The Australian Prudential and Regulation Authority (APRA) has updated the industry on its progress in designing a new capital adequacy regime, addressing industry concerns that have arisen after the revisions to its capital standards proposals released at the end of March.

APRA held a seminar with the Institute of Actuaries, the Insurance Council of Australia and the Financial Services Council as part of its consultation process to assist industry in their preparation of submissions to the life and general insurance capital proposals, which are due by July 31.

APRA Executive Member Ian Laughlin says the major concerns to arise from the consultation process are the capital requirements APRA is looking for above the level of so-called “pillar one” capital, concerns about the complexity and over-conservatism of pillar one requirements, and how transitional arrangements will work.

He says that the pillar one model APRA is proposing will be appropriate for “a normal, going-concern insurer which is well managed, has sound governance, robust and effective risk management and a satisfactory internal capital adequacy assessment process”.

For capital required above pillar one levels, Mr Laughlin says insurers that do not meet the criteria, as well as those that have high growth plans, a changing strategy or an unusually risky business model may qualify for a pillar two assessment.

“The pillar two outcome is ultimately in the insurer’s hands,” he says, adding that “large doesn’t necessarily mean pillar two adjustment”.

He says if APRA-recommended changes to a strategy or business model are adopted by companies, a pillar two assessment can be avoided.

“Pillar two is not a tool for APRA to lift industry capital levels via the back door. We’re not going to use it as a de-facto way of lifting pillar one requirements.”

Helen Rowell, GM Policy Development at APRA, says that in response to concerns about the complexity of the pillar one requirements, APRA has made some simplifications.

But she maintains that “some complexity is appropriate”.

Addressing concerns about the conservatism of the proposed pillar one requirements, Ms Rowell says that the overall increase in capital required has been “higher than intended” by APRA.

The regulator has refined many of the risk charges in response, but she says the greater risk sensitivity allows for a wider range of individual company outcomes.

She says that because the proposals will affect each insurer differently, APRA is open to transitional arrangements to the new standards being designed on a case-by-case basis.

APRA is due to release a second response paper and draft prudential standards on the life and general insurance capital requirements at the end of October, with the new standards coming into effect on January 1 2013.