Life Insurance Act 1995 Prudential Standards No. 3 Prudential Capital Requirement (Cth)

Life Insurance Act 1995

PRUDENTIAL STANDARDS No 3

 

PRUDENTIAL CAPITAL REQUIREMENT

 

I, Graeme  John  Thompson,  Chief  Executive  Officer (“CEO”)  and a delegate of Australian

Prudential Regulation Authority, under paragraph 230A(1)(a) of the Life Insurance Act 1995 (the  “Act”),  DETERMINE  the  standards set out in the Schedule in relation to prudential matters to be complied with by all life companies.

 

This instrument commences on 30 June 2002.

 

Dated  11 June 2002

 

[Signed]

G J Thompson

CEO

 

[Note: A failure to comply with a standard is not an offence, but it may lead to a direction being given under section 230B of the Act.]

 

SCHEDULE

 

PRUDENTIAL STANDARDS No 3

 

PRUDENTIAL CAPITAL REQUIREMENT

 

Under section 230A of the Life Insurance Act 1995 (the Act) APRA may, among other things, in writing, determine standards in relation to prudential matters to be complied with by all or some specified life companies in order to protect the interests of policy owners or prospective policy owners of the life companies concerned (“prudential standards”). The requirements determined by APRA as prudential standards are set out below in bold type. Under the Act, a failure to comply with a prudential standard may lead to, among other things, a direction being given under section 230B.

 

Administrative guidance and commentary is shown in normal print directly after the standard to which it relates.  Headings are always in bold, but are administrative in nature, inserted for convenient reference only and have no effect in limiting or extending the language of provisions to which they refer.  The administrative guidance and commentary does not purport to be exhaustive in its coverage of a life company’s rights or obligations under this prudential standard or any other law.  Users of this prudential standard should obtain professional advice on the standard and other applicable legislation.

 

OBJECTIVE

 

That the financial position of all life companies reflects an appropriate capital commitment, outside of the statutory funds of the company, to the life insurance business of the company. This objective is secured by requiring that each life company must maintain a minimum prescribed amount of capital outside the statutory fund, irrespective of the requirements imposed by actuarial standards.

 

PRESCRIBED MINIMUM CAPITAL AMOUNT

 

1.      This Prudential Standard applies to a registered life company at all times from 30 June 2002.

June 2002.

 

1.1 The standard is being introduced to re-establish the minimum capital requirement previously prescribed under the Act (prior to 1 July 1999) and by actuarial standard AS6.01 (for the period 1 July 1999 to 29 June 2002).

 

2.      At any time a registered life company is required to hold capital in the General Fund of the company sufficient to meet the prescribed amount. This is referred to as the Minimum Capital Amount.

 

2.1    General Fund refers to the management fund for a friendly society or the shareholders’ fund for other life companies, and is distinct and separate from the statutory funds of the life company.

 

2.2    It is noted that from 30 June 2002, actuarial standard AS6.02 stipulates a    Management Capital Requirement for the General Fund of a registered life

         company.  Although a registered life company must comply with both the Minimum Capital Amount and the Management Capital Requirement at any time, compliance with these two requirements is not additive. Generally, complying with the Minimum Capital Amount will result in capital over and above that needed to comply with the Management Capital Requirement only where:

 

·       the Management Capital Requirement, when reduced for the value of the liabilities of the General Fund, is less than the prescribed Minimum Capital Amount; or

 

·       the capital used in satisfying the Management Capital Requirement is not in the appropriate form to be used in establishing the Minimum Capital Amount.

 

3.      The prescribed amount for the purposes of item 2 is:

 

a.      in the case of a friendly society, nil; and

b.      in the case of a registered life company other than a friendly society,

$10 million.

 

3.1    Regardless of the capital requirements specified by this Prudential Standard, it is ultimately the responsibility of the life company’s Board and senior management to ensure that the life company has, at all times, capital resources that are appropriate to the scale, complexity and mix of its business.

 

4.      For a registered life company limited by shares only, capital for the purpose of this Prudential Standard must take the form of:

 

a.      paid-up share capital represented by ordinary shares; or

b.      paid-up share capital represented by irredeemable preference shares; or

c.       paid-up share capital represented by redeemable preference shares only to the extent that capital was in existence at 30 June 1999 and has been approved by APRA for this purpose.

 

Further, capital for the purpose of this Prudential Standard must be maintained as excess assets in the General Fund, at least 50% of which must be in the form of eligible assets.

 

4.1    Excess assets exist in the General Fund to the extent the value of the assets of the General Fund exceed the value of the liabilities (excluding liabilities in respect of share capital) of the General Fund.

 

5.      Fora lifecompany:

 

a.      limited both by shares and guarantee; or b.      that does not have any share capital;

 

capital for the purpose of this Prudential Standard must be held in the form of eligible assets.

 

6.      The eligible assets of a registered life company are assets of the General Fund of the company, but exclude assets invested in a related company where the following requirements are not satisfied:

 

a.      the related company is a subsidiary of the life company and the asset is not reinvested with a company that is related to the life company, other than as a subsidiary; or

b.      the investment is a deposit with a bank.

 

6.1    Reinvestment of an asset includes reinvestment, whether direct or indirect, through one or more interposed bodies corporate, trusts or partnerships.

 

6.2    In order to qualify as an eligible asset for the purpose of this Prudential Standard, the asset must be of tangible form and be readily liquifiable.

 

6.3    An asset invested in a related company should not be considered an eligible asset to the extent that the related company is a prudentially regulated entity and the value of that asset includes a component of value in respect of any prudential capital requirement for that entity.