Sydney-based life insurer NobleOak Life (ASX: NOL) has received a notice from the Australian Prudential Regulation Authority (APRA) saying that it is in breach of its prudential and reporting obligations concerning its capital. 

The regulation authority informed NobleOak that the calculation and reporting of its reinsurance asset exposures deviated from APRA’s prudential standards. As per the notification, NobleOak’s approach is inconsistent with APRA’s interpretation. However, the Company defended its process, saying that its method for calculating and reporting reinsurance asset exposure is consistent with the advice received from its appointed actuary, KPMG. Plus, NobleOak’s financial statements have also been subject to an external audit by Deloitte Australia.

APRA holds that NobleOak has breached Prudential Standard LPS 117 Capital Adequacy: Asset Concentration Risk Charge (LPS 117) and Reporting Standard LRS 117.0 Asset Concentration Risk Charge (LRS 117.0). The breaches are about the measurement and reporting of NobleOak’s reinsurance exposures and the associated asset concentration risk, which have resulted in a breach of capital requirements.

The Company and APRA affirm that this won’t affect shareholders, but NobleOak has also not revealed the costs involved in getting back on track. 

NobleOak is undertaking actions to manage the way it operates its reinsurance arrangements, and APRA considers these a credible plan. The Company believes that the impact of these actions will effectively mitigate the issues raised by APRA and satisfy its regulatory reporting obligations by 30 June 2023. NobleOak’s network extends to a diversified panel of APRA-regulated reinsurers and is working collaboratively with these reinsurers and the authority.

In its half-year FY23 financial report, NobleOak pointed to the increase in regulation over the past years. Over the last three years, changes to adviser revenue models and the increased licencing and regulatory requirement for advisers have resulted in an over 30% reduction in adviser numbers across the market. This has led to product changes, leading to annual sales falling across the country—NobleOak’s new product sales fell by 46% on H1 FY22. 

Today, there are fewer policyholders switching life insurers, which can also be observed by the sustained lower levels of cancellations across the industry. To make matters worse, fewer people are interested in buying Life Insurance. That could be the outcome of rising inflation and interest rates.

Seeing how few factors are in its control, the Company remains focused on executing its strategy and continuing to achieve growth in in-force premiums, the key value driver for the business. In-force premiums were up 25% to $283.3 million in H1 FY23, with net insurance premium revenue up 25% to $38.4 million.

But now, it might also have to consider the expenses resulting from mitigating this breach.

APRA will examine NobleOak’s processes for compliance with its standards in the context of its broader risk governance framework to establish the underlying causes of such breaches. It will also take action as needed to hold those responsible for the breach to account. 

The NobleOak board has launched a review of its control processes for complying with APRA’s prudential standards.