Health Insurance (prudential standard) determination No. 3 of 2024
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority (APRA)
Private Health Insurance (Prudential Supervision) Act 2015, section 92
Under subsection 92(1) of the Private Health Insurance (Prudential Supervision) Act 2015 (the Act), APRA may, in writing, make standards (prudential standards) relating to prudential matters, that must be complied with by, or in relation to, private health insurers. Under subsection 92(5) of the Act, APRA may, in writing, vary or revoke a prudential standard.
On 27 November 2024, APRA made Health Insurance (prudential standard) determination No. 3 of 2024 (the instrument), which revokes Prudential Standard HPS 112 Capital Adequacy: Measurement of Capital made under Health Insurance (prudential standard) determination No. 1 of 2024 and determines a new Prudential Standard HPS 112 Capital Adequacy: Measurement of Capital (HPS 112).
The instrument commences on 1 January 2025.
1. Background
APRA’s role is to protect the financial interests of Australians by maintaining the safety and soundness of financial institutions. To do this, APRA sets legal requirements and guidance for the entities it regulates (the prudential framework).
The prudential framework comprises:
- legally binding prudential standards;
- legally binding reporting standards; and
- supporting guidance (such as prudential practice guides).
HPS 112 is a legally binding prudential standard. It is part of a group of prudential standards relating to the capital that a private health insurer must hold as a buffer against unexpected losses.
HPS 112 remakes the previous version of the prudential standard with minor amendments.
2. Purpose and Operation
The purpose of the instrument is to revoke the existing version of HPS 112 and replace it with a new version. The new version makes minor amendments to rectify typographical errors and replaces a reference to Prudential Standard HPS 001 Definitions (now revoked) with Prudential standard CPS 001 Defined terms which came into effect on 1 October 2024.
Adequate capital is critical to protect policyholders. APRA sets requirements on minimum capital to ensure private health insurers can absorb unexpected losses. This is a core tool of prudential regulation and supports system-level financial stability.
The overarching purpose of HPS 112 is to ensure a private health insurer holds adequate capital against the risks it faces. The standard specifies both the amount and type of capital that must be held.
Details of HPS 112 are set out in Attachment A to this Explanatory Statement.
3. Consultation
On 6 September 2024, APRA undertook a public consultation [1] on a proposed set of minor updates to the prudential framework, including minor updates to HPS 112. APRA has previously consulted on the provisions in HPS 112 that remain unchanged.
APRA did not receive any submissions in respect of HPS 112 during consultation.
4. Scope of administrative powers
Exercise of discretion by APRA
HPS 112 provides for APRA to exercise various discretions. Decisions made by APRA in exercising those discretions are not subject to merits review. This is because these decisions are preliminary decisions that may facilitate or lead to substantive decisions which are subject to merits review.
Under the Act, a breach of a prudential standard is a breach of the Act, as the Act provides that regulated entities must comply with the 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 in relation to the insurer. Those decisions may include the decision to issue a direction to the regulated entity, including a direction to comply with all, or specified obligations, which includes prudential standards (section 96 of the Act).
It is only at this stage that an insurer is exposed to a penalty, loss of licence or imposition of a penalty if it breaches the direction (30 penalty units each day under section 104 of the Act). In nearly all cases, the decision is preceded by a full consultation with the insurer to raise any concerns it may have in relation to the decision.
A decision of APRA to impose a direction is subject to merits review under section 168 of the Act, which is appropriately available at the point where an insurer could be exposed to a penalty.
Cancellation of the registration of a private health insurer is subject to merits review (section 168 of the Act).
Adjust and exclude discretion
HPS 112 gives APRA the discretion to adjust or exclude a provision of the prudential standard (paragraph 9). The power to create such a discretion is provided for under subsection 92(4) of the Act.
APRA may exercise this power when it is satisfied that the adjustment or exclusion of a specific requirement for one or more specified regulated entities will better support APRA in meeting its objectives. For example, the adjustment or exclusion may be necessary to obtain a better prudential outcome than would be the case if the prudential requirement were applied unaltered to a particular regulated entity. A tailored approach gives APRA comfort that the prudential requirements apply appropriately to protect the interests of policyholders. APRA will also take into account other considerations, such as efficiency, competition, contestability, competitive neutrality and regulatory burden, including comparisons with the entity’s peer group.
The exercise of APRA's powers is governed by a robust decision-making framework which is documented in APRA's internal policies. This framework supports APRA in fulfilling its mandate by limiting decision making to those senior APRA officers with the appropriate experience and skill to exercise prudent judgement. The framework also requires decision makers to seek advice from internal technical experts.
5. Incorporation by reference
Under paragraph 14(1)(a) of the Legislation Act 2003, the standard incorporates by reference as in force from time to time:
- Acts of Parliament and associated delegated laws;
- Prudential Standards determined by APRA under subsection 92(1) of the Act;
- Reporting Standards determined by APRA under subsection 13(1) of the Financial Sector (Collection of Data) Act 2001;
- 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 on the Federal Register of Legislation 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).
6. Impact Analysis (IA)
The Office of Impact Analysis has confirmed that an IA is not required as the remaking of HPS 112 is unlikely to have more than a minor regulatory impact.
7. 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 B to this Explanatory Statement.
ATTACHMENT A
Details of HPS 112
1. Authority, application, commencement and interpretation
Under subsection 92(1) of the Act, APRA may determine prudential standards to be complied with by private health insurers.
Paragraphs 1 to 3 are the machinery provisions relating to the legal authority under which the instrument is made, and the requirement that a private health insurer must apply the standard separately to each of its health benefits funds and its general fund, as well as to the private health insurer as a whole.
Paragraphs 4 to 8 are machinery provisions relating to the commencement and interpretation of the standard, and relevant definitions used in the standard.
2. Adjustments and exclusions, determinations made under previous prudential standards
Paragraph 9 provides APRA the power to adjust or exclude a specific requirement in HPS 112 in relation to a private health insurer.
Paragraph 10 notes that an exercise of APRA’s discretion given to a private health insurer under a previous version of the standard continues to have effect.
3. Definitions
Paragraph 11 outlines the relevant definitions used in the standard.
4. Capital base of a private health insurer
Paragraph 12 requires the capital base to be assessed for the private health insurer as a whole and for each of its funds.
Paragraphs 13 sets out the capital base of a private health insurer, consisting of Common Equity Tier 1 (CET1), Additional Tier 1 (AT1), paid-up mutual equity interests and Tier 2 (T2) Capital.
Paragraphs 14 to 30 detail requirements that a private health insurer must comply with regarding the size and composition of the capital base for the private health insurer.
5. CET1
Paragraphs 31 to 38 set out the characteristics that comprise as components of CET1.
Attachment A paragraphs 1 to 5 provide the criteria for an instrument to be classified as paid-up ordinary shares in CET1.
6. AT1
Paragraphs 39 to 40 set out the characteristics that AT1 comprises of.
Attachment C paragraphs 1 to 41 set out further details on the criteria for an instrument to be classified as ATI.
7. T2
Paragraphs 41 to 42 set out the characteristics that T2 comprises of.
Attachment D paragraphs 1 to 42 outline requirements relating to the criteria for an instrument for inclusion in T2.
8. Additional T1 or T2 issued overseas by the private health insurer
Paragraph 43 provides conditions that allow a private health insurer to issue AT1 and T2 Capital instruments either in its country of incorporation or through a branch in another country.
9. Intragroup capital transactions
Paragraphs 44 to 46 set out matters that APRA may consider in assessing the capital strength of a private health insurer in relation to intra-group capital transactions.
10. Holding of capital instruments in group members by other group members
Capital instruments of a private health insurer that are held as direct investments by a vehicle subject to consolidation within the financial statements of the group and direct investments in shares of a private health insurer by a special purpose vehicle must meet the criteria in paragraphs 47 to 48.
Paragraph 49 states that if the requirements in paragraphs 47 and 48 are not satisfied, the relevant capital instruments must be treated as holdings of own capital instruments and deducted from CET1, AT1 and T2.
11. Capital base of a health benefits fund and general fund
The capital base requirements for health benefit funds are specified in paragraphs 50 to 53.
The capital base requirements for general funds are specified in paragraphs 54 to 56.
12. Transition
Capital instruments issued before 1 July 2025 that complied with APRA’s prudential capital requirements in force at the time of issue may be eligible for transitional arrangements set out in paragraphs 57 to 58
Attachment G paragraphs 1 to 4 outline conditions for the transitional arrangements to be effective and how to calculate the transitional adjustment.
13. Regulatory adjustments
Attachment B paragraphs 1 to 31 detail regulatory adjustments required to ensure the capital base is adequate to support the activities of the private health insurer.
14. Loss absorption at the point of non-viability: AT1 and T2 Capital instruments
Attachment E paragraphs 1 to 18 outline requirements relating to a private health insurer ensuring its AT1 or T2 capital instruments can absorb losses at the point of non-viability to allow its continued operation.
15. Mutual Equity Interests
Attachment F paragraphs 1 to 5 outline the criteria for an instrument to be classified as a mutual equity interest.
ATTACHMENT B
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Insurance (prudential standard) determination No. 3 of 2024
This Legislative Instrument is compatible with the human rights and freedoms recognised or declared in the international instruments 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 112 Capital Adequacy: Measurement of Capital made under Health Insurance (prudential standard) determination No.1 of 2024 and replace it with a new version of the prudential standard.
HPS 112 is designed to ensure private health insurers remain financially resilient by maintaining sufficient capital against the risks associated with its activities.
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.
Conclusion
This Legislative Instrument is compatible with human rights as it does not raise any human rights issues.
[1] See https://apra.gov.au/prudential-framework-minor-updates-1