The Australian Prudential Regulation Authority has clarified its rules on aggregate reinsurance and how it will be used when calculating companies’ capital requirements.

Aggregate reinsurance covers an accumulation of losses, such as from a series of storms or earthquakes.

It is used when determining an insurer’s insurance concentration risk charge (ICRC), or the minimum amount of capital the company must hold against the risk of a single large loss or series of losses.

The regulator has written to insurers explaining the types of reinsurance contract it will accept as providing aggregate cover when determining ICRCs, and its approach to drop-down covers.

Insurers must apply to the regulator if they want to recognise aggregate reinsurance in calculating their ICRCs.