APRA: Supervision Approach

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

• General Commentary on our supervision approach
• Description of PAIRS and SOARS
• Examples to demonstrate how we populate PAIRS

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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

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Supervision Approach - PAIRS
PAIRS
Probability and Impact Rating System
Taking Account of both Probability and Impact
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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

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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

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Supervision Approach - PAIRS

• Inherent Risk
• Minus
• Management and Control
• Equals
• Net risk
• Minus
• Capital Support
• Equals
• Overall risk of failure

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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

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Supervision Approach - SOARS
SOARS Supervisory Oversight and
Response System Grid
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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

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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

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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

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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

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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

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Supervision Approach
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