Insurer solvency stress testing should be stressful, according to a senior Australian Prudential Regulation Authority (APRA) official.

Keith Chapman, GM of APRA’s Supervisory Support Division, says the global financial crisis has taught the industry that things can change quickly and companies need to look far beyond standard model deviations and into the extreme.

“They need to ask, ‘What if something extreme happens?’,” he told the Insurance Summit conference in Sydney on Friday. “What is going to be the impact on your business? What sort of capital do you need? What sort of process do you need to cover it?”

He says APRA pushes through the supervision process the message that insurers need to work out what they need to know when things start to change quickly, and have an efficient process in terms of the course of action they might need to take.

But he believes the local insurance industry generally has good corporate governance and is more forward-focused than overseas operators.

Mr Chapman says APRA’s relationships with insurers vary from good partnerships where information is shared to more distant situations.

“I often ask why we are seen by industry to be over-the-top in terms of how much information we want quickly when the position does start to change,” Mr Chapman said. “We actually find it quite worrying that industry can’t give us that information.”

He says it would be a mistake if highly prescriptive rules were to emerge from international regulatory forums.

Australia needs to balance its effective supervisory approach with offshore frameworks.