Auto & General Insurance Company has been ordered to rectify “significant” risk governance weaknesses following an Australian Prudential Regulation Authority (APRA) review, the watchdog announced today.

An additional $50 million capital requirement has been imposed on the insurer due to the “heightened” prudential risk arising from the weaknesses, which extend across its risk management and compliance practices.

The insurer’s issues include capability and capacity weaknesses in the risk function, ineffectiveness of the “three lines of defence” model and weak risk reporting, APRA says.

Under the “three lines of defence” model, the first line is business management, who have ownership of risks, the second is specialist risk management functions that are independent of the first line, and the third line is independent assurance to the board on the effectiveness of the first and second lines.

The regulator says its review also revealed unclear accountabilities and responsibilities across the business, and an overall immature risk culture.

“In addressing APRA’s concerns, Auto & General is required to undertake a root-cause analysis to identify the drivers that have contributed to the weaknesses, and to develop and implement an APRA-approved risk remediation program,” the authority said.

“Execution of the program is to be subject to assurance by an independent third party.”

The extra capital requirement is in the form of an operational risk charge, and it takes effect from Thursday. The measure will remain in place until the regulator is satisfied the weaknesses have been remediated.

“Last financial year, APRA-regulated general insurers paid almost $40 billion in claims to their policyholders, so it is essential that consumers can have confidence that insurers are meeting their regulatory obligations, and in their ability to honour their commitments,” APRA Member Suzanne Smith said. “APRA continues to engage with the industry on appropriate risk governance and will take suitable action if companies do not meet these expectations.”

Auto & General, which owns Budget Direct and provides insurance through third parties such as Qantas, says it has engaged an independent firm with expertise in risk management to review its activities and identify opportunities for improvement.

“We will continue our program of work focused on ensuring our governance, culture and risk frameworks meet or exceed industry best practice,” a spokesperson told insuranceNEWS.com.au. “We understand and support APRA’s focus on these important matters and will work closely with it through this process.”

The spokesperson says the additional capital requirement will have no impact on the insurer’s business as “we continue to focus on delivering quality, affordable insurance that is critical to Australian households, especially during this current cost-of-living crisis”.

Auto & General has a prescribed capital amount of $325 million, of which $63 million is categorised as operational risk charge, according to APRA industry statistics for financial years ending in the 12 months to last June 30.