The Australian Prudential Regulation Authority (APRA) has issued a draft guide on capital standards for general and life insurers.

The Prudential Practice Guide aims to help insurers develop internal capital adequacy assessment processes (ICAAPs).

“This obligation goes beyond the need to ensure compliance with regulatory capital requirements and requires the board to ensure each regulated institution holds capital resources commensurate with its risk profile,” the guide says.

“Consistent with that overarching responsibility, the capital standards require each regulated institution to have an ICAAP that has been approved by its board.”

The regulator wants senior management to be involved in developing ICAAPs, with input from appointed actuaries where necessary.

“APRA expects the board to robustly challenge the assumptions and methodologies behind the ICAAP and the associated documentation,” the guide says. It also “expects the board to understand and be able to explain the key aspects of the ICAAP and why it is considered appropriate for the institution”.

The regulator says ICAAPs should be integrated into insurers’ decision-making processes and considered in strategic and business planning.

APRA has also issued a draft guide on insurance concentration risk. Again, boards are responsible for “prudent and effective” management.

“APRA expects the board to review the insurer’s exposure to insurance concentration risk, the effectiveness of the proposed reinsurance arrangements and the residual risk,” it says.

“The board is expected to use analysis and recommendations from management and relevant experts to assist its understanding of the concentration risk to which the insurer is exposed.”

The regulator wants insurers to use catastrophe models, scenario analysis, stress testing, advice and analysis from reinsurers. This analysis should also be used to assess the suitability and adequacy of reinsurance arrangements.

APRA wants insurers to regularly review their concentration risk exposure and have documented processes to help the board and senior management understand the topic.

It has also issued a draft paper to help insurers calculate the asset risk charge in their businesses.

The industry has until December 21 to comment on the two guides and paper.