Life Insurance (prudential standards) determination No. 13 of 2007 Prudential standard LPS 310 Audit and Actuarial Requirements (Cth)
Life Insurance (prudential standards) determination No.13 of 2007
Prudential standard LPS 310 Audit and Actuarial Requirements
Life Insurance Act 1995
I, John Roy Trowbridge, Member of APRA, delegate of APRA:
under subsection 230A(5) of the LifeInsurance Act 1995 (the Act), REVOKE the following prudential standards:
·Prudential Standards No.1 Actuarial Advice; and
·Prudential Standards No.2 Approved Benefit Fund Requirements; and
under subsection 230A(1) of the Act, DETERMINE Prudential Standard LPS 310 Audit and Actuarial Requirements in the form shown in the Schedule, which shall apply to all life companies, including friendly societies.
This determination takes effect on the later of 1 January 2008 and the date of registration on the Federal Register of Legislative Instruments.
Dated 27 November 2007
[Signed]
John Trowbridge
Member
Interpretation
In this instrument:
APRA means the Australian Prudential Regulation Authority.
Federal Register of Legislative Instruments means the register established under section 20 of the Legislative Instruments Act 2003.
Schedule
Prudential Standard LPS 310 Audit and Actuarial Requirements comprises the ten pages commencing on the following page.
Prudential Standard LPS 310
Audit and Actuarial Requirements
| Objective and key requirements of this Prudential Standard This Prudential Standard is designed to ensure that life companies are subject to minimum standards of independent oversight. It sets out a number of requirements relating to audit and actuarial arrangements, which provide an independent perspective of the activities of a life company. The requirements are applicable to all life companies, including friendly societies, registered under the Life Insurance Act 1995. The key requirements of this Prudential Standard are: · the records of each life company in relation to each financial year must be audited by an auditor appointed by the life company; · each life company must arrange for its appointed actuary to conduct financial condition investigations and provide actuarial advice regarding life policies. |
Authority
This Prudential Standard is made under subsection 230A(1) of the LifeInsurance Act 1995 (the Act).
Application
This Prudential Standard applies to all life companies, including friendly societies, registered under the Act.
Eligibility of auditors
An auditor will be eligible to be appointed as the auditor of a life company if the auditor meets the fit and proper criteria set out in Prudential Standard LPS 520 Fit and Proper (LPS 520) including, if applicable[1], the additional criteria in relation to auditors in paragraph 18 of LPS 520.[2]
[1] The additional criteria will not apply where the criteria set out in paragraph 20 of LPS 520 are met.
[2] Section 84 of the Act
If:
(a)a life company, in writing, requests a firm to nominate a member or employee of the firm for appointment as auditor of the life company; and
(b)a written nomination is given to the company in accordance with the request; and
(c)the person nominated meets the requirements of LPS 520 in relation to the life company and there is no declaration in force, under section 86 of the Act, in relation to the person nominated declaring that the person is ineligible to hold an appointment as an auditor of a life company; and
(d)the request by the life company has not been withdrawn when the nomination is made;
the person nominated is taken to have been appointed by the life company to be its auditor.
An appointment by virtue of paragraph 4 is taken to have been made when the written nomination was given to the life company.
Audit requirements
The directors of a life company must ensure that the records of the company in respect of each financial year are audited by the auditor of the company.
The audit must be carried out before reporting documents as at the end of that financial year are given to APRA.[3]
[3] The reporting documents are collected under either:
Reporting documents referred to in paragraph 7 are not effective for the purposes of the Act or the Financial Sector (Collection of Data) Act 2001 unless they are accompanied by a report signed by the auditor of the company and stating:
(a)that the statements have been prepared in accordance with the Act;
(b)that the records of the company on which the statements are based record properly the affairs and transactions of the company; and
(c)that the statements truly represent the financial position of the company.
The auditor of a life company may accept, for the purposes of an audit under this standard, a valuation by the appointed actuary for the company of:
(a)the policy liabilities of the company as at the end of a financial year of the company; or
(b)a change, during a financial year of the company, in the policy liabilities of the company in relation to a statutory fund.
Eligibility of actuaries
An actuary will be eligible to be appointed as the actuary of a life company if the actuary meets the fit and proper criteria set out in LPS 520, including, if applicable[4], the additional criteria in relation to actuaries in paragraph 19 of LPS 520.[5]
[4] The additional criteria will not apply where the criteria set out in paragraph 20 of LPS 520 are met.
[5] Subsection 93(3) of the Act.
Financial condition reports
A life company that is not a friendly society must arrange for its appointed actuary to:
(a)investigate the financial condition of the company 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, to the extent required by Attachment A;
(iii) 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 11or 12 must include:
(a)the making of a valuation of the life company’s policy liabilities; and
(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 Prudential Standard LPS 2.04 Solvency Standard and Prudential Standard LPS 3.04 Capital Adequacy Standard and with any directions given to the company relating to capital adequacy or solvency.
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.[6]
[6] Refer to section 16ZE of the Act.
Nothing in this Prudential Standard prevents a life insurance company that is not a friendly society from having its appointed actuary investigate the financial condition of the company as at a time other than the end of a financial year.
Nothing in this Prudential Standard prevents a friendly society from having its appointed actuary investigate the financial condition of:
(a)an approved benefit fund of the society; or
(b)the management fund of the society to the extent required by Attachment A
at a time other than at the end of a financial year.
A company must not make public the results of an investigation referred to in paragraph 15 or 16 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.
If APRA, by written notice given to a life company, requires that an investigation referred to in paragraph 15 or 16 be conducted by the company:
(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) A life company must give to APRA a copy of a financial condition report prepared under paragraph 11, 12, 15 or 16 within 3 months after the end of the period as at which the report is made.
(b)APRA may extend the period fixed by paragraph 19(a) by not more than 3 months.
(c)An extension of time may be granted before or after the end of the period to be extended.
Actuarial advice regarding policies
A life company must not issue policies of a particular kind unless the appointed actuary has given the company written advice about:
(a)the proposed terms and conditions on which policies of that kind are to be issued; and
(b)the proposed basis on which the surrender value of policies of that kind is to be determined; and
(c)if the policies provide for benefits to be calculated by reference to units—the proposed means by which the unit values are to be determined.
A life company must not enter into a reinsurance arrangement unless the appointed actuary has given the company written advice as to the likely consequences of the proposed arrangement.
Ascertainment of income and outgoings of statutory funds
For the purposes of subsection 47(1) of the Act, income and outgoings of a statutory fund are, respectively, the amounts pertaining to that statutory fund that have the character of income and outgoings in accordance with the provisions of the Reporting Standards made under the Financial Sector (Collection of Data) Act 2001, as in force from time to time, that provide for accountability for profit and loss.
Attachment A
Modified operation for friendly societies
Subject to:
(a)items 2 and 3 of this Attachment; and
(b)Prudential Standard LPS 6.03 Management Capital Standard,
an investigation of the financial condition of a friendly society under paragraph 12 of this Prudential Standard is limited to:
(a)each approved benefit fund and;
(b)the management fund, but only to the extent that it impacts on any of the approved benefit funds,
of the friendly society.
In addition to the requirements set out in paragraph 13 of this Prudential Standard, the financial condition report required under item 1 must include:
(a)analysis and comment on the position of each approved benefit fund of the friendly society relative to the requirements of Prudential Standard LPS 2.04 Solvency Standard, both in terms of the position at balance date and the future prospects of the fund;
(b)analysis and comment on the adequacy of policies and procedures that are used for monitoring the solvency requirement on a continuous basis;
(c)comment on the continuing appropriateness of the Risk Management Strategy (RMS) as it relates to derivatives or foreign currency use, in relation to an approved benefit fund or the management fund;
(d)subject to paragraph 3 of this Attachment, analysis of the extent to which the management and administration of each approved benefit fund can be met from fees transferred from the approved benefit fund to the management fund;
(e)comment on the discounted cash flow valuation, as conducted or reviewed by the appointed actuary, of any retirement village run from the management fund.
For the purposes of paragraph 2(d) of this Attachment, the analysis of the extent to which fees from an approved benefit fund are sufficient to finance the expenses of administering that fund must include both short term analysis, based on historical figures, and medium to long term future analysis, bearing in mind both the realistic plans of the friendly society, particularly in regard to new business, and the details of contracts in force at the time of the analysis.
Under paragraph 18(b) of this Prudential Standard, if:
(a)APRA is satisfied that a further, more extensive financial condition investigation is required, which should deal with matters in addition to those required under paragraphs 2 and 3 of this Attachment; and
(b)APRA gives a written notice to the friendly society requiring the friendly society to arrange for its appointed actuary to conduct such a further financial condition investigation,
then the friendly society must comply with that written notice.
A financial condition report provided to the board of a friendly society under this Prudential Standard must:
(a)include a statement by its appointed actuary in the form set out in Attachment B; and
(b)comply with the Code of Conduct and any relevant professional standards of the Institute of Actuaries of Australia.
The board of a friendly society must obtain and consider the advice of the appointed actuary, in addition to any financial condition report, as set out below:
(a)the appointed actuary must make a statement as to the accuracy of the particulars provided to APRA by the society as required by subrule 1(g) of Prudential Rules No 40; and
(b)to satisfy Prudential Rules No 40, before the friendly society applies to APRA for approval of benefit fund rules under section 16L of the Act, the appointed actuary must report on the proposed benefit fund rules, stating whether the proposed benefit fund rules will result in unfairness to any prospective member of the benefit fund; and
(c)to satisfy Prudential Rules No 41, before the friendly society applies to APRA for amendment of approved benefit fund rules under section 16Q of the Act, where that proposed amendment is beyond the scope of any previous actuarial advice, the appointed actuary must report on the proposed amendment to the approved benefit fund rules, stating whether the proposed amendment will result in unfairness to the members of the approved benefit fund; and
(d)before any change is made, beyond that disclosed to members in the approved benefit fund rules, to the investment management or strategy of an approved benefit fund, the appointed actuary must provide advice on the effect of such modification; and
(e)before any change to the operation of an approved benefit fund, where that change is beyond the scope of any previous actuarial advice, the appointed actuary must provide advice on the effect of such a change; and
(f)before any modification of reinsurance arrangements, the appointed actuary must provide advice on the effect of any such modification.
A friendly society must provide a copy of the advice of the appointed actuary in relation to any of the matters in paragraph 6 of this Attachment to APRA within 14 days of receiving it from the Appointed Actuary.
Attachment B
I have investigated the financial condition of the XYZ Friendly Society as at xx/xx/xxxx in accordance with paragraph 12 of this Prudential Standard and Attachment A to this Prudential Standard. As a result of that investigation it is my opinion that:
(a)The investment strategy adopted by the friendly society for each approved benefit fund is appropriate to the fund’s liabilities. I have formed this opinion having considered, amongst other things:
(i)the financial position of each fund including the unallocated surplus, after the surplus, if any, declared as at xx/xx/xxxx;
(ii)the nature of the liabilities of each fund;
(iii)the approved benefit fund rules of each fund; and
(iv)each fund’s disclosure documents.
(b)I have valued the following approved benefit funds as at xx/xx/xxxx. In summary, the results of those valuations are as follows:
| Fund Name | Net Assets | Member liabilities | Surplus before distributions | Intended distributions to members | Other intended distributions | Unallocated surplus |
(c)The directors’ intended distributions of surplus as at xx/xx/xxxx, as conveyed to me by the chief executive officer’s letter of _______, are in accordance with my recommendations. These recommendations are based on the relevant approved benefit fund rules of the friendly society and representations made to members. If the distributions are made as intended, each fund will have complied as at xx/xx/xxxx with LPS 2.04 Solvency Standard.
(d)The friendly society’s policy in regard to the continuous monitoring and management of the Benefit Fund Solvency Reserve is adequate for each of the friendly society’s approved benefit funds. (I have not however audited the friendly society’s compliance with this policy - this is a function of the society’s auditor).
(e)The current pricing of approved benefit fund products is such that margins available for the management and administration of those approved benefit funds would, under reasonable foreseeable future scenarios, as well as the scenario of ceasing to write new business, be adequate for the continued administration and management of those approved benefit funds.
Signed
…………………………………… APPOINTED ACTUARY
…………………………………… ……………………………………………..
Name Firm
Date …………………………….
a)subsection 82(1) of the Act; or
b)reporting standards under the Financial Sector (Collection of Data) Act 2001, once the reporting standards have been determined by APRA.
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