Insurers need to remedy their recovery planning significantly before they are judged to have credible plans in place, the Australian Prudential Regulation Authority (APRA) says.

The regulator assessed general and life insurers’ current plans against existing APRA guidance. The plans – designed in-house – are meant to enable insurers to survive a financial shock and restore themselves to sound condition without needing a taxpayer bailout.

APRA says many of the plans it has assessed aren’t effectively integrated with the insurer’s broader risk management framework, and don’t consider how a broad range of emerging risks could coalesce to cause a financial shock.

Multiple plans are relying on a single capital trigger for activating the plan instead of being able to identify various emerging risks across different areas, it says.

The regulator suggests insurers create stronger plans that incorporate a wider range of early warning indicators and operate in a cascading manner to trigger intensifying responses according to severity.

Insurers also need to consider a range of stress scenarios that are severe enough to trigger the plan, it says.

The escalation procedures, trigger framework, recovery options and communication strategy should be consistent and aligned with other risk management documents. Governance arrangements should be well understood.

APRA also wants insurers to make people clearly responsible for activating and monitoring the plans.

Most insurers don’t have a framework to do operational testing, and they should be doing dry-runs and training exercises at least annually. They also don’t know how much it will cost to implement the recovery plan. This is significantly underdeveloped across the majority of insurers, the regulator says.

“Building recovery and resolution capability, through improved planning, will remain a key strategic priority for APRA over the coming years,” Executive Board member Geoff Summerhayes said.