Life Insurance (prudential standard) determination No. 2 of 2010 Prudential Standard LPS 320 Actuarial and Related Matters (Cth)
Life Insurance (prudential standard) determination No. 2 of 2010
Prudential Standard LPS 320 Actuarial and Related Matters
Life Insurance Act 1995
I, John Roy Trowbridge, Member of APRA:
(a) under subsection 230A(1) of the Act, DETERMINE Prudential Standard LPS 320 Actuarial and Related Matters in the form set out in the Schedule, which shall apply to all life companies, including friendly societies.
This instrument takes effect from 1 July 2010.
Dated 2 March 2010
[Signed]
………………………
John Roy Trowbridge
Member
Interpretation
In this Instrument
APRA means the Australian Prudential Regulation Authority.
life company has the meaning given in the Dictionary to the Act.
friendly society has the meaning given in section 16C of the Act.
Schedule
Prudential Standard LPS 320 Actuarial and Related Matters comprises the 8 pages commencing on the following page.
Prudential Standard LPS 320
Actuarial and Related Matters
Objectives and key requirements of this Prudential Standard
This Prudential Standard aims to ensure that the Board and senior management of a life company are provided with impartial advice in relation to the life company’s operations, financial condition and policy liabilities. This advice is designed to assist the Board and senior management in carrying out their responsibility for the sound and prudent management of the life company.
Accordingly, this Prudential Standard outlines certain roles and responsibilities of a life company’s Appointed Actuary. It also outlines the obligations of a life company to make arrangements to enable its Appointed Actuary to fulfil his or her responsibilities.
The key requirements of this Prudential Standard are:
a life company must make arrangements to enable its Appointed Actuary to undertake his or her role and responsibilities;
the Appointed Actuary must provide an assessment of the overall financial condition of the life company and advise on the valuation of its policy liabilities on an annual basis. In particular, the Appointed Actuary must prepare a Financial Condition Report and provide this report to the company;
a life company must submit the Financial Condition Report to APRA;
the Appointed Actuary may also be required to provide advice to the life company on certain life policies; and
the Appointed Actuary may be required to conduct a special purpose review and provide a report to APRA and the life company.
APRA works closely with the Institute of Actuaries of Australia in the development of professional standards. As the Institute of Actuaries of Australia issues professional standards and guidance on product advice and financial condition investigations for life companies, APRA does not deem it necessary to provide detailed guidance on these topics in addition to principles stated in this Prudential Standard.
Table of contents
Authority...................................................................................................................... 3
Application.................................................................................................................. 3
Obligation of a life company to appoint an actuary......................................... 3
Financial Condition Report.................................................................................... 4
Actuarial advice regarding policies and reinsurance...................................... 5
Special purpose review........................................................................................... 6
Obligation to report to APRA under the Act....................................................... 7
General requirements.............................................................................................. 7
Adjustments and Exclusions................................................................................. 8
Authority
This Prudential Standard is made under paragraph 230A(1)(a) of the Life Insurance Act 1995 (the Act).
Application
This Prudential Standard applies to all life companies (including friendly societies) registered under the Act.[1]
[1] Refer to section 21 of the Act.
This Prudential Standard includes requirements that apply to all actuaries appointed under the Act. These requirements are functions of an actuary for the purposes of subsection 97(1) of the Act.
Obligation of a life company to appoint an actuary
Under the Act, a life company must appoint an actuary (Appointed Actuary).[2]
[2] Refer to subsection 93(1) of the Act.
A life company must ensure that its Appointed Actuary:
(a)satisfies the eligibility criteria in Prudential Standard LPS 520 Fit and Proper (LPS 520) applicable to an Appointed Actuary; and
(b)is a fit and proper person in accordance with the life company’s fit and proper policy as required by LPS 520, including those requirements that apply specifically to the Appointed Actuary.
A life company must ensure that its Appointed Actuary has access to all relevant data, information, reports and staff of the life company (and must take all reasonable steps to ensure access to contractors of the life company) that its Appointed Actuary reasonably believes are necessary to fulfil his or her responsibilities.[3] This will include access to the life company’s Board[4], Board Audit Committee and internal auditors as required.
[3] Note that under subsection 97(2) of the Act a life company must make any arrangements necessary to enable the actuary to perform these functions.
[4] Or, in the case of an eligible foreign life insurance company (EFLIC), the Compliance Committee.
A life company must ensure that its Appointed Actuary is fully informed of all prudential requirements applicable to the life company. Prudential requirements include requirements imposed by the Act, regulations, prudential standards, Prudential Rules, the Financial Sector (Collection of Data) Act 2001 (FSCODA), reporting standards, conditions on registration and any other requirements imposed by APRA, in writing, in relation to the life company. In addition, the life company must ensure that the Appointed Actuary is provided with any other information APRA has provided to the life company that may assist the Appointed Actuary in fulfilling his or her role and responsibilities under this Prudential Standard.
Financial Condition Report
A life company that is not a friendly society must arrange for its Appointed Actuary to:
(a)investigate the financial condition of the company (including reporting on the financial condition of each statutory and shareholder’s fund) as at the end of every financial year of the company; and
(b)give the company a written report of the results of the investigation.
A friendly society must arrange for its Appointed Actuary to:
(a)investigate the financial condition of:
(i) each approved benefit fund of the society; and
(ii) the management fund of the society
as at the end of every financial year of the society; and
(b)give the society a written report of the results of the investigation.
The investigation required under paragraph 8 or 9 must be carried out with regard to all the prudential standards applicable to the life company (the prudential standards) and include:
(a)the making of a valuation of the life company’s policy liabilities;
(b)an assessment, in relation to each statutory fund or benefit fund of the life company, of the extent to which the life company has complied, during the financial year concerned, with the solvency and capital adequacy requirements specified in the prudential standards;
(c)an assessment of the extent to which the life company has complied, during the financial year concerned, with the requirements specified in the prudential standards which relate to the management fund (for a friendly society) or the shareholders’ fund (for a life company that is not a friendly society); and
(d)an assessment as to whether the life company has complied with any directions given to the company relating to capital adequacy or solvency, or any directions given to the company relating to the management fund (for a friendly society) or the shareholders’ fund (for a life company that is not a friendly society).
To avoid doubt, if the life company is an eligible foreign life insurance company (EFLIC), the investigation need not cover the financial condition of the company to the extent that the financial condition relates to life insurance business carried on outside Australia by the company.[5]
[5] Refer to section 16ZE of the Act.
Nothing in this Prudential Standard prevents a life company from having its Appointed Actuary also investigate the financial condition of the company as at a time other than the end of a financial year.
A company must not make public the results of an investigation referred to in paragraph 12 unless:
(a)the investigation has been conducted in the manner in which an annual actuarial investigation is required to be conducted; and
(b)the Appointed Actuary has given the company a written report of the results of the investigation.
APRA may, by written notice given to a life company, require the life company to arrange for its Appointed Actuary to carry out an investigation of the financial condition of the company as at a time other than the end of a financial year. In this case:
(a)the investigation must be conducted in the manner in which an annual actuarial investigation is required to be conducted; and
(b)the life company must arrange for the Appointed Actuary to give the company a written report of the results of the investigation.
A life company must give to APRA a copy of a Financial Condition Report (FCR) prepared under paragraph 8, 9, 12 or 14 within three months after the end of the period to which the report relates. In exceptional cases, a life company may apply to APRA to extend the time within which this report is to be provided to APRA.
In preparing a FCR, an Appointed Actuary must have regard to relevant professional standards issued by the Institute of Actuaries of Australia, to the extent that they are not inconsistent with the requirements of this Prudential Standard.
Actuarial advice regarding policies and reinsurance
A life company must not issue or modify a policy unless either:[6]
[6] ‘Policy’ includes a life policy (section 9 of the Act), a sinking fund policy (referred to in section 11 of the Act) and a policy issued in respect of business declared to be life insurance business under section 12A or section 12B of the Act. For friendly societies ‘policy’ has the same meaning as in section 16F of the Act. Note that friendly societies also have obligations under Prudential Rules 40 and Prudential Rules 41 to submit this advice to APRA.
(a) the Appointed Actuary has given written advice about:
(i) the proposed terms and conditions on which it is to be issued or modified;
(ii) the proposed basis on which the surrender value is to be determined;
(iii) if the policy provides for benefits to be calculated by reference to units, the proposed means by which the unit values are to be determined;
(iv) if the life company is a friendly society, the proposed approved benefit fund rules or modification of the benefit fund rules; and whether the benefit fund rules will result in unfairness to any prospective or existing members of the benefit fund; and
(v) if the life company is a friendly society, any change to the investment management or strategy of an approved benefit fund beyond that disclosed in the approved benefit fund rules; or
(b)the proposed modification is assessed by the life company as not being material under the written policy approved by the Board for the purposes of paragraph 20 and the Appointed Actuary has been advised of the proposed modification and advises the life company that the modification is not material.
The Appointed Actuary’s written advice may relate to a number of policies of a similar kind.
1.
A life company must not enter into, modify or terminate a reinsurance arrangement unless the Appointed Actuary has given the company written advice as to the likely consequences of taking such action.
A life company must have a written policy, approved by the Board, which:
(a)sets out the situations where the Appointed Actuary’s written advice may relate to more than one life policy under paragraph 18;
(b)enables the life company to decide whether any proposed modification to a policy is material or not for the purposes of paragraph 17(b) of this Prudential Standard, taking into account the likely impact of the modification on policy owners and the financial position of the life company; and
(c)sets out who must consider the advice under paragraph 17 or 19 and, in particular, the situations where the advice must be considered by the Board.
Special purpose review
When requested to do so in writing by APRA, a life company must arrange for its Appointed Actuary to:
(a)undertake a special purpose review of matters set out in writing by APRA relating to the life company’s operations, risk management or financial affairs; and
(b)prepare a report in respect of that review.
A special purpose review may be conducted by an actuary other than the actuary appointed under paragraph 4 but only where this is agreed to by APRA and the actuary satisfies the criteria set out in paragraph 5.
The review must be completed in accordance with any relevant professional standards and guidance notes (as appropriate to the nature of the special purpose review), to the extent that they are not inconsistent with the requirements of this Prudential Standard. Where APRA considers, having regard to the nature of the life company’s operations and the purpose of the special purpose review, that the review should not be completed in accordance with those professional standards and guidance notes, APRA may advise the life company in writing that an alternative standard must be used (which is not inconsistent with the requirements of this Prudential Standard and the Act).
The cost of a special purpose review will be borne by the life company.
The actuary must submit the final report to APRA and the life company simultaneously within three months of the review being commissioned, or such other period as APRA agrees.
Obligation to report to APRA under the Act
The Act specifies certain circumstances where Appointed Actuaries are required to report to APRA where a life company or its directors may have contravened the Act or any other law and the contravention may significantly prejudice the interests of the owners of policies issued by the life company.[7]
[7] Refer to subsection 98(2) of the Act.
Where a report is made to APRA, the Appointed Actuary should not disclose this to the life company if the Appointed Actuary:
(a)considers that by doing so the interests of policy owners may be jeopardised; or
(b)has lost confidence in or mistrusts the Board or senior management of the life company.
General requirements
APRA liaison with an Appointed Actuary will normally be conducted under tripartite arrangements involving APRA, the life company and the Appointed Actuary. Notwithstanding the tripartite relationship, APRA and an Appointed Actuary may meet, at any time, on a bilateral basis at the request of either party.
All working papers and other documentation of an Appointed Actuary or an actuary appointed under paragraph 22, in relation to prudential requirements of the life company8, must be retained by the actuary’s employer where the actuary is externally appointed, or by the life company where the actuary is employed by the life company, for a period of seven years. The person whose responsibility it is to hold the working papers must provide the working papers and other documentation to APRA where requested to do so in writing by APRA.
8 ‘Prudential requirements’ is defined in paragraph 7 of this Prudential Standard.
Persons involved in the provision of information should note that it is a serious offence under subsection 137.1 and 137.2 of the Criminal Code 1995 to provide, whether directly or indirectly, false or misleading documents to a Commonwealth entity such as APRA.
Adjustments and Exclusions
APRA may, by notice in writing to a life company, adjust or exclude a specific prudential requirement in this Prudential Standard in relation to that company.
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