The Australian Prudential Regulation Authority (APRA) is set to reshape the banking landscape by introducing a three-tier classification system.
This framework will categorise banks into large banks (the majors), medium banks (other banks designated as Authorised Deposit-taking Institutions or ADIs, specifically those classified as Significant Financial Institutions SFIs), and small banks (non-SFIs).
This nuanced approach signals a strategic shift towards more tailored regulatory oversight and risk management that better reflects the diverse business models within the banking sector.
What does the new three-tier system mean?
APRA’s proposed change aims to calibrate regulatory requirements more precisely according to the size, risk profile, and operational complexity of banks.
As stated by APRA’s Chair, John Lonsdale (opens a new window), “This change will allow us to introduce more nuance into our policy and supervision approach to banks, with greater differentiation between requirements for different bank business models.”
For the majors, regulatory scrutiny and capital requirements are likely to remain stringent given their systemic importance.
Medium-sized banks, identified as SFIs, will face a middle ground subject to regulatory requirements that reflect their growing role but allow some operational flexibility.
Small banks, the non-SFIs, will see lighter regulatory burdens, acknowledging their lower systemic risk and simpler business models.
How insurers might respond
Insurance providers will be closely watching these regulatory shifts.
Banks typically secure a range of insurance products to mitigate operational risks, cyber risks, professional indemnity, directors and officers (D&O) liabilities, and more.
With differentiated regulatory expectations, insurers will need to reassess risk profiles for each banking tier.
Increased demand for tailored insurance products:
Larger banks will continue demanding comprehensive, high-limit policies with rigorous risk management support. Medium banks might seek more customized products that balance coverage with cost efficiency, given their transitional scale. Smaller banks may look for simpler, more affordable solutions.
Risk appetite and pricing adjustments:
Insurers will likely recalibrate their risk appetite and pricing models to reflect the varied supervision intensity and business complexities in the three tiers. For example, small banks may be viewed as lower risk, potentially benefiting from lower premiums or simplified underwriting processes.
Opportunities for innovation:
The nuanced regulatory environment creates openings for insurers to innovate product offerings, particularly around emerging risks such as cyber threats or evolving compliance landscapes.
The role of a broker
Insurance brokers are uniquely positioned to help banks navigate this transition and optimise their insurance coverage in alignment with APRA’s new framework.
Our expertise can help with delivering tangible benefits across several dimensions:
Risk assessment and coverage optimisation: We can analyse the distinct risk exposures of banks across all three tiers and recommend tailored insurance solutions that align with regulatory expectations and business realities.
Cost efficiency and negotiation: By leveraging our market knowledge and relationships, we can negotiate favourable terms and consider an organisations risk profile through a holistic lens to help ensure banks receive value-driven protection.
Education and compliance support: We provide risk advisory considerations to educate bank management on evolving regulatory requirements, helping them understand how insurance fits into broader risk management and prudential frameworks.
Collaboration: We serve as the crucial link between banks and insurers, fostering communication and understanding. This partnership helps ensure insurance policies are not only adequate but also aligned with strategic goals, supporting business outcomes and financial stability.
Toward greater stability in the banking sector
The shift to a three-tier system reflects APRA’s commitment to a more sophisticated, risk-sensitive approach to supervision.
This regulatory evolution means banks will require more nuanced, responsive insurance solutions.
In this changing landscape, banks will benefit from risk advice that is not just reactive but proactive, helping them manage risk comprehensively while navigating new regulatory waters.
Ultimately, this collaboration contributes to stronger, more resilient financial institutions that can better withstand operational challenges and support economic stability.
The contents of this publication are provided for general information only. Lockton arranges the insurance and is not the insurer. While the content contributors have taken reasonable care in compiling the information presented, we do not warrant that the information is correct. The contents of this publication are not intended as a legal commentary or advice and should not be relied on in that way. It is not intended to be interpreted as advice on which you should rely and may not necessarily be suitable for you. You must obtain professional or specialist advice before taking, or refraining from, any action based on the content in this publication.
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