APRA proposes amendments to better support cyclone reinsurance pool

The Australian Prudential Regulation Authority (APRA) has released a letter proposing amendments to the prudential framework to support the operation of the Treasury Laws Amendment (Cyclone and Flood Damage Reinsurance Pool) Bill 2022.

The legislation passed through Parliament in March 2022, enabling the government to deliver on its commitment to establishing a cyclone reinsurance pool by July 01, 2022, to support and protect Australians in areas vulnerable to extreme weather events.

In its letter, APRA proposes to clarify that reinsurance contracts purchased by insurers from the Australian Reinsurance Pool Corporation (ARPC), which will administer the pool, must be treated as an exposure guaranteed by the Australian government. Its proposed amendments include:

Amending the definition of an APRA-authorised reinsurer in GPS 001 Definitions (GPS 001) to include the ARPC;
Clarifying that a reinstatement is not required in GPS 116 Capital Adequacy Insurance Concentration Risk Charge; and
Removing footnotes added in 2017 to recognise the ARPC terrorism insurance scheme and references to the Terrorism Insurance Act (which will be superseded) in GPS 114 Capital Adequacy Asset Risk Charge and GPS 117 Capital Adequacy Asset Concentration Risk Charge – with the APRA noting that these will be redundant due to the proposed amendment to GPS 001.

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In May 2021, the Australian government announced its plan to establish a reinsurance pool covering the risk of property damage caused by cyclone and cyclone-related flood damage.

Australian insurers welcomed the legislation’s passing in March 2022, with industry leaders looking forward to the finalisation of its implementation details. However, APRA noted that the reinsurance pool’s capital implications required it to make minor amendments to the prudential framework.

“As the prudential regulator, APRA is primarily focused on the capital treatment of funds payable from the pool to insurers and the reinsurance pool’s capitalisation plans. As the legislation includes a requirement for the pool to meet all obligations, APRA intends to allow insurers to fully recognise the risk transfer provided by the reinsurance pool,” APRA deputy chair Helen Rowell wrote in the letter.

APRA seeks industry feedback on its proposed amendments, to be sent to [email protected] by June 01, 2022. It expects to finalise the framework changes before the reinsurance pool commences on July 01, 2022.