The insurance industry must pay more attention to catastrophe risk management, Australian Prudential Regulation Authority (APRA) Executive Member Ian Laughlin warns.

Boards do not assess risk adequately or properly document the research and decision-making that supports their safeguards against catastrophe losses, he told the Aon Benfield Hazards Conference last week.

“APRA wants each insurer to challenge itself about its governance and management of catastrophe reinsurance arrangements and to adopt very good practice.”

The regulator is “absolutely intent” on improving industry practice, he says.

“We particularly want the insurer to understand the strengths and weaknesses of any models it uses and the degree of uncertainty in the results produced.”

Mr Laughlin says without catastrophe reinsurance for probable maximum loss (PML), industry capital would have to double to meet its prescribed capital amount (PCA), or increase by 300% to maintain current PCA coverage.

Catastrophe risk management is fundamental to insurers’ financial management, but does not get the attention it deserves, he says.

“Is it because it is too hard to understand, so a broad-brush is applied? Or maybe it’s because there are experts and tools to produce the answer.”

Mr Laughlin says catastrophe models can have considerable deficiencies, and APRA expects insurers’ boards to understand this and adjust their PML calculations accordingly.