More Reforms Necessary: Apra
The Age
Friday September 27, 2002
The Australian Prudential Regulation Authority has called for a boost to its powers and significant reforms to general insurance regulation in the wake of the $5.3 billion HIH collapse.
APRA was heavily criticised following HIH's demise. As a result of that criticism, a range of reforms to insurance regulation were introduced in July.
However, APRA has said in its submission to the HIH Royal Commission that the changes do not go far enough and has called for further reforms in three main categories to create a coherent regulatory structure across the finance sector.
These include: consolidating supervision across the whole of the insurance sector; improving financial disclosure; and improving corporate governance and risk management arrangements.
APRA has floated the idea of developing a compensation regime that would protect general insurance policy holders in corporate collapses. The regulator has also raised the possibility that this mechanism could be introduced right across the finance sector to protect bank depositors, life-insurance policy holders and superannuation investors.
This proposal was looked at by the Wallis inquiry in the late 1990s but was rejected on the grounds that it would reduce the incentive for financial institutions to handle their businesses responsibly by insulating customers from collapses.
Increased globalisation in the insurance business has boosted risks that Australian general-insurance companies will be undermined by activities of related companies based in other jurisdictions. As a result APRA is calling for a consolidated approach to capital requirements for companies operating in the Australian insurance market. This would mean that Australian rules would be used to calculate the capital position across the whole group.
The regulator says this may disadvantage some Australian insurers operating in jurisdictions that have less stringent regulations than Australia. But it would also boost the strength of the Australian insurance sector as a whole and help protect it from financial contagion spreading from other markets. APRA also calls for improved disclosure from insurance companies of prudential information.
In its submission, APRA says that, in comparison with banks, the disclosure from insurance groups is ``relatively scant." APRA says it is developing proposals that would see insurers delivering information to the market place on the composition of their capital base, their capital management strategy, details of risk exposures and risk control measures.
Commercially sensitive information would not have to be disclosed and the cost of such measures would be low since companies already collect the information for their own internal use.
A number of corporate-governance and risk-management reforms are also recommended. These include: personal declarations by directors and executives that regulatory requirements have been adhered to; peer review of actuarial reports; and a requirement for actuaries to report on the financial soundness of a firm, not just its insurance liabilities.
Directors and executives acting as whistleblowers by reporting potential problem areas in insurers should be protected from legal action, APRA said.
APRA has called to be free to take action to enforce its decisions on the prudential issues relating to insurance companies. At the moment such decisions, which dictate reserve levels insurers must carry, are subject to review and some must be agreed to by the Federal Treasurer.
APRA also says the legal sanctions in insurance regulation had been introduced in an ad hoc basis over many years. As a result there are great inconsistencies in penalties that needed to be regulated.
© 2002 The Age