The prudential regulator is acting on its long-running concerns over the increased use of offshore reinsurers, seeking feedback for its plans to revise a key capital standard after an initial round of consultation in 2019.

In the consultation paper released last week, the Australian Prudential Regulation Authority (APRA) says its proposed changes for LPS 117 Capital Adequacy: Asset Concentration Risk Charge are necessary to support the effective supervision of the life industry and protect policyholders.

The proposals call for revisions to existing restrictions on exposures to offshore reinsurers in LPS 117 to further mitigate the risk presented by the growth in use of foreign reinsurance providers that are not regulated by APRA.

These revisions include the introduction of an aggregate limit on exposures to offshore reinsurers and restrictions on the recognition of risk mitigants in certain circumstances.

APRA says its proposed actions take into account stakeholder feedback received from the 2019 consultation and represent a balanced approach that aims to ensure there are appropriate limits on the use of offshore reinsurers, while continuing to enable their participation in the Australian market.

The regulator flagged its concerns over the increased use of non-regulated offshore reinsurers in 2017 and 2019, saying the trend could put at risk its ability to supervise the prudent operation of the life insurance industry.

“The recent growth in life insurers placing business with offshore reinsurers has been a prudential concern, as APRA does not have regulatory authority over these reinsurers,” Deputy Chairman Helen Rowell said.

“This has limited our ability to maintain appropriate oversight of the financial safety and resilience of the market.

“The proposed revisions to the prudential standards for life insurers are necessary to address the potential risks to policyholders from growing use of offshore reinsurance.

“But APRA has also sought to balance this by still enabling the benefits of competition and innovation from the participation of offshore reinsurers in the Australian life insurance market.”

A spokesman for the Financial Services Council (FSC) says the peak body understands APRA’s “concerns about onshore regulated entities using offshore reinsurers”.

“The FSC will consult with its members in preparing a submission to this important consultation,” the spokesman told insuranceNEWS.com.au.

The Actuaries Institute in its submission to the 2019 consultation agrees there is a need for appropriate limits on the use of offshore reinsurers to protect the financial safety of Australian life insurers and by extension, policyholders.

Closing date for submissions is June 25. APRA expects to release the final standard by the end of the year.

Click here for the consultation paper.