In a speech at the Aon Benfield Hazards Conference, APRA deputy chairman Ian Laughlin said that without catastrophe reinsurance, industry capital would need to increase by about 100 per cent just to meet required prescribed capital amounts.
“I’ve given you these figures just to highlight the significance of catastrophe risk management to the industry P&L and balance sheet, and hence its fundamental importance to the financial management of general insurers and the industry as a whole,” Mr Laughlin said.
“This begs the questions: does the industry give catastrophe risk management the attention it deserves, given this significance? I don’t think it does.”
Mr Laughlin outlined an example to highlight the importance of having good management around catastrophe reinsurance models in areas of geographic risk.
He said it is important that company boards recognise the “considerable weaknesses and deficiencies” of catastrophe risk models and assess their limitations as a tool.
“APRA wants each insurer to challenge itself about its governance and management of catastrophe reinsurance arrangement and to adopt very good practices,” Mr Laughlin said.
“We particularly want the insurer to understand the strengths and weaknesses of any models it uses, and the degree of uncertainty in the results produced.
“And we want model outputs to be complemented by significant further analysis.
“Lastly we want the insurer to satisfy itself that the residual risk is truly within its appetite,” he added.
Mr Laughlin said APRA is “absolutely intent” on seeing the industry improve its catastrophe risk assessment.
