APRA Prudential Standards for Risk and Financial Management

APRA Prudential Standards for Risk
and Financial Management: Final Release
On 9 February 2006, APRA released its final prudential standards in relation to Risk and Financial Management. This overview
touches on the points likely to be of most interest and highlights the key changes since the draft standards were released in May
2005. We also make some brief comments on the other prudential standards that are still to be released.
The Structure
The diagram below shows the structure of Prudential Standards and highlights those released on 9 February and the other new
standards still pending final release (expected in the next few months). Note that revised versions of the 100 series prudential
standards (Capital) are also expected to be released shortly.
Risk & Financial Management
Risk Management
Business Continuity
Audit & Actuarial
GPG 200
Risk Management
Transfers and Amalgamations
GPG 220
Credit Risk
GPG 230
Operational Risk
GPG 240
Insurance Risk
GPG 250
Balance Sheet
& Market Risk
Business Continuity
GPG 245
510 & 511
520 & 521
Fit & Proper
New 9 Feb
Key changes in structure since the draft standards are –
In keeping with APRA’s new format for prudential
standards, the previous Guidance Notes (GGNs) have
been re-drafted as Prudential Practice Guides (GPGs).
The non-enforceable nature of the new GPGs mean they
will become “guidance” in the truer sense of the word
The draft GGN230.2 Reinsurance Arrangements and
GGN230.3 Limited Risk Transfer Arrangements have
been incorporated into GPS230 rather than being
replaced by GPGs
APRA Prudential Standards for Risk
and Financial Management: Final Release
The draft GGN310.2 Liability Valuation has been
incorporated into GPS310 rather than being replaced by
The draft GGN310.1 Financial Condition Reports
has been omitted. Guidance in respect of FCRs will
be provided by the Institute of Actuaries of Australia’s
Professional Standards rather than through APRA. The
final version of the IAAust’s professional standard in
respect of FCRs is due for release in early March 2006
and follows a long consultation process both within the
actuarial profession and with APRA.
Audit and Actuarial
The key elements of GPS310 are unchanged from the draft that
was released in May 2005.
Insurance Liability Valuation Report (ILVR)
The key new requirement for the ILVR is that it will now be
subject to External Peer Review (EPR) by a Reviewing Actuary.
The focus of the EPR is the Reviewing Actuary’s “assessment of
the reasonableness of the Approved Actuary’s investigations,
report and results”. The EPR must take place before the ILVR is
submitted to APRA.
The IAAust is in the process of finalising a professional
standard covering EPR that the Reviewing Actuary will need
to adhere to (due for release early-March 2006). The
Reviewing Actuary will need to meet the same ‘fit and proper’
requirements as the Approved Actuary, cannot be an employee
of the insurer, and cannot be from the same firm as the
Approved Actuary. However, the Reviewing Actuary can be from
the same firm as the Approved Auditor. The potential conflict
issues are resolved by allowing the Reviewing Actuary’s report
to be addressed to the Approved Auditor rather than the Board.
GPS310 also contains some wording changes on risk margins
that the actuary will need to consider.
In our view, a key challenge for insurers and actuaries is to
make the FCR a value adding process. Timing the FCR with
the annual accounts mitigates against this. Potentially the
FCR can be used to focus some attention on issues such as
underwriting execution, claims management performance
and business planning effectiveness if the actuary can bring
the right resources to bear in a constructive way.
Timing will be very tight. Both the FCR and ILVR are required
to be submitted to APRA with the yearly statutory accounts, but
in reality, few insurers would be happy preparing AASB1023
accounts without them. Many elements of the FCR will be able
to be prepared in advance of the balance date, but many will
require post-balance date updates. With EPR of the ILVR also
required, year-end timetables will be squeezed.
Preparing for EPR
The first-time EPR is likely to be a learning experience for
insurers, Approved Actuaries and Reviewing Actuaries. To
minimise the risks involved in doing this under year-end
time pressures, we suggest insurers consider –
Financial Condition Report (FCR)
The Approved Actuary must report annually to the Board on the
broad ‘financial condition’ of the insurer, providing an overview
of the key risks facing an insurer. The FCR is a significant piece
of work, potentially more complex and definitely more widereaching than the ILVR.
The FCR must include discussion of:
general information on corporate structure and
insurance operations
recent experience and profitability
results of the ILVR
adequacy of past liabilities
asset and liability management, including
investment strategy
current and future capital adequacy and approach
to capital management
pricing, including adequacy of premiums
suitability and adequacy of reinsurance
suitability and adequacy of risk management
It must also identify the future implications of each of the
above and propose recommendations to address any
adverse implications.
A single FCR may be prepared for a corporate group, however
it must adequately consider each insurer within the group. It
must also consider the financial position of the group and the
potential to support or impact on each insurer.
The report goes to APRA but is not public. We expect that
Rating Agencies will ask to see them.
APRA Prudential Standards for Risk
and Financial Management: Final Release
appointing their Reviewing Actuary as soon as
involving the Approved Actuary in drafting the
scope of EPR
engaging the Reviewing Actuary to do a dry run EPR
on the latest valuation so any major concerns can
be discussed and addressed in advance
early sign-off of the year-end timetable by the
Approved Actuary, Reviewing Actuary and Approved
When is the first FCR required?
The transitional arrangements described in GPS310 are
confusing. Our understanding is that:
all companies balancing 30 June 2006 and 30
September 2006 (or in between) will need to prepare
an FCR as at the 2006 balance date on a “best
endeavours” basis. We interpret a best endeavours
FCR to cover all of the FCR topics but may lack the
depth of coverage of a full FCR. Companies will have
6 months to submit this initial FCR.
companies balancing after 1 October 06 will prepare
their first FCR at their next balance date, and will have
the “normal” FCR timing, i.e. needs to be submitted by
the date of the annual APRA returns.
Risk Management Upgraded?
With the exception of requiring an annual financial information
declaration from the CEO and CFO, APRA’s final risk
management standard represents little more than cosmetic
changes to the existing July 2002 standard. In this respect,
APRA has responded to criticism of over-specification in the
May 2005 draft. The new standard does, however, provide
more detailed guidance on what is required. While this should
pose little problem to insurers’ operating at better practice,
it may require insurers that have taken a more minimalist
approach to risk management to rethink their approach going
As reported in our last update, the new risk management
standard introduces the concept of a Risk Management
Framework (RMF). In the final version of the standard, APRA
has moved to clarify what constitutes the RMF versus the Risk
Management Strategy (RMS).
The RMF is a conceptual notion comprising the entirety of an
insurer’s policies, procedures, reporting and oversight structures
which control risk across its operations. In contrast, the RMS
is a high level policy document which describes key elements
of the RMF but does not include the detailed polices and
procedures themselves.
APRA appears to have watered down the requirement to
integrate risk management and business planning. This
is unfortunate as greater integration has the capacity to
ensure that risk management becomes a more mainstream
activity, rather than a compliance activity with little day-to-day
relevance. We encourage insurers wishing to get greater value
out of risk management to consider the extent to which the two
business processes can be combined.
Reinsurance Management
The most significant new requirement is for an annual
reinsurance declaration in respect of signed documentation
for both placing slips and contracts. This annual declaration
is a simplification of the requirements that were included in the
May 2005 draft standard. The declaration needs to state that
both the “two month rule” and “six month rule” have been met.
These are:
2 months from inception – signed and stamped placing
slips with no outstanding terms or conditions, or cover
6 months from inception – signed and stamped placing
slips with no outstanding terms or conditions and a slip
wording, or signed and stamped full treaty contract
This new requirement will mean that many of the loose
practices in respect of reinsurance documentation will no longer
be acceptable. This could be a particular challenge for those
dealing with the strong traditions of the London market.
Reinsurance contracts entered into prior to 1 October 2006
without signed documentation by 31 December 2009 may not
be able to automatically count for capital adequacy after that
date. The insurer must apply to APRA for these reinsurance
arrangements to count. This is a softening of APRA’s stance
on documentation of old reinsurance contracts since the
May 2005 draft standard. However, it will still mean that the
documentation status of all historical reinsurance arrangements
where reinsurance recoveries are expected will need to be
determined. We expect the Approved Actuary may wish to
sight this documentation where reinsurance recoveries are
Other elements of GPS230 clarify requirements for the REMS
and request a Reinsurance Arrangements Statement giving a
more user friendly summary of the reinsurance program of
the insurer. The key change from the draft standard is that
the Reinsurance Arrangements Statement is required every six
months for insurers who have multiple inception dates for their
reinsurance arrangements.
The key requirement for Limited Risk Transfer (LRT)
arrangements is for prior approval by APRA. Insurers
must apply to APRA for approval before entering into LRT
arrangements and APRA may approve as either a reinsurance
arrangement (in which case normal accounting applies) or a
financing arrangement, in which case the contract may not
be treated as reinsurance for any purpose. LRT arrangements
are described as those that ‘typically do not involve significant
transfer of insurance risk over the life of the arrangement’.
There is no specific definition of what constitutes ‘significant
transfer’. It will be a challenge to decide whether some
arrangements need to be submitted for approval. APRA’s
ability to make prompt and consistent approvals is also
What do the changes mean for audit?
EPR of the ILVR could mean changes in the scope of audit –
for those insurers choosing to combine EPR with the
audit, the audit scope may expand
for those insurers who do not use the auditor’s
actuaries for EPR, contractions of the audit scope
should be possible with the auditor relying on the EPR
Auditors’ engagement terms will probably need to be revised
either way. We expect insurers are already reviewing audit
engagement terms in light of the new requirements for
AASB1023 disclosures from 31 December 2005 balance dates.
Prospective Accounting
APRA has clarified that “prospective accounting” extends to
business that the insurer has “bound” at the balance date,
even if it has not incepted. There is heated debate on the
impracticalities of this approach, and the issue remains
unresolved at February 2006.
Pending standards
APRA are still to release the final versions of the standards in
respect of Outsourcing (GPS221), Governance (GPS510 and
511) and Fit and Proper Requirements (GPS520 and 521).
APRA are also due to release revised versions of GPS110
Capital Adequacy and GPS120 Assets in Australia in the
coming months. The draft prudential standards were released
in October 2005.
Documents and Reports
One way to look at the new requirements is to identify the
deliverables needed. The consolidated table on the next page
gives an idea of how extensive the requirements are. Note
we have included the requirements in respect of all of APRA’s
prudential standards for general insurers – including those still
pending as well as the ones released in February 2006.
Further advice or clarification can be sought from
our consultants.
Our key contacts:
Geoff Atkins: 02 8252 3337
Estelle Pearson: 02 8252 3331
Amanda Goodban: 02 8252 3309
APRA Prudential Standards for Risk
and Financial Management: Final Release
Documents and Reports Required
Risk Management
Risk Management Strategy
Internal Effectiveness Audits
Risk Management Declaration
Financial Information Declaration
Business Plan (3 years)
Annual Review of Risk Management
Function, including resourcing
Internal Responsibility
Regular periodic Senior management
Two directors
Within 10 days of Board approval
With statutory accounts
With statutory accounts
Within 10 days of Board approval
Australian outsourcing agreements
As required
Offshore outsourcing agreements
As required
Outsourcing policy document
Notify problems/intention to
terminate arrangement
As required
20 days after execution of
the contract
Prior to entering arrangement
(requires approval)
Summary within RMS
Reasonable notice
Business Continuity
Business Continuity Plan (BCP)
Notify major disruption
As required
Summary within RMS
24 hours
Annual, for common
inception date, within
2 months of inception
10 Days after Board approval
10 Days after Board approval
Reinsurance Management Strategy
Reinsurance Arrangements Statement
Bi-annual, for multiple
inception dates
As required
Reinsurance Declaration
Limited risk transfer arrangements
With statutory accounts
Prior to entering arrangement
(requires approval)
Audit & Actuarial
Audit of Statutory Accounts
Review of Systems, Processes and Controls
Insurance Liability Valuation Report
Financial Condition Report
Peer Review of ILVR
Attestation that Reviewing Actuary meets
eligibility and fit and proper criteria
Special Purpose Review (auditor or actuary)
As required
With statutory accounts
With statutory accounts
With statutory accounts
With statutory accounts
With statutory accounts
3 Months from request
As amended
As amended
As amended
Within 3 months of balance date
Within 3 months of balance date
On Request
As amended
On Request
Within 4 months of year end
Within 4 months of year end
Board Charter
Board Audit Committee Charter
Board Risk Committee Charter
Auditor Independence Declaration
Auditor Fees Declaration
Performance Assessments:
- Board
- Each Director
- Senior Managers
Board Renewal Policy
Fit and Proper Statement
Attendance Record
* final standards still pending
This summary is intended as a brief guide to the main changes in the prudential standards. It is by no means comprehensive and therefore is not intended to
cover all details of the standards or all circumstances of their application. Finity Consulting does not warrant that the information contained here is correct.
The proposed standards can be found at www.apra.gov.au
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