Lower interest rates require higher premiums – that’s the pricing implication for general insurers in the wake of the economic downturn, according to the prudential regulator.

In an address last week to the Institute of Actuaries of Australia, Australian Prudential Regulation Authority (APRA) Executive Member John Trowbridge said large and rapid interest rate falls during 2008 took their toll on profits and balance sheets.

He says the industry is “now very much on its guard” and that relatively adverse economic conditions will likely generate increased claims activity in the period ahead, despite the recovery in confidence, a fall in credit spreads and a rise in longer interest rates since December. 

Mr Trowbridge says the regulator’s response to the global financial crisis has been “modest”.

“I want to put emphasis in particular on supervision as distinct from regulation,” he said, referring to last month’s G20 Summit leaders’ statement that called for consistent, consolidated supervision and regulation.

He says there is no particular reason Australia should follow Europe’s emerging Solvency II regulatory regime for general and life insurance.

“The combination of political compromises on the regulations, levels of technical difficulty and implementation challenges make Solvency II a very uncertain venture when viewed from outside Europe,” he said.

But he says APRA is assessing Australia’s own capital and other requirements against Solvency II.