Life Insurance (Prudential Rules) Determination No. 3 of 2005: Prudential Rules No. 48 Applying To Life Companies That Are Friendly Societies
Explanatory Statement
Issued by the authority of the Australian Prudential Regulation Authority (‘APRA’)
Life Insurance Act 1995, subsection 252(1)
Acts Interpretation Act 1901, subsection 33(3)
Legislative background
Under subsection 252(1) of the Life Insurance Act 1995 (‘the Act’), APRA has the power to determine (in writing) prudential rules prescribing all matters required or permitted by the Act that must be complied with by life companies (including friendly societies) registered under the Act.
Section 244 of the Act provides that APRA must collect such statistics as are prescribed by the prudential rules, in the time and manner prescribed by the rules.
Although section 244 does not appear in some published compilations of the Act, it will continue to form part of the Act until it is repealed by Items 72 and 75 of Schedule 2 to the Financial Sector (Collection of Data – Consequential and Transitional Provisions) Act 2001. The repeal will not occur until APRA makes a reporting standard in relation to life companies under section 13 of the Financial Sector (Collection of Data) Act 2001 (‘the FSCOD Act’) and in accordance with section 15 of the FSCOD Act the reporting standard applies to life companies. Accordingly, for the time being, section 244 of the Act remains in effect.
Subsection 33(3) of the Acts Interpretation Act 1901 provides that where an Act confers a power to issue an instrument the power shall, unless the contrary intention appears, be construed as including a power exercisable in the like manner and subject to the like conditions (if any) to revoke any such instrument.
The Determination
The purpose of Life Insurance (Prudential Rules) Determination No. 3 of 2005 dated 26 August 2005 (‘the Determination’) is to revoke the current Prudential Rules No. 48 (made under section 252 for the purposes of section 244), and replace them with a new Prudential Rules No. 48. The Determination will take effect upon registration on the Federal Register of Legislative Instruments.
The revoked Prudential Rules No. 48 provide for statistical reporting forms under subsections 244(1) and (2) of the Act, comprising quarterly reporting forms for friendly societies.
The purpose of the variations is:
- to clarify APRA’s transitional regulatory reporting arrangements until a post-International Financial Reporting Standards (‘post-IFRS’) regulatory reporting framework takes effect; and
- to ensure a match between the Schedule to Prudential Rules No. 48 and the statistical reporting forms currently submitted by friendly societies in satisfaction of the reporting requirements under Prudential Rules No. 48 as subsequently varied.
IFRS Transitional Arrangements
Background
All Australian reporting entities are required to adopt the Australian equivalent of International Financial Reporting Standards (‘IFRS’) for reporting periods beginning on or after 1 January 2005. There are significant differences between the previous Australian accounting standards (‘pre-IFRS standards’) and those post-IFRS. The principles in the post-IFRS standards alter the basis for recognising and measuring certain financial assets and liabilities and the manner in which the information is disclosed in the financial reports of APRA regulated entities.
APRA is a special purpose user of financial information and, wherever practical, it aligns its regulatory reporting requirements with the accounting standards. Existing APRA prudential rules and the underlying statistical reporting forms will not capture all data that will require collection once IFRS is fully implemented. APRA recognises that dual reporting needs to be kept to a minimum and that reporting should be aligned wherever possible.
In addition, the Life Insurance Actuarial Standards Board (‘the LIASB’) has issued discussion drafts of revised actuarial standards which allow for IFRS to apply to life companies including friendly societies. The discussion drafts indicate that these revised standards will apply from 1 January 2006 (with early adoption permitted). Changes to the reporting of some items on the statistical reporting forms underlying Prudential Rules No. 48 will be required to align with the revised actuarial standards.
APRA is currently reviewing all prudential rules and the underlying statistical reporting forms for friendly societies, to identify the changes necessary to enable effective supervision in the new environment while minimising dual reporting.
Life Insurance (Prudential Rules) Determination No. 3 of 2004 (amending the definitions of “AASB” and “accounting standards” under Prudential Rules No. 35) ensured that, for the meantime, capital and reporting requirements remained linked to pre-IFRS accounting standards.
However, APRA is aware that some friendly societies are already moving to provide general purpose financial reports on a post-IFRS basis. APRA is keen to achieve an efficient transition between the old and new reporting requirements and to minimise dual reporting during this period.
Interim reporting arrangements
Of immediate concern are the quarterly statistical reporting forms underlying Prudential Rules No. 48. Until the revised actuarial standards become effective and the prudential rules which take account of IFRS are implemented, the statistical reporting forms continue to be based on the existing actuarial and pre-IFRS accounting standards, even though life companies may now be in, or entering, reporting periods for which IFRS applies to their general purpose accounts.
Accordingly, Life Insurance (Prudential Rules) Determination No. 3 of 2005 revokes Prudential Rules No. 48 and makes new Prudential Rules No. 48, with amendments to allow transitional arrangements which may be applied to regulatory reporting by life companies (that are friendly societies) in respect of the period from 1 January 2005 (the implementation of IFRS) until the implementation of new prudential rules which take account of IFRS.
The Determination specifies transitional arrangements and the criteria that must be satisfied before the alternative arrangements can be used. It allows life companies that are friendly societies to use data sourced from their IFRS-based ledgers to populate their statistical reporting forms to APRA if they so wish, provided that certain requirements are met. Those requirements include that, where such data is materially different from data that would have been available on a pre-IFRS basis, the reported amounts must be adjusted accordingly and the amount of the adjustments reported to APRA.
Under the Determination, the option to use IFRS-based ledger data applies to the quarterly reporting under the new Prudential Rules No. 48 for life companies that are friendly societies. Use of IFRS data will not be compulsory until the revised actuarial standards come into effect. By that time, review of the statistical reporting forms under the prudential rules should be complete and the ongoing requirements known.
Additional information
IFRS has led to the introduction of new items on the balance sheet, or modification to the way in which existing items are measured.[1] Under the transitional arrangements, and where material, such items will need to be excluded or adjusted, and the amount of the adjustment reported to APRA on a regular basis an APRA-approved format as specified in the Table C – IFRS Modified Items to the new Prudential Rules No. 48.
Updated Schedule to Prudential Rules No. 48
Background
At some point the Schedule to Prudential Rules No. 48 and the statistical reporting forms submitted by life companies that are friendly societies deviated. The underlying data collected remained materially the same, but the statistical reporting forms submitted to APRA by friendly societies no longer exactly matched the Schedule to the revoked Prudential Rules No. 48. In addition, actuarial standards issued by the LIASB which took effect from 30 June 2002 required the alteration of terminology and the calculation and presentation of the capital requirements. Life companies that are friendly societies have been reporting on the updated statistical reporting forms since this time.
Variation
APRA has taken the opportunity to ensure that the Schedule to the new Prudential Rules No. 48 accurately match the statistical reporting forms currently submitted to APRA by life companies that are friendly societies. This has involved changes to the Schedule to the new Prudential Rules No. 48 of a minor and mechanical nature that have not materially changed the underlying data required by the Schedule. It is noted that all life companies that are friendly societies are currently reporting on the statistical reporting forms that match the updated Schedule, so this will have no effect on the industry.
Consultation
Consultation has been undertaken with representatives of the major friendly societies to ensure that the proposed IFRS transitional arrangements would provide them with sufficient regulatory reporting flexibility, while maintaining the quality and material accuracy of the statistics supplied to APRA.
Further consultation was not considered necessary given:
- the generally positive feedback received by APRA from those discussions;
- the variations provide friendly societies with an option to continue under the original arrangements;
- the variations to Prudential Rules No. 48 arising from this Determination do not materially alter the current regulatory reporting requirements; and
- the variations go no further than is necessary to provide life companies that are friendly societies with some flexibility to deal with temporary transitional impacts arising from the introduction of IFRS; and
- the variations are consistent with those to be available to life companies that are not friendly societies.
Consultation on the minor variations to the Schedule was not considered necessary as those variations have no impact on current industry arrangements and practices.
[1] For example: DAC assets in respect of incremental policy acquisition expenses, employer sponsored defined benefit superannuation plan surpluses and deficits, owner-occupied property, use of fair value rather than net market value, etc.