Australian Prudential Regulation Authority Research Articles

ANALYSIS OF ROBUST CHAIN LADDER METHOD IN ESTIMATING AUSTRALIAN MOTOR INSURANCE RESERVES WITH OUTLYING DATASET

Reserves are one of the most crucial components for an insurance company to make sure it has enough money to pay off all the incurred claims. The presence of outliers in the incurred claims data harbors risk on inaccurately predicting reserves to cover claim amounts, usually achieved by the standard chain ladder reserving method. To remedy the effect of the outliers, the robust chain ladder reserving method is used by setting the median value to predict estimated reserve. On this research, we utilized both methods on various datasets. The purpose of this paper is to determine the best method that can be utilized by insurance company in various scenario to obtain the most optimized reserved estimate that can minimize the risk of being unable to pay the insurance claim or even the risk of over allocating reserves that could pose profitability issue. The primary data used are the Australian domestic motor insurance claims from 2012 to 2017, obtained from Australian Prudential Regulation Authority (APRA). The dataset is then manipulated to have outliers. After calculating the estimation, the result is compared to assess the strength of the methods using Mean Squared Error (MSE) and Root Mean Squared Error (RMSE) calculation. In conclusion, we found that the robust chain ladder reserving method works better in an outlying dataset. We also identify cases in which robust chain ladder are not appropriately used.

How executive remuneration responds to guidance: evidence from the Australian banking industry

AbstractThis study investigates whether executive remuneration responds to regulatory guidance. Using an exogenous shock in the form of a regulatory guideline issued by the Australian Prudential Regulation Authority to the Australian banking industry, we analyse whether remuneration is more aligned to prudent risk‐taking since the guideline was published. We find that remuneration to both chief executive officers and the top five highest paid executives was adjusted to be more consistent with the guideline from its first year of operation. These findings are robust to the introduction of the Two Strikes Rule as an alternative explanation.

Impact of the COVID-19 Pandemic on Manual Therapy Service Utilization within the Australian Private Healthcare Setting

The COVID-19 pandemic has impacted a wide range of health services. This study aimed to quantify the impact of the COVID-19 pandemic on manual therapy service utilization within the Australian private healthcare setting during the first half of 2020. Quarterly data regarding the number and total cost of services provided were extracted for each manual therapy profession (i.e., chiropractic, osteopathy, and physiotherapy) for the period January 2015 to June 2020 from the Australian Prudential Regulation Authority. Time series forecasting methods were used to estimate absolute and relative differences between the forecasted and observed values of service utilization. An estimated 1.3 million (13.2%) fewer manual therapy services, with a total cost of AUD 84 million, were provided within the Australian private healthcare setting during the first half of 2020. Reduction in service utilization was considerably larger in the second quarter (21.7%) than in the first quarter (5.7%), and was larger in physiotherapy (20.6%) and osteopathy (12.7%) than in chiropractic (5.2%). The impact varied across states and territories, with the largest reductions in service utilization observed in New South Wales (17.5%), Australian Capital Territory (16.3%), and Victoria (16.2%). The COVID-19 pandemic has had a profound impact on manual therapy service utilization in Australia. The magnitude of the decline in service utilization varied considerably across professions and locations. The long-term consequences of this decline in manual therapy utilization remain to be determined.

Service utilisation trends in the manual therapy professions within the Australian private healthcare setting between 2008 and 2017

BackgroundBetter understanding of the dynamics and temporal changes in manual therapy service utilisation may assist with healthcare planning and resource allocation. The objectives of this study were to quantify, describe, and compare service utilisation trends in the manual therapy professions within the Australian private healthcare setting between 2008 and 2017.MethodsData regarding the number of services, total cost, and benefits paid were extracted for each manual therapy profession (i.e. chiropractic, osteopathy, and physiotherapy) for the period 2008–2017 from the Australian Prudential Regulation Authority. The number of registered providers for each profession were obtained from the Australian Health Practitioner Regulation Agency. Descriptive statistics were produced for two time periods (i.e. 2008–2012 and 2013–2017) for each manual therapy profession. Annual percentage change during each time period was estimated by fitting Poisson regression models. Test for the equality of regression coefficients was used to compare the trends in the two time periods within each profession, and to compare the trends across professions within a time period.ResultsA cumulative total of 198.6 million manual therapy services with a total cost of $12.8 billion was provided within the Australian private healthcare setting between 2008 and 2017. Although service utilisation and total cost increased throughout the ten-year period, the annual growth was significantly lower during 2013–2017 than 2008–2012. Whereas osteopathy and physiotherapy experienced significant annual growth in the number of services and total cost during 2013–2017, negative growth in the number of services was observed for chiropractic during the same period. The annual number of services per provider declined significantly for chiropractic and physiotherapy between 2013 and 2017.ConclusionService provision under private health insurance general treatment cover constitute a major source of revenue for manual therapy professions in Australia. Although manual therapy service utilisation increased throughout the ten-year period from 2008 to 2017, the annual growth declined. There were diverging trends across the three professions, including significantly greater decline in annual growth for chiropractic than for osteopathy and physiotherapy.

Switching between superannuation funds: Does performance and marketing matter?

This study examines the roles of fund performance and marketing in superannuation members' fund switching activity in Australia. Using member-nominated transfers from a unique data set of Australian Prudential Regulation Authority (APRA)-regulated superannuation funds from 2005 to 2014, our results indicate that members who switched funds do not chase after superior short-term returns but they do punish bad performers by withdrawing investments. We find a consistent positive relation between marketing effort and investor choice for retail funds, which engage in extensive marketing. However, marketing does not appear to be an effective strategy for industry-based funds to attract investments.

Has the Australian Prudential Regulation Authority Done Enough to Meet Its Legislated Objectives and Prepare Australia for the Next Financial Crisis?

This article examines APRA’s performance against its legislated objectives and the policy rationales and legal theories underlying the supervision of prudential regulation and promotion of financial system stability. The article will investigate the prudential framework in place and actions taken by APRA in the period beginning January 2014 to the end of June 2018, focusing on APRA’s oversight of residential property lending standards because the quality of these loans will be the single largest determinant of the future health of the Australian financial system. The current study’s findings and broader evidence suggest that APRA’s responses to ongoing lax and risky home lending standards were ad hoc, conservative, and reactive.

Australia

This Detailed Assessment of Observance report specifies Base Core Principles (BCP) for effective banking supervision in Australia. An assessment of the effectiveness of banking supervision requires a review of the legal framework, and a detailed examination of the policies and practices of the institution(s) responsible for banking regulation and supervision. In line with the BCP methodology, the assessment focused on banking supervision and regulation in Australia and did not cover the specificities of regulation and supervision of other financial institutions. The assessment has made use of five categories to determine compliance: compliant; largely compliant, materially noncompliant, noncompliant, and non-applicable. The report insists that Australian Prudential Regulation Authority (APRA) should put more focus on assessing the various components of firms’ Internal Capital Adequacy Assessment Process and other firm-wide stress testing practices. A periodic more comprehensive assessment of banks’ risk management and governance frameworks will further enhance APRA’s supervisory approach.

Restricted Banking Licences: An Opportunity to Be Seized

In August 2017, the Australian Prudential Regulation Authority (APRA) launched a public consultation concerning a new licensing regime for authorised deposit-taking institutions (ADI). This article argues that the new Restricted ADI licences proposed by APRA should, if implemented, serve to promote competition and innovation in Australia’s financial system. However, such promotion must preserve the integrity of the market and, crucially, ensure that Australians are not affected in case of possible failures of the new entrants. The integrity of the new licensing regime, which follows a global trend of creating new opportunities for businesses to enter the banking market, will ultimately depend on APRA’s response to the underlying challenges highlighted in this article.

Impact of Asset Allocation and Operational Structure on the Investment Performance of Australian Superannuation

In the first paper, the lacklustre investment performance of Australian superannuation was attributed to the Retail sector. This second paper investigates potential explanations for this fact through an empirical attribution analysis of the impact of asset allocation, operational structure and scale on sectoral investment performance. Since 2004, relatively lower investment returns of the Retail sector have not been compensated by lower risk, due to unexpectedly higher return volatility. This fact can be explained by significant costs neglected in most academic theories. Using official asset allocation data available from the Australian Prudential Regulation Authority (APRA), for the three years to September 2016, the 2.7 percent per annum difference in measured investment performance between the Industry and Retail sector has been attributed 1.1 percent to asset allocation and 1.6 percent to operational structure and costs. The high cost of Retail funds (incurred but not reported) is consistent with the high incomes and profits reported annually by vertically integrated conglomerates from providing superannuation and related financial services. At March 2017 Retail assets of $577 billion, the 2.7 percent return deficit relative to Industry funds represents about $15.5 billion per annum in additional costs to Retail members. Empirically, but contrary to the theory of economic rationalism, the market approach to superannuation, based on competition and profit maximization of the Retail sector, has been detrimental to members.

Corporate boards, monitoring and securities class actions: a pitch

PurposeThe purpose of this paper is to apply Faff’s (2015) pitch template to a regulatory financial accounting research topic. The author describes her personal reflections on completing the pitch template for this project by investigating corporate boards, monitoring and securities class actions (SCAs) in Australia. The author builds on prior research in this area (Chapple et al., 2014). This study is set within prior literature examining capital markets, corporate governance, continuous disclosure regime and regulatory changes. The market reaction to corporate board changes pre- and post-SCAs is the focus of the examination within the pitch template. The pitch letter contributes to prior literature, as it demonstrates a team with established researchers using the pitch template, while prior papers have documented PhD student usage of the pitch template.Design/methodology/approachThe author uses the Faff (2015) pitch template to focus the research team’s ideas into a concisely focused research idea. An earlier version of this pitch was presented at the Centre for International Finance and Regulation Pitching Research Symposium on 29 May 2015 in Sydney to a panel of distinguished professors and participants from market regulators including the Australian Securities and Investments Commission, Reserve Bank of Australia, Australian Prudential Regulation Authority and the financial sector including Colonial First State.FindingsIt was found that there are benefits to using the pitch template for both established and emerging researchers. Prior pitch papers have primarily been authored by PhD students. This paper’s aim was to provide evidence that established as well as emerging scholars can benefit from completing the Faff pitch template.Originality/valueThis pitch letter contributes to the research community, as it shows the process and personal reflections on undertaking the pitch exercise by a team including established and emerging researchers. Within this pitch letter there is a documentation of how the research team for the underlying project was formed and the prior experiences of the team.

Contagion risk for Australian banks from global systemically important banks: Evidence from extreme events

This paper presents evidence that extreme negative shocks for the global systemically important banks (GSIBs) are contagious to Australian banks. Our logit regression models predict transmission of adverse extreme shocks in the distance to default (DD) of GSIBs to the Australian banks. While most previous studies consider contagion across national stock markets, we investigate the degree of contagion risk for Australian banks spreading from GSIBs. Our results point to the critical importance for the Australian Prudential Regulation Authority (APRA) (2015) to closely observe and monitor developments across the major GSIBs and direct appropriate local policy measures accordingly.

Efficiency of Australian superannuation funds: a comparative assessment

Purpose The purpose of this paper is to measure efficiency of superannuation funds using data envelopment analysis (DEA), using data related to financial performance of superannuation funds. The sample comprises 183 superannuation funds covering approximately 79 per cent of the 231 largest Australian Prudential Regulation Authority (APRA)-regulated funds in 2012. The research covers a period of seven years from 2005 to 2012. The results indicate that most Australian superannuation funds are inefficient relative to the benchmark efficiency frontier based on efficient funds. The findings emphasise the importance of improving the efficiency of Australian superannuation funds by reducing overall fund expenses to narrow the gap in performance between efficient and inefficient funds. Design/methodology/approach This study aims to contribute to policy, theory and practice in several dimensions. Member protection and the efficiency of the superannuation system are topical issues (Donald, 2009). Despite its importance from a regulatory point of view, efficiency has only been discussed in relation to operational issues such as managing agency relationships, fees and charges, investment return or economies of scale. The relative efficiency of the Australian superannuation system from an economic productivity perspective has rarely been examined, except for a study by Njie (2006), where the Malmquist productivity DEA technique was used to measure the efficiency of Australia’s retirement income system. Findings Most inefficient funds had very low efficiency scores and were fell into the lower quintiles such as Quintiles 4 (scored 0.200-0.399) and 5 (scored 0.001-0.199). Consequently, input reduction targets were significantly higher for these two quintiles. Similarly, input reduction targets were high under the period DEA estimates. In order to be comparatively efficient, Quintile 4 funds were required to reduce total expenses by 75 per cent (−0.754) and volatility of return by 80 per cent (−0.801). Similarly, Quintile 5 funds needed to reduce total expenses by, on average, 83 per cent (−0.824) and volatility of return by 89 per cent (−0.894). Research limitations/implications As in other empirical research, this study also depended heavily on the data collected from the secondary sources such as APRA database and other financial reports. The issues of measurement errors in data sources such as APRA database are well documented (see, e.g. Cummins, 2012). This issue needs the attention of future research on the efficiency of superannuation funds. Practical implications The findings on individual year DEA estimates indicate that most funds were inefficient due to high expenses. Therefore, mandatory disclosure of fees and charges in a comparable manner may be necessary to justify fee payments and to address transparency and accountability issues, which are critical issues identified by the Cooper Review and the academic literature (Australian Government, 2014; Cooper et al., 2010; Gallery and Gallery, 2006). Social implications The issue of Australian superannuation funds concentrating the majority of fund assets in highly volatile investment vehicles such as the share markets has been in the spotlight in the aftermath of the global financial crisis. There have been proposals to better diversify superannuation assets in other asset classes (Cooper et al., 2010). Originality/value This study contributes to the current literature on superannuation funds by investigating efficiency. As efficiency studies using DEA have not been conducted on the Australian superannuation industry, this study also contributes to the academic literature on DEA and its extensive applications to various economic sectors. Efficiency scores using DEA, ranking, trends and shifts in the efficiency frontiers could be obtained for Australian superannuation funds on an on-going or annual basis.

Australian Prudential Regulation before and after the Global Financial Crisis

This paper reviews the nature of Australian bank prudential regulation before and after the Global Financial Crisis (GFC). It provides a detailed conceptual framework for understanding the functions of banks and deposit-takers, the theory of what can go wrong with the operation of these institutions, and the logic of prudential regulation. It traces developments in Australian prudential regulation from the introduction of the formal capital-based framework in the 1980s to the implementation of the Basel III regime after the GFC. The paper concludes that i) the introduction of the Financial Claims Scheme was a clear and welcome change compared with pre-GFC arrangements; ii) the introduction of the Basel III liquidity regime constituted a more fundamental modification, best characterised as a significant refinement to the riskbased calculation of capital than as a fundamental change to regulatory philosophy; iii) the Australian Prudential Regulation Authority (APRA) had been practising macroprudential regulation well before the GFC even though Australia’s adoption of Basel III’s macroprudential apparatus appears on the surface to constitute a genuine innovation in prudential regulation; and iv) the importance of financial stability as a policy objective and the nature of macroprudential regulation raise questions about the wisdom of having split monetary policy and prudential regulation functions in 1998, and a revisit of this question and a reassessment of institutional structures are called for.

AIST Superannuation Governance: Paper examining International and Australian Governance Trends

The Australian Government is seeking to introduce major changes to the governance of superannuation funds. Industry superannuation funds in Australia often have an executive board of directors in which the composition of the boards is based on equal representation of the number of directors elected by the Members and by the employer organisation. One of the major tenets of governance is the appointment of independent directors. The Government has issued a discussion paper in which it was suggested that this should be adopted by the superannuation funds. This paper argues on behalf of the Australian Institute of Superannuation Trustees (AIST) why this change is not necessary and how under the current model the funds are compliant with the governance standards of the Australian Prudential Regulation Authority (APRA) and the Australian Securities Exchange (ASX).

Twin Peaks The Legal and Regulatory Anatomy of Australia's System of Financial Regulation

This paper is one of a series of working papers that explore various aspects of Australia’s system of financial regulation and the relevance of its experience to reform in other countries. Adopting a broad perspective that outlines the context in which the system operates in Australia, it examines the anatomy of the ‘twin peaks’ model as it exists in Australia from a legal and regulatory perspective and how it deals with fundamental regulatory issues. The twin peaks system is functionally based. The functions for financial regulation are consolidated into two regulators: the Australian Securities and Investments Commission, which is responsible for the regulation of companies, market conduct and consumer protection, and the Australian Prudential Regulation Authority, which is responsible for prudential regulation. Under this model, the central bank, the Reserve Bank of Australia, remains responsible for monetary policy and financial stability, including ensuring a safe and reliable payments system. The two other models with which the twin peaks model is usually compared are the institutional model, under which the different sectors - namely, banking, insurance and securities - are supervised by different regulators, and the integrated model, under which supervision is consolidated in a single integrated regulator, or ‘super-regulator’, as was previously the case in the United Kingdom before it adopted the twin peaks model. The relevance of the twin peaks model is becoming greater as an increasing number of jurisdictions have adopted, or are considering adopting, this model. It has also been of recent interest in Australia in the context of the Financial System Inquiry of 2014, which reviewed Australia’s financial system and examined many issues that are relevant to the ways in which the twin peaks model works in Australia.

Association between Key Management Personnel Remuneration and the Performance of Authorized Deposit-Taking Institutions in Australia

The study investigates the association between each component of key management personnel remuneration (short-term and long-term remuneration) and total remuneration, and the performance of Authorized Deposit-taking Institutions (ADIs) in Australia. Data were collected from 91ADIs regulated by the Australian Prudential Regulation Authority. The study provides evidence that total key management personnel remuneration, short-term key management personnel remuneration and long-term key management personnel remuneration are significantly associated with the performance of ADIs, while the pay-performance association is weaker for long-term remuneration as compared to total remuneration and short-term remuneration. In addition, size of the board, existence of remuneration board committee and composition of remuneration board committee is significantly associated and composition of the board is partially associated with the performance of ADIs in Australia. The findings of the study also suggest that the pay-performance association is more sensitive for short-term remuneration as compared to long-term remuneration, indicating that although long-term remuneration is widely used by ADIs, short-term remuneration is an important part of key management personnel remuneration.

Longevity Risk and Capital Markets: The 2010–2011 Update

This Special Issue of Geneva Papers on Risk and Insurance - Issues and Practice contains 10 contributions to the academic literature all dealing with longevity risk and capital markets. Draft versions of the papers were presented at Longevity Six: The Sixth International Longevity Risk and Capital Markets Solutions Conference that was held in Sydney on 9-10 September 2010. It was hosted by the Australian Institute for Population Ageing Research, the Australian School of Business and the University of New South Wales. It was sponsored by PricewaterhouseCoopers, Australian Prudential Regulation Authority (APRA), Coventry Capital, Swiss Re, and Institute of Actuaries of Australia.

Impact of the regulatory regime on promoting the housing finance market in Australia

The purpose of this article is to analyse how Australia's regulatory framework for housing finance mitigates various risks in mortgage lending and promotes positive market outcomes and system stability. The article first considers the main bodies involved in the regulation of residential mortgages, their roles and the type of regulations enforced by each regulator in relation to housing finance in Australia. The key regulators identified in this article include the Reserve Bank of Australia, the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission and the Australian Competition and Consumer Commission. This part focuses on the post-financial crisis regulatory changes in housing finance, including revisions to existing regulations and introduction of new regulations. The article then discusses the implications of regulation for mortgage markets and players, practices and conduct. This section reviews mortgage lending practices in Australia that can be viewed as either particularly prudent or particularly risky. Finally, the article analyses the impact of regulation on promoting positive market outcomes, including housing finance system stability in Australia.

Longevity Risks and Capital Markets: The 2010-2011 Update

This Special Issue of Geneva Papers on Risk and Insurance - Issues and Practice contains 10 contributions to the academic literature all dealing with longevity risk and capital markets. Draft versions of the papers were presented at Longevity Six: The Sixth International Longevity Risk and Capital Markets Solutions Conference that was held in Sydney on 9-10 September 2010. It was hosted by the Australian Institute for Population Ageing Research, the Australian School of Business and the University of New South Wales. It was sponsored by PricewaterhouseCoopers, Australian Prudential Regulation Authority (APRA), Coventry Capital, Swiss Re, and Institute of Actuaries of Australia.

Economies of Scale and Scope in Australian Superannuation Funds

This paper estimates economies of scale and scope for 200 large Australian superannuation (pension) funds in 2009 using a multiple-output cost function. This is the first and currently only year that certain fund-level information provided in the superannuation annual returns to the Australian Prudential Regulation Authority (APRA) has been deemed non-confidential and made publicly available. Costs are separately defined in terms of investment expenses - including investment, custodian and asset management fees - and operating expenses - comprising management, administration, actuarial, director and trustee fees and charges. Four outputs are specified for each cost: namely, cash flow adjusted net assets, the number of investment options, the proportion of total assets in the default strategy and the five-year rate of return for investment costs, and cash flow adjusted net assets, the number of members, net contribution flows and net rollovers for operating costs. The findings indicate that ray economies of scale hold up to at least 300 percent of current mean output in both investment and operating costs, though product-specific economies of scale hold primarily for assets under management and the number of investment options at relatively high levels of output for investment costs and for rollovers at low levels of output for operating costs. In contrast, there is little evidence that global and product-specific economies of scope prevail in the sector, and this is reflected in the proclivity of many superannuation funds to contract out many aspects of their investments and operations.