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The PHI should always be vigilant

Friday 1 June 2018


Regulation 


Earlier this week the Australian Prudential Regulation Authority (APRA) Senior Manager of Policy Development, Peter Kholhagen, addressed the importance of resilience in the private health industry (PHI).

“Regardless of the cause, APRA will look to understand how the strategy and financial performance sits within the insurers’ pricing philosophy, capital management, risk management and business planning. We will also look to understand any corrective action the insurer intends to take regarding the situation,” he explained.

He asked the industry to challenge itself and “cultivate a sense of ‘chronic unease’ about risks and threats”.

“One antidote to complacency is a robust program of stress testing. Institutions and regulators across the financial services industry use stress testing to understand financial resilience and vulnerabilities. It complements regulatory capital requirements by providing a different lens through which to view an institution’s resilience to financial stress. Strong stress testing approaches give us more comfort that an insurer’s capital is sufficient; weak approaches give us pause.”

Kholhagen said that a stress-to-fail approach can be a useful method and can help management see the weaknesses.

He indicated that the prudential regulator wrote to the insurance industry earlier this year to find what their approaches to stress testing were and they found some challenges:

  • we saw a lack of severity in the stresses applied, and reverse stress testing was not considered
  • instead of genuine, multifactor scenarios, the focus was primarily on sensitivity testing; and
  • stress testing was primarily focused on regulatory capital requirements, rather than using both the regulatory capital lens and other complementary approaches.
He also addressed the Policy Roadmap that were divided into three stages-risk management, governance and capital.

The first came into effect in April and the second phase will then come into effect on 1 July.

It is the third phase that goes back to the theme of his speech on resilience.

Before we can decide whether to change the capital standards, we need to assess how insurers are implementing the current standards. On that front, we see a wide range of practices. This is not necessarily wrong, and the standards allow for significant discretion, but it does give us reason to pause.

He indicated that the APRA will be working with insurers so that they do not underestimate the challenges and build a prudential framework that will ensure that will support resilience for industry.