Bigger is not necessarily better when it comes to insurers’ reports on internal capital adequacy assessment processes, regulators say.

It follows insurers’ first summary statements to the Australian Prudential Regulation Authority (APRA) since the life and general insurance capital (LAGIC) regime began on January 1.

“Insurer size did not seem to necessarily be an indicator of better quality [reports],” APRA Executive Member Ian Laughlin told the Financial Services Accountants Association last week. “Indeed, some large insurers were not well rated.”

Statements on 17 key areas were completed “reasonably well” but there was often significant room for improvement.

Independent review and stress testing were frequently addressed poorly, as were risk appetite, risk assessment and internal controls, according to Mr Laughlin.

But the industry has done a good job of implementing LAGIC so far, he says.

Although general insurers continue to invest mainly in highly rated interest-bearing securities, low interest rates may encourage them into riskier investments, and APRA is monitoring this closely.

In coming months the regulator will assess the governance and risk management of a group of insurers, Mr Laughlin says.

While the underwriting performance of short-tail property classes improved significantly last year because of premium increases and fewer disasters, long-tail classes were mixed, with competitive pressures and risks to claims cost.

“Management and controls in insurers’ pricing processes continue to be a key issue identified in APRA insurance risk reviews,” Mr Laughlin said. However, he says underwriting and claims management controls improved last year.

APRA proposes collecting regular data on reinsurer counterparties, to assess the impact on insurers of reinsurer downgrades or failures.

Last December Treasury issued a discussion paper on improving the financial regulation framework, which included strengthening APRA’s crisis management powers.

Mr Laughlin says this would help align Australia’s regime with international best practice, but given the Government’s priorities work is unlikely to start before next year.