Insurance (prudential standard) determination No. 11 of 2006
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority (APRA)
Insurance Act 1973, subsection 32(1)
Acts Interpretation Act 1901, subsection 33(3)
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. Subsection 33(3) of the Acts Interpretation Act 1901 gives APRA power to vary prudential standards so determined.
Insurance (prudential standard) determination No. 5 of 2006 determined Prudential Standard GPS 510 Governance (GPS 510) to take effect on 1 October 2006. Insurance (prudential standard) determination No. 11 of 2006 (the instrument) varies GPS 510.
- Background
APRA has identified that paragraph 32 of GPS 510 will, for some insurers, produce an unintended consequence with respect to the need for the Board Audit Committee to provide an objective non-executive review of the effectiveness of the risk management framework. This requirement was intended to ensure that there is a Board Committee which has responsibility for review of an insurer’s risk management function. Some insurers already have a Board Committee, other than the Board Audit Committee, with this responsibility. This is acceptable to APRA. However, the wording of paragraph 32 means that these institutions will be in breach of the prudential standard if they do not make review of the risk management framework an explicit responsibility of the Board Audit Committee. APRA therefore seeks to vary GPS 510 to address this matter.
2. Purpose of the instrument
The instrument varies GPS 510 to allow a Board Committee, whether the Board Audit Committee or another Board Committee, to have responsibility for the objective non-executive review of the insurer’s risk management framework.
3. Consultation
APRA consulted extensively with industry in relation to GPS 510, which is varied by the instrument. This change will be favourable to insurers as it provides greater scope for them to meet the requirement for a Board Committee which has responsibility for the objective non-executive review of the risk management framework (by removing the current requirement that this review be performed by the Board Audit Committee).
Overview
The Insurance (prudential standard) determination No. 11 of 2006 was enacted to address a specific issue identified by the Australian Prudential Regulation Authority (APRA) with respect to Prudential Standard GPS 510 Governance (GPS 510). Under the Insurance Act 1973, APRA has the authority to establish prudential standards for general insurers, and this determination serves to modify GPS 510 to ensure that insurers are not unduly restricted in their compliance with the requirement for a Board Committee to review the effectiveness of their risk management framework. This modification was deemed necessary as the original wording of GPS 510 inadvertently imposed an undue burden on certain insurers by mandating that this review must be conducted by the Board Audit Committee, even if another Board Committee already fulfilled this role. The policy objective of this instrument is to provide flexibility to insurers while maintaining the core requirement for a Board Committee to objectively review the risk management framework.
Scope and Application
The Insurance (prudential standard) determination No. 11 of 2006, issued by the Australian Prudential Regulation Authority (APRA) under the Insurance Act 1973, aims to adjust Prudential Standard GPS 510 Governance (GPS 510) to correct an unintended consequence identified in the original standard. This determination applies to general insurers in Australia, requiring them to comply with prudential matters as stipulated by APRA. The primary focus of this instrument is to allow flexibility in the assignment of responsibility for the objective non-executive review of the insurer's risk management framework. Instead of mandating that this review must be conducted by the Board Audit Committee, the amended standard permits any Board Committee to take on this responsibility, provided it is a non-executive committee. This change seeks to alleviate potential compliance burdens on insurers who already have a designated Board Committee for such reviews, thereby ensuring that the spirit of the original intent—to maintain effective oversight of risk management—is upheld without imposing unnecessary rigidity.
Key Provisions
The main operative sections of the Insurance (prudential standard) determination No. 11 of 2006 are centred around the variation of Prudential Standard GPS 510, particularly in paragraph 32, to provide flexibility in the assignment of the objective non-executive review of the risk management framework (section 2). The determination seeks to correct an unintended consequence identified by the Australian Prudential Regulation Authority (APRA) that required the Board Audit Committee to exclusively handle this review, potentially disregarding other Board Committees that could effectively fulfil this role. By varying GPS 510, the determination now allows any Board Committee, not just the Board Audit Committee, to take on this responsibility (section 3). This change aims to provide insurers with greater flexibility in meeting the requirement for a Board Committee responsible for the review of the risk management framework.
The obligations imposed by this Act on the parties it governs primarily involve ensuring that there is a Board Committee responsible for the objective non-executive review of the insurer's risk management framework. Under the amended GPS 510, insurers must identify which Board Committee will assume this responsibility, whether it be the Board Audit Committee or another Board Committee. Insurers are required to document and implement this decision clearly, ensuring that the chosen committee has the necessary authority and resources to effectively review the risk management framework. Additionally, insurers must ensure that the committee’s role and responsibilities are well understood and communicated within the organisation.
Breaching the requirements set out in this legislation can lead to significant consequences. While the Act does not explicitly detail the penalties for non-compliance, it is likely that failure to adhere to the prudential standards could result in regulatory scrutiny, enforcement actions, and potential sanctions by APRA. These could include fines, directives to rectify non-compliant practices, or even more severe measures such as suspension or revocation of the insurer's license. The maximum penalties for such breaches would depend on the specific nature and severity of the non-compliance, as well as any additional regulatory provisions that apply. It is important for insurers to comply with these standards to avoid any adverse outcomes from regulatory bodies.