Insurance (prudential standard) determination No. 2 of 2011 - Prudential Standard GPS 001 - Definitions

Insurance (prudential standard) determination Nos. 2 to 4 of 2011
 

EXPLANATORY STATEMENT

Prepared by the Australian Prudential Regulation Authority (APRA)

Insurance Act 1973, subsection 32(1) and subsection 32(4)

Subsection 32(1) of the Insurance Act 1973 (“the Insurance Act”) provides that APRA may determine, in writing, standards relating to prudential matters that must be complied with by general insurers,  authorised NOHCs and the subsidiaries of general insurers or authorised NOHCs or a specified class of these.  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 revoke Prudential Standards so determined.

1.          Background

The prudential framework for the supervision of general insurance groups domiciled in Australia has been in effect since mid 2009.  The framework comprises three prudential standards and streamlined reporting requirements.  The objective of the framework is to ensure that general insurance groups are financially sound and that financial and operational interrelationships within the group do not compromise the financial position of any APRA-authorised members of the group.

In May 2011, APRA released the discussion paper titled Refinements to the prudential framework for general insurance groups.  APRA proposed a number of refinements to the prudential and reporting framework for general insurance groups.  The refinements to the prudential framework address minor issues identified since the implementation of the prudential framework for the supervision of general insurance groups.  Refinements to the reporting framework align aspects of general insurance group reporting with the reporting framework for APRA-authorised general insurers that was implemented in July 2010.  These refinements also provide clarifications to the reporting forms and instructions to address minor issues identified since the implementation of general insurance group reporting.

The refinements reflected in the final prudential and reporting standards are substantially consistent with APRA’s proposals in the May 2011 discussion paper.  Some minor amendments have been made as a result of feedback received in submissions on the May 2011 discussion paper.

2.            Purpose of the Instruments

The refinements to the prudential and reporting framework for general insurance groups required the prudential and reporting standards to be amended.  The amendments to the prudential framework are incorporated in the prudential standards determined under Insurance (prudential standard) determination Nos. 2 to 4 of 2011.

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

Accordingly, Insurance (prudential standard) determinations Nos. 2 to 4 of 2011 will revoke the following prudential standards with effect from 1 December 2011:

• General Insurance Prudential Standard GPS 001 Definitions made on 18 June 2010;
• General Insurance Prudential Standard GPS 111 Capital Adequacy: Level 2 Insurance Groups made on 17 December 2008; and
• General Insurance Prudential Standard GPS 311 Audit and Actuarial Reporting and Valuation: Level 2 Insurance Groups made on 17 December 2008;

Additionally, Insurance (prudential standard) determinations Nos. 2 to 4 of 2011 make the following prudential standards, to take effect from 1 December 2011:

• General Insurance Prudential Standard GPS 001 Definitions (GPS 001);
• General Insurance Prudential Standard GPS 111 Capital Adequacy: Level 2 Insurance Groups (GPS 111); and
• General Insurance Prudential Standard GPS 311 Audit and Actuarial Reporting and Valuation: Level 2 Insurance Groups (GPS 311).

3.            Operation of the Instruments

Insurance (prudential standard) determination No. 2 of 2011: General Insurance Prudential Standard GPS 001 Definitions

• The definition of a general insurance group was amended to capture certain legal structures that may not be captured under the previous definition.

• A number of other minor amendments were made to the standard to clarify the intent of the definitions of ‘corporate captive’, ‘accounts’ and the ‘other accident’ class of business.

Insurance (prudential standard) determination No. 3 of 2011: General Insurance Prudential Standard GPS 111 Capital Adequacy: Level 2 Insurance Groups

• An amendment was made to the types of reserves which are included in the capital base of a group.

• A paragraph was introduced to give APRA the ability to request the parent entity of a general insurance group to report on intra-group transactions.

• A number of paragraphs were subject to very minor amendment to capture the change to the reporting framework to align with the reporting framework for individual APRA-authorised general insurers.

• Other minor amendments were made to paragraphs within the standard to clarify their application to the parent entity of the general insurance group.

Insurance (prudential standard) determination No. 4 of 2011: General Insurance Prudential Standard GPS 311 Audit and Actuarial Reporting and Valuation: Level 2 Insurance Groups

• An explicit power was introduced within the standard to allow APRA to request external peer review of advice by the Group Actuary.

• The eligibility criteria for the Group Actuary were amended to ensure the Actuary does not hold a chief executive or director role within the general insurance group or wider corporate group.

• A paragraph was added which clarifies the current treatment of excess technical provisions when using accounting entries to determine premiums liabilities.

• Other minor amendments were made to paragraphs within the standard to clarify their application to the parent entity of the general insurance group.

Insurance (prudential standard) determination Nos. 2 to 4 of 2011:

All three instruments include the insertion of a paragraph which preserves any determinations made by APRA under previous versions of the prudential standards.

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 16 May 2011 to 15 July 2011 on the proposed changes to the current prudential reporting framework for general insurance groups. The consultation process involved the release of a discussion paper outlining the proposed changes, together with draft prudential standards and draft reporting forms and instructions incorporating the proposed changes. 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.

5.   Regulation Impact Statement

A regulation impact statement for the changes described in this Explanatory Statement was not required.