News Analysis - Raising Australian standards.

(From Reinsurance)

By Peter Falush.

The collapse of the Australian non-life insurer HIH Insurance in March 2001, which has already resulted in the re-writing of the country's insurance law, is causing further ripples in regulatory affairs three years after the event. This is clearly demonstrated by the latest consultation paper issued by the Australian Prudential and Regulatory Agency (Apra), the country's regulator. The HIH collapse, costing more than A$5bn ($3.88bn) to policyholders and financial intermediaries resulted in the recent conviction of one of the company's executives for a three-year (suspended) jail sentence.

Apra has found that while all non-life insurers had to be re-licensed by the end of June 2002, the new regulatory requirements have not been interpreted as rigorously by all insurers as the authorities would have liked.

Stages of reform

The first stage of prudential reform - already implemented by June 2002, leading to the re-licensing of all non-life companies, active in Australia - dealt with three main subjects.

Firstly it uplifted capital adequacy standards and put solvency margins on a risk-based standard, placing a minimum level at A$5m, a rise from A$2m. Secondly, it introduced stronger checks and balances on insurance company corporate governance practices. Thirdly, Apra already requires insurers to submit a risk management strategy (RMS) within 14 days of its approval by the board, outlining the strategy adopted by the company.