The Australian Prudential Regulation Authority (APRA) is increasing its focus on how insurers set their risk appetite after reviews raised questions over the analysis behind risk-setting and boards’ involvement with the task.

APRA Supervisory Support Division EGM Helen Rowell told the Insurance Council of Australia Regulatory Update conference in Sydney last week that discussions with directors and CEOs had found some boards had “a questionable level of engagement” in setting risk appetite.

When APRA reviewed risk appetite statements it found the quality varied from “poor to quite good”.

The reviews picked up a lack of analysis using stress testing that supported how an insurer set its risk appetite as well as a disconnect between the statement and its translation into operation.

In response, APRA will increase its work on risk appetite and issue guidance to insurers.

Ms Rowell said directors have complained that APRA expects too much of boards, and is overburdening them with regulation and confusing the role of directors and senior management.

But the Insurance Act imposes responsibilities on senior management and boards, and the prudential standards empower boards because they give a frame of reference for good practice.

She said boards rely heavily on management and there is plenty that senior executives can and should do to support boards, including helping directors to think ahead, providing clear and targeted information and providing tools to complement documents and explain issues – for example, sensitivity tables or graphs in capital management considerations.

Ms Rowell said APRA has stressed the need for insurers to adopt a holistic approach to risk and capital management and the starting point for this is the insurer’s risk appetite.

Other areas of focus this year include reinsurance, catastrophe modelling, pricing practices and capital adequacy. APRA intends to issue final capital standards mid-year, to take effect from January 1 next year.

Ms Rowell said there had been considerable feedback on the insurance concentration risk charge and the horizontal requirement, which is intended to address a series of catastrophes over a year.

Insurers have complained that “it is overly conservative, the reinsurance to offset the requirement is more expensive and less readily available” and there are timing issues.

But she said events of the past few years have shown the risk of multiple events needs to be addressed in the capital framework and APRA does not believe the requirement is overly conservative.

It sees no need to delay the introduction of the new capital requirements past January 1 but is considering a short delay in implementation of the horizontal requirement.