"Confidential" and Australian Prudential Regulation Authority - [2002] AATA 1346

DECISION AND REASONS FOR DECISION [2002] AATA 1346

ADMINISTRATIVE APPEALS TRIBUNAL )

) No N2002/874

GENERAL & ADMINISTRATIVE DIVISION    )
           Re        "CONFIDENTIAL"
  Applicant
           And    AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY
  Respondent

DECISION

Tribunal Hon Justice Garry Downes AM, President Mr W McLean, Member; Ms C Prime, Member

Date4 July 2002
PlaceSydney

Decision        Applications refused.
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REASONS FOR DECISION

Introduction

This application was heard on 1 July 2002. On the same day substantial amendments to the Insurance Act, 1973 commenced. These amendments were made by the General Insurance Reform Act, 2001 (the amending Act). By the amending Act, the Insurance Act, 1973 as in force before 1 July 2002 is called "the old Act" and as in force from 1 July 2002 is called "the new Act". We will adopt that terminology.
The Tribunal, following ss 63(14) of the new Act, conducted the hearing in private. Consistent with that provision, we have in these reasons taken the additional step of not referring to the applicant by name. We have also made efforts to ensure that other facts contained in the reasons do not disclose the identity of the applicant. To that end the names of various individuals and companies have been omitted.
By s.10 of the new Act:

"10(1) A body corporate (other than a Lloyds underwriter) commits an offence if:

(a)the body corporate carries on insurance business in Australia; and
(b)the body corporate is not a general insurer;"

By s.11 of the new Act:

"A general insurer is a body corporate that is authorised under section 12 to carry on insurance business in Australia."

Section 12(1) of the new Act authorises bodies corporate to "apply in writing to APRA [the Australian Prudential Regulation Authority] for an authorisation to carry on insurance business in Australia. By s.12(2) "APRA may authorise an applicant to carry on insurance business in Australia." Section 13 permits APRA to impose conditions on an insurer's authorisation relating to prudential matters.

Schedule 2 of the amending Act contains "transitional provisions" which are given effect to by s.3 of the amending Act. By item 2 of those provisions Division 2 of Part III of the new Act (which contains the provisions relating to authorisation) "appl[ies] after the Act receives the Royal Assent as if those provisions had come into operation at that time". The Royal Assent was given on 19 September 2001. Item 2 was enacted "[f]or the purpose of allowing applications for an authorisation to carry on insurance business to be made and dealt with before the commencement" of the amendments. Schedule 2 contains other provisions in aid of the timely making and processing of applications so as to permit insurers to qualify for the grant of authorisations under s.12 of the new Act prior to the commencement date.
Schedule 2 provides for a transition period of two years. Item 3A of the amending Act provides that licences under the old Act will cease to be in force "immediately after an authority is granted" under the new Act. Item 4 is in the following terms:

"4 Application of the old Act during the transition period

(1)APRA may determine that all or specified provisions of the old Act continue to apply to a person or class of persons for a specified period during the transaction period.

(2)The determination may include a different specified period in respect of:

(a)different provisions of the old Act; or
(b)different persons or classes of persons.

(3)The determination may be made subject to specified conditions.

(4)A copy of the determination must be published in the Gazette and, on Gazette publication, has effect according to its terms."

Item 5 permits APRA to determine that "all or specified provisions of the new Act do not apply to an insurer." It is in similar form to item 4.
Part IIIA of the new Act authorised APRA to determine prudential standards "that must be complied with … by all general insurers." Prudential standards are disallowable instruments for the purpose of s.46A of the Acts Interpretation Act 1901. APRA has now determined a number of prudential standards. A "Guidance Note" has also been issued, entitled "Guidelines on Authorisation of General Insurers". These documents, in draft form, were available prior to the granting of Royal Assent to the amending Act.
The applicant is an insurer that was authorised to carry on insurance under the old Act.

History

On 3 September 2001 APRA sent a letter to all general insurance companies giving information relating to the new prudential standards which would apply under the new Act. The letter referred to draft standards which had been issued on"Capital Adequacy, Liability Valuation, Risk Management and Reinsurance". It announced the issue of draft standards relating to "assets inside Australia" and "transfer of business between insurers". The letter included the following:
"The draft Prudential Standards are available from the APRA web site ( Comments are welcome by 30 September 2001.
As noted, the new prudential regime will come into force on 1 July 2002. The regime will be based on the revised Insurance Act, from which APRA will derive its power to issue Prudential Standards. As well as the two draft standards issued today, APRA has released draft standards on Capital Adequacy, Liability Valuation, Risk Management and Reinsurance. These have been discussed extensively with industry and, following consideration of latest industry submissions, APRA hopes to issue final versions of the Prudential Standards in early November. The Standards, which are disallowable instruments, will then go before Parliament for final endorsement.
The new prudential regime imposes a number of new requirements on general insurers. Some of the more important are:
·     the need to apply to be authorised under the new regime;
·     the need to appoint an auditor and an actuary, and have these appointments approved by APRA;
·     the need to meet new capital adequacy requirements (including a new minimum capital requirement of $5 million);
·     the need to review the composition of the insurer's Board to ensure membership provides adequate independence and oversight;
·     the need to ensure directors and senior management meet new standards of fitness and propriety;
·     the need to establish a Board Audit Committee;
·     the need to provide APRA with the insurer's business plan and financial projections;
·     the need to develop, and submit to APRA, a Risk Management Strategy document; and
·      the need to develop, and obtain APRA's approval for, the insurer's Reinsurance Management Strategy.
It is important that all general insurance companies have a detailed knowledge of the new requirements, and start work now to ensure that they will be able to comply from 1 July 2002.
Many companies already have policies and practices in place that will meet the new requirements. However, it will still be necessary for these policies and practices to be assessed in detail against the new Standards, and for any specific remedial actions to be identified, discussed with APRA as necessary and undertaken promptly."

On 24 September APRA wrote directly to the applicant. That letter included the following:
"As you are now aware, the reforms to the prudential supervision of the general insurers commence on 1 July 2002. As a result, there will be significant changes to the prudential requirements, which firstly includes the need for all insurers to be authorised under the new Insurance Act. In this respect, every insurer needs to submit an application for authorisation addressing the requirements set out in the Authorisation Guidance Note which should include, at a minimum, information in relation to each of the draft prudential standards GPS 110, GPS 210, GPS 220 and GPS 230. The application should be made in writing to APRA and signed by 2 directors. Further information regarding the authorisation can be found in the draft Guidance Note on Authorisation of General Insurers available on the APRA web-site at .au.
The major change will be the need for all authorised insurers to meet new risk based capital requirements and a new minimum entry requirement of $5 million in accordance with the new Prudential Standard GPS 110. Our latest analysis shows that [the applicant] has a solvency surplus of $357,000 for the quarter ending 30 June 2001 which has fallen from a surplus of $636,000 reported for the previous quarter ending 31 March 2001. With the new requirements, there is now a tighter timetable for general insurers to raise additional capital or look to merge with others to meet the requirements. APRA is concerned that the company will not be able to meet the new capital requirement, as a solvency surplus of $357,000 is considered to be extremely marginal. Accordingly, APRA requires that [the applicant] formally develop appropriate strategies to address the issue and submit to APRA the relevant strategic plan as a matter of urgency.
However, as indicated in our letter of 3 September 2001, there is a two-year transition period until 30 June 2004 for companies unable to meet the new capital requirements on 1 July 2002. In this respect, if you are intending to take advantage of the transitional arrangements, APRA strongly encourages [the applicant] to submit its strategic plan together with a timetable as soon as possible to demonstrate that the company can get its capital position in order."

The applicant replied to this letter on 16 October 2001. The letter claimed the applicant was being required "to jump from one hoop to another". It objected to being referred to a website and asked APRA "to provide us copies of the exact legislation in place". It proposed a meeting "to discuss the issues for clarification purposes." APRA's reply of 22 October 2001 drew attention to the impractibility of it being required to provide hard copies of the legislation and suggested that the applicant's particular concerns might be communicated before any meeting was held. That same letter also stated:
"APRA also notes that [the applicant has] known of the reforms for an extended period of time, in particular, … the increase in minimum capital of a general insurer from $2 million to $5 million. APRA is surprised that the company has not yet developed appropriate strategies to address the issues."
This letter produced the following response dated 6 November 2001:
"Thanks for your letter of 22 October 2001.

Your letter is almost insulting. It implies that we haven't got any strategy in place for the future of the company.

We have consulted with a number of professionals including actuaries, for instance Brent Walker, who is unable to predict the future of legislation either.

Nevertheless, we have strategies in place.

As for your last sentence in your third paragraph, using the word 'surprised'. You are making inferences with no basis on which to do so. I doubt very much that you have any professional reason for carrying on the way that you are.

You must recall that your department was the overseer of the HIH disaster as well as numerous Super-fund collapses.

In any event, one of the things that our firm surely plans for is future APRA shenanigans.

If you want to help have a meeting. If not, then just continue on the way in which you are heading."

This intemperate response does not seem to us to represent the appropriate reaction of a corporation to a regulator whose proper and reasonable requirements had to be complied with. We should have thought that at this point in time the applicant would have been setting about preparing a well documented case for its reauthorisation as an insurer which responded to the matters found in APRA's letters and enclosures.
On 5 November 2001 APRA had written to all general insurance companies giving more detail of reauthorisation procedures. The letter contained a proposed timetable which would have seen all necessary steps completed in time to achieve reauthorisation prior to the commencement of the new Act. It contained the following:

"Your application will need to demonstrate that your company will be operating under the new Prudential Standards from 1 July 2002 and will need to assure us that your company:

·is in a sound financial position;

·is unlikely to cause instability in the Australian financial system; and

·is conducting its affairs with integrity, prudence and professional skill."

Nothing seems to have happened for two months until APRA again wrote to the applicant on 10 January 2002. In this letter APRA agreed to a meeting. A response to this letter was apparently sent by the applicant on 17 January 2002, but not received by APRA. In any event by letter dated 6 February 2002 APRA proposed dates in February 2002 for a meeting. By letter dated 11 February 2002 the applicant agreed to the last of these dates, namely 18h February 2002. The meeting took place. However, on 14 March 2002 APRA again wrote to the applicant. The letter was as follows:
"We refer to earlier correspondence and our meeting of 18th February 2002 concerning the requirement for all insurers to be authorised under the new Insurance Act.
You will be aware that [the applicant] must be authorised prior to 1 July 2002, the commencement date of the new standards, in order for it to write insurance business from that date forward. You will also be aware from earlier correspondence of the preferred timeframes for lodgement of applications for authorisation.
We note to date that APRA has not received an application from the body corporate. If the body corporate proposes to submit an application for authorisation, APRA requests that it be submitted at the earliest possible opportunity, and no later than Friday 19th April 2002, in order to allow time for it's assessment by APRA and, if required, submission of amendments facilitating authorisation prior to the commencement date of the new regime. In any event, APRA requests that the body corporate advise APRA immediately of it's intentions and progress."

The applicant replied on 19 March 2002. The letter was as follows:

"Thanks for your letter of 11 March 2002.

Naturally we will attend to these issues in our reregistration process which we hope to have to you in the not too distant future.
Unfortunately we are constrained a little bit as we have been waiting for a couple of weeks for a reply and explanation to a particular part of APRA's legislation interpretation from Mr Lumsden.
Meanwhile, in order to just give you a brief review of our reinsurance arrangements, we have not entered into any reinsurance arrangements whatsoever and have never done so at any time which involves side letters or any other thing that would reduce the transfer of risk.
We have proper and traditional reinsurance arrangements in place.
We trust that this information at least assists for the time being just to let you know there is nothing wrong on this side of the fence."

To the extent the applicant intended this letter to provide some partial support for its application, we consider that it fails dismally. It does not contain any particularity, nor any documentary support.
APRA informed the applicant that Mr Lumsden was on leave and any particular concerns should be addressed to the writer of the APRA letter. The applicant replied on 22 March 2002. The letter included the following:
"You might recall that, at our meeting a few weeks ago, Andrew Lumsden suggested that, if our company goes into runoff, it will essentially go into liquidation or be handed over to another insurance company.
[A], at the time, tried to get Andrew Lumsden to qualify that further, asking him specifically whether or not this would occur even if a company was in a sound financial condition but just didn't meet the new solvency requirements?
Unfortunately, Andrew Lumsden was unable to answer at that time.
This company is in a sound financial position and, as we move forward in our growth strategies and other strategies in order to re-register, we had written to Mr Lumsden some weeks ago in order to determine this issue as it is important in our planning.
The shareholders of this firm stand to make a great deal of money if the company was to be put into runoff because the company can easily meet its outstanding claims and all of its other liabilities and still have a pile of money left over.
However, if APRA is of the view that that just would not be allowed we need to know because, if the company was extremely successful in its underwriting in the future as it is now, then a runoff is sometimes a very sensible way in which to exit a business to legitimately take the profits."

We do not find this letter easy to understand. However, it does suggest that the applicant was considering ceasing to write new business as an alternative to obtaining reauthorisation. This seems to be the way in which APRA understood the letter when it replied on 4 April 2002:

"Unfortunately at this stage, insufficient information has been provided to APRA to give a definitive answer on this matter. APRA's considerations, as I am sure you will understand, would be influenced by a number of considerations not limited to the following:

· findings of the inspector currently appointed to investigate [the applicant];

· submission of a detailed proposal for the runoff in particular with respect to any longtail exposures;

· outcome of the examination of [the applicant's] application for reauthorisation which will be required in the event of [the applicant] proposing either to continue to underwrite or to go into runoff."

On 11 April 2002 APRA again wrote to the applicant concerning the obligation to submit an application for authorisation. It again asked for the application by 19 April 2002.
The reference to the investigation is a reference to an investigation which APRA had asked an actuary to undertake into:
"(i) [the applicant's] assets and liabilities
(ii)[the applicant's] capacity to be able to meet its liabilities in Australia and elsewhere
(iii)The adequacy of [the applicant's] information and reporting systems and the systems and structures it has in place to accommodate and ensure swift and appropriate changes to its financial condition."

The application set out "submissions for re-authorisation" in a letter dated 8 April 2002. Characteristically, rather than providing a complete submission it asked APRA to identify any insufficiencies and stated that it "would appreciate knowing exactly where and how to deal with" them. The letter is four and a half pages long. It discloses the existence of a company which owns 70% of the applicant's capital.
We will not set out the full text of the letter although we have read it with care. We will set out part of the letter which seems to us to illustrate how general and unsupported the submissions were:

"(f) An outline of the proposed organisation framework, including the names, responsibilities and curriculum vitae of senior management.
Referring to information (e) above, the day to day operations and general management control is handled by [B], the Managing Director. As there are only approximately eight (8) staff members, it is not a particularly difficult exercise in which to conduct day to day operations.
[B] has regular contact and meetings with the Board of Directors which is outlined in the Offer Information Statement.
(g) Proposed initial capital and capital ratios.
[The applicant], together with its advisers, has had some difficulty in understanding the Prudential Standard GPS 110 Capital Adequacy. However, the company is currently moving through approximately $3million annualised premium turnover and looking to achieve over the next two (2) years an annualised premium turnover of approximately $10million.

Currently the solvency margins, as at 31 March 2002, stand at approximately $3.7million. The company has outlined in the OIS' plans to write premium of no more than $2.00 for every $1.00 of asset capital and this is still our intention.
The company, is seeking the "grace period" in which to allow for transition from the current solvency margins to the new solvency margin of $5million required by 1 July 2004.
Meanwhile, [the applicant] had planned to raise capital by way of a public offering to it's shareholders through an Offer Information Statement. ASIC have stirred up some unnecessary difficulties with the OIS resulting in a suspension of the OIS. We are currently attempting to work with ASIC to have the suspension removed however all indications are that the matter will proceed the Administrative Appeals Tribunal.
In any event, the OIS even though it was out for a short time only was successful. The number and scope of applications received clearly indicated that the $5,000,000 raising was achievable and likely.
With little effort and little expense another Offer Information Statement or Prospectus could be issued that takes into consideration ASIC's concerns. (please find copy attached together with Supplementary Document)
(h) A written undertaking by substantial shareholders (including any foreign parents) to provide additional capital, if required, and to confirm that their investment in the insurer represents a long-term commitment.
Please find a separate letter attached herewith from Mr [A], principal shareholder of [C] Pty Ltd."

The separate letter contained the following:

"This company is unable to categorically guarantee that it will be able to make up any required sums towards a solvency margin as required.
However, the company will do its best to assist [the applicant] in its endeavours and needs including.
This company has been [the applicant's] principal shareholder since 1989 and plans to remain a major shareholder for the long term."

On 22 April 2002 APRA responded to the application setting out "extensive omissions and shortcomings in the submissions" and stated that "APRA considers that it has been provided with insufficient information on which to base a decision regarding reauthorisation of [the applicant]". The letter concluded:

"It is strongly recommended that [the applicant] review the information it has submitted to date, together with correspondence to [the applicant] from APRA, the 'Guidelines on Authorisation of General Insurers' on the APRA website, The Insurance Act 1973, and the General Insurance Prudential Statements and Guidance Notes, to ensure that a revised submission for reauthorisation is as comprehensive as possible and addresses all requirements. APRA is extremely concerned by the number and scope of omissions in the application, particularly given the short timeframe before the new regime comes into effect. Furthermore, APRA advises that it will not reauthorise [the applicant] from the commencement of the new regime, if it is unable to provide a timely and comprehensive application, which confirms that [the applicant] will comply with the requirements of the new regime from 1 July 2002."

We have read the letter carefully. We agree broadly with APRA's response. We do not propose to incorporate the full text of the letter in these reasons.
On the same day the applicant responded that it would "endeavour [to] address the issues forthwith."
On 26 April 2002 [B], Managing Director on behalf of the Board of Directors in a letter written on the applicant's letterhead stated:

"The company hereby undertakes to:
1.   Adhere to APRA's prudential requirements at all times.
2.   Consult and be guided by APRA on prudential matters and in respect of new business initiatives, and
3.   Provide APRA with any information which may be required for its prudential supervision."

On 30 April 2002, the applicant sent a further submission to APRA comprising 12 pages. The letter was signed by two directors as required.
On 22 May APRA wrote to the applicant expressing the opinion that the application was deficient and inviting the applicant "to show cause why the application should not be refused." A ten page document setting out APRA's reasons was attached. We have carefully read the letter and the attachment.
The applicant wrote on 23 May 2002 that it would "do our best to address all the issues." It did complain that it was being treated like a "large company". It asked for a copy of the Interim Report which had by then been issued by the investigator appointed by APRA. A copy of the report was made available on 24 May 2002.
On 31 May 2002 (by a letter wrongly dated 31 March 2002) the applicant informed APRA that it was seeking the assistance of "outside consultants". On 3 June a meeting took place been representatives of APRA and representatives of the applicant. Notes of this meeting prepared on behalf of APRA suggest that the seriousness of the show cause letter was made known to the applicant's representatives. On 5 June the applicant wrote a four page letter to the applicant responding to the invitation to show cause. We refer below in more detail to this letter.
On 13 June 2002 APRA, by its delegate, refused the company's application for reauthorisation. The communication gave notice of the applicant's entitlement to internal review of this decision.
On 14 June 2002 APRA received a further submission from the applicant along with three letters dated 12 June 2002. One of the letters contained a number of attachments including a lengthy Risk Management Statement, a Business Plan, and a budget containing unsupported financial projections.
On 18 June 2002 the delegate wrote acknowledging receipt of the correspondence dated 12 June and attachments but confirming that he was "not satisfied that the information the company has provided addresses the deficiencies in the company's application." He confirmed his refusal of the company's application for reauthorisation. Upon receipt of this letter by facsimile the applicant immediately wrote suggesting that the letter did not address the recently supplied material, which could not have been accorded proper regard.
On 17 June 2002 solicitors retained by the applicant wrote to APRA seeking that APRA refrain from publishing its decision pending review of the decision by APRA and any proceedings in this Tribunal. They sought agreement to a stay. APRA replied by letter dated 19 June 2002 acknowledging that it had been requested to reconsider its decision.

The Decision

On 25 June 2002 APRA wrote again confirming the decision to refuse the application for reauthorisation. Enclosed with the letter were "determinations and conditions" which accorded with indications as to what was proposed given at the time of the original refusal of reauthorisation. They were as follows:
CONDITION UNDER SECTION 13 ON THE FURTHER
CARRYING ON OF INSURANCE BUSINESS To: [the applicant] (the "Company")
SINCE:
A. The Company has applied to the Australian Prudential Regulation Authority (" APRA ") for re-authorisation to carry on insurance business In Australia under subsection 12(1) of the Insurance Act 1973 as amended by the General Insurance Reform Act 2001 (the "new Act"); and
B. Item 2 of Schedule 2 to the General Insurance Reform Act 2001 (the "GI Reform Act") provides that such applications may be made before commencement of the amendments contained in the new Act, with authorisation to take effect on a date, not before that commencement, specified by APRA; and
C. APRA has decided to refuse the Company's application for re-authorisation to carry on insurance business in Australia under subsection 12(1) of the new Act; and
D. By a determination dated 25 June 2002 (the "Determination") APRA has determined under subitem 4(1) of Schedule 2 of the GI Reform Act that section 23 of the old Act is to apply to the Company during the whole of the transition period; and
E. By the Determination, APRA has determined under subitem 5 (1) of Schedule 2 of GI Reform Act that section 12 of the new Act does not apply to the Company during the whole of the transition period.
I, Graeme Thompson, a delegate of APRA, under paragraph 13(1)(a) of the new Act, IMPOSE the following conditions on the Company:
1. The company may only carry on insurance business in Australia for the sole purpose of discharging liabilities that arose under policies entered into prior to 1 July 2002.
2. The body corporate must seek APRA's approval before making a reduction in capital. A reduction in capital includes, but is not limited to: share buybacks; the redemption, repurchase or early repayment of any eligible capital instruments issued by the insurer or a special purpose vehicle; trading in own shares; aggregate interest and dividend payments exceeding the insurer's after-tax earnings in the year to which they relate.
3. The company shall:
(a)maintain its paid-up share capital at all times at not less than $2,000,000;
(b)maintain the value of its assets at all times to exceed the amount of its
liabilities by not less than:

(i) $2,000,000; or
(ii) 20% of its premium income during its last preceding financial year; or
(iii)15% of its outstanding claims provision as at the end of its last preceding financial year; whichever is the greatest.

To the extent that this Condition 3 conflicts with Prudential Standard GPS 110 titled "Capital Adequacy for General Insurers", including Guidance Notes GGN 110.1-5, this Condition 3 shall prevail.

DETERMINATION THAT PROVISIONS OF THE OLD
ACT APPLY AND PROVISIONS OF THE NEW ACT DO NOT APPLY
I, Graeme Thompson, a delegate of the Australian Prudential Regulation Authority:
·under sub-item 4(1) of Schedule 2 of the General Insurance Reform Act 2001 (the "GI Reform Act"), DETERMINE that section 23 of the old Act continues to apply to [the applicant] during the whole of the transition period; and
·under sub-item 5(1) of Schedule 2 of the GI Reform Act, DETERMINE that section 12 of the new Act does not apply to [the applicant] during the whole of the transition period;

Note: In this determination, "new Act", "old Act" and "transition period" have the meanings given in item 1 of Schedule 2 of GI Reform Act.
Dated this 25th day of June, 2002"

The Proceedings

On 26 June 2002 the applicant commenced proceedings for the review of APRA's decisions communicated by APRA's letters dated 13, 18 and 25 June 2002. At the same time, it applied for orders prohibiting publication, pursuant to s.35(2) of the Administrative Appeals Tribunal Act, 1975 and for other interim orders under s.41(2) of the Act.
On the same day the applicant's solicitors wrote to APRA responding to APRA's letter of 25 June 2002.
The application for interim orders was listed for directions before the Acting President on 27 June 2002. To enable a Tribunal of three persons to be constituted as required by ss.63(10), (11) and (14) of the new Act, the application for interim orders could not be listed for hearing until 1 July 2002. Recognising the Tribunal's concern that a delay of one day should not prejudice the applicant, APRA revoked its existing determinations and made a new determination as follows:

"REVOCATION AND NEW DETERMINATION
I, Graeme John Thompson, Chief Executive Officer and a delegate of the Australian Prudential Regulation Authority:
·under sub-items 4(1) and 5(1) of Schedule 2 of the General Insurance Reform Act 2001 (the "GI Reform Act") and subsection 33(3) of the Acts Interpretation Act 1901, REVOKE the determination under those sub-items made by me on 25 June 2002 in relation to [the applicant] and
·under paragraph 13(1)(b) of the new Act, REVOKE the conditions imposed by me under paragraph 13(1)(a) of the new Act on 25 June 2002 in relation to [the applicant]; and
·under sub-item 4(1) of Schedule 2 of the GI Reform Act, DETERMINE that all of the provisions of the old Act continue to apply to [the applicant]; and
·under sub-item 5(1) of Schedule 2 of GI Reform Act, DETERMINE that all of the provisions of the new Act do not apply to [the applicant]

during the whole of the transition period or until revoked before the expiry of that period.
"new Act", "old Act" and "transition period" have the meanings given in item 1 of Schedule 2 of GI Reform Act. "

APRA made this determination on a temporary basis notifying that, subject to its obligation always to make any determination in accordance with law, if no interim order were made preventing it from doing so, the new determinations would immediately be replaced with a remaking of the previous determinations. This course had the practical consequence that the applicant could, in the meantime, continue to conduct its business as it had up to 30 June 2001, including the writing of new business.
The new determinations did potentially give rise to technical problems associated with the fact that the application for review in its present form relates to the earlier determinations. However, APRA is anxious for the substance of the matter to be dealt with and takes no jurisdictional point relating to the Tribunal's ability to deal with that substance. We consider that it is appropriate to address the substance of the applications and return to any jurisdictional matters as may be necessary.
We have recounted the history of the correspondence and dealings between the parties because they put the matter in context. The applicant can hardly complain that responsibility for the lateness of its ultimate submissions should be borne by anyone but itself. Although APRA does not appear to have acted upon this basis, we think that the delay in action on the part of the applicant, its reluctance to act without assistance from the applicant in preparing a comprehensive submission, its confrontational stance and the undoubted inadequacy of its earliest attempts to satisfy the clear requirements of the legislation are themselves a comment on the suitability of the applicant for authorisation as a general insurer.

APRA's Grounds for Decision

The ultimate decision of APRA, as appears from its letter of 25 June 2002, is based on the contents of that letter and upon the material in the attachment to the letter of 22 May. We will set out the reasons:

Letter of 25 June 2002 -
"Business Plan
(a)Reference to capital appears to be based on a solvency figure calculated in accordance with the Insurance Act 1973 and not in accordance with the General Prudential Standard 110 which will have effect from 1 July 2002.
(b)An estimation of capital as at 30 June 2002 has not been provided to support the assumptions in accordance with the reauthorisation guidelines and it is not clear that all capital charges have been considered in arriving at the capital figure.
(c)Projections for business growth at 25 per cent per annum appear to be unrealistic and not supported by evidence.
(d)The Capital Transition Plan attached to the Business Plan places reliance on capital injection from the shareholders. It does not appear that the company has obtained written undertakings from the shareholders that they are willing and able to make the capital available.
(e)It is noted that loans were made by the company to a shareholder ([C] Pty Ltd) which were subsequently provided for and qualified by the auditor as unlikely to be recovered. This fact appears to contradict the prospect of capital support being provided by this shareholder.

Risk Management Strategy
(a)The document which was prepared by external consultants appears to be a pro forma document tailored in parts to the company's business. For example:
· the document refers to a number of controls which, based on the information obtained by the inspector, are not currently supported by the company's operational structure;
· the document does not contain supporting documentation outlining who will occupy positions identified in the document eg Compliance Officer.
(b)The document refers to procedures that support controls outlined by the Risk Management Strategy. The company has not submitted any documentation to support the existence of such procedures.
(c)The company's reliance on external consultants to prepare and submit the Risk Management Strategy combined with the relevant findings in the Inspector's interim report does not lead APRA to conclude that the company would be capable of implementing the Risk Management Strategy.

For the following reasons the company's response does not demonstrate that the company will have a strong and fully informed Board as prescribed by the relevant prudential standard:
(d)the company has not provided confirmation of the acceptance and appointment of two additional directors referred to in correspondence dated 12 June 2002;
(e)the company has not demonstrated that the Board Chair will be a non executive director;
(f)the company has not specified who will comprise the Board committees."

Letter of 22 May 2002 –
"CAPITAL
1.APRA's Guidance Note titled Guidelines on Authorisation of General Insurers ("the Guidance Note") states that general insurers are required to meet the Minimum Capital Requirements ("MCR") in GPS 110. A general insurer unable to comply with GPS 110 would contravene section 35 of the amended Act which imposes on insurers an obligation to comply with the prudential standards.
2.APRA has acknowledged that some general insurers may not be able to comply with the MCR by 1 July 2002. There is provision for those general insurers to comply by the end of the "transition period" as defined by item 1 of the General Insurance Reform Act 2001. Relevantly the Chief Executive Officer of APRA wrote to general insurers in August 2001 and September 2001 regarding the transitional arrangements and APRA's procedures. In essence those general insurers that are unable to meet the MCR by 1 July 2002 are required to agree a Capital Transition Plan with APRA. On 5 November 2001 the Chief Executive Officer of APRA wrote to all general insurers. In the preferred timetable at the Appendix to his letter the Chief Executive Officer stated that general insurers should reach agreement on their Capital Transition Plans with APRA by the end of December 2001.
3.In its application for reauthorisation the company states that it will meet the MCR at the end of the "grace period" which I take to mean the "transition period". The statements made by the company that it will be able to comply with the MCR by the end of the "transition period" do not in my view constitute a Capital Transition Plan.
4.In its application for reauthorisation the company has suggested it may be able to raise capital by way of public offer although it has advanced no evidence in its application that this process has commenced. I have taken into account the decision of the Australian Securities and Investment Commission ("ASIC") dated 22 March 2002 to place a final stop order on the company's replacement Offer of Information Statement. I have formed the view that ASIC's administrative action will significantly impede the company's ability to raise sufficient capital by way of public offer. I am not satisfied on the information contained in the application that that the company will be able to raise sufficient capital by way of public offer by the end of the "transition period".
5.I note that in its application for reauthorisation the company has provided no evidence to support its statement that its estimated capital base at 1 July 2002 will be $4 million or thereabouts. I note that the company in its application refers to written undertakings by shareholders to provide additional capital if required although the company does not suggest that those undertakings have been formalised. I am not aware that the company has in place capital for the company to meet the MCR by the end of the "transition period" in the event that the company has not raised sufficient capital by that time.

6.I have also had regard to the Interim to the interim report dated 14 May 2002 by the inspector appointed by APRA to investigate part of the affairs of the company under Part V of the Insurance Act 1973 (the "inspector"). The inspector was unable to form a definitive view of the company's solvency and consequently whether the company meets the current minimum capital requirements under the Insurance Act 1973.
7.Based on the information available to me and for the reasons above I am not satisfied that the company will be able to comply with the MCR and therefore GPS 110 either by 1 July 2002 or by the end of the "transition period".

INADEQUATE RECORD KEEPING/INFORMATION MANAGEMENT/ACCOUNTS
8.APRA has throughout the re-authorisation process emphasised that general insurers must have in place adequate record keeping systems in order to be able to comply with the prudential standards. The Guidance Note GGN 220.2 for example states that the Risk Management Strategy must document, in detail, the strategy adopted for managing risk. Orderly documentation must be in place in order that items such as Outstanding Claims Liabilities and Premium Liabilities can be properly determined (see GPS 210).
9.The inspector's interim report concludes that the company's record keeping is poor. He finds that much of the information an insurer should have available to run its business was not available to him. The inspector's conclusions include the following,
·     the company would not be able to comply with the GPS220 regarding risk management,
·     there is a high level of uncertainty surrounding the recommended outstanding claims provision,
·     there is insufficient clarity of the recoverability of reinsurance recoveries on outstanding claims.
10.APRA made it known that applications for reauthorisation must contain details of accounting systems (see subparagraph 4(c) of the Guidance Note). The company's systems should enable it to meet its accounts reporting obligations to APRA. Table 1 indicates the company's performance in meeting its recent accounts reporting obligations,

Annual Quarterly
         Late    On time/ early No of Returns   Late    On time/ early No of Returns
[The applicant] 75%    25%    4       80%    20%    15

Table 1

11.It appears to me that either the company's accounts or its information management systems are such that the company is unable to comply with its reporting obligations to a satisfactory level. Although the company's application describes its accounts it is silent on how the accounts and related information systems are likely to be able to meet reporting obligations.
12.I am satisfied that the company's conduct relating to proper and orderly record keeping and information management is a "prudential matter", as defined in section 3 of the amended Act, to which I am entitled to have regard.
13.I have taken into account all of the comments made by the inspector in his interim report regarding the company's record keeping and information management. I have also considered that part of the company's application for re-authorisation relevant to its accounts along with APRA's record of the company's accounts reporting performance. I am of the view that the company has not demonstrated an appropriate level of prudence and professional skill in keeping proper records and discharging information management functions.

RISK MANAGEMENT STATEGY
14.The amended Act will confer a legal obligation on the company to comply with GPS 220. GPS 220 will require the company to have in place a Risk Management Strategy that complies with GPS 220.
15.It appears from the inspector's interim report that during the course of the investigation the inspector sought documentation from the company relevant to its documented risk management strategies. The inspector states that the company was unable to supply certain relevant documentation. In his interim report the inspector suggests that the company either does not appear to have any documented risk management strategies or the extent to which they do exist they are limited.
16.In its application for reauthorisation the company states that its computer systems restrict underwriting to guidelines and sums which are not in excess of usual sums insured. It makes the following statements regarding its risk management strategies,

"All underwriters sit together and each cover note is discussed at a relatively senior level, in this regard Risk Management Strategies are quite easily maintained together with the Management Reports"
"...one management report follows the demographic of sums insured over any given period which could be a day, a week, a month or a year. The demographics of the portfolio have not changed for several years..."
"We do not insure areas of business that are high risk..." "The company has its focus on writing low risk, reasonably fair premium type business ";
17.Notwithstanding the expressed lack of complexity in the company's business I consider the company's application in relation to its Risk Management Strategy to be deficient. The application as it relates to Risk Management Strategy is in my view deficient because it is restricted to consideration of the "controls" in place in relation to limited aspects of insurance risk. It is clear from GPS 220 (Paragraphs 45- 46) that … "[A]n effective Risk Management Strategy identifies, manages, monitors and continually assesses the material risks that could adversely affect the operations of an insurer and that APRA must consider that at a minimum the following categories must be addressed in the systems: balance sheet and market risk (including investment risk, insurance risk, product design and pricing risk, underwriting and liability risk, liquidity risk, risk arising from claims management) credit risk and operational risk (including legal and reputational risks)". It appears to me that all of the categories are, to differing extents, relevant to the company's business.
18.The application is also deficient in that it does not provide any information or evidence of the link which should exist between the insurers Reinsurance Management Strategy and the insurer's risk management systems as envisaged by paragraph 47 of GPS 220.
19.Having regard to the relevant parts of the inspector's interim report, the company's -application for reauthorisation and GPS 220 I am not satisfied that the company will be able to comply with GPS by 220 by 1 July 2002.
REINSURANCE
20.On 11 March 2002 the Chief Executive Officer of APRA wrote to general insurers stating that in the process of reauthorising insurers APRA would pay particular attention to each insurer's reinsurance (ie outward reinsurance and retrocession) arrangements. The letter identified information required from general insurers seeking reauthorisation under the amended Act. GPS 230 will require the Board and senior management of the company to develop, implement and maintain a Reinsurance Management Strategy.
21.In his interim report the inspector expressed doubts that the company has a documented reinsurance strategy.
22.In its application for reauthorisation the company states,
there are nil claims history under current arrangements,
that current reinsurers will pay swiftly if a large claim occurred,
outstanding claims for aviation reinsurance are almost at an end and that the company is currently collecting its last monies on that program. The company states that it does not envisage any difficulties and expects that by 30 June 2002 it will have all monies collected and that part of the program finished,
that the reinsurance management strategy is not particularly difficult for the company because the lead, together with the reinsurers have been relatively static over the years.
that the company has have never had any trouble placing its program because it is 100% claims free.
23.It appears to me that the company's reinsurance management strategy is a proposed continuation of its current arrangements. Notwithstanding the company's current underwriting business is not complex the strategy referred to in the application does not address the requirement of GPS 230. GPS 230 requires that an insurer must develop, implement and maintain a reinsurance management strategy to ensure that the insurer has sufficient capacity to meet obligations as they fall due, however simple this may be. Notwithstanding the company's stated confidence in its current reinsurance arrangements the company has not demonstrated that it is or will be able to satisfy the requirements of GPS 230.
24.Based on the inspector's relevant comments and on the relevant content of the company's application for reauthorisation as particularised above and GPS 230 I am not satisfied that the company will be able to comply with GPS 230 by 1 July 2002.

BUSINESS CONTINUITY PLAN (GPS 220)
25.APRA's Guidance Note GGN 220.5 - Operational Risks paragraphs 9-10 addresses business continuity. The guidance sets out minimal requirements for complying with the risk management system for business continuity.
26.In its application for reauthorisation dealing with business continuity the company states "It is not quite clear what APRA requires under this heading however..."

the company could easily be integrated with another firm or taken over by incoming staff,
in respect of renewals and other continuity matters the systems are all in place - the company has never missed a renewal,
a fire would cause major problems, however a copy of the entire computer system is updated on a weekly basis and kept off the premises. There are also tapes kept on premises for backup purposes,
the company is currently investing in fireproof cabinets to store current policies, Chubb & Wormald are assisting fireproofing arrangements for the office.
27.It appears to me that the company has not tailored the relevant part of its application to APRA's published minimum requirements. Having regard to the information above contained in the company's application it appears to me that the company's business continuity plan does not meet APRA's minimum published requirements.
28.By reference to Guidance Note 220.5, significant omissions include:
Process for identifying likelihood of disrupting events identified, processes most at risk and consequences of events,
The Business Continuity Plan (see subparagraph 10(b)),
Procedures for enacting the Business Continuity Plan including,
person responsible for activating the Business Continuity Plan,
manual processes,
identification and activation of off-site recovery site,
contact information for staff, regulators and other key people,
time frame for restoring critical systems,
pre-assigned responsibilities of staff and procedures for training,
procedures for regular testing and review of the Business Continuity Plan.
29.In view of the deficiencies particularised above I am not satisfied that the company will have in place by 1 July 2001 adequate risk management systems relating to business continuity. I therefore take the view that the company will not be able to comply with GPS 220.
BOARD AND MANGEMENT AND CORPORATE GOVERNANCE
Board of Directors
30.The company has 3 directors and does not therefore meet the requirement that it have 5 directors (GPS 220 paragraph 18). The company has requested that it be allowed to retain its current arrangements in the "transition period" to 1 July 2004.
31.I note that minutes of the Board of Director's meetings have never been provided to APRA despite several requests made to the company. In my view the standards of corporate governance would be improved by the appointment to the Board of Directors of additional directors and this requirement should be met in order that the company can comply with the requirements of GPS 220.
Board Chair
32.GPS 220 subparagraph 18(b) requires the company of the Board to have a non-executive chair.
33.The Board of the company does not have a Chair rather [D] of [E] is invited to chair the Board meetings. The company contends that it considers it unnecessary to set a specific chairman from the Board of Directors.
34.The company response does not demonstrate that the company will have a strong and fully informed Board as prescribed by the relevant prudential standard.
Board Committees
35.The company states that the size and scope of the company is insufficient to justify committees. The company does not comply with the relevant requirements relating to Board Committees as particularised GPS 220 paragraph 20.
Fitness & Propriety
36.GPS 220 paragraphs 2-7 addresses the fitness and propriety requirements of persons in key - positions. The company has explained that in its view it meets the criteria for fitness and propriety.
37.The company has not however demonstrated that it has established policies and procedures designed to ensure that key position holders have the degree of probity and competence commensurate with their responsibilities. The company has not demonstrated to my satisfaction that it complies with that part of OPS 220 addressing fitness and propriety (see paragraphs 2- 7).
APPROVED ACTUARY
38.Subsection 39 of the amended Act requires general insurers to have an auditor and an actuary appointed by the insurer. The appointees may only hold their positions if APRA has approved the appointments under section 40 of the amended Act (see subsection 39(3)). On 5 November 2001 the Chief Executive Officer of APRA wrote to general insurers. In the timetable at the Appendix to his letter it was made clear that applications in regard to approval of auditors and actuaries should be submitted to APRA by the end of December 2001. Guidance on the approval process was contained in APRA's letter dated 2 October 2001.
39.APRA has not received from the company an application for appointment of an actuary or an auditor. It does not therefore appear that by 1 July 2001 the company will be able to comply with the requirements in section 39 of the amended Act.
BUSINESS PLAN
40.It will be a requirement that general insurers must have a business plan approved by the Board (see GPS 220 paragraphs 56-57). Attachment A to the Guidance Note states the relevant information required for an application for reauthorisation.
41.In its application for reauthorisation the company presents a strategy which refers in part to the Offer Information Statement which I note has been stopped by ASIC. In my view the application is deficient in this regard because it does not explain how the company proposes to implement its strategy.
42.In particular the company states that "... given the current times it is impossible to have set in concrete a business plan other than to underwrite successful business and continue the path that is tried and proven."
43.The company reiterates that it will rely upon the current lines of business.
44.In my view the company's application for reauthorisation does not contain a business plan that conforms to APRA published requirements in its Guidance Note. In light of the company's apparent inability to meet the MCR by 1 July 2002 it is imperative in my view that the company have in place a business plan in the form envisaged by GPS 220 paragraph 56. The omission of such a business plan in the circumstances is a serious deficiency in the company's application to which I have had regard. Based on the company's application I have formed the view that the company will not be able to comply with GPS 220 by 1 July 2002.

The Issues

The issue for us in this application for interim orders is the issue raised by s.41(2) of the Act.
An important matter for us to look at is the applicant's prospects of success. We are not, of course, finally determining the application for review. However, from the material before us we must consider whether there is a real or serious question to be tried.
In the hearing before us, in addition to the documentary material referred to above, two affidavits by the managing director of the applicant were read. Apart from referring to the documentary material, the first affidavit contains statements relating to the business of the applicant including its premium income and projections of likely premium income prepared by an actuary. This affidavit, and the second affidavit, also contain material relating to the interests of persons affected by the review, including the applicant. During the hearing, the Tribunal also received into evidence a notice to the Australian Securities and Investment Corporation of the appointment of a director, a statement of the financial position of the applicant as at 31 March 2002, the quarterly returns of the applicant to APRA between 31 March 1998 and 31 March 2002, and a letter dated 30 June 2002 from the actuary referred to above to the applicant. We have also had regard to the material in the applicant's solicitors letter of 25 June 2002.
We propose to include all this material in the matters we consider in this interim application although it was not, of course, before APRA or its delegate when it made the original decision.

Business Plan

The Authorisation Guidance Note issued by APRA (which was referred to in APRA's first direct communication with the applicant on 24 September 2001) contained an attachment headed "Supporting information required for an application to conduct insurance business". The document contained eight headings. The first and second were "Ownership, Board and Management" and "Independent Experts". The third was "Three Year Business Plan". It had two sub-headings: "Structure of the Business" and "Financial Projections". The headings appearing thereafter included "Systems and Controls" and "Other".
The applicant's original submission dated 2 April 2001 contains the first and second headings and addresses their content, at least to some extent. It does not contain the third heading and does not deal with its content. Nor, for that matter, does it contain any of the other headings.
In its response dated 22 April 2002, APRA referred to this omission. The applicant's letter of 30 April 2002 purported to address the omission. Under the heading "Three Year Business Plan" there appears material of the most general kind.
In our present opinion, APRA was entitled to regard this material as inadequate. It was entitled to regard it as not amounting to a business plan.
One of the grounds given in the attachment to APRA's letter of 22 May 2002 for refusing reauthorisation was a finding under the heading "Business Plan" that the application "did not contain a business plan that conforms to APRA published requirements in its Guidance Note."
The applicant returned to this matter in its letter of 5 June 2002. That contains a seven line paragraph under the heading "Business Plan". That paragraph referred to a proposal to forward a formal business plan on 14 June.
A document of three pages headed "Business Plan" was included with one of the applicant's letters of 12 June 2002. After a short introduction, the plan contains a very general analysis of the "Market". It contains five further headings, namely "Appetite for Risk", "Underwriting Philosophy", "Capacity", "Profitability" and "Business Schedule". None of these headings contain any considered proposal for the way in which the insurer will seek to attract and process business in the future. In our present opinion, APRA was entitled to conclude that it was not a business plan.
We do not consider that any of the material in the evidence before us that was not before APRA alters the situation. The actuary's letter contains five paragraphs under the heading "Business Plan". Apart from containing a statement of fact which is wrong, and to which we will return, that document refers generally to prospects of growth. To our minds, that is not a business plan. Such a plan would contain a set of goals and an outline of the proposed activities by which they were to be achieved as contemplated in the Guidance Note.

Accordingly, we presently see no reason why APRA was not entitled to conclude that the requirement that the applicant submit a conforming business plan had not been complied with.

Capital

An important change introduced by the new prudential standards was a requirement (contained in Prudential Standard GPS 110, para 9) that insurers must satisfy a minimum capital requirement of $5 million.
This was specifically referred to in APRA's letter of 24 September 2001, as was its concern that the applicant might not be able to meet the requirement. As appears in the letter, in appropriate cases, insurers not able immediately to comply were to be given the two year transition period to take steps to comply. However, APRA stated in the letter that it "strongly encourages [the applicant] to submit its strategic plan together with a timetable as soon as possible to demonstrate that the company can get its capital position in order".
Inadequacies in capital might be rectified by fresh injections of capital or by earning and retaining profits. In the Guidance Note the former was dealt with under "Ownership, Board and Management" and the latter under "Three-Year Business Plan". To the extent to which capital was to be provided from profits the importance of a proper business plan containing financial projections and a considered basis for them can readily be seen.
The original submissions by the applicant dated 8 April 2002 deal with capital in sub-paragraphs 1(g) and (h) corresponding with the appropriate sub-paragraphs in the Guidance Note. The paragraphs are set out above. Sub-paragraph 1(h) refers to a letter from the principal shareholder of the company owning 70% of the applicant. That letter, the material parts of which are set out above, declined to guarantee "to make up any required sums towards a solvency margin as required." As we have said above, the submission did not contain any business plan.
In its response to the submission, as appears from the extract of APRA's letter of 22 April 2002 set out above, APRA particularly raised concerns as to capital and also noted the absence of a business plan.
The applicant's letter of 30 April 2002 contained approximately one page dealing with capital. Relevantly, it was as follows:

Capital
No Capital Transition Plan provided.
The Capital Transition Plan is quite simplistic. As you will see our accounts are estimated to take the company to approximately $4 million solvency or thereabouts at 30 June 2002. It is then proposed to increase the company solvency by a minimum $125,000.00 a quarter from natural growth. That should get the company to $5 million by the planned period of 1 July 2004.
The company can also at any time put out another Prospectus and very easily raise a few million dollars. However, that will naturally water down the existing shareholders, equities which is not in their interests at this time.
There is also a possibility of bringing in other equity investors ahead of that but again, not necessery (sic).
The transition plan only involved $1 million or so over two (2) years and therefore isn't a great deal of money to be concerned about. The growth of the company would be easily reviewable over the period of two (2) years. It would not be a situation of getting to 1 July 2004 and being in a position where it's unable to meet the $5 million solvency. If this was the case the company, in the very worst sense, could only be a little bit off its solvency and, if it couldn't make it up, the company could easily be incorporated into another company's program or sold off.
There is no detriment to policy holders whatsoever. The company has a good record of profitability and, as well, it does not intend to enter new and difficult long tail liability type markets and it does not intend to increase its premium to a ratio of more than $2.00 for every $1.00 of asset.
No Estimation of Capital Base as at 1 July 2002 provided.
It has been submitted in previous correspondence and on numerous occasions and through this document that the estimated capital base at 1 July 2002 will be $4 million or thereabouts.
Due to the obvious difficulties the actuarial report hasn't been completely finalised as yet. This has not been our doing but, APRA's own experts share some problems in that.
Naturally, we would love to know what it is about Peter McCarthy that is so much in the newspapers of recent times. It appears that he is very busy with the HIH enquiry (sic), sending out lots of press releases, etc. It would also seem that his work has dropped off from a couple of government departments and yet no comments have been made in relation to APRA and Peter McCarthy's services to yourselves. We have been told by other actuaries of some very disturbing things about matters that are in the pipeline and we wonder if it has some bearing on the pace of this exercise.
Those reports will be sent to you in due course and as quickly as possible, we hope, because we don't want the re-authorisation to slow down either.
No provision of MCR calculation as at actuarial valuation/2001 balance date accompanied by auditors certificate verifying the level of capital & capital ratios.
We can't get this organised for you until the acturial report is complete.
We appreciate your assistance. If APRA requires any further information in this regard we would appreciate your guidance. We are trying to cooperate and will do as best we can.

The first seven paragraphs of the reasons attached to APRA's show cause letter of 22 May 2002 relate to "Capital". They conclude that APRA is not satisfied "that the company will be able to comply with the MCR [Minimum Capital Requirement] and therefore GPS 110 by 1 July 2002 or by the end of the "transition period". In our opinion, this finding was open to APRA.
The applicant's letter of 5 June 2002 contains a cursory attempt to show that the company will achieve the capital requirements. Depending on the alternative chosen, the submissions variously refer to undertakings to subscribe for shares which are said to be attached (although no such undertakings appear with any of the copies of the letter we have examined), to offers of shares to other parties and to forgoing dividends on profits. The letter promised a Capital Transition Plan on 14 June 2002. One of the letters dated 12 June 2002 refers to a Capital Transition Plan. It refers to shareholders having agreed to purchase 5 million extra shares for $500,000 and to pay this money into the applicant's accounts before 30 June 2002. This has not happened. We were told that the shares would only be subscribed for if reauthorisation was granted. However, the money has not been paid into any trust or escrow account to await that event. We referred above to a statement in the actuary's letter of 30 June 2002 which was wrong. That statement was "David [referring to one of the applicant's solicitors] indicated to me that the $500,000 has been subscribed into a solicitor's trust fund to ensure it can be withdrawn if it is no longer needed due to the AAT action being unsuccessful."
Attached to one of the letters dated 12 June 2002, but not explained in the letter, is a budget from July 2001 to June 2004. Other documents are attached. They were not referred to in argument. The budget shows projections of premiums increasing throughout the period. Premium is budgeted to increase from $469,000 in July 2002 to $791,000 in June 2004. (These figures are extracted from one of the attachments to one of the letters of 12 June 2002. However, it is noted that the amount of $469,000 for July 2002 differ from paragraph 10 of one of the affidavits before us which shows an amount of $472,000 for July 2002.) Reserves of capital are shown to increase from $3,724,000 in July 2002 to $7,736,000 in June 2004. Of this increase $775,000 relates to revaluations of assets and $432,000 to the subscription of further capital. The balance represents increasing profits. It can immediately be seen how important the presentation of a cogent business plan was if these projections were to be accepted as reasonable.
In our opinion, on the evidence as it presently is, APRA was entitled not to be satisfied with the material provided by the applicant relating to capital requirements.
The material which was not before APRA but is before us does not alter this position.

Conclusion

It follows that upon two of the major grounds upon which APRA based its decision we are presently of the opinion that APRA was entitled to come to the conclusions to which it came.
In this interim application it is not necessary for us to examine every conclusion reached by APRA. On the matters we have already addressed we consider that the consequence is that it is likely that the applicant will fail in the substantive proceedings. There is no real or serious question to be tried.
Indeed, as we understand it, the applicant will wish to present substantial further evidence supporting its claim to reauthorisation. It appears to recognise that this is necessary. It did not seek a final hearing on the material already presented.
While it is well recognised that in administrative review on the merits the reviewing decision-maker should act on the evidence as it is at the time of the final decision (and that may lead parties to adduce further evidence at a final hearing) in this application for interim relief we can only look at the evidence as it is now. That evidence justifies the decision which has been made by APRA.
We must bear in mind that the legislation provides that a new regime is to apply from 1 July 2002 and contemplates that insurers should have satisfied the regulator before that time that they can comply with the requirements of the new regime, accepting that, as to some insurers, that satisfaction may be no more than that compliance will be achieved by July 2004. However, APRA has not been so satisfied with respect to the applicant and was, on our present thinking, justified in not being so satisfied.
This conclusion is justified on the two matters we have addressed in detail. However, it also seems to us that the bulk of the grounds relied upon by APRA are made out, certainly enough grounds of sufficient seriousness are made out to lead to the denial of reauthorisation.
There may be cases in which a primary decision-maker correctly refuses an application but where there is every reason to believe that the applicant can readily rectify a defect. In such a case, the Tribunal might grant interim relief pending a hearing where evidence rectifying the defect would be presented. However, that is not this case.
In considering this matter, we have given careful consideration to the interests of the applicant and to others who will, or might, be affected by the result, including the applicant's existing and potential future insured. We need no persuasion as to the potential catastrophic effects on an insurer of its being prevented from writing new business and of the potential effects of the publishing of this fact. We accept that, as a result, the failure to grant relief may render success on the application for review nugatory. We must also recognise our responsibility to consider the public interest implications of allowing the applicant to write new business without having fully complied with the regulatory requirements operating under the new Act. Given our opinion as to the prospects of success, we do not consider that the prejudice which might be suffered by the applicant or its existing insured justifies the grant of interim relief.
We have not so far dealt with the Interim Report prepared for APRA by the investigator it appointed. We are not fully aware of the circumstances surrounding the investigation and consider that, in the absence of reliance upon the report by the applicant, it was appropriate not to place weight upon it. We have noted a recommendation in the Report "that the issues and recommendations set out in the report be largely dealt with by APRA through the re-licensing of [the applicant]". However, that does not seem to be a recommendation that there be a "re-licensing" or that, if there is, it should be unconditional. Were we to have relied upon them to any extent, the findings and recommendations in this report would, in our opinion, have supported the conclusions of APRA.
In all the circumstances, we propose to refuse the application for interim relief under s.41(2) however it is framed. It follows that we will also refuse the application under s.35(2) relating to publication. It may be anticipated that APRA, after proper consideration, may revoke the current determinations and make new determinations in similar form to the original determinations. The applicant will need to address that matter, as and when it occurs, with respect to the continuation of these proceedings.

Finally, we note that it is accepted that in the future the applicant can at any time seek authorisation under s.12 upon such material as it considers will satisfy the reasonable requirements of APRA carrying out its duties under the new Act.
I certify that the 81 preceding paragraphs are a true copy of the reasons for the decision herein of Justice G Downes, Mr W McLean and Ms C Prime.
Signed:         .....................................................................................
  Associate
Date of Hearing  1 July 2002
Date of Decision  4 July 2002
Counsel for the Applicant        Mr R Horsley
Solicitor for the Applicant          Gillis Delaney Brown
Counsel for the Respondent    Mr D Grey
Solicitor for the Respondent    Australian Prudential Regulation Authority