The Australian Prudential Regulation Authority (APRA) wants life insurers to assess reinsurance risks as part of stress-testing.

It proposes collecting more information on reinsurance asset exposure before and after the application of insurance risk charge stresses.

“The failure of a reinsurer would affect the value of a life insurer’s adjusted policy liabilities,” APRA says in a letter to companies.

“In the worst case, the insurer’s capital base would reduce by an amount equal to the reinsured part of the adjusted policy liabilities. This would occur if no recoveries could be made from the reinsurer and any tax benefits could not be netted against existing tax liabilities.”

APRA proposes reporting based on reinsured adjusted policy liabilities, not balance sheet assets.

This would be required for all reinsurance exposures, even if below 1% of total assets.

Submissions on the proposal must be sent to APRA by March 21. The changes would apply from the December quarter next year.