News Regulations19 Oct 2020

Australia:Insurers withstand challenges and prove resilience

| 19 Oct 2020

APRA-regulated financial institutions (authorised deposit-taking institutions (ADIs), insurers and superannuation funds) have stood up to the challenges which emerged at the beginning of 2020, both financially and operationally, and have continued to fulfil their critical roles in society and the economy, according to Mr Wayne Byres, APRA chairman in the regulatory agency's 2019-2020 Annual Report released last week.

The series of events at the beginning of 2020 included the most devastating and traumatic bushfire season in memory; severe storms and flooding across vast swathes of the country’s east coast; and most significantly, a once-in-a-century pandemic.

Investment in resilience

Mr Byres says that the positive outcome reached by the financial institutions reflects a long period of investment in financial and operational resilience, founded on a strong prudential framework. “Moreover, this investment has meant that each industry has not only been able to withstand the events of the past year, but has been able to play a part – through measures such as deferring loan repayments, suspending premium increases, and facilitating prompt access to funds – in helping cushion the blow from the severe economic contraction that the Australian community has experienced in recent months,” he said.

He added, “Looking forward, the intense and ongoing focus on financial and operational resilience will undoubtedly dominate APRA’s agenda in the year ahead, as the financial system continues to navigate an environment of heightened risk and considerable uncertainty.”

The Annual Report gives a breakdown of APRA's actions in several regulated sectors as follows:

General insurance

APRA’s risk-based supervision of the general insurance industry needed to step up in intensity at the beginning of 2020 given the significant impacts of natural catastrophe events (including floods and bushfires), the COVID-19 pandemic and increased market volatility. The prudential strength of general insurers remains an important focus for APRA and, on a positive note, despite the deteriorating operating environment and negative earnings impact during the year, general insurers continued to maintain strong balance sheets and report robust capital positions.

Prior to the onset of COVID-19, APRA’s supervision focus was on the catastrophe events of late 2019-early 2020, ensuring that capital positions and claims information were regularly updated, and that appropriate remediation measures (especially concerning impacted reinsurance programs) were being taken. Additionally, APRA continued to pursue its work on a number of key strategic initiatives including external engagement on affordability, the adequacy and appropriateness of insurance cover and managing the industry reliance on overseas reinsurance. However, product design and consumer value work streams were deferred as APRA’s resources were redirected towards the more immediate COVID-19 response.

Given the ongoing uncertainty in the external environment, APRA paid particular attention to the potential for significant downside risks across impacted lines of business. APRA intensified its engagement with peer domestic and international regulators and actively participated in a cross-agency working group on business interruption insurance.

Life insurance

Life insurers were able to maintain their balance sheet strength during the year with all life insurers maintaining capital levels above APRA’s prudential requirements, although not without some notable challenges. Some insurers have, in particular, experienced very adverse outcomes from Disability Income Insurance (DII) products, which has been a long- standing source of loss for the industry. APRA held an industry roundtable in relation to Individual DII products in November 2019 and subsequently notified 20 insurers of specific capital adjustments that would be applied in early 2020 in relation to concerns with these products. However, owing to the changing external environment as a result of COVID-19, the capital adjustments were subsequently postponed to reduce pressure on insurers in a time of stress until the latter part of 2020.

Initiatives to drive an uplift in risk governance maturity and improved data collections across the life insurance industry were progressed, though somewhat slower than planned given APRA’s capacity constraints triggered by COVID-19 and to minimise burden on industry. Risk governance work completed during the year included internal work to develop measures to address unsustainable pricing and product design practices, particularly for Individual DII. Similarly, work was completed to determine a new APRA data collection on Individual DII data.

Private health insurance

APRA continued its supervisory focus during the year on ensuring that private health insurers continued to develop credible strategies to address ongoing sustainability and affordability challenges and respond prudently to the impacts of COVID- 19.

The prudential strength of private insurers remained a key focus for APRA. As such, APRA increased its monitoring of the industry impacts of COVID-19 (involving more engagement with peer regulators to jointly monitor targeted areas of impact), strengthened capital monitoring activities and issued industry guidance to ensure the consistent treatment of capital for prudential purposes for all insurance claims, particularly those disrupted by COVID-19. Notwithstanding the challenging operating environment, the private health insurance industry managed to sustain a sound capital position with a capital coverage ratio of 1.6x at end June 2020.

Significant progress was made on other planned strategic initiatives aimed at maintaining financial system resilience. This included the assessment of insurers’ recovery plans, increased engagement with the Department of Health to ensure that prudential considerations continued to be factored into the setting of broader health policy, and the release of a discussion paper in December 2019 on a revised and strengthened capital framework for private health insurers.

Sustainability of the private health insurance industry remained a key issue given the increasing number of people opting out of health insurance and Australia’s ageing population. APRA will continue to work with industry and Government to help address those challenges.

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