Insurance (prudential standard) determination No. 11 of 2019

Administered by Department of the Treasury

Legislation au F2019L00874 Not in force Legislative Instrument

Legislation content

Insurance (prudential standard) determinations Nos. 10 to 13 of 2019

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, authorised non-operating holding companies (authorised insurance NOHCs), and subsidiaries of general insurers and authorised NOHCs. Under subsection 32(4) of the Act, APRA may, in writing, vary or revoke a prudential standard.

On 19 June 2019, APRA made the following determination instruments (the Instruments):

(1)          Insurance (prudential standard) determination No. 10 of 2019 (the instrument) which revokes Prudential Standard GPS 110 Capital Adequacy made under Insurance (prudential standard) determination No. 1 of 2019;

(2)          Insurance (prudential standard) determination No. 11 of 2019 (the instrument) which revokes Prudential Standard GPS 116 Capital Adequacy: Insurance Concentration Risk Charge made under Insurance (prudential standard) determination No. 6 of 2019;

(3)          Insurance (prudential standard) determination No. 12 of 2019 (the instrument) which revokes Prudential Standard GPS 110 Capital Adequacy made under Insurance (prudential standard) determination No. 3 of 2014 and determines a new Prudential Standard GPS 110 Capital Adequacy (GPS 110); and

(4)          Insurance (prudential standard) determination No. 13 of 2019 (the instrument) which revokes Prudential Standard GPS 116 Capital Adequacy: Insurance Concentration Risk Charge made under Insurance (prudential standard) determination No. 6 of 2012 and determines a new Prudential Standard GPS 116 Capital Adequacy: Insurance Concentration Risk Charge (GPS 116).

Insurance (prudential standard) determination No. 10 of 2019 and Insurance (prudential standard) determination No. 11 of 2019 commence on the date they are signed, and Insurance (prudential standard) determination No. 12 of 2019 and Insurance (prudential standard) determination No. 13 of 2019 commence on 1 July 2019.

  1. Background

On 17 April 2019, APRA determined nine general insurance prudential standards reflecting consequential amendments arising from the introduction of the new Prudential Standard CPS 320 Actuarial and Related Matters (CPS 320) and Prudential Standard GPS 340 Insurance Liability Valuation (GPS 340).

During the process of revoking the former versions of those nine general insurance prudential standards and determining new versions of those standards, several words were inadvertently omitted from GPS 110 and GPS 116 as made under Insurance (prudential standard) determination No. 1 of 2019 and Insurance (prudential standard) determination No. 6 of 2019 (respectively).

2.             Purpose and operation of the instruments

The purpose of these instruments is to revoke the versions of GPS 110 and GPS 116 as made under Insurance (prudential standard) determination No. 1 of 2019 and Insurance (prudential standard) determination No. 6 of 2019 (respectively) containing the minor omissions, and to determine new versions of GPS 110 and GPS 116 correcting those minor omissions. The instruments do not make any other changes.

Prudential standards GPS 110 and GPS 116 provide for APRA to exercise various discretions, including the power to adjust or exclude a specific requirement in the standard in relation to a regulated entity.  Decisions made by the APRA exercising those discretions are not directly subject to merits review. This is because these decisions are preliminary decisions that may facilitate or lead to substantive decisions which are subject to merits review.

A breach of a prudential standard is also breach of the enabling legislation, as each enabling Act provides that regulated entities must comply with the standard.  However there are no penalties prescribed for such breaches. Instead, an entity’s breach of the prudential standard/enabling legislation is grounds for the APRA to make further, substantive decisions under the Insurance Act 1973 (Insurance Act) in relation to the entity. Those decisions are:

(a)     to revoke an authorisation to carry on insurance business (s.15A Insurance Act); and

(b)     to issue a direction to the insurer, including a direction to comply with the whole or part of a prudential standard (s.104 Insurance Act).

It is only at this stage that an entity is exposed to a penalty: loss of licence under s.15A or 50 penalty units if it breaches the direction (s.108 Insurance Act). The subsequent substantive decisions of APRA to impose a direction or revoke a licence are subject to merits review. In nearly all cases the substantive decisions are preceded by consultation with the regulated entity to raise any concerns they may have in relation to the decision.  The exception is provided in section 15(4) of the Insurance Act, whereby APRA may dispense with consultation if it is satisfied that doing so would result in a delay in revocation that would be contrary to the national interest.

3.             Consultation

The instruments are minor and machinery in nature and do not substantially alter existing arrangements.


4.             Regulation Impact Statement

The Office of Best Practice and Regulation advised that a Regulation Impact Statement was not required for the prudential standards (CPS 320 and GPS 340) that gave rise to these consequential amendments.

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 Nos. 10 to 13 of 2019

These Legislative Instruments (instruments) are 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 these instruments is to correct minor omissions in the versions of GPS 110 and GPS 116 as made under Insurance (prudential standard) determination No. 1 of 2019 and Insurance (prudential standard) determination No. 6 of 2019 (respectively) arising from consequential amendments made to GPS 110 and GPS 116 in April 2019 to reflect the introduction of CPS 320 and GPS 340.

Human rights implications

APRA has assessed the instruments against the international instruments listed in section 3 of the HRPS Act and has determined that the instruments do not engage any of the applicable rights or freedoms.

Conclusion

These instruments are compatible with human rights as they does not raise any human rights issues.

Overview

The Insurance (Prudential Standard) Determinations Nos. 10 to 13 of 2019 were introduced to address minor omissions in the previous versions of Prudential Standards GPS 110 Capital Adequacy and GPS 116 Capital Adequacy: Insurance Concentration Risk Charge. These omissions arose from the consequential amendments in April 2019, which reflected the introduction of Prudential Standards CPS 320 Actuarial and Related Matters and GPS 340 Insurance Liability Valuation. Enacted under the authority of the Insurance Act 1973, these determinations were made by the Australian Prudential Regulation Authority (APRA) to ensure regulatory standards are accurately and effectively communicated. The primary policy objective of these instruments is to maintain the integrity and clarity of prudential standards, thereby supporting the stability and reliability of the insurance industry. By correcting the inadvertent omissions, APRA aims to prevent any potential misunderstanding or non-compliance among the regulated entities.

Scope and Application

The Insurance (prudential standard) determinations Nos. 10 to 13 of 2019 were made under the authority of the Insurance Act 1973, specifically section 32, which empowers the Australian Prudential Regulation Authority (APRA) to establish and modify prudential standards for compliance by general insurers, authorised non-operating holding companies (NOHCs), and their subsidiaries. These determinations serve to correct minor errors in previously established standards GPS 110 and GPS 116, which were inadvertently omitted during the revision process in April 2019. The affected standards pertain to capital adequacy and insurance concentration risk charges, which are integral to maintaining financial stability within the insurance industry. The instruments do not introduce new requirements but rather rectify existing ones, ensuring the standards are accurately reflective of the legislative intent. The revocation and re-determination of these standards apply nationally, impacting all regulated entities within the scope of the Insurance Act 1973. The commencement dates for the determinations vary, with some effective immediately upon signing and others on 1 July 2019. Breaches of these prudential standards, while not carrying prescribed penalties themselves, can lead to further regulatory actions by APRA, such as the revocation of business authorisations or directives to comply with the standards, which are subject to merits review. These instruments are considered minor and do not require a Regulation Impact Statement. Additionally, they have been assessed for compatibility with human rights, concluding that they do not engage any of the applicable rights or freedoms as declared in the international instruments under the Human Rights (Parliamentary Scrutiny) Act 2011.

Key Provisions

The main operative sections of the legislation pertain to the authority of the Australian Prudential Regulation Authority (APRA) under the Insurance Act 1973 to determine, vary, or revoke prudential standards (sections 32(1) and 32(4) of the Act). Specifically, the determinations Nos. 10 to 13 of 2019 revoke existing prudential standards GPS 110 and GPS 116, which were found to have minor omissions, and establish new versions of these standards to correct those omissions. Determination Nos. 10 and 11 of 2019, which revoke the old standards, commenced on the date they were signed. Determination Nos. 12 and 13 of 2019, which determine the new standards, commenced on 1 July 2019. The obligations imposed by these determinations are primarily on the general insurers, authorised non-operating holding companies (NOHCs), and their subsidiaries. These entities must comply with the newly determined standards GPS 110 and GPS 116, as corrected by the determinations. The standards pertain to capital adequacy and insurance concentration risk charge, and they provide APRA with the discretion to adjust or exclude specific requirements in relation to a regulated entity. However, it is important to note that decisions made by APRA exercising these discretions are not directly subject to merits review, as they are preliminary decisions leading to substantive decisions that are subject to review. Breaches of these prudential standards are not directly penalised under the Act. Instead, a breach serves as a basis for APRA to make further substantive decisions. These decisions may include the revocation of an authorisation to carry on insurance business (section 15A of the Insurance Act) or the issuance of a direction to the insurer, which may include a direction to comply with the whole or part of a prudential standard (section 104 of the Insurance Act). A breach of such a direction carries a penalty of 50 penalty units (section 108 of the Insurance Act). The substantive decisions by APRA are subject to merits review and are usually preceded by consultation with the regulated entity, unless APRA determines that such consultation would delay the revocation in a manner contrary to the national interest (section 15(4) of the Insurance Act). These instruments also ensure compatibility with human rights as they do not engage any of the applicable rights or freedoms under the international instruments listed in the Human Rights (Parliamentary Scrutiny) Act 2011. APRA has assessed these instruments and concluded that they do not raise any human rights issues.

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