Financial Sector (Collection of Data) (reporting standard) determination No. 31 of 2007 - LRS 901 - Transitional Arrangements 2008

Financial Sector (Collection of Data) (reporting standard) determination
Nos.18 to 31 of 2007

EXPLANATORY STATEMENT

Prepared by the Australian Prudential Regulation Authority

Financial Sector (Collection of Data) Act 2001, paragraph 13(1)(a)

Under paragraph 13(1)(a) of the Financial Sector (Collection of Data) Act 2001 (FSCOD Act), APRA has the power to determine (in writing) standards in relation to prudential matters to be complied with by all life companies, including friendly societies.

Financial Sector (Collection of Data) (reporting standard) determination Nos.18 to 31 of 2007 make the following reporting standards to take effect from 1 January 2008:

• Reporting Standard LRS 100.0 Solvency;
• Reporting Standard LRS 110.0 Capital Adequacy;
• Reporting Standard LRS 120.0 Management Capital;
• Reporting Standard LRS 210.0 Derivatives, Commitments and Off Balance Sheet Items;
• Reporting Standard LRS 220.0 Large Exposures;
• Reporting Standard LRS 300.0 Statement of Financial Position;
• Reporting Standard LRS 310.0 Statement of Financial Performance;
• Reporting Standard LRS 330.0 Summary of Revenue and Expenses;
• Reporting Standard LRS 340.0 Retained Profits;
• Reporting Standard LRS 400.0 Statement of Policy Liabilities;
• Reporting Standard LRS 410.0 Capital Measurement Statistics;
• Reporting Standard LRS 420.0 Assets Backing Policy liabilities;
• Reporting Standard LRS 430.0 sources of Profit; and
• Reporting Standard LRS 901 Transitional Arrangements 2008

1. Background

From 1 January 2008 APRA will collect data for life companies (including friendly societies) under the FSCOD Act rather than the Life Insurance Act 1995 (Life Act).

In 2001 the Government enacted the FSCOD Act to provide APRA with general powers to collect data across all industries. The FSCOD Act enables APRA to determine reporting standards that require regulated institutions to provide information about their businesses and activities. The life insurance industry is the final APRA-regulated industry to be brought under the umbrella of the FSCOD Act. Once these new reporting standards are determined, the previous data collection provisions of the Life Act will no longer have effect[1].

APRA is also moving the processes and controls for the collection, storage, retrieval and reporting of data to its standard data collection system, Direct to APRA (D2A). This will make the process for collecting data more efficient.

Life companies and friendly societies will be required to report using both the existing and new forms for the first quarter of 2008. A ‘transitional’ reporting standard made under the FSCOD Act, Reporting Standard 901 – Transitional Arrangements 2008 (LRS 901), implements the dual reporting of 1st quarter 2008 data. This will enable insurers and APRA to work through any data quality issues and recognise movements and trends in the data. It will also provide a valuable point of comparison between the two collections and a sounder basis for the accurate calculation of industry levies.

In addition, one new prudential standard will be introduced under the Life Act to ensure the continuation of product classification requirements: Prudential Standard LPS 350 - Contract Classification for the Purpose of Regulatory Reporting to APRA (LPS 350). This is required as the sections of the Life Act under which PR 49 was issued will no longer be effective once the new reporting standards come into effect.

2. Purpose of the instrument

A total of 13 reporting standards and associated reporting forms will be issued under these determinations. These will replace the existing set of 53 forms for life companies (that are not friendly societies), and 31 forms for friendly societies. The collection of quarterly data under the FSCOD Act and using D2A will commence for the first reporting period ending after 1 January 2008.

APRA intends that, as far as possible, life companies should comply with the new prudential standards on actuarial matters in the same way that they complied with the following prudential rules made under the Life Act:

• Prudential Rules 26 Collection of Statistics;
• Prudential Rules 35 Financial Statements;
• Prudential Rules 47 Friendly Society Financial Statements; and
• Prudential Rules 48 Collection of Statistics - Friendly Societies.

The above prudential rules will be revoked upon commencement of the new reporting standards on 1 January 2008.

3.              Operation of the instrument

• Life insurance (reporting standard) determination No.18 of 2007: Reporting Standard LRS 100.0 Solvency

              Outlines the solvency data required for each statutory fund, plus solvency reserve, ratio and coverage, and component details.

• Life insurance (reporting standard) determination No.19 of 2007: Reporting Standard LRS 110.0 Capital Adequacy

              Outlines the required capital adequacy data for each statutory fund, plus capital adequacy reserve, ratio and coverage, and component details.

• Life insurance (reporting standard) determination No.20 of 2007: Reporting Standard LRS 120.0 Management Capital

              Outlines the required management capital data for the shareholders’ fund, as well as management capital reserve and ratio, component details, and the prudential capital requirement and coverage.

• Life insurance (reporting standard) determination No.21 of 2007: Reporting Standard LRS 210.0 Derivatives, Commitments and Off Balance Sheet Items

              Outlines the required information on the potential effects and values of derivative activity, charges or commitments, and non-market related off-balance sheet transactions on the assets of a statutory fund.

• Life insurance (reporting standard) determination No.22 of 2007: Reporting Standard LRS 220.0 Large Exposures

              Outlines the required details of asset exposures greater than 1% of the value of assets of the fund and information about related party exposure.

• Life insurance (reporting standard) determination No.23 of 2007: Reporting Standard LRS 300.0 Statement of Financial Position

              Outlines the required assets, liabilities and capital data.

• Life insurance (reporting standard) determination No.24 of 2007: Reporting Standard LRS 310.0 Statement of Financial Performance

              Outlines the required revenue, expenses and tax data.

• Life insurance (reporting standard) determination No.25 of 2007: Reporting Standard LRS 330.0 Summary of Revenue and Expenses

              Outlines the required revenue, expenses and tax data.

• Life insurance (reporting standard) determination No.26 of 2007: Reporting Standard LRS 340.0 Retained Profits

              Outlines the required development and disposition of retained profits data.

• Life insurance (reporting standard) determination No.27 of 2007: Reporting Standard LRS 400.0 Statement of Policy Liabilities

              Outlines the required information on policy liabilities by APRA Product Group - to understand the development, disposition and quality of the profit results across different product lines.

• Life insurance (reporting standard) determination No.28 of 2007: Reporting Standard LRS 410.0 Capital Measurement Statistics

              Outlines the required key statistics by APRA Product Group, including solvency and capital adequacy liabilities, and actuarial assumptions adopted for capital adequacy.

• Life insurance (reporting standard) determination No.29 of 2007: Reporting Standard LRS 420.0 Assets Backing Policy liabilities

              Outlines the required product-level balance sheet information - to assess asset/liability mismatch risks for different product groups.

• Life insurance (reporting standard) determination No.30 of 2007: Reporting Standard LRS 430.0 sources of Profit

              Outlines the required product-level information to understand and assess the sources of profit.

• Life insurance (reporting standard) determination No.31 of 2007: Reporting Standard 901 – Transitional Arrangements 2008

Outlines the requirements for the provision of relevant information to APRA for all reporting periods ending between 1 January 2008 and 31 March 2008. It requires all registered life insurance companies and friendly societies to report to APRA, as a transitional measure, data that was required to be submitted to APRA under the Prudential Rules prior to 1 January 2008

4. Consultation

APRA consulted from 12 April to 13 June 2007 with life companies and industry representative bodies on the proposed new data collection framework. The consultation process involved the release of draft reporting standards, forms and instructions, along with a discussion paper outlining the proposed changes. Eighteen responses were received from life companies and industry bodies. These responses represented the views of the majority of industry participants.

5. RIS

A Regulation Impact Statement is attached.

Tabling Regulation Impact Statement

Life Insurance and Friendly Society Data Collection
and Returns

(Office of Best Practice Regulation reference number 8455)

Executive Summary

From 2008, the Australian Prudential Regulation Authority (APRA) will collect data from life companies (including friendly societies) using its powers under the Financial Sector (Collection of Data) Act 2001 (FSCOD Act).[2]  APRA currently collects data from life companies using its powers under the Life Insurance Act 1995 (Life Act).  APRA will make a new set of reporting standards under the FSCOD Act, to replace the current reporting requirements specified in prudential rules made under the Life Act.

At the same time, APRA is considering a proposal to revise the content of the collection and to update the technology it uses to collect the data. The current collection has become somewhat out-of-date, and the data collection systems, built on old technology, are difficult to maintain. APRA is seeking to make the data collection more relevant and efficient for both life companies and APRA.

This Regulation Impact Statement (RIS) presents two options. Both assume the transition from prudential rules under the Life Act to reporting standards under the FSCOD Act.  The two options are:

1. Continue collecting the existing data using the existing technology and systems. This is the ‘status quo’ option:  the data collection, publication and reporting tools would be unchanged.
2. Update the specifications of the data to be collected. Replace the current data-collection IT platforms with APRA’s standard data-collection system called Direct to APRA (D2A).

In the period to 12 June 2007, APRA undertook two months of consultation with life companies and other stakeholders in order to develop a proposal for Option 2. APRA proposed a new set of forms, requesting comment. As a result of the consultation, APRA made a number of changes to its original proposal. The changes to the proposal included:

• the removal of two forms;
• the conversion of two forms from quarterly to annual;
• lengthening the deadlines for submitting audited annual returns;
• lengthening the deadlines for the first two quarterly returns extended as a transitional measure; and
• further streamlining a number of forms to ease workloads and costs for life companies.

APRA considers that Option 2 best achieves the desired objective of improving the data collection framework with the optimum cost-benefit relationship. APRA proposes to proceed on this basis and to issue the new set of reporting standards, forms and instructions in the fourth quarter of 2007. The new data collection will come into effect for reporting periods ending from 1 January 2008.

Background

APRA is the prudential regulator of the Australian financial services industry, which includes life companies. APRA’s mission is to establish and enforce prudential standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by institutions it supervises are met within a stable, efficient and competitive financial system. APRA also acts as the national statistical agency for the Australian financial sector and plays a role in preserving the integrity of Australia’s retirement income policy.

APRA collects and analyses data from life companies for the purpose of prudential supervision, including assessing compliance with prudential and actuarial standards. APRA also provides data to other government agencies and publishes statistical information for the industry and the general public. It is therefore crucial that the data collected from APRA-regulated entities remains useful and up-to-date.

The data are used by APRA to:

• verify compliance with prudential requirements (e.g. solvency and capital requirements);
• understand the operations of the company and the industry;
• identify emerging issues in both the company and the industry;
• assist the activities of other government agencies; and
• collect and disseminate finance sector information to research organisations and the general public.

At the end of March 2007 there were 35 life companies that are not friendly societies and 26 friendly societies authorised under the Life Act. Total statutory fund assets were $244.5 billion for life companies that are not friendly societies and $6.7 billion for friendly societies.

The Financial Sector (Collection of Data) Act) 2001

The FSCOD Act enables APRA to collect information from the institutions it regulates. Under this act APRA may determine reporting standards that require regulated institutions to provide information about their businesses and activities.

APRA’s data collection and publishing powers were originally contained in a variety of industry-specific legislation, including:

• the Banking Act 1959;
• the Insurance Act 1973;
• the Life Insurance Act 1995;
• the Superannuation Industry (Supervision) Act 1993;
• the Retirement Savings Account Act 1997; and
• the Australian Prudential Regulation Authority Act 1998.

The FSCOD Act came into effect in 2001. It provides APRA with general powers to collect information across all industries. These powers assist APRA in the prudential regulation of the financial sector and enable APRA to collect data on behalf of some other government bodies, thus improving the efficiency of reporting for the prudentially regulated financial sector. The FSCOD Act is the legislative foundation of APRA’s program to streamline and harmonise its data collection systems.

The FSCOD Act allowed APRA to implement reforms in stages. APRA now collects data under the FSCOD Act for authorised deposit-taking institutions, general insurers and superannuation entities. The life insurance industry is the final APRA-regulated industry to be brought under the umbrella of the FSCOD Act. In order to complete this legislative reform, APRA must determine, under the FSCOD Act, new reporting standards for life companies. Once these new reporting standards are determined, the previous data collection provisions of the Life Act will no longer have effect.[3]

This RIS assumes that APRA must make the transition from collecting data under the Life Act to collecting data under the FSCOD Act. Nonetheless, this change to the underlying legal basis of the collection naturally provides an opportunity for APRA to consider improving the content of the collection and its systems.

Problem Identification: why update the data collection?

APRA’s current data collection systems for life companies are now more than ten years old. They were inherited from two of APRA’s predecessors, the Insurance and Superannuation Commission (ISC) for life companies that were not friendly societies and the Australian Financial Institutions Commission (AFIC) for friendly societies. The life insurance industry has changed substantially over the past 10 years.  The current data collection is decreasing in relevance and the systems used for the current collection have become outdated.

Decreasing relevance of the current data returns

The current life insurance data returns are not well understood and, in view of changes within the industry, are of decreasing relevance. This is the overwhelming consensus of life industry participants, including both users (such as industry and other government agencies) and providers of the data. 

There have been continuing industry and market developments over the past 10 years, including significant changes in types of assets, products, and risk assessment and management techniques. For instance, IFRS has introduced additional requirements, and friendly societies no longer enjoy an exemption from preparing financial reports on the same basis as life companies that are not friendly societies.

APRA’s life industry data collection systems and forms were modified in 2005–06 to cater for the change in accounting requirements to implement the International Financial Reporting Standards (IFRS). However, a complete review of the collections was not possible at that time and APRA indicated to the life industry that a more comprehensive review of data collections would need to be undertaken.

Outdated processes and technology

The technology currently used for collecting life insurance data is anachronistic and has not kept up with market developments. The current collections have the appearance of a set of paper-based returns. Data input into the Life Insurance System - Accounts and Reporting Database (LISARD) is still required to be sent to APRA on 1.44MB floppy disks, despite many PCs these days not even having a floppy disk drive. The data collection system for friendly societies (FIMS) is similarly outdated.

Modern approaches are to collect information in a consistent tabular form, more suitable for loading into a data warehouse. This provides more flexibility in analysing and reporting on the data, and is much more efficient both for those producing and submitting the data and for those processing and analysing the data.

APRA’s own systems for the life insurance collections have become ‘legacy systems’. With diminishing corporate knowledge they have become difficult and expensive to support, and are out of step with APRA’s IT strategy and mainstream statistics system.

Table A: Example of Impact of Current Data Collection for Life Companies and APRA using the LISARD System

Reduced supervisory effectiveness

Due to outdated data collection processes, APRA supervisors are required to employ more time-intensive methods of data analysis and, in many cases, seek supplementary information from life companies. APRA believes the data currently collected in returns is not appropriate to effectively supervise life companies.

Information on life companies is not stored in the same APRA data warehouse used for other APRA-regulated industries. In addition, some supervisory requirements are not catered for, such as information on the Management Capital position. Some data are only collected on an annual basis, including solvency and capital. It is likely that gaps in APRA’s supervisory effectiveness will arise unless the collection and systems are modernised.

APRA supervisors also experience difficulty in producing reports using the legacy systems (LISARD and FIMS). The systems themselves are cumbersome to use and the structure of the data is difficult to understand (assuming the required data are there in the first place). The operational performance of these systems, therefore, is regarded as unsatisfactory.

Irrelevance to life companies

The information contained in the current APRA returns is increasingly regarded by industry as of marginal relevance. Since the data returns were developed, industry has moved on and internal management reporting and general purpose accounting reporting by life companies are diverging away from the format and content of the existing data returns.

While there will always be some differences between management, general purpose reporting and regulatory reporting, for efficiency and cost reasons these differences should be minimised where possible.

Limited quality and relevance of APRA’s publications and research

The data collected from the APRA returns enables general research and analysis to be undertaken by APRA, the Australian Bureau of Statistics (ABS), the Reserve Bank of Australia (RBA) and ASIC into the trends and pressures affecting the life insurance and financial sectors.

As the data collections for life companies are not easily stored in the APRA data warehouse, the ability of APRA to report on trends and benchmarks is restricted. An upgraded data collection framework would provide external industry stakeholders with more relevant and timely information.

Objectives

APRA proposes to update the processes and systems for the collection of data from life companies. The key objectives are:

• to make the data collection more relevant and useful to all stakeholders (including life insurers, friendly societies, APRA and other Government bodies); and
• to make the collection, storage and retrieval of data more efficient.

APRA expects that the benefits of these changes will be:

• an increase in the supervisory effectiveness of APRA, because more relevant information can be derived from better data;
• further protection of policy owner’s interests, because more effective supervision by APRA reduces the risk of failure of a life insurer or friendly society;
• reduced cost for life insurers and friendly societies, because the new data will be less onerous to compile, and more efficient to transmit to APRA;
• reduced cost for life insurers and friendly societies that are part of corporate groups operating across multiple regulated industries, because of more consistent data collection standards, forms and processes across the various APRA-regulated industries; and
• more relevant and timely publication of data for industry, other government organisations and the general public, enabling better benchmarking across the industry.

Identification of options

Option 1

Continue collecting the existing data using the existing technology and systems.

This is the ‘status quo’ option - the data collection, publication and reporting tools would be unchanged. The new reporting standards under the FSCOD Act would be written to have exactly the same effect as the current prudential rules for data collection under the Life Act. 

Option 2

Update the specifications of the data to be collected. Replace the current data-collection IT platforms with APRA’s standard data-collection system, Direct to APRA (D2A).

Under this option, 13 new reporting standards and associated reporting forms would be issued under the FSCOD Act containing amended data collection requirements (see Table B). These standards would introduce modernised and harmonised reporting requirements for life companies. They would replace the existing set of 53 forms for life companies that are not friendly societies and 31 forms for friendly societies. This will be achieved by grouping data better to eliminate redundancy, rationalising product groups, and by completely removing a number of forms that are out-of-date.

The new forms will contain similar data to the existing forms, although they will be structured in a manner that is compatible with modern information technology and data warehousing (storage and retrieval) capabilities. There would be a reduction in the number of line items and, in some instances the level of detail. Some new items are also proposed to give APRA a better understanding of actuarial assumptions and their impact, and to enable APRA to benchmark the data and identify outliers. In a few instances, important data that is currently collected annually would be collected quarterly, although not at the level of depth of information collected under the existing framework.

Migration of data collection from the current ‘legacy’ systems to D2A would result in a simpler, more standardised data submission process. Changes in the data collected will be limited to essential supervisory requirements and any data items that are no longer needed or used would be eliminated.

Table B – Proposed Reporting Standards/Forms for data collection[4]

The key features of the new collection would be:

• a more relevant, streamlined and complete data collection;
• consistency between quarterly and annual returns;
• consistency between the data collected from friendly societies and the data collected from other life companies; and
• a more modern system for collection, storage and reporting, so that improved analysis can be undertaken.

Impact analysis

Impact group identification

Policy owners, life companies, APRA and other government bodies (ABS, ASIC and RBA) are likely to be positively affected by the proposed modernised and harmonised reporting standards.

Assessment of costs and benefits

Option 1

Policy owners

Benefits

This option would not result in any benefit to policy owners.

Costs

It may be harder for APRA to protect policy owners’ interests. Data received would not assist APRA’s assessment of the financial soundness of life companies. Higher long-term costs for life companies (see below) may be passed on to policy owners.

Life companies

Benefits

This option avoids the initial cost to life companies of changing systems and procedures and in training staff to use them.

Costs

There would be no up-front cost for life companies in maintaining the status quo under Option 1. However, the current data collection fails to adequately support APRA’s supervisory needs, and costs will rise in the longer-term as life companies continue to report decreasingly relevant data. Life companies would bear the cost of APRA requests to clarify and review information on solvency, capital adequacy and management capital, as well as ad hoc requests from other agencies (such as Treasury and international agencies). Life companies would also face increasing costs in preparing irrelevant data that this is only used for reporting to APRA, on systems that are outdated. Also, life companies that are part of conglomerates would be required to continue producing data using different reporting systems – adding to the cost and complexity of reporting to APRA.

APRA

Benefits

This option avoids the initial cost to APRA of changing systems and procedures and in training staff to use them.

Costs

Under this option APRA will have the ongoing cost of maintaining the existing data collection systems (FIMS and LISARD), which are now quite old and cumbersome to service. For example, an external contractor was recently required for a period of nine months to make important changes to LISARD for IFRS. APRA would also continue to bear the cost of training staff to use these older and less user-friendly systems.

APRA would also need to continue to rely on more intensive methods of supervision. This would include requests for more information from life companies to gather information necessary to protect the interests of policy owners. Also, a deteriorating data collection decreases the likelihood that APRA would intervene in a timely manner, if a life company was in difficulty.  Without future improvements, this option would diminish APRA’s credibility among life companies and the regulatory community.

Other government bodies

Benefits

This option would not result in any benefit to other government bodies.

Costs

Other government bodies relying on data collected from APRA would potentially suffer loss of standing and credibility, due to inadequate data and inefficient data collection.

Table C: Option 1 - Summary of Estimated Impacts

Option 2

Policy owners

Benefits

APRA expects there would be significant benefits to policy owners by introducing new reporting standards, forms and data collection using the D2A software. The revised collection would provide more accurate and relevant data, which should enable more effective protection of policyholder interests. Benefits would also accrue to policy owners through greater confidence in financial services, greater safety for investors and a stronger financial sector. The improved data collection would help to improve the effectiveness of APRA supervision to the benefit of the security of policy owners.

Costs

Policy owners may be disadvantaged under this option if the requirements cause life companies to increase their premiums due to increased reporting costs. While life companies have indicated that costs may increase in order to comply with the new requirements, no specific estimates were provided in the consultation process.

Life companies

Benefits

The streamlined data collection would benefit life companies through a reduction in the costs of completing outdated returns that are inconsistent with other APRA-regulated industries. The new data would be simpler to compile, and more efficient to transmit to APRA. In particular, life companies that are part of conglomerate groups would no longer need to contend with multiple systems for APRA reporting.

Life companies would also benefit from the improved ability of APRA to examine and analyse aggregate industry data collected by APRA. This data will be selectively used as a basis for comparison within the life insurance industry or sectors of the financial system. This would benefit the industry by facilitating greater market transparency, which may lead to better-informed commercial decisions.

Life companies might benefit further if APRA is able to better tailor the intensity of supervision to individual institutional circumstances. More relevant, up-to-date and timely information could lead to a more accurate risk rating and potentially less frequent supervisory action.

Costs

Life companies are likely to incur upfront costs to revise their systems to collect data under the proposed arrangements. For conglomerates already using the D2A software, these costs are likely to be lower. The costs are also likely to be mitigated by a better alignment between internal and external reporting arrangements of life companies.

Life companies may face some ongoing costs as a result of some data being required on a more regular (quarterly) basis. However, given that the updated data collection is designed to more closely mirror the way data are collected and reported internally by companies, these costs should be offset by management efficiencies.

APRA

Benefits

This option would provide more relevant, up-to-date, internally consistent, accurate and useful data. This will enhance APRA’s understanding of life companies and industry operations, and help ensure compliance with prudential requirements. In particular, it would provide supervisors with a better understanding of the capital adequacy and solvency positions of life companies.

The improved data collection may also benefit APRA though:

• a more modern and functional system for accessing data and generating reports on supervised institutions;
• an ability to better tailor the intensity of supervision in the event that better quality data reveals that risks are not as substantial as previously envisaged;
• an efficiency saving to APRA due to less time spent maintaining cumbersome legacy systems; and
• an improved capacity for APRA to identify emerging issues and pass on aggregate data to other government agencies, research organisations and the general public.

A range of critical data would be requested on an annual basis, consistent with the information included in the Appointed Actuary’s annual Financial Condition Report (FCR). This data could then be collected on a consistent basis and stored in APRA’s data warehouse.

APRA also proposes quarterly reporting of key financial data for life companies that are not friendly societies.[5] This will improve the analysis of company-specific and sector-wide trends, and would be particularly valuable during the more challenging phases of the economic cycle.

Costs

The upfront costs to APRA of Option 1 relate to the development and deployment of updated data systems, as well as staff training costs to ensure efficient analysis of data received from life companies. The development costs could be expected to be manageable due to the internal expertise developed during implementation of the existing D2A system for the other industries. The training costs could be expected to be limited as many APRA supervisors are already familiar with the proposed system. APRA would also bear the costs associated with policy development activities, including industry consultations and the release of new and revised legislative instruments.

APRA does not expect to experience significant ongoing costs as a result of this option. The simplified data collection, streamlining of systems and removal of obsolete technology would be expected to result in significant cost savings. The long-term benefits, including better access to data and more efficient regulation, are expected to outweigh the initial investment.

Other government bodies

Benefits

Other government bodies relying on data collected from APRA would potentially benefit from the receipt of better quality and more reliable data. This would assist in their research and analysis and help them to identify emerging issues. Other agencies would also benefit from any increase in APRA’s supervisory effectiveness.

Costs

Other government bodies may incur some cost, depending on their internal processes, to adapt to the changes to data format. It is unlikely that these costs would be material.

Table C: Option 2 - Summary of Estimated Impacts

Consultation

In the two-month period to 12 July 2007, APRA consulted with life companies and industry representative bodies on the proposed changes outlined under Option 2. The consultation process involved the release of draft reporting standards, forms and instructions, along with a discussion paper outlining the proposed changes.

APRA sought from industry a detailed estimate of the costs and benefits of the proposals. Advice was requested on whether any specific proposals are likely to incur disproportionate costs. Where significant issues were identified, APRA has endeavoured to modify the proposals to reduce cost to industry while continuing to meet prudential objectives.

Eighteen responses were received from life companies and industry bodies, including the Investment and Financial Services Association (IFSA) and the Australian Friendly Societies Association (AFSA). In general, the respondents welcomed the proposed new reporting standards and forms, and supported the move towards a framework that is more consistent with other APRA-regulated industries.

Respondents were asked to use the Business Cost Calculator (BCC) to assess the compliance costs under the proposed new standards. The BCC was developed by the Office of Small Business, and is the preferred tool of the Commonwealth Government in calculating business compliance costs. This request was intended to ensure APRA received data on expected costs from companies in a uniform manner, and to help with APRA’s assessment of the overall cost/benefit relationship of the proposals. APRA also asked respondents to communicate separately any costs and underlying assumptions that are not covered by cost categories in the BCC.

No respondent submitted any BCC data, nor were any estimates provided that would enable a reliable assessment of the monetary costs and benefits of the transition to the proposed framework outlined under Option 2.

Five primary concerns were raised in relation to the proposals:

Level of detail, workload and costs

• A number of submissions indicated the level of detail required in the proposed new reporting forms will lead to increased workloads and costs, at least during the implementation phase.
• In response, APRA has decided not to collect LRF 200 Interest Rate Risk LRF 230 Credit Risk. In addition, the collections of LRF 420 Assets Backing Policy Liabilities and LRF 430 Sources of Profit will be changed from quarterly to annual.

Transitional arrangements

• Industry consensus is for a transition period, involving extended deadlines for submitting returns for the first year.
• In response, APRA will extend the deadline for the submission of annual returns from three to four months, and will introduce transitional arrangements for quarterly reporting. The deadlines for the first two quarterly returns using the new forms will be extended. APRA will consider reasonable requests for further transitional arrangements from individual life companies.

Terminology

• There was general concern over the use of certain terminology in the draft reporting forms and instructions. There were also a number of requests to clarify specific terms, such as ‘best endeavours estimates’ and ‘look-through requirements’.
• In response, APRA will clarify the terminology in a revised set of forms and instructions.

Handling of sensitive data

• There is some concern over how APRA proposes to manage the collection and disseminate company-specific and potentially sensitive data which will be made available to the public in aggregated form.
• APRA notes this concern, and intends to release only such information as is already made publicly available. Declarations will be made under the APRA Act to specify which reporting documents do not contain confidential information. Any company-specific information that is not subject to these declarations will be held as confidential under section 56 of the APRA Act. APRA will engage industry in consultation prior to making these declarations to ensure a reasonable outcome is achieved. Any reporting documents not subject to these declarations will not be released by APRA.

Audit requirements

• APRA expects only the annual returns to be audited. However, several submissions sought clarification on whether a full auditor’s review is required for the quarterly returns.
• APRA does not expect the quarterly returns to be audited. APRA will further clarify in the instructions that the external auditor is required to review and test, only in the first instance, the processes and controls for the quarterly returns. The processes and controls would be expected to be reviewed only if they are subsequently changed.

Following APRA’s consideration of submissions, a limited number of changes are proposed. As outlined above, this includes the elimination of two forms (reducing the proposed number of forms from 15 to 13), modification of two forms from quarterly to annual, increased deadlines for submitting audited annual returns from three to four months, and extended deadlines for the first two quarterly reports in 2008.

APRA sent a letter to IFSA and AFSA in late September 2007 to inform them and their members of the changes made following the industry consultations, and the steps being taken to progress with these plans.

Conclusion and recommended option

APRA proposes to progress with Option 2 as this provides a net positive benefit to life industry stakeholders, including life companies, policyholders, supervisors, industry peak bodies, other government agencies and the general public. Option 2 addresses issues associated with decreasingly relevant data and outdated legacy systems. APRA considers that Option 1 would not address these problems.

Implementation

As proposed under Option 2, APRA intends to determine 13 reporting standards under the FSCOD Act in respect of life companies. These will each be accompanied by a new Reporting Form relating to an updated and more relevant data collection.

These changes would take effect on 1 January 2008, and the first collection of quarterly data would occur for the period ending after 1 January 2008. Life companies and friendly societies will need to report using both the existing and new forms for the first quarter of 2008. This will enable insurers and APRA to work through any data quality issues and recognise movements and trends in the data. It will provide a point of comparison between the two collections. This is also required for the calculation of levies in the event that the first quarterly returns in the new format contain unreliable data.

APRA will ensure that the final reporting standards and materials are released in time to allow life companies to meet the requirements of the standard in an orderly fashion and at least cost to the industry.

Once implemented, APRA proposes to work closely with life companies to address any issues that may arise. APRA will also monitor the operation of the new requirements to ensure that the data collection remains effective and relevant to industry.

[1]  Specifically, Life Act sections 82, 117, 118, 121, 243 and 244 will no longer have effect. Refer to FSCOD Act section 15 and Financial Sector (Collection of Data – Consequential & Transitional Provisions) Act 2001 schedule 2 item 75.

[2] In this Regulation Impact Statement “life companies” are companies registered under the Life Insurance Act 1995, and include friendly societies that carry on life insurance business in Australia.

[3] Sections 82, 117, 118, 121, 243 and 244 of the Life Act will no longer have effect. Refer to the FSCOD Act, section 15 and Financial Sector (Collection of Data – Consequential and Transitional Provisions) Act, 2001, Schedule 2, item 75.

[4] APRA proposes in most instances to use the same (or very similar) forms for friendly societies and for life companies that are not friendly societies. Forms 330 and 420 will not apply to friendly societies.

[5] Friendly Societies currently report on a quarterly basis.