APRA published a letter about the review of Prudential Standard LPS 117 Capital Adequacy: Asset Concentration Risk Charge or ACRC (LPS 117), to ensure it remains fit for purpose and in line with the objectives in the APRA mandate. APRA intends to commence this review in the second half of 2018. The review will focus on the elements of LPS 117 dealing with asset concentration risk arising from reinsurance arrangements. It may also be necessary to review related aspects of Prudential Standard LPS 114 Capital Adequacy: Asset Risk Charge.
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)
Sam leads the quantitative research team within the CreditEdge™ research group. In this role, he develops novel risk and forecasting solutions for financial institutions while providing thought leadership on related trends in global financial markets.
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