Health Insurance (prudential standard) determination No. 1 of 2023

Administered by Department of the Treasury

Legislation au F2023L00732 Not in force Legislative Instrument

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Health Insurance (prudential standard) determinations No. 1 of 2023

EXPLANATORY STATEMENT

Prepared by the Australian Prudential Regulation Authority (APRA)

Private Health Insurance (Prudential Supervision) Act 2015, subsection 92(1)

Under subsection 92(1) of the Private Health Insurance (Prudential Supervision) Act 2015 (the Act), APRA has power to determine standards (prudential standards), in writing, in relation to prudential matters to be complied with by private health insurers. Under subsection 92(5) of the Act, APRA may, in writing, vary or revoke a prudential standard.

On 24 May 2023, APRA made Health Insurance (prudential standard) determination No. 1 of 2023 (the instrument), which revokes Prudential Standard HPS 001 Definitions made under Health Insurance determination No. 1 of 2022 and determines a new Prudential Standard HPS 001 Definitions (HPS 001).

The instrument commences on 1 July 2023.

1. Background

Capital standards are an important tool to support the objectives of APRA’s prudential framework. They are intended to ensure that an insurer has sufficient financial resources available to meet its financial promises to policy holders despite adverse conditions. APRA’s capital standards determine the minimum regulatory capital requirement for an insurer, taking into account the nature of the risks an insurer is exposed to in its business.

Since assuming prudential regulatory responsibility for the private health insurance industry in 2015, APRA has progressively reviewed and updated the prudential policy framework. APRA’s review of the capital framework represents the third and final phase of that systematic process.

The review of the private health insurance capital framework revealed that, in a number of respects, the former capital framework was less robust than the requirements applied to other Australian insurance sectors and did not appropriately reflect the risks faced by insurers.

The new private health insurance capital framework seeks to address these concerns by ensuring there is an appropriate level of financial resilience and protection for policyholders through:

improved risk sensitivity of the capital standards to better reflect the risks faced by private health insurers;
reduced discretion available to private health insurers to determine their capital requirements, so as to narrow the differences between insurers with similar business models and profiles; and
alignment with the structure of the life and general insurance capital framework, where appropriate. This reflects APRA’s overall approach to capital quality and adequacy and is consistent with international best practice.

The changes to the private health insurance capital framework also incorporate changes to APRA’s insurance capital framework due to the new accounting standard AASB 17 Insurance Contracts (AASB 17). This ensures alignment between he prudential and accounting requirements and reduces cost and complexity for industry from otherwise needing to manage and report on diverging frameworks.

2. Purpose and operation of the instrument

The purpose of the instrument is to revoke HPS 001 and replace it with a new version of HPS 001. HPS 001 has been updated to include new defined terms referred to in other prudential standards appliable to private health insurers.

Documents incorporated by reference

Under paragraph 14(1)(a) of the Legislation Act 2003, the prudential standard incorporates by reference as in force from time to time:

Acts of Parliament and associated delegated legislation;
Prudential Standards determined by APRA under:
- subsection 11AF(1) of the Banking Act 1959;
- subsection 32(1) of the Insurance Act 1973;
- subsection 230A(1) of the Life Insurance Act 1995; and
- subsection 92(1) of the Private Health Insurance (Prudential Supervision) Act 2015; and
Reporting Standards determined by APRA under subsection 13(1) of the Act;
the Australian Accounting Standards determined by the Australian Accounting Standards Board under section 334 of the Corporations Act 2001 (Cth); and
the Australian Auditing Standards determined by the Auditing and Assurance Standards Board under section 336 of the Corporations Act 2001 (Cth).

These documents may be freely obtained at www.legislation.gov.au (all documents listed above except for Australian Accounting and Auditing Standards), https://www.aasb.gov.au/pronouncements/accounting-standards/ (Australian Accounting Standards) and https://auasb.gov.au/standards-guidance/auasb-standards/auditing-standards/ (Australian Auditing Standards).

Review of decisions

There are several powers that may be exercised by APRA in prudential standards that involve an element of discretion, and which may impact the interests of the private health insurers to which the prudential standards apply.

Decisions made by APRA exercising those powers are not subject to merits review. APRA considers decisions made by APRA exercising discretions under its prudential standards should not be subject to merits review as they are financial decisions with a significant public interest element.

A breach of a prudential standard is also a breach of the Act, as the Act provides that a private health insurer must comply with the prudential standard. However, there are no penalties prescribed for such breaches. Instead, a private health insurer’s breach of a provision in the Act is grounds for APRA to make further, substantive decisions under the Act.

3. Consultation

This and other prudential standards, forming the new private health insurance capital framework, are the product of extensive consultation with the industry and other key stakeholders. Submissions were received from, and discussions held with, private health insurers, industry bodies and other government agencies.

Submissions were largely supportive of aligning the private health insurance capital framework with the requirements for life and general insurers. Key areas of feedback from submissions included the treatment of the deferred claims liability within the capital framework, the allowance for management actions, and the design of the insurance risk charge. Insurers also raised the scale of the increase in minimum regulatory capital requirements and the impact this could have on premiums.

A number of public discussion and response papers were released during and following the consultation periods with draft standards accompanying the December 2021 response paper:

November 2018: Letter Roadmap for APRA’s review of the private health insurance capital framework;
December 2019: Discussion Paper Private Health Insurance Capital Standards Review;
December 2021: Response Paper A proposed new capital framework for Private Health Insurance;
December 2021: Quantitative Impact Study;
December 2021: Response Paper Integrating AASB 17 into the capital and reporting framework for insurers and updates to the LAGIC framework;
April 2022: Letter Integrating AASB17 into the Capital and reporting framework for insurers and updates to private health insurer capital framework;
September 2022: Response paper Finalising the review of the Private Health Insurance Capital Framework; and
September 2022: Response Paper Finalisation of the integration of AASB 17 into the capital and reporting frameworks for insurers and updates to the LAGIC framework.

APRA is satisfied the consultation was appropriate and reasonably practicable.

4. Impact Analysis (IA)

In making the new prudential standards, including HPS 001, APRA has followed a process which satisfies the requirements of the Office of Impact Analysis (OIA). APRA has followed a similar process to that required for a Regulation Impact Statement (RIS) which satisfies the OIA’s requirements. APRA’s policy development process is evidenced in Attachment A of the Response Paper Finalising the review of the Private Health Insurance Capital Framework. An extract of Attachment A has been lodged as supporting material.

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

A Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 is provided at Attachment A to this Explanatory Statement.

ATTACHMENT A

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Health Insurance (prudential standard) determination No. 1 of 2023

This Legislative Instrument is compatible with the human rights and freedoms recognised or declared in the international instrument listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (HRPS Act).

Overview of the Legislative Instrument

The purpose of the Legislative instrument is to revoke Prudential Standard HPS 001 Definitions made under Health Insurance determination No. 1 of 2022 and determine a new Prudential Standard HPS 001 Definitions.

Human rights implications

APRA has assessed the Legislative Instrument and is of the view that it does not engage any of the applicable rights or freedoms recognised or declared in the international instruments listed in section 3 of the HRPS Act. Accordingly, in APRA's assessment, the Instrument is compatible with human rights.

Conclusion

This Legislative Instrument is compatible with human rights as it does not raise any human rights issues.

Overview

The Health Insurance (prudential standard) determination No. 1 of 2023, issued by the Australian Prudential Regulation Authority (APRA) under subsection 92(1) of the Private Health Insurance (Prudential Supervision) Act 2015, revokes the previous Prudential Standard HPS 001 Definitions and introduces a new version of HPS 001. This determination, which commences on 1 July 2023, aims to enhance the robustness of the private health insurance capital framework, ensuring that private health insurers maintain sufficient financial resilience to meet their obligations to policyholders. APRA’s review identified that the former capital framework was less robust than those applied to other sectors and did not adequately reflect the risks faced by insurers. The updated framework improves the risk sensitivity of capital standards, reduces discretion in determining capital requirements, and aligns with the structure of the life and general insurance capital frameworks, while also incorporating changes due to the new accounting standard AASB 17 Insurance Contracts. The determination is part of APRA's ongoing efforts to align the private health insurance sector with international best practices and ensure adequate protection for policyholders.

Scope and Application

The Health Insurance (prudential standard) determination No. 1 of 2023, issued by the Australian Prudential Regulation Authority (APRA) under the Private Health Insurance (Prudential Supervision) Act 2015, applies to all private health insurers operating in Australia. These prudential standards, which include the new Prudential Standard HPS 001 Definitions, aim to ensure that private health insurers maintain sufficient financial resources to meet their obligations to policyholders under adverse conditions. The instrument, which comes into effect on 1 July 2023, revokes the previous Prudential Standard HPS 001 Definitions made in 2022 and introduces updated definitions to align with other prudential standards applicable to private health insurers. APRA's determinations are informed by comprehensive consultations with private health insurers, industry bodies, and other stakeholders, reflecting a commitment to aligning the private health insurance capital framework with that of life and general insurers, as well as with international best practices. The new standards also incorporate the requirements of the new accounting standard AASB 17 Insurance Contracts to align prudential and accounting frameworks. APRA's decisions under these prudential standards are not subject to merits review, given their significant public interest element, although breaches of these standards are breaches of the Act itself, which may lead to further regulatory actions by APRA.

Key Provisions

The main operative sections of the Health Insurance (prudential standard) determinations No. 1 of 2023 involve the revocation of the previous Prudential Standard HPS 001 Definitions and the establishment of a new Prudential Standard HPS 001 Definitions under the Private Health Insurance (Prudential Supervision) Act 2015 (section 2). This determination is designed to ensure that private health insurers maintain adequate financial resilience to meet their obligations to policyholders under adverse conditions. The new HPS 001 Definitions incorporate new terms referenced in other prudential standards applicable to private health insurers (section 2). The determination also incorporates by reference various Acts, delegated legislation, and standards as in force from time to time (section 2). The obligations and requirements imposed by the Act on the parties it governs include compliance with the newly determined prudential standards. Specifically, private health insurers must adhere to the updated definitions and standards set out in HPS 001, ensuring they maintain sufficient financial resources to meet their obligations to policyholders. APRA's role in determining and revising these standards reflects its responsibility for overseeing the prudential supervision of the private health insurance industry, aiming to align the capital framework with international best practices and the requirements of other Australian insurance sectors. Furthermore, the determination mandates that private health insurers consider various documents, including Acts, Prudential Standards, Reporting Standards, Australian Accounting Standards, and Australian Auditing Standards, to ensure they operate within a comprehensive regulatory framework. Any breaches of the prudential standards, which are also breaches of the Act, do not carry specific penalties prescribed by the Act. Instead, breaches are grounds for APRA to take further substantive actions under the Act. This includes the possibility of imposing additional regulatory measures or sanctions on the private health insurers found in breach, ensuring that they maintain adequate financial resilience and protect policyholders. The determination highlights that decisions made by APRA exercising discretions under its prudential standards are not subject to merits review, as they are financial decisions with a significant public interest element. In conclusion, the Health Insurance (prudential standard) determinations No. 1 of 2023 serves to update and strengthen the regulatory framework governing private health insurers in Australia. By revoking the previous prudential standard and introducing a new one, APRA aims to enhance the financial resilience of insurers, ensuring they can meet their obligations to policyholders under adverse conditions. The obligations placed on private health insurers include compliance with the new definitions and standards, while the consequences for non-compliance primarily involve further regulatory actions by APRA rather than specific penalties.

Area of Law: Insurance Law; Financial Services Regulation
Instrument: Regulation
Concepts: Definitions & Interpretation; Regulatory Standards; Compliance Obligations; Consultation Requirements
Catchwords: Prudential Standard

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Sourced from the Federal Register of Legislation at 26 August 2026. For the latest information on Australian Government law please go to https://www.legislation.gov.au.

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