The prudential regulator has warned insurers to seek its permission before they enter into offshore arrangements.

Speaking at a conference in Sydney last week, Australian Prudential Regulation Authority (APRA) Chairman John Laker said a growing phenomenon in the financial services sector is offshoring – “the practice of outsourcing business activities to a provider outside Australia”.

“APRA does not wish to discourage prudently structured offshoring arrangements, but it does expect institutions to consider the additional and specific risks involved,” he said.

Dr Laker also warned of “country risk” – the risk that overseas economic, political and/or social events would impact on the ability of the overseas provider to continue to provide services to the institution.

“Another is compliance (legal) risk – the risk that offshoring arrangements will impact upon the institution’s ability to comply with relevant Australian and overseas laws and regulations,” he said.

Another less obvious risk, “but one that is relevant to both the regulated institution and APRA”, is access risk. This is the risk the institution may not be able to obtain information or retain records or that APRA may not be able to access the service provider and the business activity being conducted.

Dr Laker said because of the different scale and dimension of risks in offshoring, “we are proposing that general insurers obtain APRA’s approval prior to entering into any material offshoring arrangements”. 

“This is one stable door we don’t want to reach late. Subject to the consultation process, our intention is to introduce a harmonised prudential framework for outsourcing, including offshoring, across all our regulated industries.”