The Australian Prudential Regulation Authority (APRA) has issued new prudential standards on outsourcing for general insurers and life companies.

The standards, to take effect on January 1, are designed to ensure regulated institutions manage in a prudent manner the risks from outsourcing material business activities.

APRA says they introduce greater flexibility in the approach to intra-group outsourcing and deal explicitly with outsourcing to an overseas party (offshoring).

The standards enhance current arrangements for general insurers and extend to the life insurance sector for the first time.

APRA Chairman John Laker says the use of third parties to perform business activities can be beneficial but also entails additional risks.

“Well-run institutions already address these outsourcing principles as part of their operational risk management systems,” he said.

As part of the new standards, APRA says an insurer must consult with it before entering any offshoring agreement involving a material business activity to ensure there’s an adequate risk management framework.

“If, in APRA’s view, the offshoring agreement involves risks that the insurer is not managing appropriately, APRA may require the insurer to make other arrangements for the outsourced activity as soon as practicable.”