General insurers are permitted to use catastrophe bonds and other types of insurance-linked securities (ILS) for their reinsurance needs, the Australian Prudential Regulation Authority (APRA) says in a reminder letter to the industry. 

The prudential regulator issued the reminder having observed ongoing difficulties in the reinsurance market, noting premiums have gone up due to a range of factors such as the war in Ukraine and recent natural disasters. 

Insurers have also sought to increase their retentions in response to higher reinsurance premiums, says APRA. Retention refers to the part of the accepted risks which an insurer/reinsurer does not reinsure. 

“In the current reinsurance environment, insurers may wish to consider both traditional and ILS options,” APRA says in the letter. 

“While traditional reinsurance arrangements will remain an integral part of an insurer’s overall reinsurance strategy, we recognise the benefit to considering a range of reinsurance solutions.” 

Reinsurance requirements and expectations as set out in Prudential Standard GPS 116, and specifically its reinstatement requirements for catastrophe reinsurance, favour traditional reinsurance solutions. 

GPS 116 also permits the use of catastrophe bonds and other forms of ILS which may not have a reinstatement.

APRA says Australian insurers have preferred to use traditional reinsurance solutions. 

“There has been little participation in Australian reinsurance by ILS markets, and the use of catastrophe bonds, which is a common form of ILS, is rare,” the APRA letter says. 

The regulator says insurers looking to use ILS should “engage with APRA early and prior to any formal approval request when considering these”. 

“For these to be approved, the insurer must demonstrate to APRA why their use is practical and appropriate,” the letter says. 

APRA also says in the letter it intends to review the reinsurance settings in the prudential framework over the course of 2023 and the first half of 2024 to ensure reinsurance requirements remain fit-for-purpose.