Peter Kohlhagen of APRA on Combating Complacency in PHI Sector

He said: “APRA is working with industry to implement a prudential framework that supports insurers to build resilience, so that they are sustainable in the long term. However, no amount of policy, process or regulation can succeed without insurers thinking deeply about what could go wrong—and taking action early.” As per Mr. Kohlhagen, a robust stress testing program, which complements regulatory capital requirements, is one antidote to complacency. “We see evidence that current stress testing practices fall well short of those in other APRA-regulated industries” and “we expect to see a material strengthening of stress testing practices over time.” He then discussed the state-of-play on the Policy Roadmap, highlighting that APRA expects to release final standards on the role of the Appointed Actuary "very soon" and it is consulting on the first installment of its broader work on operational risk, with a new standard that addresses the increasingly prominent issue of cyber risk. APRA also launched a consultation on the second phase, governance, in February this year, wherein it proposed to strengthen the rules around governance, fitness and propriety, and audit, with effect from July 01, 2019. “With phases 1 and 2 of the Roadmap substantially complete, critical parts of the regulatory architecture have been modernized and made fit for purpose,” he said.

He then examined phase 3, which is capital. As per the Roadmap, APRA did not intend to review the capital standards until 2018-2019. Now the time for review is coming closer. “As our thinking progresses on the review of capital standards, we will release a ‘roadmap for capital.’” He finally discussed the challenges related to sustainability of the industry and examined how APRA uses the sustainability metrics, which include measures on financial performance, capital and liquidity, cross-subsidization and risk equalization, social license (reflects the trust of the community in an industry), membership demographics, and APRA’s own risk ratings of the insurer. With respect to sustainability challenges, “APRA will look to understand how the strategy and financial performance sits within the insurers’ pricing philosophy, capital management, risk management, and business planning. We will also look to understand any corrective action the insurer intends to take regarding the situation.” He concluded that APRA continues to “encourage insurers to step up to the challenge of resisting complacency.”

Related Link: Speech

Keywords: Asia Pacific, Australia, Insurance, Private Health Insurance, Policy Roadmap, Stress Testing, Governance, APRA