Initially, the proposals suggested that non-APRA authorised reinsurers would be ‘encouraged’ to post collateral in Australia to meet 100% of their Australian cedants’ gross outstanding liabilities. If non-APRA authorised reinsurers chose not to post collateral in Australia, Australian cedants would be required to hold funds
equal to 100% of their outstanding liabilities.
Additionally, APRA proposed to introduce an additional capital factor to collateral requirements. This would vary depending on the rating and location of reinsurers, with non-APRA authorised reinsurers allocated a higher capital factor than APRA authorised reinsurers of the same rating.
However, following substantial objections from the international insurance community, APRA revisited these proposed refinements and, in April 2008, published a number of revisions.
The most significant change relates to the recognition of reinsurance recoverables from non-APRA authorised reinsurers. APRA is now proposing to apply a risk-based scale to the recognition of these reinsurance recoverables, based on reinsurer ratings, in place of the nil recognition previously proposed. Where a recoverable has become receivable and has been overdue for more than six months since a payment request was made to the reinsurer, a 100% capital factor will apply irrespective of the counterparty rating. This approach is to apply to future new reinsurance arrangements, but existing ones will be ‘grandfathered’, subject to increased scrutiny by companies of the quality of recoverables.
The revisions relating to reinsurance recoverables will be introduced on 31 December 2008, but all other proposals will take effect from 1 July 2008.
As mentioned in our Spring update, Lloyd’s has received confirmation from APRA that the proposed changes do not apply to Lloyd’s. This means that Lloyd’s syndicates operating in Australia can continue to take full credit for reinsurance purchased from non-APRA authorised reinsurers, even where those reinsurers do not post collateral in Australia. Additionally, the revisions now clearly include Lloyd’s underwriters within the definition of APRA-authorised reinsurers.
