Document ID: chunk:federal_register_of_legislation:F2023L00678:body:0:p10
Version: federal_register_of_legislation:F2023L00678
Segment Type: other
Provision Reference: 
Character Range: 26663–29901

between the insurer and the reinsurer. An arrangement may involve one contract, or a combination of two or more individual contracts and/or side letters.

     2. Such arrangements are often characterised by requirements placed on the insurer to mitigate any loss experienced by the reinsurer to this arrangement over a future period of time.

     3. While the main purpose of such arrangements is usually financing, Limited Risk Transfer Arrangements can be used to affect the presentation of financial results. This can lead to a misrepresentation of the true financial position of the insurer that may ultimately pose risks to policyholders.

Approval of Limited Risk Transfer Arrangements
    4.              At a minimum, the submission for approval must include:

       (a)          a draft contract or other draft proposed agreement and collateral or 'side' agreements, and any other documentation or information relevant to the transaction (including a written description of any verbal understandings and/or undertakings that are material to the operation of the arrangement); and

       (b)          details of the proposed accounting treatment and the effect of the proposed arrangement on the statement of financial position[13] and capital adequacy of the insurer for each reporting period and over the full period of the arrangement, certified by the Appointed Auditor.

    5.             Where (a) is not available, the insurer must submit to APRA a comprehensive description of the proposed arrangement including details of any risk transfer and financing elements.

    6.             When seeking approval, the insurer must demonstrate to APRA that it has formal written policies and procedures addressing the purpose, nature and use of Limited Risk Transfer Arrangements. Specifically, the insurer must, at a minimum, demonstrate that:

       (a)          the purpose and effect of any Limited Risk Transfer Arrangement is fully understood;

       (b)          the associated risks have been identified and addressed;

       (c)          appropriate internal approvals have been identified and implemented;

       (d)          the Appointed Actuary and Appointed Auditor have indicated whether the arrangement, in their view, meets the description of a Limited Risk Transfer Arrangement as outlined above; and

       (e)          all documentation has been scrutinised by suitably qualified and experienced staff of the insurer.

    7.             APRA will only approve a Limited Risk Transfer Arrangement where the following criteria are met:

       (a)          the arrangement has a legitimate purpose and effect;

       (b)          the arrangement will not disguise, or is not designed to disguise, a material risk to the insurer's current or continuing profitability, solvency or capital adequacy from any party;

       (c)          the financial costs and benefits of the arrangement, and the nature and potential quantum of any potential risks to policyholders, are reflected in the application for approval and the proposed accounting and disclosure arrangements;

       (d)          there will be no adverse effect on the insurer's balance sheet and capital position in any one