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APRA Tightening Up Corporate Governance For Insurers

by Mary Swire, for LawAndTax-News.com, Hong Kong

20 May 2005

The Australian Prudential Regulation Authority (APRA) this week released discussion papers proposing a strengthening of the framework for the prudential supervision of corporate groups involving authorised general insurers, and proposed governance arrangements for authorised deposit-taking institutions, general insurers, life insurers and authorised non-operating holding companies.

The consultation package for general insurers outlines proposals to:

  • define a framework for the classification, calculation and management of capital adequacy at both the regulated entity and group levels;
  • amend standards covering large exposures, intra-group dealings and asset concentration threshold to better encapsulate group dealings;
  • ensure a group-wide approach to risk management that is supported by an annual report from the group’s auditor on the adequacy of the risk management environment and processes; and
  • require groups to develop group-wide actuarial oversight for consolidated capital adequacy as well as the valuation of insurance liabilities.

APRA member Steve Somogyi said that the proposals recognise the structures that exist in the insurance industry and provide a solid and workable framework to apply to conglomerate structures and group-wide controls.

“These reforms balance the need to protect policyholder interests at an individual entity level with the management and control issues associated with running commercial conglomerates,” he said.

The proposals mirror many of the current practices of the industry’s major players and have been developed in line with recommendations of the HIH Royal Commission on consolidated supervision.

Mr Somogyi said that the proposed framework will clarify APRA’s position on group operations, in particular risk mitigation practices, to ensure all industry participants have a full understanding of their prudential obligations.

The corporate governance package outlines proposals for boards of APRA-regulated institutions to:

  • meet composition requirements regarding board size, independence of directors and shareholder representation;
  • have a majority of independent non-executive directors, with exceptions for certain types of subsidiaries;
  • have an independent non-executive director as chairperson of the board;
  • establish a Board Audit Committee and a Board Risk Committee;
  • have a policy on board renewal;
  • ensure their institutions have a dedicated internal audit function; and
  • apply independence provisions for external auditors, consistent with the CLERP 9 requirements in the Corporations Act.

APRA Chairman Dr John Laker said that the proposed prudential standards are intended to ensure that APRA-regulated institutions consider key governance principles, based on the ASX Principles of Good Corporate Governance for listed companies, and meet standards of governance that are generally considered good practice.

“The reforms also aim to ensure that board members have access to appropriate independent expertise and that the composition of boards of APRA-regulated institutions reflects a prudent balance of independent oversight and industry experience,” he said.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry.APRA is funded largely by the industries that it supervises. It was established on 1 July 1998. APRA currently supervises institutions holding approximately $2.0 trillion in assets for 20 million Australian depositors, policyholders and superannuation fund members.

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