Insurance (prudential standard) determination No. 1 of 2015
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority (APRA)
Insurance Act 1973, section 32
Under subsection 32(1) of the Insurance Act 1973 (the Act), APRA has the power to determine standards (prudential standards), in writing, in relation to prudential matters to be complied with by general insurers and authorised non-operating holding companies. Under subsection 32(4) of the Act, APRA may, in writing, vary or revoke a prudential standard.
On 6 November 2015, APRA made Insurance (prudential standard) determination No. 1 of 2015 (the instrument) which revokes Prudential Standard GPS 320 Actuarial and Related Matters (old GPS 320) made under Insurance (prudential standard) determination No. 6 of 2014 and determines a new Prudential Standard GPS 320 Actuarial and Related Matters (new GPS 320).
The instrument will take effect on 31 December 2015.
- Background
The accurate valuation of a general insurer’s insurance liabilities is a key prudential issue and subject to multiple layers of oversight. This includes a requirement, under GPS 320, for general insurers to seek on an annual basis (and at their expense) an external peer review report (the review report), from a Reviewing Actuary, of the Appointed Actuary’s Insurance Liability Valuation Report (ILVR).
APRA is seeking opportunities to reduce regulatory costs for APRA-regulated institutions, without compromising the soundness of the prudential framework. Modifying the review report requirements under GPS 320 was identified as an area where regulatory compliance costs could be reduced.
2. Purpose and operation of the instrument
GPS 320 sets out the roles and responsibilities of an Appointed Actuary and Group Actuary (Actuary), and the obligations of an insurer or Level 2 insurance group to make arrangements to enable its Actuary to fulfil those roles and responsibilities. Other than the changes to the review report discussed below, the requirements of new GPS 320 substantively replicate those of old GPS 320. Where GPS 320 incorporates by reference the requirements of another prudential standard, this is a reference to the prudential standard as it exists from time to time.
Since its introduction, the annual review report requirement under GPS 320 drove improvements in general insurer practices. Over time, APRA has observed improvements in the quality of the Appointed Actuary’s work and Reviewing Actuaries raise relatively minor and infrequent issues regarding the ILVR. With this in mind, APRA has assessed that the regulatory compliance cost burden of the review report outweighs its continued prudential value. The new GPS 320 removes the mandatory annual requirement whilst retaining APRA’s ability to request a review report in circumstances it considers appropriate. As a result, annual compliance costs for the general insurance industry will be reduced without compromise to the soundness of the prudential framework.
3. Consultation
In 2014, APRA held a number of discussions with industry bodies and identified the review report requirement as an area where regulatory compliance costs could be reduced.
In April 2015, APRA released a consultation letter outlining its proposed amendments to GPS 320. APRA received 17 submissions in response. The proposal received support from general insurers, whereas the Actuaries Institute and actuarial service providers were not supportive. Submissions supporting the proposal noted the value of the review report has diminished over time, and argued its costs now outweigh its benefits. Submissions opposing the proposal noted the benefits provided by the review report and suggested removing the requirement may increase costs in other areas that leverage the review report work. Some submissions proposed alternatives to removing the annual requirement.
APRA has carefully weighed the submission feedback and remains of the view that its initial proposed approach strikes the best balance in achieving regulatory compliance cost savings without compromising the soundness of the prudential framework. On 29 October 2015, APRA released a letter responding to the consultation feedback together with the revised GPS 320.
New GPS 320 will apply to general insurers from 31 December 2015.
4. Regulation Impact Statement
The Office of Best Practice Regulation has advised that a Regulation Impact Statement is not required for this legislative instrument.
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
Insurance (prudential standard) determination No. 1 of 2015
The 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 GPS 320 and determine a new GPS 320. The new GPS 320 includes revised actuarial review requirements to reduce annual compliance costs for the general insurance industry without compromise to the soundness of the prudential framework.
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
The Legislative Instrument is compatible with human rights because it does not raise any human rights issues.