APRA Prudential Standard GPS 230 Reinsurance Management – An Overview and Summary of Requirements

• By: Staff Editor
• Date: June 14, 2013

• Regulated institutions should have a reinsurance management framework to manage the risks arising from its reinsurance arrangements.
• Reinsurance management framework should deal with both the reinsurance and the retrocession arrangements of the regulated institution.
• Reinsurance management framework should at least include:

1. A written Reinsurance Management Strategy (ReMS) that complies with this Prudential Standard and is approved by the Board.
2. Reinsurance management policies and procedures to manage the selection, implementation, monitoring, review, amendment and documentation of reinsurance arrangements of the regulated institution
3. Mechanisms to ensure that the reinsurance management framework remains effective
4. Clearly defined managerial responsibilities and controls.

• Reinsurance management framework should be consistent with the regulated institution’s Business Plan and Internal Capital Adequacy Assessment Process.
• Reinsurance management framework should be subject to effective and comprehensive review by operationally independent, trained and competent staff.

• The ReMS is a high level, strategic document intended to describe the key elements of the reinsurance management framework.
• A regulated institution should review its ReMS at least annually to ensure that it accurately documents the regulated institution’s reinsurance management framework.
• In case of any material changes to the operations of a regulated institution, the regulated institution should review and amend its reinsurance management framework and its ReMS to take into account the changes.
• The amended ReMS should be approved by the Board and submitted to APRA within 10 business days of Board Approval.
• A regulated institution should not intentionally deviate in a material way from its ReMS.
• A regulated institution should inform APRA immediately if it anticipates that a problem is likely to arise out of its reinsurance arrangements that may materially and adversely affect its current or future capacity to meet its obligations.
• A regulated institution’s ReMS should:

1. Define and document the regulated institution’s objectives and strategy for reinsurance management and control.
2. Identify the key elements of the regulated institution’s policies and procedures, processes and controls
3. Document the process and methodologies for setting and monitoring its ICRC
4. Provide a summary of the processes for selecting, implementing, monitoring and reviewing reinsurance arrangements
5. Provide a summary of the process for ensuring accurate and complete reinsurance documentation is put in place
6. Describe the processes for setting and monitoring retentions to ensure regulated institution’s ICRC is not exceeded
7. Describe the processes for reviewing and ensuring the adequacy of reinstatements of the regulated institution’s catastrophe reinsurance program
8. Identify those persons or groups of persons with managerial responsibility for the reinsurance management framework and set out their roles and responsibilities
9. Cover both the Australian operations and the risks arising from the overseas operations of the regulated institution

• Where a regulated institution has a common inception date for its reinsurance arrangements, the regulated institution must submit to APRA, on an annual basis, a Reinsurance Statement within two months of the inception.
• Where a regulated institution has multiple inception dates for its reinsurance arrangements, the regulated institution must submit to APRA a Reinsurance Statement every six months.
• Where a regulated institution enters into reinsurance arrangements for a period in excess of 12 months, the Reinsurance Statement should confirm the continuation of these arrangements for each year of the duration of the arrangements.
• The Reinsurance Statement should contain:

1. Schematics of the regulated institution’s reinsurance arrangements
2. Details of individual parameters by class of business
3. Details of how the reinsurance program will reduce the overall gross exposures to result in the net retention per risk, by class of business, and catastrophic event retention levels of the regulated institution
4. Details of the ICRC calculation
5. Details of any Limited Risk Transfer Arrangements

• A regulated institution should have processes to achieve legally binding reinsurance arrangements.
• The regulated institution should comply with the ‘two month rule’ and the ‘six month rule’.
• For any reinsurance contract entered into by a regulated institution incepting on or after 31 December 2008, the regulated institution should ensure that the reinsurance contract provides:

1. The governing law of the reinsurance contract is Australian law
2. Any disputes that fall to be determined by a court are to be heard in an Australian court.

• An insurer should make a reinsurance declaration annually.
• The reinsurance declaration should be signed by both the chief executive and the chief reinsurance officer.
• The reinsurance declaration should be submitted to APRA at the same time as the Reinsurance Statement required under this Prudential Standard.
• In case the reinsurance arrangements from the current and previous Reinsurance Statement are not met, the details of any gaps should be mentioned in the reinsurance declaration together with their impact on the insurance liabilities and ICRC of the insurer.
• Where an insurer complies with the ‘six month rule’, the reinsurance declaration should confirm that there are:

1. No outstanding clauses, terms and conditions or other provisions yet to be agreed
2. No differences in content or intention between the full treaty contract wording and the placing slip.

• The ‘two month rule’ states within two months after the inception date of the regulated institution’s reinsurance arrangements:

1. the regulated institution has a placing slip pertaining to these reinsurance arrangements, which has been signed and stamped by all participating reinsurers; and contains slip wording or full treaty wording agreed to by the regulated institution, with no outstanding terms or conditions to be agreed; or
2. the regulated institution has a placing slip(s) pertaining to the reinsurance arrangements, which has been signed and stamped by all participating reinsurers, with no outstanding terms or conditions to be agreed; or
3. the regulated institution does not have a placing slip, but the regulated institution has a cover note issued by the participating reinsurer and/or from its appointed reinsurance broker.

• The ‘six month rule’ states within six months after the inception date of the regulated institution’s reinsurance arrangements:

1. the regulated institution has a placing slip pertaining to these reinsurance arrangements, which has been signed and stamped by all participating reinsurers; and contains slip wording or full treaty wording agreed to by the regulated institution, with no outstanding terms or conditions to be agreed; or
2. the regulated institution has in its possession a full treaty contract wording that has been signed and stamped by all contracting parties, namely the regulated institution and all participating reinsurers.

• If the insurer is unable to state in its reinsurance declaration that it has complied with the ‘two month rule’ or the ‘six month rule’, the declaration should set out what alternate documentation is in place or, if there is no documentation, the reasons for this and what action the insurer is taking to seek to put this documentation in place.
• If the reinsurance arrangements attested to in the reinsurance declaration differ from those included in the insurer’s Reinsurance Statement submitted to APRA, the insurer or insurance group should submit to APRA a revised Reinsurance Statement which reflects details of the amended arrangements that are in place.

• An insurer should submit to APRA details of all proposed Limited Risk Transfer Arrangements for approval prior to entering into such arrangements.
• APRA can approve a Limited Risk Transfer Arrangement as either a reinsurance arrangement or a financing arrangement.
• APRA will generally consider a Limited Risk Transfer Arrangement to be a reinsurance arrangement where the purpose and effect of the arrangement is to genuinely transfer significant insurance risk from the insurer to another (re)insurer.
• A Limited Risk Transfer Arrangement that is approved by APRA as a reinsurance arrangement should be treated accordingly by the insurer for prudential purposes.
• A Limited Risk Transfer Arrangement that is approved by APRA as a financing arrangement should be accounted for by the insurer so that:

1. The arrangement has a legitimate purpose and effect
2. The arrangement will not misrepresent a material risk to the insurer’s current or continuing profitability, solvency or capital adequacy from any party.

• The terms and conditions of the financing arrangement will determine the appropriate accounting treatment for prudential purposes.
• A Limited Risk Transfer Arrangement approved by APRA as a financing arrangement, should not be treated as reinsurance arrangement for the purpose of determining the prescribed capital amount under the capital standards or as reinsurance for any other purpose.

• APRA can, by notice in writing to a regulated institution, adjust or exclude a specific requirement in this Prudential Standard in relation to that regulated institution.

Additional Resources

Read the APRA Prudential Standard GPS 230 Reinsurance Management in full.