The Australian Prudential Regulation Authority (APRA) has been focussed on the adequacy of insurers’ own reinsurance arrangements, given international reinsurance provides critical insurance capacity for the Australian market.
This is particularly so following extreme weather events since November that were in the form of bushfires, storms, hail and floods, said APRA chairman Wayne Byres, in a statement to the Senate Economics Legislation Committee on 6 March.
Current estimates for total insured losses as a result of these disasters across Australia are projected to be in the order of A$5bn ($3.3bn), he said.
Mr Byres said, “Our work in recent months has been very much focussed on the resilience of the financial system in the face of several natural disasters that occurred over the summer, and more recently the emergence of COVID-19.”
He added, “Pleasingly, the financial position of the insurance sector means it is well-placed to cover these claims. The insurance industry’s ability to respond to the recent disasters highlights the importance of the work APRA undertakes in relatively benign times to build and maintain strength in the financial system. Insurers have the capital strength and liquidity to meet their claims and, very importantly, remain well capitalised to respond to further events that may occur – especially as, for example, we are not yet through the Australian cyclone season. Nonetheless, the summer’s events will undoubtedly have an impact on the price and, in some cases, availability of insurance into the future.”
Another challenge for APRA has been understanding the potential impact of COVID-19 on the financial system, said Mr Byres. APRA has been actively monitoring the situation across three dimensions:
over a month ago, it initiated our own crisis management arrangements, and began to take steps to protect its own operations and staff;
it has been engaging with regulated institutions to understand how the virus might affect their operational ability, using APRA’s Pandemic Planning guidance as a benchmark to assess their readiness to cope with disruption, and are now undertaking some targeted testing of those plans; and
it has been assessing the potential for any specific or broader economic impacts to affect the Australian financial system, particularly given recent volatility and stress in global financial markets.
In all these activities, APRA has been in regular contact with its domestic and international peers.
At this point, APRA’s judgement is that:
the regulated institutions at the core of the financial system are very alert to the risks to their businesses – both financial and operational – and initiating contingency planning to deal with a range of scenarios; and
the financial system is positioned to handle short-term volatility in financial markets, but navigating any period of extended stress is inevitably something that will warrant considerable vigilance.