Life Insurance (prudential standard) determination No. 2 of 2006 Prudential Standard LPS 510 Governance (Cth)
Life Insurance (prudential standard) determination No. 2 of 2006
Prudential Standard LPS 510 Governance, Prudential Standard 6.3C Audit
as amended
made under subsections 230A(1) and (5) of the
Life Insurance Act 1995
This compilation was prepared on 27 August 2009
taking into account amendments up to Life Insurance (prudential standard) determination No. 5 of 2006 – Variation to Prudential Standard LPS 510 GovernancePrepared by the Office of Legislative Drafting and Publishing,
Attorney-General’s Department, CanberraI, John Francis Laker, Chair of APRA:
(a) under subsection 230A(1) of the Life Insurance Act 1995 (‘the Act’), DETERMINE Prudential Standard LPS 510 Governance in the form set out in the Schedule, which shall apply to all life companies registered under the Act; and
(b) under subsection 230A(5) of the Act, VARY Prudential Standard 6.3C (relating to audit) as in force under section 28 of the AFIC Code immediately before the transfer date as defined in the Financial Sector Reform (Amendments and Transitional Provisions) Act (No. 1) 1999 by deleting:
(i) the fourth paragraph under the heading “General Background”;
(ii) the headings “Audit Committee” and “Internal Audit” and all the words under those headings; and
(iii) all of the words after the heading 6.3.8 Audit Standards except for paragraph 6.3.8.g.
This instrument takes effect from 1 October 2006.
Dated 5 May 2006
[Signed]
John Francis Laker
Chair
Interpretation
In this Instrument
AFIC Code means any of the following Codes of a State or Territory:
(a) the AFIC (NSW) Code of New South Wales;
(b) the AFIC (Victoria) Code of Victoria;
(c) the AFIC (Queensland) Code of Queensland;
(d) the AFIC (Western Australia) Code of Western Australia;
(e) the AFIC (South Australia) Code of South Australia;
(f) the AFIC (Tasmania) Code of Tasmania;
(g) the AFIC (ACT) Code of the Australian Capital Territory;
(h) the AFIC (NT) Code of the Northern Territory.
APRA means the Australian Prudential Regulation Authority.
life company has the meaning given in the Dictionary to the Act.
Note 1 Prudential Standard 6.3C (relating to audit) has effect, for the purposes of the Act, by application of regulation 33 of Financial Sector Reform (Amendments and Transitional Provisions) Regulations1999.
Note 2 A life company that does not comply with a standard may be issued with directions by APRA under subsection 230B(1) of the Act. Non-compliance with a direction is an offence attracting a penalty of up to 250 penalty units for a body corporate (currently $27,500) for each day that the offence continues. Officers of the life company may also be criminally liable (see section 230F).
Schedule
Prudential Standard LPS 510 Governance comprises the 17 pages commencing on the following page.
Prudential Standard LPS 510
Governance
Objectives and key requirements of this Prudential Standard
The ultimate responsibility for the sound and prudent management of life companies rests with their Board of directors. It is essential that life companies have a sound governance framework and conduct their affairs with a high degree of integrity.
A culture that promotes good governance is of benefit to all stakeholders of a life company and helps to maintain public confidence in the institution.
This Prudential Standard sets out minimum foundations for good governance of life companies. It aims to ensure that life companies are managed in a sound and prudent manner by a competent Board of directors, which is capable of making reasonable and impartial business judgements in the best interests of the life company and which gives due consideration to the impact of its decisions on policyholders.
The governance arrangements of life companies build on these foundations in ways that take account of the size, complexity and risk profile of the institution.
The key requirements of this Prudential Standard include:
· specific requirements with respect to Board size and composition;
· the chairperson of the Board must be an independent director;
· an Audit Committee must be established;
· life companies must have a dedicated internal audit function;
· certain provisions dealing with independence requirements for auditors consistent with those in the Corporations Act 2001; and
· the Board must have a policy on Board renewal and procedures for assessing Board performance.
A number of requirements also apply to eligible foreign life insurance companies.
Authority
1.This Prudential Standard, made under s230A of the Life Insurance Act 1995 (Life Insurance Act), applies to all life companies authorised under the Life Insurance Act.
Application
2.All life companies (except eligible foreign life insurance companies[1]) have to comply with this Prudential Standard in its entirety.
[1] An eligible foreign life insurance company (EFLIC) is one within the meaning of section 16ZD of the Life Insurance Act 1995 (Life Insurance Act).
3.Eligible foreign life insurance companies (EFLICs) have to comply with only those provisions of this Prudential Standard which specifically indicate that they apply to EFLICs. The obligations imposed by this Prudential Standard, on or in relation to an EFLIC, only apply in relation to its Australian business. Attachment B to this Prudential Standard applies specifically to EFLICs.
The Board and senior management
4.The Board of directors (the Board) of a life company is ultimately responsible for the sound and prudent management of the life company. This Prudential Standard sets out the minimum requirements that a life company must meet in the interests of promoting strong and effective governance.
5.The Board of a life company must have a formal charter that sets out the roles and responsibilities of the Board.
6.The Board, in fulfilling its functions, may delegate authority to management to act on behalf of the Board with respect to certain matters, as decided by the Board. This delegation of authority must be clearly set out and documented. The Board must have mechanisms in place for monitoring the exercise of delegated authority. The Board cannot abrogate its responsibility for functions delegated to management.
7.The Board must ensure that directors and senior management of the life company, collectively, have the full range of skills needed for the effective and prudent operation of the life company, and that each director has skills that allow them to make an effective contribution to Board deliberations and processes. This includes the requirement for directors, collectively, to have the necessary skills, knowledge and experience to understand the risks of the life company, including its legal and prudential obligations, and to ensure that the life company is managed in an appropriate way taking into account these risks. This does not preclude the Board from supplementing its skills and knowledge through the use of external consultants and experts.
8.Senior management of the life company (and senior management of an EFLIC), with responsibilities relating to the business in Australia, must be ordinarily resident in Australia.
9.Members of the Board and senior management (and senior management of the EFLIC) must be available to meet with APRA on request.
10.The Board must provide the external auditor[2] and the Appointed Actuary of the life company with the opportunity to raise matters directly with the Board (the Compliance Committee for an EFLIC[3]).
[2] References to external auditor in this Prudential Standard include the Approved Auditor under s85 of the Life Insurance Act.
[3] As defined in section 16ZF of the Life Insurance Act.
Independence
11.For the purposes of this Prudential Standard, an independent director is a non-executive director who is free from any business or other association – including those arising out of a substantial shareholding, involvement in past management or as a supplier, customer or adviser – that could materially interfere with the exercise of their independent judgement. In assessing whether a director is independent, the Board must apply the definition set out in the ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations (Attachment A).
12.If the Board of a life company is in doubt regarding a director’s independence, the life company may refer the matter to APRA for guidance.
Definition of non-executive director
13.For the purposes of this Prudential Standard a reference to “non-executive” director is to be interpreted as meaning a director who is not a member of management.
Board composition
14.The Board of a life company must have a minimum of five directors at all times.
15.The Board must have a majority of independent directors at all times. For life companies that are subsidiaries[4] of other APRA-regulated institutions or overseas equivalents,[5] exceptions may apply as set out at paragraphs 24 to 26. For life companies that are subsidiaries of a parent company that is not prudentially regulated exceptions may apply as set out at paragraph 27.
[4] “Subsidiary” means a subsidiary within the meaning of the Corporations Act 2001 (Corporations Act).
[5] An overseas equivalent is one which is not authorised in Australia but is authorised and subject to prudential regulation in a foreign country.
16.The chairperson of the Board must be an independent director of the life company.
17.A majority of directors present and eligible to vote at all Board meetings must be non-executives.
18.The chairperson of the Board cannot have been the Chief Executive Officer (CEO) of the life company at any time during the previous three years. If the position of the CEO is unexpectedly vacated, the chairperson may serve as an interim CEO. After a period of 90 days, approval must be sought from APRA to allow this arrangement to continue.
19.The chairperson must be available to meet with APRA on request.
20.For locally-owned and incorporated life companies, a majority of directors must be ordinarily resident in Australia.
21.For foreign-owned locally incorporated life companies at least two of the directors of the life company must be ordinarily resident in Australia, at least one of whom must also be independent.
22.Board representation must be consistent with a life company’s shareholding. Where a shareholding constitutes not more than 15% of a life company’s voting shares there should not be more than one Board member who is an associate of the shareholder where the Board has up to six directors, and not more than two Board members who are associates of the shareholder where the Board has seven or more directors. A director is taken to be an associate of a shareholder for the purposes of this clause, if the director is an “associate” of the shareholder, or the shareholder is an “associate” of the director, according to the definition of “associate” in clause 4 of Schedule 1 of the Financial Sector (Shareholdings) Act 1998. That definition is to be applied for the purposes of this clause as if subparagraph (1)(l) of that definition were omitted.
23.Where an individual shareholding is greater than 15%, as approved under the Financial Sector (Shareholdings) Act 1998, the Board representation of that shareholding can be greater than allowed in paragraph 22, although it must still be broadly proportionate to the shareholding concerned.[6]
[6] Note, where the proportionate shareholding does not equate to a whole number, it can be rounded to the nearest whole number.
Life companies that are subsidiaries of other APRA-regulated institutions or overseas equivalents
24.For a life company that is a subsidiary of another APRA-regulated institution or an overseas equivalent, the Board of the life company must have a majority of non-executive directors, but these non-executive directors need not all be independent. They can include Board members or senior management of the parent company or its subsidiaries, but not executives of the life company or its subsidiaries.
25.A life company to which paragraph 24 applies will be required to have, at a minimum, two independent directors, in addition to an independent chairperson, where the Board has up to seven members. Where the Board has more than seven members, the life company will be required to have at least three independent directors, in addition to an independent chairperson.
26.For the purposes of meeting the requirements in paragraph 25, the independent directors on the Board of the parent company or its other subsidiaries can also sit as independent directors on the Board of the life company.
Subsidiaries with a parent that is not prudentially regulated
27.For a life company that is a subsidiary of another entity, not covered by the arrangements in paragraphs 24 to 26 of this Prudential Standard, the Board must have a majority of independent directors. However, independent directors on the Board of the parent company or its other subsidiaries can also sit as independent directors on the Board of the life company.
Life companies that are part of a corporate group
28.Where a life company is part of a corporate group[7] (group), and the life company utilises group policies or functions, the Board of the life company must ensure that these policies and functions give appropriate regard to the life company’s business and its specific requirements.
[7] A “corporate group” comprises more than one company that are related bodies corporate within the meaning of section 50 of the Corporations Act.
Joint ventures
29.For the purposes of this Prudential Standard, a life company that operates as a joint venture can be considered as part of the group of each parent entity. Independent directors of a parent can sit as independent directors on the Board of the joint venture entity. However, the general concessions available to subsidiaries in paragraphs 24 to 26 will not be available to joint ventures.
Audit Committee
30.A life company must have an Audit Committee.[8] A life company (including an EFLIC) will need to comply with the requirements with respect to Audit Committees as set out in the Life Insurance Act.[9] Other Board Committees may have risk management responsibilities provided the Audit Committee retains the functions prescribed by section 92 of the Act.
[8] The requirement to have an Audit Committee is imposed by section 90 of the Life Insurance Act.
[9] Refer sections 90-92 of the Life Insurance Act for details.
31.The Audit Committee must have sufficient powers to enable it to obtain all information necessary for the performance of its functions.
32.The Audit Committee must have at least three members. A majority of members of the Committee must be persons who are not executive officers of the life company.[10] A majority of the members of the Committee must be independent.
[10] This requirement is imposed by subsection 91(3) of the Life Insurance Act. The definition of “executive officer” is contained in the Schedule to the Life Insurance Act.
33.The chairperson of the Audit Committee must be an independent director of the life company.
34.The chairperson of the Board can sit on the Audit Committee, but cannot chair the Committee.[11]
[11] Refer to subsection 91(5) of the Life Insurance Act.
35.The Audit Committee must have a charter that includes a reference to the fact that the Committee is responsible for the oversight of APRA statutory reporting requirements as well as other financial reporting requirements, professional accounting requirements, internal and external audit, the appointment of the life company’s external auditor,[12] and ensuring that the life company has a sound system of management and financial controls.[13]
[12] The external auditor must have the requisite approval under section 85 of the Life Insurance Act.
[13] Also refer section 92 of the Life Insurance Act.
36.The Audit Committee should also be responsible for formulating the risk strategy of the life company, for determining policies that ensure the strategy is adhered to, and for monitoring adherence to those policies.
37.The Audit Committee must review the external auditor’s engagement at least annually, including making an assessment of whether the auditor meets the Audit Independence tests set out in Professional Statement F1 Professional Independence,[14] as well as the additional auditor independence requirements set out in this Prudential Standard. For an EFLIC, it will be the responsibility of the Compliance Committee to undertake this assessment.
[14] Professional Statement F1 was jointly issued by CPA Australia and The Institute of Chartered Accountants in Australia in May 2002 and revised in December 2004.
38.The Audit Committee must regularly review the internal and external audit plans, ensuring that they cover all material risks and financial reporting requirements of the life company. It must regularly review the findings of audits, and ensure that issues are being managed and rectified in an appropriate and timely manner.
39.The Audit Committee must ensure the adequacy and independence of both the internal and external audit functions.
40.The members of the Audit Committee must, at all times, have free and unfettered access to senior management, the internal auditor, the heads of all risk management functions, the life company’s external auditor, and the Appointed Actuary and vice-versa.
41.The Audit Committee must establish and maintain policies and procedures for employees of the life company to submit, confidentially, information about accounting, internal control, compliance, audit, and other matters about which the employee has concerns. The Committee should also have a process for ensuring employees are aware of these policies and for dealing with matters raised by employees under these policies.
42.Members of the Audit Committee must be available to meet with APRA on request.
43.The Audit Committee must invite the life company’s external auditor and Appointed Actuary to meetings of the Committee where reasonable and necessary to enable the auditor and actuary to perform their functions in accordance with the Life Insurance Act.[15]
[15] This requirement is imposed by subsection 92(4) of the Life Insurance Act.
44.The internal auditor must have a reporting line and unfettered access to the Audit Committee. For EFLICs, the auditor of the local operation must have direct access to the Head Office audit function.
Internal audit
45.A life company (including an EFLIC in relation to its Australian business) must have an independent and adequately resourced internal audit function. If a life company does not believe it is necessary to have a dedicated internal audit function, it must apply to APRA, in writing, seeking an exemption from this requirement, and set out reasons why it should be exempt. APRA may approve alternative arrangements for a life company where APRA is satisfied that they will achieve the same objectives.
46.The objectives of the internal audit function must include evaluation of the adequacy and effectiveness of the financial and risk management framework of the life company (including an EFLIC). To fulfil its functions, the internal auditor must, at all times, have unfettered access to all the life company’s business lines and support functions.
Auditor independence
47.The Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 introduced a number of new requirements into the Corporations Act 2001 (Corporations Act) in relation to auditor independence. The auditor independence requirements in this Prudential Standard are substantially consistent with those requirements, and are intended to help ensure the independence of an auditor engaged to perform work of a prudential nature in relation to the Life Insurance Act, the Prudential Standards and the Reporting Standards.[16]
[16] Reporting Standards are those standards made under the Financial Sector (Collection of Data) Act 2001.
48.The Board of a life company (and the Compliance Committee in the case of an EFLIC) must, to the extent practical, undertake steps to satisfy itself that the auditor, who undertakes work for the life company (or EFLIC) in relation to the Life Insurance Act, the Prudential Standards, or the Reporting Standards, is independent of the life company (or EFLIC),[17] and that there is no conflict of interest situation that could compromise, or be seen to compromise, the independence of the auditor.
[17] “Independent of the life company (or EFLIC)” means that the auditor has been assessed as independent in terms of paragraph 37 of this Prudential Standard.
49.As part of the process of ascertaining the independence of the auditor, a life company (including an EFLIC) must obtain a declaration from the auditor to the effect that the auditor is independent, both in appearance and in fact, and has no conflict of interest situation, and that there is nothing to the auditor’s knowledge (either in relation to the individual auditor or any audit firm or audit company of which the auditor is a member or director) that could compromise that independence.
50.For the purposes of this Prudential Standard, a conflict of interest situation exists in relation to a life company (or EFLIC) at a particular time, if because of circumstances that exist at that time:
(a)the auditor is not capable of exercising objective and impartial judgement in relation to the conduct of the work that is undertaken for the life company (or EFLIC) in relation to the Life Insurance Act, the Prudential Standards or the Reporting Standards; or
(b)a reasonable person, with full knowledge of all relevant facts and circumstances, would conclude that the auditor is not capable of exercising objective and impartial judgement in relation to undertaking the work for the life company (or EFLIC) for the purposes of the Life Insurance Act, the Prudential Standards, or the Reporting Standards.[18]
[18] This definition is based on that used in the Corporations Act to describe the circumstances under which a conflict of interest situation is considered to exist, and is intended to be interpreted in a similar manner. Without limiting the situations that may cause a conflict to arise for the purposes of this Prudential Standard, it is expected that any circumstances of the type that would lead to a breach of the Corporations Act requirements for audit independence, whether or not these provisions actually apply in relation to the audit of the life company (including an EFLIC), will also result in a breach of the provisions of this Prudential Standard.
51. A person, who was a member of an audit firm or a director of an audit company, and who served in a professional capacity in the audit of a life company (including an EFLIC) in relation to the Life Insurance Act, the Prudential Standards or the Reporting Standards, cannot be appointed to the role of director or senior manager of that life company until at least two years have passed since they served in that capacity.
52.A person, who was an employee of an audit company, other than a director of that company, and who acted as the lead auditor[19] or review auditor[20] in the audit of a life company (including an EFLIC) in relation to the Life Insurance Act, the Prudential Standards or the Reporting Standards, cannot be appointed to the role of director or senior manager of that life company until at least two years have passed since they acted as the lead auditor or review auditor.
[19] Lead auditor means the registered company auditor who is primarily responsible to the audit firm or the audit company for the conduct of audit work conducted in relation to the Life Insurance Act, the Prudential Standards or the Reporting Standards.
[20] Review auditor means the registered company auditor (if any) who is primarily responsible to the individual auditor, the audit firm or the audit company for reviewing audit work conducted in relation to the Life Insurance Act, the Prudential Standards or the Reporting Standards.
53. A person cannot be appointed as a director or senior manager of a life company (or a senior manager in the case of an EFLIC) if:
(a) the person was, or is, a director of the audit company or a member of the audit firm that was, or is, responsible for the audit of the life company in relation to the Life Insurance Act, the Prudential Standards or the Reporting Standards; and
(b) there is already another person employed as a director or senior manager of the life company who was a director of the audit company or a member of the audit firm, at a time when the audit company or audit firm undertook an audit of the life company at any time during the previous two years.
54.An individual who plays a significant role[21] in the audit of a life company (including an EFLIC) in relation to the Life Insurance Act, the Prudential Standards or the Reporting Standards, for five successive years, or for more than five years out of seven successive years, cannot continue to play a significant role in the audit until at least a further two years have passed, except with an exemption from APRA. APRA may grant an exemption from this requirement if the individual provides specialist services that are otherwise not readily available or there are no other registered company auditors available to provide satisfactory services for the life company.
[21] For the purpose of this paragraph “significant role” means an individual auditor who acts as the auditor in respect of any of the requirements of the Life Insurance Act, the Prudential Standards or the Reporting Standards, and the lead or review auditor where such audit work is performed by an audit company or audit firm.
55.For the purposes of maintaining their independence and objectivity, the Approved Auditor[22] and Appointed Actuary[23] of a life company (including an EFLIC), cannot both be employed by the same body corporate or related bodies corporate, or by the same firm or related firms.[24]
[22] Is an auditor approved under section 85 of the Life Insurance Act.
[23] Is an actuary appointed in accordance with section 93 of the Life Insurance Act.
[24] For the purposes of this Prudential Standard, related firms means either two or more firms, or a firm and a body corporate, that have common ownership or management, or where one has a substantial shareholding in the other.
Board performance assessment
56.The Board of a life company must have procedures for assessing, at least annually, the Board’s performance relative to its objectives. It must also have in place a procedure for assessing, at least annually, the performance of individual directors.
Board renewal
57.The Board of a life company must have in place a formal policy on Board renewal. This policy must provide details of how the Board intends to renew itself in order to ensure it remains open to new ideas and independent thinking, while retaining adequate expertise.
Persons not to be constrained from providing information to APRA
58.No prospective, current, or former officer,[25] employee or contractor (including professional service provider) of a life company (including an EFLIC), may be constrained or impeded, whether by confidentiality clauses or other means, from disclosing information to APRA, from discussing issues with APRA of relevance to the management and prudential supervision of the life company, or from providing documents under their control to APRA, that may be relevant in the context of the management or prudential supervision of the life company. Such persons are not to be constrained or impeded from providing information to auditors, the Appointed Actuary and others, who have statutory responsibilities in relation to the life company.
[25] “Officer” is defined in section 9 of the Corporations Act.
59.Life companies (including EFLICs) must ensure that their internal policy and contractual arrangements do not explicitly or implicitly restrict or discourage auditors or other parties from communicating with APRA.
Commencement and transitional arrangements
60.This Prudential Standard commences on 1 October 2006.
61.Upon commencement of this Prudential Standard, existing requirements applying to Friendly Societies under Prudential Standard PS 6.3C Audit will be varied to remove matters from that Prudential Standard that are covered by this Prudential Standard.
62.A life company may be unable to comply immediately with particular requirements in this Prudential Standard upon commencement, due to the need to seek the approval of members to give effect to changes required by this Prudential Standard. If the life company has notified APRA of this matter, in writing, prior to the commencement of this Prudential Standard, providing details of the next scheduled meeting of members that will allow the necessary approval to be sought, those particular requirements do not apply to that life company on commencement of this Prudential Standard. In any event, those requirements will apply to the life company not later than 31 March 2007.
63.Upon commencement of this Prudential Standard, the auditor rotation and independence requirements required by paragraph 54 will apply. However the auditor of a life company (including an EFLIC) not previously subject to the auditor rotation provisions in the Corporations Act can continue in this role even if they have already been the auditor for five successive years, or more than five out of seven successive years upon commencement of this Prudential Standard for a further period of not more than two years from the date of commencement of this Prudential Standard.
Attachment A
Definition for the purpose of assessing independence[26]
[26] Reproduced from the ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations as in force at March 2003.
An independent director is a non-executive director (i.e. is not a member of management) and:
1. is not a substantial shareholder[27] of the company or an officer of, or otherwise associated directly with, a substantial shareholder of the company
[27] It is stated that for the purpose of this definition a “substantial shareholder” is a person with a substantial holding as defined in section 9 of the Corporations Act.
2. within the last three years has not been employed in an executive capacity by the company or another group member, or been a director after ceasing to hold any such employment
3. within the last three years has not been a principal of a material professional adviser or a material consultant to the company or another group member, or an employee materially associated with the service provided
4. is not a material supplier or customer of the company or other group member, or an officer of or otherwise associated directly or indirectly with a material supplier or customer
5. has no material contractual relationship with the company or another group member other than as a director of the company
6. has not served on the board for a period which could, or could reasonably be perceived to, materially interfere with the director’s ability to act in the best interests of the company
7. is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director’s ability to act in the best interests of the company.
Attachment B
Compliance Committee for eligible foreign life insurance companies
Purpose of the Compliance Committee
1.The purpose of the Compliance Committee (the Committee) is to:
(a)ensure the EFLIC complies with the requirements in, or imposed under, the Life Insurance Act; and
(b)assist the Board of Directors of the EFLIC (the Board) in meeting its responsibilities under the Life Insurance Act.
2.As required by subsections 16ZF(1) and (4) of the Life Insurance Act, the Board must delegate sufficient powers of management to the members of the Committee to enable Committee members to ensure that the EFLIC complies with the requirements in, or imposed under, the Life Insurance Act. The Board must do so irrespective of anything to the contrary in the EFLIC’s constitution.
Continuing responsibility of the Board
3.Establishment of the Committee does not free the Board from ultimate responsibility for ensuring the Australian branch of the EFLIC complies with the requirements in, or imposed under, the Life Insurance Act.
4.In recognition of this, the Board must:
(a)have the power to appoint and remove, at its discretion, members of the Committee, as long as certain composition and residency requirements pertaining to the Committee continue to be met (refer paragraphs 5 to 8);
(b)ensure that the delegation of relevant managerial powers (of the kind referred to in paragraph 16ZF(1)(a) and (b) of the Life Insurance Act) is not irrevocable, and that the Board retains the powers delegated; and
(c)establish adequate procedures for monitoring and supervising the operation of the Committee, as well as assessing its performance.
Composition and residency status of Committee members
5.The Committee must comprise of at least five members appointed by the Board. Those members must include:
(a)at least one director of the Board of the EFLIC;
(b)the Principal Executive Officer (PEO) appointed by the EFLIC for its Australian branch under either subsections 20(4) or section 246 of the Life Insurance Act; and
(c)at least two independent members.
6.A member cannot satisfy more than one of the composition requirements contained in subparagraphs 5(a), 5(b) and 5(c) (i.e. the director, PEO and independent members must all be separate individuals).
7.At least two of the Committee members must be ordinarily resident in Australia, one being the PEO and the other an independent member.
8.It should be noted that the definition of director contained in the Life Insurance Act, in relation to an EFLIC, is taken to refer to both members of the Committee and the directors of the EFLIC (except for certain provisions, notably sections 92, 230B and 245 of the Life Insurance Act, where only Committee members are being referred to).
Application for a modified Committee composition
9.APRA may, on written application from an EFLIC, determine a modified Committee for the EFLIC where it can be demonstrated that it is appropriate to do so.
10.In making this determination, APRA will take into account the following factors:
(a)the quantum of liabilities written by the EFLIC;
(b)the cost effectiveness or otherwise of establishing a Committee;
(c)any restrictions on the lines of business written by the EFLIC;
(d)whether these restrictions limit the number of policyholders of the EFLIC (for example, by targeting specific policyholder characteristics, such as age, nationality or geographical location); and
(e)whether the EFLIC has written any material amount of long tail business.
11.The composition of any modified Committee would be determined in writing on a case by case basis by APRA, but the possible modifications could take one or more of the following forms:
(a)a Committee with fewer than five members;
(b)replacing the director of the Board of the EFLIC as required by subparagraph 5(a) with the PEO; or
(c)a Committee with fewer than two independent members.
Appointment and removal of Committee members
12.The power to appoint and remove members of the Committee resides with the Board.
13.The Board must have appointed all members and formally constituted the Committee within seven days of receiving notification of registration.
14.Each member of the Committee must be fit and proper for the role.
(Note: The requirements for fitness and propriety are set out in Prudential Standard LPS 520 Fit and Proper Requirements).
15.The Board must ensure that the Committee as a whole possesses the necessary skills and expertise to ensure that the EFLIC complies with the requirements in, or imposed under, the Life Insurance Act, and to discharge the duties and responsibilities of the Committee provided for in this Prudential Standard.
16.The Committee must have a policy for dealing with conflicts of interest.
17.Notwithstanding the Board’s power to appoint and remove members, APRA may, under section 230B of the Life Insurance Act, direct an EFLIC to remove a member of the Committee.
18.While membership of the Committee is the responsibility of the Board, the powers to appoint and remove members of the Committee must not be used in a manner that impedes, discourages or otherwise hinders the Committee from discharging its duties and responsibilities. Examples that would be cause for concern by APRA would be an excessive turnover of members, or the removal of members at inappropriate times (for example at critical reporting periods). If requested to do so, by APRA, an EFLIC must, within a time stipulated by APRA, in writing (which must not be unreasonable), provide a written report to APRA responding to any queries APRA has regarding the removal of members.
Processes of the Committee
19.At least three members of the Committee are required to be present at a meeting of the Committee to form a quorum. The PEO, and at least one independent member who is ordinarily resident in Australia, must be amongst the three members present.
20.The chairperson of the Committee must be a non-executive member.
21.Resolutions can only be passed by a majority with the chairperson having a casting vote.
22.The Committee must meet as often as required to discharge its duties and responsibilities, although APRA would expect the Committee to meet on at least a quarterly basis. Members, and individuals who may be needed to address the Committee, must be given reasonable notice of pending meetings.
23.The Appointed Actuary is entitled to attend, and the Committee must ensure that they are given reasonable notice of, any meeting of the Committee, to enable them to address members on any matters outlined in subsection 97(4) of the Life Insurance Act if any of these matters are to be considered at a Committee meeting.
24.Written minutes of Committee meetings must be taken and copies kept and made available to APRA on request. Any papers or submissions put to the Committee must likewise be kept and made available to APRA on request.
Duties and responsibilities of the Committee
25.The Committee must, with the powers delegated to it by the Board, ensure that the EFLIC complies with:
(a)the Life Insurance Act;
(b)the Life Insurance Regulations 1995;
(c)the actuarial standards as determined by the Life Insurance Actuarial Standards Board;
(d)the prudential standards determined under section 230A;
(e)the prudential rules made under section 252;
(f)any conditions placed upon the EFLIC under section 22 at the time, or after, of its registration;
(g)directions given under the Life Insurance Act; and
(h)the Financial Sector (Collection of Data) Act 2001.
26.The Committee members must report to APRA, within 14 business days, of becoming aware:
(a)that the EFLIC has failed to comply with a requirement referred to in paragraph 25; or
(b)the Committee believes there is a material risk of the EFLIC being unable to meet its obligations at some future time.
27.The report must:
(a)be in the form of a written report explaining the causes of the failure or the material risk to the solvency of the EFLIC identified by the Committee; and
(b)outline a plan and timeframe for rectifying the failure or mitigating the risk of insolvency.
28. APRA would expect the Committee to provide a copy of the report to the Board.
Notes to the Life Insurance (prudential standard) determination No. 2 of 2006
Prudential Standard LPS 510 Governance, Prudential Standard 6.3C Audit
Note 1
The Life Insurance (prudential standard) determination No. 2 of 2006 – Prudential Standard LPS 510 Governance, Prudential Standard 6.3C (in force under subsections 230A(1) and (5) of the Life Insurance Act 1995) as shown in this compilation is amended as indicated in the Tables below.
Table of Instruments
| Year and | Date of FRLI registration | Date of | Application, saving or |
| No. 2 of 2006 | 10 May 2006 (see F2006L01459) | 1 Oct 2006 | |
| No. 5 of 2006 | 4 Jan 2007 (see F2007L00043) | 4 Jan 2007 | — |
Table of Amendments
| ad. = added or inserted am. = amended rep. = repealed rs. = repealed and substituted | |
| Provision affected | How affected |
| Para. 30..................................................... | am. No. 5 of 2006 |
| Para. 31..................................................... | am. No. 5 of 2006 |
| Attachment B | |
| Para. 6....................................................... | am. No. 5 of 2006 |
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