AUSTRALIA: APRA warns offshore reinsurance a risk to domestic policies.

Added on 04/03/2019

As published on, Monday 4th March, 2019.


A surge in the use of offshore reinsurers to underwrite domestic life policies is undermining APRA's ability to supervise the industry, warns the prudential regulator.

The Australian Prudential Regulation authority said it was particularly concerned about the effect this would have on group life policies, which are sold through super funds and cover the vast majority of working Australians.

"If the use of offshore reinsurers continues to increase, APRA's ability to effectively supervise the Australian life insurance industry as a whole could be put at risk," the regulator said in a letter to life companies on Monday.

APRA's Geoff Summerhayes sent the letter to life insurance companies on Monday.

"This gives rise to prudential concerns for APRA, and these concerns are particularly heightened in relation to the group risk market, which plays an important role in Australia's superannuation system."

APRA's solution would be to include a cap on the use of offshore reinsurers, a measure it acknowledged could reduce competition in the reinsurance market.

Under the Stronger Super reforms, life insurance was made a mandatory default component of default superannuation products offered through the workplace. Although members are allowed to opt out, high levels of disengagement mean most do not.

APRA said the mandatory nature of group insurance meant it was particularly important for it to "maintain robust controls".

"[R]isks also emerge from the possibility that offshore reinsurers may not take a long-term perspective when operating in the Australian market. APRA's view is that a long-term perspective is essential for a stable life insurance market," the regulator said.

The lower cost base of some offshore reinsurers makes them cheaper and therefore more attractive to life companies chasing large group contracts with super funds, one industry source said. However, the risk was they were operating in jurisdictions with weaker prudential standards than Australia's.

APRA proposed new limits on the amount that could be reinsured through offshore companies, allowing "moderate level of offshore reinsurance, while mitigating against the prudential concerns arising from their increasing use by life companies".

Disengagement and increasing job mobility mean many Australians are paying life insurance premiums from multiple superannuation accounts. This problem has been addressed by government reforms aimed at protecting members with low balances or who are under 25.

Failures of the group market were highlighted in the Productivity Commission's report, published in January, which found that for some members "the blunt one-size-fits-all approach of group cover means that insurance is poor value and does not meet their needs and preferences, but because they are uninformed and disengaged they do not elect to opt out".

It called on the government to set up an independent public inquiry into the role of default life insurance through superannuation.