Health Insurance (prudential standard) determination No. 7 of 2023

Administered by Department of the Treasury

Legislation au F2023L00689 In force Legislative Instrument

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Health Insurance (prudential standard) determinations No. 7 of 2023

REPLACEMENT 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 has power to determine 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 that applies to private health insurers.

On 24 May 2023, APRA made Health Insurance (prudential standard) determination No. 7 of 2023, which determines Prudential Standard HPS 118 Capital Adequacy: Operational Risk Charge (HPS 118).

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

HPS 118 sets out the method for calculating the Operational Risk Charge, the minimum amount of capital a private health insurer must hold against operational risks.

The Operational Risk Charge is one of the components of the prescribed capital amount and relates to the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events.

Exercise of discretion by APRA

Under subsection 92(4) of the Act, a prudential standard may provide for APRA to exercise powers and discretions under the standard, including (but not limited to) discretions to approve, impose, adjust or exclude specific prudential requirements in relation to a particular private health insurer.

HPS 118 includes powers to adjust or exclude a provision of the standard, which may be exercised by APRA that involve an element of discretion.

APRA considers a wide range of factors when exercising its discretion under prudential standards, including the considerations set out in the Act and the Australian Prudential Regulation Authority Act 1998. The need to apply discretion is driven by entity specific issues and circumstances which are not adequately addressed by the generally applicable provisions of the prudential standards.

Adjust and exclude powers

Paragraph 9 of HPS 118 provides for APRA to adjust or exclude a specific prudential requirement in relation to a particular private health insurer. APRA will exercise this power if it is satisfied that the exclusion or adjustment of the specific requirement will achieve a better prudential outcome than if it remained in its original form. In other cases, an adjustment or exclusion may be necessary to give APRA comfort that the prudential requirements apply appropriately to protect policy holders (for example when action may need to be taken urgently and with certainty that the insurer will comply with the adjusted requirements). Other considerations include efficiency, competition, contestability, competitive neutrality and regulatory burden, including comparisons with the entity’s peer group.

A decision to exercise the powers under a prudential standard is subject to 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 experts.

The adjust and exclude power is exercised following discussion with the relevant private health insurer about its appropriateness and the impact it may have on the entity.

Review of decisions

Decisions made by APRA exercising its powers under the Act 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.

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; and
Prudential Standards determined by APRA under subsection 92(1) of the Act;

which are available on the Federal Register of Legislation at www.legislation.gov.au.

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

In making the new prudential standards, including HPS 118, 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 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 to this Explanatory Statement.

ATTACHMENT

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. 7 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 determine Prudential Standard HPS 118 Capital Adequacy: Operational Risk Charge.

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 legislative 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 Private Health Insurance (Prudential Supervision) Act 2015 was enacted to provide for the prudential supervision of private health insurers in Australia. The Act was introduced to address gaps in the regulation of the private health insurance industry, ensuring that private health insurers maintain sufficient financial resources to meet their obligations to policyholders. Enacted by the Parliament of Australia, the policy objective of the Act is to protect consumers by ensuring that private health insurers are financially sound and capable of meeting their commitments. The Australian Prudential Regulation Authority (APRA) has the authority under this Act to set prudential standards, including capital adequacy requirements, to safeguard the financial stability of private health insurers. APRA's role involves setting and enforcing these standards to maintain confidence in the private health insurance market and to ensure that insurers can meet their obligations to policyholders, even in adverse conditions.

Scope and Application

The Health Insurance (prudential standard) determination No. 7 of 2023 applies to private health insurers, as defined under the Private Health Insurance (Prudential Supervision) Act 2015. These standards are established by the Australian Prudential Regulation Authority (APRA) to ensure that private health insurers maintain sufficient financial resources to meet their obligations to policyholders under adverse conditions. The Act applies nationally across Australia, as APRA operates as the prudential regulator for the private health insurance sector at the Commonwealth level. The determination of Prudential Standard HPS 118 specifically focuses on the operational risk charge, which is a component of the capital requirements for private health insurers, ensuring they are adequately prepared for risks arising from internal processes and external events. APRA retains the discretion to adjust or exclude certain provisions of the prudential standards on a case-by-case basis, subject to rigorous decision-making processes that consider various factors such as entity-specific circumstances and broader regulatory objectives. The instrument commences on 1 July 2023 and incorporates relevant Acts and other prudential standards by reference.

Key Provisions

Under the Private Health Insurance (Prudential Supervision) Act 2015, the Australian Prudential Regulation Authority (APRA) has the authority to determine prudential standards in writing for private health insurers (s 92(1)). This power includes the ability to vary or revoke these standards as outlined in section 92(5) of the Act. On 24 May 2023, APRA issued Health Insurance (prudential standard) determination No. 7 of 2023, which sets forth Prudential Standard HPS 118 Capital Adequacy: Operational Risk Charge (HPS 118). This standard commences on 1 July 2023 and aims to ensure that private health insurers maintain sufficient financial resources to meet their obligations to policyholders under adverse conditions. HPS 118 outlines the methodology for calculating the Operational Risk Charge, which is a component of the prescribed capital amount and pertains to the risk of loss arising from inadequate or failed internal processes, systems, and people, or from external events. Section 92(4) of the Act allows for APRA to exercise discretion in approving, imposing, adjusting, or excluding specific prudential requirements for particular insurers. HPS 118 includes provisions for APRA to adjust or exclude certain requirements if it determines that doing so will achieve a better prudential outcome or provide necessary protection for policyholders. This discretionary power is subject to a robust decision-making framework, ensuring that only senior officers with appropriate expertise make such determinations. Decisions under prudential standards are not subject to merits review as they are considered financial decisions with significant public interest implications. APRA’s discretion under prudential standards is exercised after considering various factors, including efficiency, competition, and regulatory burden. Decisions to adjust or exclude specific requirements are made following discussions with the relevant insurer to understand the potential impacts. While breaches of prudential standards are also breaches of the Act, there are no specific penalties prescribed for such breaches. Instead, a breach is grounds for APRA to take further actions under the Act. The prudential standard incorporates by reference relevant Acts of Parliament, delegated legislation, and other prudential standards determined by APRA. APRA has followed a comprehensive consultation process with industry stakeholders, including private health insurers, industry bodies, and other government agencies, before establishing HPS 118. The consultation process included the release of several discussion and response papers, culminating in the finalisation of the private health insurance capital framework. APRA has also ensured that the development of HPS 118 complies with the requirements of the Office of Impact Analysis and has prepared a Statement of Compatibility under the Human Rights (Parliamentary Scrutiny) Act 2011, confirming that the legislative instrument is compatible with human rights.

Area of Law: Insurance Law
Instrument: Regulation
Concepts: Definitions & Interpretation; Enforcement Powers; Compliance Obligations

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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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