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APRA: Supervision Approach

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

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

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

  3. 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

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

  5. 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

  6. 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

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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. Supervision Approach Visit APRA’s website at www.apra.gov.au

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