Banking, Insurance and Life Insurance (prudential standard) determination No. 4 of 2012 - Prudential Standard CPS 520 - Fit and Proper

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Legislation au F2012L02445 Not in force Legislative Instrument

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Banking, Insurance and Life Insurance (prudential standards) determination Nos. 1 to 4 of 2012

 

EXPLANATORY STATEMENT

Prepared by the Australian Prudential Regulation Authority

Banking Act 1959, subsections 11AF(1) and 11AF(3)

Insurance Act 1973, subsections 32(1) and 32(4)

Life Insurance Act 1995, subsections 230A(1) and 230A(5)

Legislative Instruments Act 2003, paragraph 6(d)

APRA may, in writing, vary or revoke a prudential standard that applies to an APRA-regulated institution under:

  • subsection 11AF(3) of the Banking Act 1959 (Banking Act), in relation to authorised deposit-taking institutions (ADIs) and authorised non-operating holding companies (authorised banking NOHCs);
  • subsection 32(4) of the Insurance Act 1973 (Insurance Act), in relation to general insurers and authorised non-operating holding companies (authorised insurance NOHCs); and
  • subsection 230A(5) of the Life Insurance Act 1995 (Life Insurance Act), in relation to life companies (including friendly societies) and registered non-operating holding companies (registered life NOHCs).

APRA may, in writing, determine a prudential standard that applies to an APRA-regulated institution under:

  • subsection 11AF(1) of the Banking Act, in relation to ADIs and authorised banking NOHCs;
  • subsection 32(1) of the Insurance Act, in relation to general insurers and authorised insurance NOHCs; and
  • subsection 230A(1) of the Life Insurance Act, in relation to life companies (including friendly societies) and registered life NOHCs. 

Pursuant to paragraph 6(d) of the Legislative Instruments Act 2003 (the Legislative Instruments Act), such prudential standards are legislative instruments for the purposes of the Legislative Instruments Act.  

 

  1.    Background

APRA commenced a review of the regulatory capital framework for general insurers and life companies (LAGIC review) in 2010. The broad aims of the review were to:

  • improve the risk sensitivity and appropriateness of the capital standards in general insurance and life insurance (including friendly societies); and
  • where appropriate, improve the alignment of the capital standards across the industries that APRA supervises.

APRA has made a range of amendments to its prudential framework to give effect to the findings of the review.

Changes in respect of cross-industry prudential standards are given effect through the instruments described in section 2 and comprise changes to prudential requirements concerning outsourcing, business continuity management, governance and fitness and propriety.

 

2.      Purpose and operation of the instruments

The purpose of making the instruments is to introduce amended prudential standards and revoke existing prudential standards in order to implement the changes arsing from the LAGIC review.

A small number of minor amendments to the cross-industry prudential standards have been made, to update footnotes that made reference to general insurance and life insurance prudential standards that will be amended as part of the LAGIC review. In conjunction with these updates, APRA has taken the opportunity to make a small number of other minor amendments to the cross-industry prudential standards to align the structure of these standards with the other prudential standards applicable to insurance, banking and superannuation. There has been no change to the substantive prudential requirements in these standards.

On 30 November 2012, APRA made the following determinations (the instruments) under the relevant provisions of the Banking Act, Insurance Act and Life Insurance Act:

  1. Banking, Insurance and Life Insurance (prudential standards) determination No. 1 of 2012, which revokes Prudential Standard CPS 231 Outsourcing made on 9 September 2011 (the existing CPS 231) and determines a new Prudential Standard CPS Outsourcing (CPS 231);
  2. Banking, Insurance and Life Insurance (prudential standards) determination No. 2 of 2012, which revokes Prudential Standard CPS 232 Business Continuity Management made on 9 September 2011 (the existing CPS 232) and determines a new Prudential Standard CPS Business Continuity Management (CPS 232);
  3. Banking, Insurance and Life Insurance (prudential standards) determination No. 3 of 2012, which revokes Prudential Standard CPS 510 Governance made on 9 September 2011 (the existing CPS 510) and determines a new Prudential Standard CPS 510 Governance (CPS 510); and
  4. Banking, Insurance and Life Insurance (prudential standards) determination No. 4 of 2012, which revokes Prudential Standard CPS 520 Fit and Proper made on 9 September 2011 (the existing CPS 520) and determines a new Prudential Standard CPS 520 Fit and Proper (CPS 520).

The instruments will take effect on 1 January 2013.

 

3.      Consultation

APRA undertook consultation on the LAGIC review between May 2010 and October 2012, including four rounds of industry consultation, three technical papers and two quantitative impact studies.

APRA released the following consultation materials:

  • May 2010 – Discussion paper ‘Review of capital standards for general insurers and life insurers’[1];
  • July 2010 – Technical papers ‘Review of capital standards for general insurers and life insurers – Asset risk capital charge’[2] and ‘Review of capital standards for general insurers and life insurers – Capital base and insurance risk capital charge for life insurers’[3];
  • September 2010 – Technical paper ‘Review of capital standards for general insurers and life insurers – Insurance concentration risk capital charge for general insurers’[4];
  • Late 2010 – APRA invited insurers to participate in the first quantitative impact study[5];
  • March 2011 – Response paper ‘Review of capital standards for general insurers and life insurers’[6];
  • April 2011 – APRA invited insurers to participate in the second quantitative impact study[7];
  • December 2011 – Response paper ‘Review of capital standards for general insurers and life insurers’[8], draft prudential standards;
  • March 2012 – Letter to all CEOs (or equivalent) and Appointed Actuaries of life insurers ‘Illiquidity premium’[9];
  • May 2012 – Response paper ‘Review of capital standards for general insurers and life insurers’[10], final versions of the capital adequacy standards, draft versions of the composition of the capital base and non-capital prudential standards containing amendments that are in the main consequential to the revised capital framework;
  • June 2012 – Discussion paper ‘Review of capital standards for general insurers and life insurers – proposed revisions to reporting requirements’[11], draft versions of reporting forms and instructions, reporting standards and capital adequacy calculation workbooks and instructions;
  • August 2012 – Letter to insurers ‘Additional proposed changes to the reporting standards’[12];
  • September 2012 – Letter to all CEOs (or equivalent) of life insurers ‘Solvency standard requirements under the Life Insurance Act 1995’[13];
  • September 2012 – Letter to insurers ‘Consultation on draft prudential practice guides and information paper’[14], draft versions of prudential practice guides and an information paper[15];
  • October 2012 – Response paper ‘Review of capital standards for general insurers and life insurers’[16], final versions of all prudential standards amended as a result of the LAGIC review; and
  • October 2012 – Response paper ‘Review of capital standards for general insurers and life insurers – reporting requirements’[17], final versions of all forms and instructions and reporting standards.

APRA has considered both formal and informal feedback from industry throughout the above multi-year process. APRA has also considered feedback from the authorised deposit-taking (ADI) industry in relation to requirements for the composition of the capital base which are common to insurers and ADIs.  Submissions made by industry were broadly supportive of the changes. Issues considered to be significant or to have merit were incorporated into the revised capital framework.

 

4.      Regulation Impact Statement

A Regulation Impact Statement is required for the life and general insurance capital review. It has been prepared and is attached as supporting material.

 

5.      Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

The legislative instruments the subject of this explanatory statement do not engage any of the applicable rights or freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. Accordingly, in APRA’s assessment, these legislative instruments are compatible with human rights.

 

 

 

 

[1] http://www.apra.gov.au/CrossIndustry/Documents/GLI_DP_RCSGILI_032010_v7[1].pdf

[2] http://apra.gov.au/CrossIndustry/Documents/GLI_TP_LGICR_062010_ex%5B1%5D.pdf

[3] http://apra.gov.au/CrossIndustry/Documents/GLI_TP_CBIRCC_072010_v8%5B1%5D.pdf

[4] http://apra.gov.au/CrossIndustry/Documents/Insurance-Conc-Risk-charge%5B1%5D.pdf

[5] http://www.apra.gov.au/GI/PrudentialFramework/Pages/Review-Cap-Stds-QIS1-QIS2-TechSpecs.aspx

[6] http://apra.gov.au/CrossIndustry/Documents/GLI_RS_RCSGILI_032011_ex_r%5B1%5D.pdf

[7] http://www.apra.gov.au/GI/PrudentialFramework/Pages/Review-Cap-Stds-QIS1-QIS2-TechSpecs.aspx

[8] http://apra.gov.au/GI/PrudentialFramework/Pages/General-and-Life-Insurance-Capital-Review-Consultation-on-Draft-Prudential-Standards.aspx

[9] http://apra.gov.au/lifs/PrudentialFramework/Documents/120330_LTI_LAGIC_LI_illiquidity_premium_consultation.pdf

[10] http://apra.gov.au/CrossIndustry/Pages/Life-and-General-Insurance-Capital-Review-Consultation-May-2012.aspx

[11] http://www.apra.gov.au/CrossIndustry/Consultations/Pages/LAGIC-Reporting-Requirements-June-2012.aspx

[12] http://www.apra.gov.au/CrossIndustry/Consultations/Documents/120806-letter-to-industry-LAGIC-proposed-changes-to-reporting-standards.pdf

[13] http://apra.gov.au/CrossIndustry/Consultations/Documents/120912_LAGIC_letter_life_insurance_temporary_solvency_standard.pdf

[14] http://www.apra.gov.au/CrossIndustry/Consultations/Pages/LAGIC-Prudential-Practice-Guides-September-2012.aspx

[15] Final versions of the prudential practice guides and information paper will be released in 2013.

[16] http://www.apra.gov.au/CrossIndustry/Pages/Life-and-General-Insurance-Capital-Review-October-2012.aspx

[17] http://www.apra.gov.au/lifs/ReportingFramework/Pages/LAGIC-final-reporting-requirements-LI-October-2012.aspx

Overview

The Banking, Insurance and Life Insurance (prudential standards) determination Nos. 1 to 4 of 2012 were enacted to address the need for an updated regulatory capital framework for general insurers and life companies. The Australian Prudential Regulation Authority (APRA) was established as the enacting body to implement these changes, which aimed to enhance the risk sensitivity and appropriateness of capital standards within the general insurance and life insurance sectors, as well as to promote better alignment of these standards across the industries under APRA’s supervision. This initiative was part of a broader review (LAGIC review) that began in 2010, responding to industry feedback and evolving market conditions. The determinations reflect the policy objective of ensuring that prudential standards are robust, fair, and aligned with the best international practices, thereby protecting the interests of policyholders and maintaining the stability of the financial system.

Scope and Application

The Banking, Insurance and Life Insurance (prudential standards) determination Nos. 1 to 4 of 2012 applies to authorised deposit-taking institutions, authorised non-operating holding companies, general insurers, authorised insurance non-operating holding companies, life companies (including friendly societies) and registered non-operating holding companies that are regulated by the Australian Prudential Regulation Authority (APRA) under the Banking Act 1959, the Insurance Act 1973 and the Life Insurance Act 1995. These instruments are designed to implement the findings of the Life and General Insurance Capital (LAGIC) review, which aimed to improve the risk sensitivity and appropriateness of the capital standards in general insurance and life insurance, as well as to enhance the alignment of capital standards across the industries that APRA supervises. The changes introduced by these determinations include updates to the prudential requirements concerning outsourcing, business continuity management, governance and fitness and propriety. The instruments will take effect from 1 January 2013. APRA has considered extensive feedback from industry during the consultation process, which has been broadly supportive of the changes. Additionally, APRA has assessed that these legislative instruments are compatible with human rights as they do not engage any of the applicable rights or freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Key Provisions

The Banking, Insurance and Life Insurance (prudential standards) determinations Nos. 1 to 4 of 2012 are legislative instruments that establish amended prudential standards and revoke existing ones, as per the findings of the Life and General Insurance Capital (LAGIC) review undertaken by the Australian Prudential Regulation Authority (APRA). These determinations are made under subsections 11AF(1) and 11AF(3) of the Banking Act 1959, subsections 32(1) and 32(4) of the Insurance Act 1973, and subsections 230A(1) and 230A(5) of the Life Insurance Act 1995. They also fall within the scope of the Legislative Instruments Act 2003. These determinations primarily revise the prudential standards concerning outsourcing, business continuity management, governance, and fitness and propriety for APRA-regulated institutions, including authorised deposit-taking institutions (ADIs), authorised non-operating holding companies (authorised banking NOHCs), general insurers, authorised insurance NOHCs, life companies (including friendly societies), and registered non-operating holding companies (registered life NOHCs). The primary obligations imposed by these determinations on the regulated entities are to comply with the newly established prudential standards concerning outsourcing, business continuity management, governance, and fitness and propriety. These standards are designed to ensure that these institutions maintain adequate capital levels and risk management practices. Specifically, the revised prudential standards require these entities to implement robust risk management frameworks, ensure the adequacy of their capital to cover potential losses, and maintain adequate business continuity plans. Furthermore, the standards necessitate that the governance structures within these institutions are sound, and that the individuals appointed to key roles meet the required fitness and propriety criteria. Compliance with these standards is essential for maintaining the financial stability and resilience of the banking and insurance sectors. Failure to comply with the prudential standards set forth in these determinations can result in regulatory action by APRA. While the determinations themselves do not explicitly outline specific penalties or consequences for non-compliance, APRA has the authority to take various enforcement actions against non-compliant entities. These actions can include issuing directions to rectify breaches, imposing financial penalties, and in severe cases, revoking licenses. Additionally, the Banking Act, Insurance Act, and Life Insurance Act provide for broader enforcement mechanisms, including fines and imprisonment for serious breaches. The exact penalties for non-compliance are determined on a case-by-case basis, taking into account the nature and severity of the breach, as well as any mitigating or aggravating factors.

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