ISSue THree | 2012 General insurance industry overview life insurance industry overview recovery planning for Adis issue Three | 2012 II Insight issue three 2012 Disclaimer and copyright While APrA endeavours to ensure the quality of this publication, it does not accept any responsibility for the accuracy, completeness or currency of the material included in this publication and will not be liable for any loss or damage arising out of any use of, or reliance on, this publication. © Australian Prudential regulation Authority (APrA) This work is licensed under the Creative Commons Attribution 3.0 Australia Licence (CCBY 3.0). This licence allows you to copy, distribute and adapt this work, provided you attribute the work and do not suggest that APrA endorses you or your work. To view a full copy of the terms of this licence, visit www. creativecommons.org/licenses/by/3.0/au/. III Insight issue three 2012 Contents 4 General insurance industry overview An overview of the operating environment for the Australian general insurance industry and an update on the financial position and performance of the industry for the year ended June 2012. 18 Life insurance industry overview An overview of the life insurance industry (including friendly societies) together with a discussion of the key prudential risks that face the industry. 40 Recovery planning for authorised deposit-taking institutions An overview of APrA’s work to date on recovery planning for authorised deposit-taking institutions (ADis). APrA expects that recovery planning will become an important part of its ongoing supervision. General Insurance industry overview This article provides an overview of the operating environment for Australian general insurance industry and an update on the financial the position and performance of the industry for the year ended June 2012. The article also provides an outline of some key industry risks on APRA’s radar. 5 Introduction The general insurance industry experienced another set of challenges over 2011/12, with a hardening in the property reinsurance market and large falls in interest rates having an impact on insurers’ profitability and causing some insurers to reset their risk appetite. Despite these challenges, the industry has continued to demonstrate resilient profitability and its solvency position remains strong. The natural catastrophe events in the preceding year provided a live stress test of reinsurance arrangements. Whilst reinsurance arrangements functioned well at a high level, the experience did provide an opportunity for APrA to closely examine industry practice. in a review conducted over 2011/12, APrA found that insurers’ reinsurance Arrangements statements (rAs) could be enhanced to improve their usefulness to Boards, senior management and APrA. APrA also considers insurers would benefit from a greater use of stress testing when developing their risk appetite and in setting reinsurance arrangements. 6 Insight issue three 2012 General Insurance industry overview Catastrophe models are an important resource Operating environment used by insurers when deciding on their Natural catastrophe events had a significantly reinsurance arrangements. The governance and reduced impact on the general insurance industry risk management practices applied by insurers in over 2011/12. A storm event in Melbourne in their catastrophe modelling processes are currently late 2011 and flooding in parts of Queensland, being reviewed by APrA. Of particular interest NsW and Victoria early in 2012 again made to APrA is the level of understanding, challenge natural catastrophe events a newsworthy part of and debate at Board and senior management level the Australian summer. however, the gross claims on the limitations of models and the uncertainty on the industry from these events have been around the outputs they produce. estimated at $1.0 billion1, which was low in contrast Other areas of particular focus for APrA at present to the claims from natural catastrophe events are the adequacy of insurers’ pricing and reserving in the previous year; the gross claims from the processes. healthy competition and factors such as Australian flooding, storm and cyclone events in low interest rates are pressure points on insurers’ that year have been estimated at $4.4 billion2 while pricing. in this environment, the maintenance of the Christchurch earthquakes resulted in gross sound and responsive pricing and underwriting claims estimated at us$14.2 billion3. practices is important. On reserving, APrA notes A large portion of the industry’s gross property that current industry challenges may increase the claims arising from the previous year’s natural risk that some insurers may inappropriately weaken catastrophe events were recovered from reinsurers. reserves to sustain short-term profitability. This resulted in a general hardening of reinsurance terms and premiums when insurers sought to Natural catastrophe events had renew their property catastrophe reinsurance arrangements. Many property insurers have a significantly reduced impact on responded to these changes in the property the general insurance industry over 2011/12. 1 insurance Council of Australia, Disaster Statistics as at 11 september 2012 2 ibid 3 swiss re, Investors and Media Briefing, 10 september 2012. This refers to the gross claims for all general insurers arising from the Christchurch events, not only APrA-authorised insurers. 7 reinsurance market with premium increases and Following the release of the NDir panel’s by reviewing their risk appetites — in some cases recommendations, the Government sought increasing risk retention levels in their reinsurance feedback on a proposal requiring all insurers to arrangements. This may result in increased offer riverine flood cover in their home building earnings volatility for such insurers. in addition, and contents policies, while allowing consumers to some insurers decided to reduce their exposures opt out of flood cover. At the time of writing, the to areas materially affected by natural peril activity Government is considering feedback received on if they could not achieve premium increases this proposal. commensurate with the risk in those areas. in response to community concerns, some The size of increases in the cost of property personal lines insurers have made riverine flood reinsurance has generally moderated in the June cover more widely available, with a few insurers 2012 reinsurance renewal period when compared offering this type of insurance for the first time. to the 2011 renewals. Most insurers offering riverine flood cover are making it a compulsory part of their property The availability and affordability of property insurance offering, with the resulting price rises in insurance in areas impacted by natural perils, such flood-prone areas leading to further criticism from as riverine flood and cyclone, has become an affected customers. important issue for those communities most at risk. An element of the Government’s response to this issue was the Natural Disaster insurance review (NDir), an independent review into insurance for flood and other natural disasters in Australia. The affordability and availability of strata title insurance in northern Queensland was also the subject of a parliamentary inquiry in 2012. 8 Insight issue three 2012 General Insurance industry overview Another development adversely impacting on the Industry structure operating environment for general insurance is As at 30 June 2012, there were 124 APrA- the significant fall in interest rates over the course authorised insurers and reinsurers, of which 102 are of the year. General insurers invest predominantly actively writing business and 22 are in run-off. in highly rated fixed-income securities and should the current low interest rate environment persist, The number of authorised insurers and reinsurers insurers’ investment income will suffer. This may in the market has remained fairly stable in recent be a driver of increased pricing in some classes of years (see Table 1). The main activity in the past business, particularly in the long-tail classes. year was the rationalisation by some insurance groups of multiple licenses arising from acquisition Finally, regulatory change is also impacting on the activity in prior years. industry as insurers implement APrA’s changes to its general insurance capital requirements, As at 30 June 2012, authorised insurers accounted which come into effect from 1 January 2013. for 89 per cent of the industry’s $118.2 billion in These changes have been introduced to improve total assets. the risk-sensitivity and cross-industry alignment of APrA’s requirements, and have been the subject of formal and informal consultation with Financial position and industry since early 2010. in addition to technical performance reforms, an important component of APrA’s revised framework for general insurers are new The financial position of the general insurance requirements for the internal Capital Adequacy industry has remained sound despite the Assessment Process (iCAAP). APrA views a challenging operating environment of recent rigorous iCAAP, in which the Board is fully engaged, years. As shown in Figure 1, the industry has a to be of fundamental importance to the sound healthy 179 per cent coverage of APrA’s minimum management of an insurer. capital requirement (MCr) as at 30 June 2012. The improvement in the industry MCr coverage over the course of the year was driven mainly by an increase in the industry’s eligible capital base to $28.4 billion from $26.7 billion, with insurers reporting a higher level of retained profits as at 30 June 2012. 9 Table 1: Industry structure 30 June 2009 30 June 2010 30 June 2011 30 June 2012 Number of authorised 116 118 115 112 insurers Number of authorised 16 12 12 12 reinsurers Total authorised insurers/ 132 130 127 124 reinsurers Figure 1: Industry capital and solvency coverage 30,000 200% 25,000 190% 20,000 15,000 180% 10,000 170% 5,000 0 160% 30 June 2009 30 June 2010 30 June 2011 30 June 2012 eligible capital base ($m left hand side) Minimum capital requirement ($m left hand side) solvency coverage ratio (% right hand side) source: Data for this chart was obtained from the Quarterly General Insurance Performance Statistics Publication. Note the capital base for branch insurers is represented by adjusted net assets in Australia.