APRA: Supervision Approach CPA Insurance Industry Symposium 20 th November, 2003. Keith Chapman General Manager Diversified Institutions Division.

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Presentation transcript:

APRA: Supervision Approach CPA Insurance Industry Symposium 20 th November, Keith Chapman General Manager Diversified Institutions Division

APRA – Supervision Approach General Commentary on our supervision approach Description of PAIRS and SOARS Examples to demonstrate how we ‘populate’ PAIRS

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

Probability and Impact Rating System PAIRS Taking Account of both Probability and Impact 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

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

Supervision Approach - PAIRS Inherent Risk Minus Management and Control Equals Net risk Minus Capital Support Equals Overall risk of failure

Supervision Approach - PAIRS Inherent risks Counterparty default Balance sheet and market Insurance Operational Liquidity Legal/ Regulatory Strategic Contagion/ Related Party Management and Control Board Senior Management Operational Management MIS/ financial control Risk management Compliance Independent Review

Supervision Approach - SOARS SOARS ‘Supervisory Oversight and Response System’ Grid

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

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

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 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 Populating PAIRS – some examples

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

Supervision Approach Visit APRA’s website at