority has released a draft prudential standard on reinsurance management
The proposed standard, part of a program of APRA reforms which followed the collapse of the direct insurer HIH and recommendations of the subsequent HIH Royal Commission, is intended to clarify and strengthen existing requirements and provide a framework for insurers to develop systems and controls to document and manage reinsurance contracts. The proposed standard said the framework needed to be appropriate to the size, business mix and complexity of an insurer's operation and address an insurer's reinsurance and retrocession arrangements.
The draft standard requires development of a reinsurance management strategy (REMS) that incorporates sound reinsurance management policies and procedures to manage selection, implementation, monitoring, review, amendment and documentation of reinsurance arrangements, and mechanisms to ensure the framework remains effective. It must contain clearly defined managerial responsibilities and controls.
Insurers will need to submit REMS annually to APRA for approval. If an insurer's operations materially change, it will need to revise its REMS and submit it to APRA for approval within 10 business days. In general, REMS must be completed by each insurer, although an insurance group may submit a single, over-arching REMS where reinsurance management is undertaken on a group basis, the proposed standard says. An insurer is also required to submit a reinsurance arrangements statement. If a new reinsurance arrangement is entered into, an insurer has two months to submit an amended statement to APRA.
A declaration describing the extent to which reinsurance arrangements are documented must be prepared within two months of arrangements being entered into and be available to APRA on request. A further declaration is required after six months to specify whether the insurer has the final contracts and that the reinsurance arrangements are fully placed. If an insurer anticipates issues arising from its reinsurance rearrangements will materially impact on its current or future abilities to meet its obligations, it must advise APRA immediately and implement plans to redress the problem.