The prudential regulator has urged insurers to review their outsourcing practices in preparation for the start of CPS 230 Operational Risk Management on July 1.

The standard applies to Australian Prudential Regulation Authority-overseen insurers and is aimed at strengthening operational risks and responses to business disruption. It also requires insurers to enhance third-party risk management, which includes underwriting agency partners.

APRA executive director of general insurance and banking Jane Magill says the industry has rapidly increased its use of external service providers in recent years, making the ecosystem more complex and requiring greater resilience in times of stress.

She says the use of third-party services extends to engaging underwriting partners to sell products, which may lead to “elevated risks”.

“It is a business decision whether an insurer keeps functions in house or chooses to use third-party providers,” Ms Magill told an industry conference last week. “It is also an insurer’s choice to distribute products via delegated underwriting arrangements if that fits with their strategic objectives.

“But delegated underwriting can bring elevated risks that need to be suitably managed and reflected in your frameworks of risk appetite, controls, measurement and reporting with clear accountability.

“The simple message is that you can delegate the task, but you cannot delegate your responsibility.”

Ms Magill says the regulator will “elaborate more on delegated underwriting later this year”, including sharing better practices.

“But for now, we encourage you to consider if there is scope to enhance your risk management around your arrangements and ensure that you are managing any conflicts of interest … it is critical that we all approach this standard with the clear intent of lifting the bar.”

She says CPS 230 will “help organisations to get their operational house in order. It will support you to identify, assess and manage foundational operational risks, with effective internal controls, monitoring and remediation.

“It also means that you should be able to continue to deliver critical operations within tolerance levels throughout severe disruptions, and with credible business continuity plans. This includes being able to handle claims in a reasonable time frame after an event that generates high demand.”

Ms Magill also urged the industry to improve pricing transparency, which has become more important because of steep rises of recent years.

APRA believes the industry can better explain how policies are priced and what risks are covered, which “would be beneficial for consumers and would help to enhance trust”, she says.

She says premium increases have moderated but remain well above the rate of inflation. Home premiums rose 16% last year and are up 92% over the past decade.

On the industry’s handling of Ex-Tropical Cyclone Alfred, Ms Magill said: To date, we have seen positive signs in terms of insurers’ readiness and proactivity to respond to Cyclone Alfred. This is commendable.”