Australian insurers lead the Asia-Pacific region in advanced risk management practices, aided by the country’s strong regulatory system, according to a report by Standard & Poor’s (S&P).

Only Australia and Japan have “strong” enterprise risk management (ERM) scores, it says. Other countries have improved over the past 18 months but still lag behind more developed markets.

The Australian Prudential Regulation Authority has raised its expectations on risk management, with more focus on risk appetite, scrutiny of actuarial reviews last year and more risk-sensitive life and general insurance capital standards from January 1 this year.

Insurers must now have board-approved internal capital adequacy assessments, to ensure capital buffers are appropriate, supported by stress testing and scenario analysis.

Australian insurers have embraced national and international risk management standards, with market leaders learning from the global financial crisis and making substantial investments in ERM.

They have adopted economic capital modelling or dynamic financial analysis, and some large Australian life companies leverage their banking parents’ robust risk management frameworks.

“The ERM advances of major European and US-based parents have also served their Australian units well,” the report says. “While the industry has not been without its risk management failures, the occurrence of significant risk events has tapered off in recent years.”

Taiwan Ratings credit analyst Andy Chang says Asia-Pacific insurers still fall short of those in more developed markets. “Nevertheless, we believe that global regulatory trends, along with emerging risks such as floods in Thailand, will motivate insurers to enhance their risk management controls.”

In New Zealand, insurers have managed their businesses to withstand catastrophe risk, but not all survived the Christchurch earthquakes, the S&P report says.

The Reserve Bank of New Zealand’s appointment as regulator in 2010, the nearly complete licensing process and revised insurance regulations are expected to result in better risk management practices.