The Australian Prudential Regulation Authority (APRA) has a comprehensive and well-documented style of risk-based supervision, but a lack of independence and poor inter-agency co-ordination threaten its performance, according to the International Monetary Fund (IMF).

The regulator is held in high regard by the industry for its prompt and consistent supervisory actions but government interference may undermine its role, the IMF says in a review of Australia’s insurance sector.

The IMF singles out two areas of concern: the Treasurer can direct APRA and Australian Securities and Investments Commission (ASIC) policy; and can also rule on changes to significant ownership of an authorised deposit-taking institution.

“Although such power has rarely been used… its existence could potentially diminish the ability of APRA and ASIC to carry out their supervisory and regulatory functions effectively,” the report says. “Therefore, it is important for APRA to have the legal power to veto, on prudential grounds, any decision on changes in significant ownership.”

While the IMF applauds trans-Tasman co-operation on prudential regulation, co-ordination between ASIC, APRA and other agencies is largely by “informal arrangement”.

APRA also needs to enhance cross-border co-ordination with international regulators. It has bilateral agreements on supervisory matters with US and UK supervisory agencies and discussions with other jurisdictions are ongoing.

The IMF notes APRA has made “significant progress” improving regulatory standards since 2006, including implementing stage II reforms of general insurance supervision and broadened enforcement powers.

Unlike ASIC, APRA is well funded and has the technical know-how to conduct effective supervision, the report says.

The IMF describes the local market as small, mature and consolidated, noting the top three insurers hold 66% of life assets and 75% of personal line premiums.