APRA: Supervision Approach
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APRA: Supervision Approach. CPA Insurance Industry Symposium 20 th November, 2003. Keith Chapman General Manager Diversified Institutions Division. APRA – Supervision Approach. General Commentary on our supervision approach Description of PAIRS and SOARS

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Apra supervision approach

APRA: Supervision Approach

CPA Insurance Industry Symposium 20th November, 2003.

Keith Chapman

General Manager

Diversified Institutions Division


Apra supervision approach

APRA – Supervision Approach

  • General Commentary on our supervision approach

  • Description of PAIRS and SOARS

  • Examples to demonstrate how we ‘populate’ PAIRS


Apra supervision approach

APRA – Supervision Approach

  • More detailed supervision

  • Focus on risk management improvements

  • Strengthened requirements – new discussion paper

  • Risk based focus

  • Industry harmonisation as appropriate

  • Visits to insurers


Apra supervision approach

Supervision Approach - PAIRS

PAIRS

Probability and Impact Rating System

Taking Account of both Probability and Impact


Apra supervision approach

Supervision Approach - PAIRS

  • Probability of failure = inherent risk - controls - capital

  • Impact of failure = size

  • Attention Index = Probability x Impact

  • Supervision strategy commensurate with Attention Index


Apra supervision approach

Supervision Approach - PAIRS

  • Advantages of PAIRS:

  • gauge the scale of overall supervisory task

  • identify priority areas

  • allocate resources according to risk

  • monitor market trends in risk profiles

  • increase objectivity and consistency of ratings

  • greater accountability


Apra supervision approach

Supervision Approach - PAIRS

  • Inherent Risk

  • Minus

  • Management and Control

  • Equals

  • Net risk

  • Minus

  • Capital Support

  • Equals

  • Overall risk of failure


Apra supervision approach

Supervision Approach - PAIRS

Management and Control

  • Board

  • Senior Management

  • Operational Management

  • MIS/ financial control

  • Risk management

  • Compliance

  • Independent Review

Inherent risks

  • Counterparty default

  • Balance sheet and market

  • Insurance

  • Operational

  • Liquidity

  • Legal/ Regulatory

  • Strategic

  • Contagion/ Related Party


Apra supervision approach

Supervision Approach - SOARS

Mandated

Extreme

Normal

Oversight

Restructure

Restructure

improvement

High

Normal

Oversight

Oversight

Mandated improvement

Restructure

Impact rating

Medium

Normal

Normal

Oversight

Mandated improvement

Restructure

Low

Normal

Normal

Oversight

Mandated improvement

Restructure

Low

low Medium

high Medium

High

Extreme

Probability rating

SOARS ‘Supervisory Oversight and Response System’ Grid


Apra supervision approach

Populating PAIRS – some examples

Counterparty Default

  • Reinsurance exposure / downgrades

  • Parental/ intra-Group exposures

    Insurance

  • Incorrect calculations and therefore reinsurance

  • Reinsurance treaty documentation

  • Pricing frameworks

  • Liability valuations and diversification


Apra supervision approach

Populating PAIRS – some examples

Operational Risks

  • Nature of operations – location, complexity

  • Robustness of IT hardware and software

  • Control of outsourced operations

    Strategic Risk

  • Price following

  • Niche markets


Apra supervision approach

Populating PAIRS – some examples

Board of Directors

  • Skills, longevity

  • Internal management and risk control framework

  • Board committee processes

  • Adequacy of information

    MIS/ Financial Control

  • Robust economic capital models

  • Systems and reporting frameworks


Apra supervision approach

Populating PAIRS – some examples

Risk Management

  • Changes in key documents (REMS/ RMS)

  • Internal audit

  • Coherent (and consistent?) risk management processes

    Compliance

  • All legislation – not just APRA related


Apra supervision approach

Conclusion

  • General Commentary on our supervision approach

  • Description of PAIRS and SOARS

  • Examples to demonstrate how we ‘populate’ PAIRS

    • Two key features:

    • CAPITAL ADEQUACY

    • MANAGEMENT QUALITY


Apra supervision approach

Supervision Approach

Visit APRA’s

website at

www.apra.gov.au


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