Australia: Capital adequacy reform post-Basel II

The Basel II capital adequacy reforms, due to be implemented in Australia in January 2008, introduce the possibility of certain types of insurance products having a role as capital reduction tools under the applicable Australian regime. Dean Carrigan reviews some of the challenges this will create for authorised deposit-taking institutions.

Authorised deposit-taking institutions seeking to use insurance as a capital mitigant will need to adopt an advanced measurement approach to operational risk, map their operational risk exposures and then carefully match those exposures against the insurance coverage it has in place for those risks.