The Australian Prudential Regulation Authority (APRA) is concerned that cost-cutting, complacency and inexperience are compromising insurance companies’ risk management.

Executive GM Charles Littrell says the insurance industry is APRA’s most challenging sector, which has moved from bust to boom since 2001. “I am hopeful that the general insurance industry has moved away from excessive cyclicality, but only time will tell if this hope becomes reality.”

Mr Littrell says a review of general insurance reveals that there is room for improvement in basic processes, including documentation and risk management policies. The main risk the insurance industry faces is not dishonesty but incompetence.

Citing large unit pricing problems in the life insurance and superannuation industries as an example, he says that in a few cases compensation has run into the tens of millions. “We expect to uncover more unit pricing errors among superannuation trustees and note that trustees who tell us about their problems are more likely to receive sympathetic treatment.”