Under scrutiny were the first quarterly Life and General Insurance Capital (LAGIC) reports, which have already been submitted to APRA by insurers.
In a speech to the Financial Services Accountants Association this week, APRA member Ian Laughlin said in general the industry had “coped well” and “done a good job of implementation to date”.
But when it came to the Internal Capital Adequacy Assessment Process (ICAAP) summary statements, there were some instances of items being “completely omitted”, said Mr Laughlin.
“Two areas that were often poorly addressed were independent review and stress testing. In both cases, there were instances when they were noted, but not much else,” he said.
Insurers should discuss the frequency of their independent reviews, along with the person(s) who carry them out, said Mr Laughlin.
As for stress testing, insurers should include more details about which factors will be stressed, and what scenarios will be considered – “particularly in terms of the major risks to the entity”, he said.
In addition, risk appetite, risk assessment and internal controls “were not well addressed in many cases”, said Mr Laughlin.
Looking specifically at the life insurance industry, the March quarterly reports indicate that the capital coverage of the industry has remained steady since December 2012, said Mr Laughlin.
He also highlighted the “poor claims experience” in the group life insurance sector, which has contributed to a 25 to 45 per cent increase in premiums for large superannuation funds in recent years, he said.
“This is a direct reflection of poor past pricing and governance practices, and recognition that the premium rates were just not sustainable,” said Mr Laughlin.
The increase in premiums is an indication that insurers are following better practices, with “stronger governance, more robust analysis [and] justification of assumptions”, he said.
“Unfortunately, superannuation members bear the brunt of the mispricing that occurred in the past,” said Mr Laughlin.
Turning to the relatively high lapse rates seen in recent years, he urged life companies to question whether it was a “short-term blip” or a more structural change to the industry.
In particular, he pointed to the high lapse rates in directly marketed life insurance, and the consequent “reputational implications” for companies.
“The risk is that actual experience is worse than anticipated and profit is depressed. We have seen some evidence that this is occurring, so we will monitor this experience closely,” Mr Laughlin said.
