Health Insurance (prudential standard) determination No. 9 of 2023

Administered by Department of the Treasury

Legislation au F2023L00695 In force Legislative Instrument

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Health Insurance (prudential standard) determinations No. 9 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. 9 of 2023, which determines Prudential Standard HPS 340 Insurance Liability Valuation (HPS 340).

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 340 sets out the requirements for the valuation of insurance liabilities of a private health insurer.

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 340 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 31 of HPS 340 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;
Prudential Standards determined by APRA under subsection 92(1) of the Act; and
Reporting Standards determined by APRA under subsection 13(1) of the Financial Sector (Collection of Data) Act 2001;

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

Under subsection 92(7) of the Act, the standard incorporates by reference, as it exists from time to time, the Australian Accounting Standards determined by the Australian Accounting Standards Board (AASB) under section 334 of the Corporations Act 2001 which are available on the AASB website at https://aasb.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 340, 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. 9 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 340 Insurance Liability Valuation.

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, enacted by the Australian Parliament, provides a regulatory framework for ensuring that private health insurers maintain sufficient financial resources to meet their obligations to policyholders. The Act empowers the Australian Prudential Regulation Authority (APRA) to set and enforce prudential standards. The Act was introduced to address the need for a robust regulatory framework to protect policyholders and maintain the financial stability of the private health insurance industry. On 24 May 2023, APRA issued the Health Insurance (prudential standard) determination No. 9 of 2023, which determines Prudential Standard HPS 340 Insurance Liability Valuation (HPS 340) to enhance the risk sensitivity of the capital standards, reduce discretion for insurers, and align with the life and general insurance capital framework. The policy objective is to ensure an appropriate level of financial resilience and protection for policyholders, reflecting international best practices.

Scope and Application

The Health Insurance (prudential standard) determination No. 9 of 2023 applies to private health insurers operating within Australia, ensuring that these entities comply with the prudential standards established by the Australian Prudential Regulation Authority (APRA). This legislation, enacted under the Private Health Insurance (Prudential Supervision) Act 2015, seeks to enhance the financial resilience and protection for policyholders by setting forth the requirements for the valuation of insurance liabilities. APRA has the authority to adjust or exclude specific prudential requirements for particular insurers, exercising this discretion based on a range of factors including entity-specific issues and broader regulatory considerations such as efficiency, competition, and competitive neutrality. The prudential standard incorporates by reference various Acts, Prudential Standards, Reporting Standards, and Australian Accounting Standards, ensuring alignment with both prudential and accounting requirements. APRA has followed a rigorous consultation process and impact analysis in developing these standards, ensuring they align with international best practices and cater to the unique aspects of the private health insurance sector in Australia.

Key Provisions

The Health Insurance (prudential standard) determination No. 9 of 2023, which was issued by the Australian Prudential Regulation Authority (APRA) on 24 May 2023, sets out Prudential Standard HPS 340 Insurance Liability Valuation (HPS 340) (s. 1). HPS 340 details the requirements for the valuation of insurance liabilities of private health insurers. This standard is part of a broader review and update of the prudential policy framework for private health insurance, which seeks to ensure there is an appropriate level of financial resilience and protection for policyholders (s. 1). APRA has the authority to determine these prudential standards under subsection 92(1) of the Private Health Insurance (Prudential Supervision) Act 2015 (the Act), and may vary or revoke them under subsection 92(5) of the Act. Private health insurers are obligated to comply with the provisions of HPS 340, which includes adhering to the requirements for the valuation of their insurance liabilities (s. 2). APRA retains discretion to adjust or exclude specific prudential requirements under HPS 340 if it is deemed necessary to achieve a better prudential outcome or to appropriately protect policyholders (s. 2). The exercise of this discretion is subject to a robust decision-making framework that involves senior APRA officers with relevant experience and expertise. The decisions made by APRA under these standards are not subject to merits review, given the significant public interest element involved in these financial decisions. The Act stipulates that a breach of a prudential standard, such as HPS 340, constitutes a breach of the Act itself (s. 2). While no specific penalties are prescribed for breaches of prudential standards, a private health insurer’s non-compliance with the Act can lead to further substantive actions by APRA, such as the imposition of additional requirements or restrictions on the insurer’s operations. HPS 340 incorporates by reference various Acts, prudential standards, reporting standards, and Australian Accounting Standards, which are available on the Federal Register of Legislation and the AASB website (s. 3). The development of HPS 340 involved extensive consultation with the private health insurance industry, industry bodies, and other stakeholders. Feedback focused on aspects such as the treatment of deferred claims liability, the allowance for management actions, and the design of the insurance risk charge. The consultation process included the release of several discussion and response papers, and APRA considered the feedback received as appropriate and reasonably practicable (s. 3). APRA’s policy development process followed a structured approach that aligns with the requirements of the Office of Impact Analysis (s. 4). Additionally, a Statement of Compatibility with Human Rights has been prepared in accordance with the Human Rights (Parliamentary Scrutiny) Act 2011, confirming that the legislative instrument does not engage any of the applicable rights or freedoms recognised in the relevant international instruments (s. 5).

Area of Law: Financial Regulation; Insurance Law
Instrument: Regulation
Concepts: Definitions & Interpretation; Enforcement Powers; Regulatory Standards; Consultation Requirements
Catchwords: Prudential Standard; Insurance Liability Valuation

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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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