APRA Announces Review of LPS 117 on Capital Adequacy of Life Insurers

APRA has received a number of representations on the increasing use (by APRA-registered life insurers) of reinsurance arrangements entered into with offshore life reinsurers that are not registered under the Life Insurance Act 1995 (non-registered reinsurers). These representations have focused on two main issues: that non-registered reinsurers are not subject to the same regulatory requirements as APRA-registered life insurers; that there may be potential for systemic risks being introduced to the Australian life insurance market through increased involvement of non-registered reinsurers.

In some cases, APRA has exercised its discretion to adjust the requirements of LPS 117, to allow collateral trust arrangements to be used to mitigate exposures to non-registered reinsurers for the purpose of calculating the ACRC. These adjustments have been made where APRA was satisfied that the specific collateral trust arrangements provided an effective risk mitigant for ACRC purposes. Until the outcomes of the review of LPS 117 are clearly known, APRA is not inclined to grant any further discretionary approvals to allow entities to mitigate exposures to non-registered reinsurers for the purpose of calculating the ACRC. As part of the review, APRA will assess the future use of collateral trust arrangements, including whether they should be permitted for the purposes of LPS 117.

Related Link: APRA Letter (PDF)

Keywords: Asia Pacific, Australia, Insurance, Reinsurance, LPS 117, Capital Adequacy, ACRC, Systemic Risk, APRA