APRA: Supervision Approach
CPA Insurance Industry Symposium 20th November, 2003.
Keith ChapmanGeneral 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
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 riskMinus
Capital SupportEquals
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
Extreme Normal OversightMandated
improvementRestructure Restructure
High Normal Oversight Oversight Mandated improvement Restructure
Medium Normal Normal Oversight Mandated improvement Restructure
Low Normal Normal Oversight Mandated improvement Restructure
Low low Mediumhigh Medium High Extreme
Probability rating
Imp
act
rati
ng
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
www.apra.gov.au
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