Insurance (prudential standard) determination No. 10 of 2010 - Prudential Standard GPS 310 - Audit and Actuarial Reporting and Valuation

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Legislation au F2010L01720 Not in force Legislative Instrument

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Insurance (prudential standard) determination Nos. 3 to 11 of 2010
 

 

EXPLANATORY STATEMENT

Prepared by the Australian Prudential Regulation Authority (APRA)

 

Insurance Act 1973, paragraphs 32(1)(a) and (b) and subsection 32(4)

 

 

Paragraphs 32(1)(a) and (b) of the Insurance Act 1973 (“the Insurance Act”) provide that APRA may determine, in writing, standards relating to prudential matters that must be complied with by general insurers and authorised NOHCs.  Pursuant to subsection 32(5A) of the Insurance Act and paragraph 6(d) of the Legislative Instruments Act 2003 (“the Legislative Instruments Act”), such Prudential Standards are legislative instruments for the purposes of the Legislative Instruments Act.  Subsection 32(4) of the Insurance Act gives APRA the power to vary Prudential Standards so determined.

 

  1.          Background

 

In December 2009, APRA released the discussion paper titled Proposed changes to general insurance prudential reporting.  APRA’s key proposal was the alignment of the balance sheet and income statement with the Australian equivalents to International Financial Reporting Standards (AIFRS).  A number of other refinements were also proposed. 

 

APRA’s objectives were to refine the prudential reporting requirements to reduce the reporting obligations for insurers, to align performance measures and to enhance APRA’s analysis of the financial performance of general insurers, while maintaining the current capital framework.

 

2.            Purpose of the Instruments

 

The changes to the prudential reporting framework required the introduction of new and amended reporting requirements.  This also required consequential changes to the terminology used in some general insurance prudential standards.

 

The purpose of making the instruments is to replace existing prudential standards with prudential standards that implement the proposals. 

 

Accordingly the Insurance (prudential standard) determination Nos. 3 to 11 of 2010 will revoke the following prudential standards with effect from 1 July 2010:

 

  • General Insurance Prudential Standard GPS 001 Definitions made on 15 December 2009;
  • General Insurance Prudential Standard GPS 110 Capital Adequacy made on 23 June 2008;
  • General Insurance Prudential Standard GPS 112 Capital Adequacy: Measurement of Capital made on 23 June 2008;
  • General Insurance Prudential Standard GPS 113 Capital Adequacy: Internal model-based method made on 19 December 2008;
  • General Insurance Prudential Standard GPS 114 Capital Adequacy: Investment Risk Capital Charge made on 23 June 2008 as amended by Insurance (prudential standard) No. 1 of 2009 made on 11 May 2009;
  • General Insurance Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Capital Charge made on 23 June 2008;
  • General Insurance Prudential Standard GPS 116 Capital Adequacy: Concentration Risk Capital Charge made on 10 March 2010;
  • General Insurance Prudential Standard GPS 120 Assets in Australia made on 23 June 2008; and
  • General Insurance Prudential Standard GPS 310 Audit and Actuarial Reporting and Valuation made on 23 June 2008.

 

Additionally the Insurance (prudential standard) determination Nos. 3 to 11 of 2010 will make the following prudential standards to take effect from 1 July 2010:

 

  • General Insurance Prudential Standard GPS 001 Definitions (GPS 001);
  • General Insurance Prudential Standard GPS 110 Capital Adequacy (GPS 110);
  • General Insurance Prudential Standard GPS 112 Capital Adequacy: Measurement of Capital (GPS 112);
  •  General Insurance Prudential Standard GPS 113 Capital Adequacy: Internal model-based method (GPS 113);
  • General Insurance Prudential Standard GPS 114 Capital Adequacy: Investment Risk Capital Charge (GPS 114);
  • General Insurance Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Capital Charge (GPS 115);
  • General Insurance Prudential Standard GPS 116 Capital Adequacy: Concentration Risk Capital Charge (GPS 116);
  • General Insurance Prudential Standard GPS 120 Assets in Australia (GPS 120); and
  • General Insurance Prudential Standard GPS 310 Audit and Actuarial Reporting and Valuation (GPS 310).

 

3.            Operation of the Instruments

 

  • Insurance (prudential standard) determination No. 3 of 2010: General Insurance Prudential Standard GPS 001 Definitions

 

The following definition has been added to GPS 001:

 

  1. Deferred reinsurance expense (DRE) represents the amount of reinsurance expense which is capitalised as an asset over the life of the reinsurance contract in accordance with GPS 310 Audit and Actuarial Reporting and Valuation.

 

The following definitions for lenders mortgage insurance and lenders mortgage insurer from GPS 116 have now been included in GPS 001.

 

2.      Lenders mortgage insurance has its ordinary commercial meaning and includes insurance under a policy which protects a lender from losses in the event of borrower default on a loan secured by a mortgage over residential or other property.

 

3.      Lenders mortgage insurer means an insurer that has written or reinsured, or proposes to write or reinsure, policies of lenders mortgage insurance.

 

The definitions for classes of business as currently set out in general insurance reporting instruction guides[1] have now been reproduced in GPS 001.

 

The following definitions have been amended in GPS 001:

 

  1. Expected reinsurance recoveries means any amounts due to an insurer, or to an entity that carries on international business within a Level 2 insurance group, from a reinsurer that arise from the recognition of Premiums Liabilities referred to in the capital standards and Prudential Standard GPS 310 Audit and Actuarial Reporting and Valuation. This is distinguished from reinsurance recoverables.

 

The definition for expected reinsurance recoveries has been amended because it has been removed as a component of reinsurance assets.

 

2.      Reinsurance assets in relation to an insurer or an entity that carries on international business within a Level 2 group comprises:

(a)     reinsurance recoverables; and

(b)     deferred reinsurance expense.

 

One of the reporting simplification measures taken in the project was to risk charge ‘deferred reinsurance expense’ as a substitute for ‘expected reinsurance recoveries.’ The definition of reinsurance assets has been used to refer to the particular reinsurance-related assets that will have a risk charge applied. This definition has been modified to change the terminology from ‘expected reinsurance recoveries’ to ‘deferred reinsurance expense’, as expected reinsurance recoveries on premium liabilities will no longer be risk-charged.

 

These changes in terminology have required other minor consequential amendments to the following general insurance prudential standards to ensure consistency across all prudential standards. 

 

  • Insurance (prudential standard) determination No. 4 of 2010: General Insurance Prudential Standard GPS 110 Capital Adequacy;
  • Insurance (prudential standard) determination No. 5 of 2010: General Insurance Prudential Standard GPS 112 Capital Adequacy: Measurement of Capital;
  • Insurance (prudential standard) determination No. 6 of 2010: General Insurance Prudential Standard GPS 113 Capital Adequacy: Internal model-based method;
  • Insurance (prudential standard) determination No. 7 of 2010: General Insurance Prudential Standard GPS 114 Capital Adequacy: Investment Risk Capital Charge;
  • Insurance (prudential standard) determination No. 11 of 2010: General Insurance Prudential Standard GPS 115 Capital Adequacy: Insurance Risk Capital Charge;
  • Insurance (prudential standard) determination No. 8 of 2010: General Insurance Prudential Standard GPS 116 Capital Adequacy: Concentration Risk Capital Charge;
  • Insurance (prudential standard) determination No. 9 of 2010: General Insurance Prudential Standard GPS 120 Assets in Australia; and
  • Insurance (prudential standard) determination No. 10 of 2010: General Insurance Prudential Standard GPS 310 Audit and Actuarial Reporting and Valuation

 

4.   Consultation

 

Section 17 of the Legislative Instruments Act 2003 requires consultation when a rule-maker makes a legislative instrument.  APRA undertook consultation with the general insurance industry from 3 December 2009 to 12 February 2010 on the proposed changes to the current prudential reporting framework. The consultation process involved the release of a discussion paper outlining the proposed changes, draft prudential standards, draft reporting forms and instructions, together with a quantitative impact study. APRA received submissions that were generally supportive of the proposals and no material changes have been made to the key proposals. Some minor modifications have been made to address aspects raised in the submissions.

[1] Instruction guides form part of the reporting standards as made under the Financial Sector (Collection of Data) Act 2001.

Overview

The Insurance (prudential standard) determination Nos. 3 to 11 of 2010, prepared by the Australian Prudential Regulation Authority (APRA) under the Insurance Act 1973, were introduced to address the need for a refined and updated prudential reporting framework for general insurers and authorised Non-Operating Holding Companies (NOHCs) in the insurance sector. These determinations were enacted to replace the existing prudential standards with updated ones that align with Australian equivalents to International Financial Reporting Standards (AIFRS), thereby reducing reporting obligations, aligning performance measures, and enhancing APRA’s analysis of insurers' financial performance while maintaining the existing capital framework. The purpose of these instruments was to implement the proposals outlined in APRA's December 2009 discussion paper, "Proposed changes to general insurance prudential reporting." The new standards, effective from 1 July 2010, include revised definitions, terminology, and reporting requirements to ensure consistency and improve the overall prudential reporting framework.

Scope and Application

The Insurance (prudential standard) determination Nos. 3 to 11 of 2010, established under the authority of the Insurance Act 1973, apply to general insurers and authorised non-operating holding companies (NOHCs) within Australia. These standards are designed to ensure that insurers maintain sufficient capital and financial stability, aligning their prudential reporting with Australian equivalents to International Financial Reporting Standards (AIFRS). This alignment is intended to streamline reporting requirements, standardise terminology, and enhance the Australian Prudential Regulation Authority's (APRA) ability to assess the financial health of insurers. The new standards, which took effect from 1 July 2010, replace and amend existing prudential standards to reflect these changes. APRA's consultation with the general insurance industry yielded generally positive feedback, with minor modifications made in response to industry submissions. These legislative instruments extend and refine the application of prudential standards, ensuring that the prudential framework remains robust and aligned with international best practices.

Key Provisions

The Insurance (prudential standard) determination Nos. 3 to 11 of 2010, issued under the Insurance Act 1973, establish new prudential standards for general insurers and authorised non-operating holding companies (NOHCs). These determinations aim to refine prudential reporting requirements, reduce reporting burdens, align performance measures, and enhance the analysis of financial performance within the existing capital framework. The operative sections (paragraphs 32(1)(a) and (b) and subsection 32(4) of the Insurance Act) grant the Australian Prudential Regulation Authority (APRA) the authority to set these standards in writing and to vary them as necessary. The new prudential standards, which take effect from 1 July 2010, replace existing ones and introduce updated terminology and reporting requirements. These include new definitions such as 'deferred reinsurance expense' and 'lenders mortgage insurance', which are capitalised over the life of a reinsurance contract and cover insurance protecting lenders against borrower default, respectively. The standards also modify existing definitions, such as changing 'expected reinsurance recoveries' to 'deferred reinsurance expense'. These changes necessitate minor amendments to other prudential standards to maintain consistency. The obligations imposed by these standards require general insurers and authorised NOHCs to adhere to the updated definitions and reporting requirements outlined in the new prudential standards. Insurers must ensure their reporting aligns with the specified definitions and standards, particularly regarding the treatment of reinsurance expenses and assets. Failure to comply with these requirements may result in regulatory scrutiny or corrective actions by APRA. In terms of penalties and consequences, while the explanatory statement does not specify penalties for non-compliance with these prudential standards, breaches of prudential standards can lead to enforcement actions by APRA. Such actions may include directions, financial penalties, or more severe measures if the breach significantly impacts the insurer's solvency or the stability of the financial system. The severity of the consequences would depend on the nature and extent of the non-compliance.

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