The Australian Prudential Regulation Authority (APRA) has set the stage for a significant shift in the reinsurance landscape with its proposed changes to capital requirements. According to Fitch Ratings, these proposed reforms could potentially be a boon for Australian general insurers in the medium term. By enhancing access to reinsurance protection, insurers may see an improvement in their credit profiles. However, the long-term picture is far from clear. The ultimate outcome will be dictated by the volatile forces of the catastrophe reinsurance market, including pricing fluctuations, as well as the unpredictable frequency and severity of natural disasters.
The proposed reforms, currently under public consultation, introduce several key modifications. General insurers will be required to obtain all-perils reinsurance coverage, a move that aims to provide more comprehensive protection. At the same time, reinstatement requirements are set to be reduced, and the obligation to hold reinstatement premiums within the insurance concentration risk charge (ICRC) will be removed. These changes are slated to take effect in June 2026. This new regulatory environment may also prompt insurers to explore alternative reinsurance avenues, such as catastrophe bonds and insurance-linked securities. APRA has previously flagged these options in August, yet their uptake in Australia has been sluggish, in part due to the existing reinstatement requirements of traditional reinsurance. With these requirements potentially being lowered, alternative reinsurance structures could become more alluring.
The current state of the catastrophe reinsurance market is one of flux. Pricing has soared, a direct consequence of the increasing frequency and severity of extreme weather events. In response, insurers have been forced to adapt. For example, Suncorp Group has increased its net retention under main catastrophe reinsurance from A$250m to A$350m for the financial year ending June 2024 and has opted to forgo the renewal of aggregate excess of loss cover. While reducing reinstatement requirements might lead to cost savings in reinsurance, mandating all-perils coverage could potentially drive up costs. The overall impact of APRA’s proposals remains uncertain, especially given that global reinsurers showed a diminished appetite for all-perils cover during 2023 renewals, which could limit available capacity. APRA’s current stance of requiring insurers to hold capital against a one-in-200-year loss differs from the Reserve Bank of New Zealand’s more stringent one-in-1,000-year earthquake event requirement, which has implications for Australian insurers operating across the Tasman. Fitch contends that expanding reinsurance options could assist insurers in better managing net catastrophe exposures without significantly inflating retention levels or probable maximum loss (PML) values, thereby shoring up their credit profiles. Nevertheless, Fitch also issues a cautionary note. In the event of successive severe catastrophes, such as one-in-200-year events, insurers could face significant strain on their capital and earnings if reinstatements are not available. Although such events are currently rare, the growing ambiguity surrounding natural disaster risks only compounds the challenges insurers must navigate.
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