Australia’s new reinsurance capital requirements to boost general insurers

Whilst lower reinstatement requirements could reduce reinsurance costs, mandating all-perils coverage may increase them. 

The Australian Prudential Regulation Authority (APRA) has proposed changes to reinsurance-related capital requirements, which Fitch Ratings says could enhance the credit profiles of Australian general insurers over the medium term by improving access to reinsurance protection. 

However, the long-term impact will depend on the pricing of catastrophe reinsurance and the frequency and severity of natural disasters.  

The proposed reforms, currently under consultation, would require general insurers to secure all-perils reinsurance coverage, reduce reinstatement requirements, and remove the requirement to hold reinstatement premiums within the insurance concentration risk charge (ICRC). 

These changes are expected to take effect in June 2026.  

The reforms may encourage insurers to consider alternative reinsurance solutions, such as catastrophe bonds and insurance-linked securities. 

APRA highlighted this option in August, but adoption in Australia has been limited, partly due to reinstatement requirements tied to traditional reinsurance. Lowering these requirements could make alternative structures more attractive.  

Catastrophe reinsurance pricing has surged, driven by more frequent and severe extreme weather events. Insurers have raised retention limits, exposing themselves to higher risks. 

For instance, Suncorp Group increased its net retention under main catastrophe reinsurance from A$250m to A$350m for the financial year ending June 2024. It also chose not to renew aggregate excess of loss cover, which protects against a series of smaller events.  

Whilst lower reinstatement requirements could reduce reinsurance costs, mandating all-perils coverage may increase them. The overall impact of APRA’s proposals is uncertain, as global reinsurers showed reduced appetite for all-perils cover during 2023 renewals, potentially constraining capacity.  

APRA currently requires insurers to hold capital against a one-in-200-year loss. Reinsurance protections meeting this threshold are given capital credit. 

By contrast, the Reserve Bank of New Zealand requires capital coverage for a one-in-1,000-year earthquake event, influencing the reinsurance strategies of Australian insurers operating in New Zealand.  

Fitch notes that expanding reinsurance options could help insurers better manage net catastrophe exposures without significantly raising retention levels or probable maximum loss (PML) values. 

This would support insurers' credit profiles by keeping net PML within manageable levels, a key factor in Fitch’s capitalisation assessments.  

Despite potential benefits, Fitch warns that successive severe catastrophes, such as one-in-200-year events, could strain insurers' capital and earnings if reinstatements are unavailable. 

Whilst such events remain rare, the increasing uncertainty around natural disaster risks adds to the challenge.