The Australian Prudential Regulation Authority (APRA) has released a new technical paper reviewing its capital requirements for general insurers – one of a series outlining the regulator’s proposals to update general and life insurers’ capital standards.

GM Policy Development Helen Rowell says the paper describes APRA’s proposals for determining general insurers’ insurance concentration risk capital charge – the part of the minimum capital risk that takes into account an insurer’s highest aggregation of risks.

The regulator has also invited insurers to participate in a “quantitative impact study” this month.

The existing concentration risk capital charge was designed to ensure that an insurer could remain solvent and continue to cover risks already underwritten, even after the occurrence of a single extreme event.

It was also intended that insurers would be able to raise additional capital if needed to support future business, as past losses would be provided for through capital and/or reinsurance cover.

The paper says the existing concentration risk capital charge differs from other components of the capital framework, which are aimed at requiring an insurer to hold sufficient capital to ensure at least a 99.5% probability of survival over the next year.

The present arrangement could lead, among other things, to insufficient levels of reinsurance “designed to cover the risk of large single events being purchased for geographically diversified property insurers exposed to large losses in more than one location”.

The key features of the proposed concentration risk capital charge include alignment with the target 99.5% probability of sufficiency that applies for the overall capital framework, and separate consideration of the limit of vertical cover required and the amount of capital and/or reinsurance required.

The paper is available on the APRA website.