Life Insurance (Prudential Rules) Determination No. 3 of 2006: Prudential Rules No. 48 Applying To Life Companies That Are Friendly Societies
Explanatory Statement
This statement is issued by the authority of the Australian Prudential Regulation Authority (‘APRA’) under:
- 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 all life companies registered under the Act. Such prudential rules are ‘legislative instruments’ within the meaning of the Legislative Instruments Act 2003.
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. Prudential Rules No. 48 (PR 48) deals with these statistical collections in relation to life companies that are friendly societies (friendly societies).
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244 does not appear in some published compilations of the Act, it will continue to form part of the Act until it is repealed by Items 72 and 75 of Schedule 2 to the Financial Sector (Collection of Data – Consequential and Transitional Provisions) Act 2001.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 and in accordance with section 15 of that Act the reporting standard begins to apply 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 2006 (‘the Determination’) is to revoke the current PR 48 (made on 26 August 2005 under subsection 252(1) of the Act for the purposes of section 244) and replace them with a new PR 48 for the same purposes. The Determination will take effect upon registration on the Federal Register of Legislative Instruments.
The revoked PR 48 provided for statistical reporting forms under subsections 244(1) and (2) of the Act, comprising quarterly forms. By virtue of Life Insurance (Prudential Rules) Determinations No. 1 and 3 of 2005, they also included transitional regulatory reporting arrangements following the introduction of new Australian accounting standards based on International Financial Reporting Standards (IFRS).
The new PR 48:
- remove the transitional regulatory reporting arrangements in place pending the final changes to reporting requirements and actuarial standards necessary to address IFRS;
- incorporate the changes to the statistical reporting forms required as a result of the introduction of IFRS;
- reflect the changes to the Actuarial Standards made by the Life Insurance Actuarial Standards Board (LIASB) as a consequence of the introduction of IFRS; and.
- incorporate the changes to the statistical reporting forms required as a result of the expiry of Australian Securities and Investments Commission (ASIC) Class Order 99/1225: Financial Reporting Requirements for Benefit Fund Friendly Societies.
Background to the Changes
The revised reporting requirements arise from:
- the introduction in Australia of IFRS;
- the expiry of ASIC Class Order 99/1225;
- consequential changes to the Actuarial Standards under the Act being made by the LIASB; and
- consequential changes being made to the regulatory financial statements under Prudential Rules No 47 (PR 47).
Explanation of the Changes
Under the previous PR 48, friendly societies were required to provide quarterly reports to APRA based on the forms included in PR 48 and similar forms were used for reporting annual financial statements under PR 47.
As a consequence of the introduction of IFRS and the expiry of ASIC Class Order 99/1225, reporting requirements under PR 47 are being revised. Equivalent changes are therefore required to reporting under PR 48.
To more clearly establish the different reporting requirements for regulatory financial statements and statistical collections, and between the requirements of quarterly and annual statistics, PR 48 now classifies forms into Category 1 forms, which are required to be completed quarterly, and Category 2 forms which are required to be completed annually. Category 2 forms are required to be audited and are required within 3 months of the end of the financial period, consistent with the reporting deadline for regulatory financial statements under PR 47.
Category 2 forms are, however, distinct from the regulatory financial statements under PR 47, which are also required annually. Consequently, annual reporting requirements which are not considered to be a natural requirement of regulatory financial statements (e.g. details of solvency and capital adequacy requirements) are included in Category 2 of PR 48 rather than in PR 47.
Category 1 contains all the forms except for Forms B2 Part ii, C3 Part ii, B13 and B14. These forms are included only in the regulatory financial statements under PR 47.
The one basic set of forms is to be used for all the collections under both PR 47 and PR 48, and in many cases the same form will be used for preparing regulatory financial statements and statistical collections, or for both quarterly and annual statistics. The categorisation simply identifies which forms out of the entire set are to apply for each purpose.
The forms in the current Friendly Society Supplementary Quarterly return and the Friendly Society Quarterly return have been combined and all incorporated under PR 48. This has resulted in some minor re-arrangement of the forms to improve comprehension and to delete duplicated items. It should also simplify the collection process.
Previously, returns required quarterly have been required to be submitted to APRA within 21 days of the end of each quarter. As this makes no allowance for public holidays, PR 48 have been amended to require the quarterly returns to be submitted within 15 business days of the end of the quarter.
The new accounting standards also introduce a distinction between life insurance contracts (which are reported in accordance with AASB1038 - Life Insurance Contracts) and investment contracts (which are mainly reported in accordance with AASB 139 – Financial Instruments: Recognition and Measurement and AASB 118 – Revenue). Recognition of this distinction is necessary for prudential reporting. For friendly societies, it is expected that this will be largely automatic as it is expected that few benefit funds will contain a mixture of life insurance and investment contracts. Where they do, an appropriate means of accommodating this requirement has been determined.
The statistical returns referred to in these Rules apply only to friendly societies. Although friendly societies are now subject to the same requirements as other life insurance companies with respect to the principles of general purpose accounting, APRA intends to maintain, for the time being, separate Rules for friendly societies for statistical reporting to APRA which will reflect the different management structure of friendly societies.
The principal changes to the forms are as follows:.
GENERAL
Item | Comment |
Assets in Benefit Funds | All assets are to be reported at fair value as determined in accordance with relevant accounting standards. Where the relevant accounting standard does not include a provision for the asset to be measured at fair value, the fair value of the asset is to be determined in a manner consistent with the fair value measurement of assets under other accounting standards which do include provision for fair value measurement. |
Tax Assets and Liabilities | To the extent that changes to the value of assets recorded in the financial statements (as above) would also result in a change to the value of tax assets or liabilities recorded in the financial statements (in accordance with relevant accounting standards) then such change should be reflected in the value of those tax assets or liabilities recorded in the regulatory financial statements. |
Mixed Business Within a Single Benefit Fund | Where a contract (such as an investment contract with death benefits offered as a rider) is required, by virtue of Prudential Rules No. 49, to be unbundled into a mixture of contract types, then in addition to the information provided in respect of the benefit fund as a whole, information in relation to revenue, expenses and liabilities is also to be provided in separate columns for each unbundled contract type as if that business were held in a separate benefit fund. |
Look through basis of reporting | In order to achieve consistency with the actuarial standards, statistics relating to solvency, capital adequacy and management capital are required to be reported on “look through” basis where a “look through” basis is adopted in the actuarial standards. Statistics reported in the Income Statement and Balance Sheet are not reported on a “look through” basis as they are intended to be consistent with general purpose reporting requirements. |
FORM B1 – BENEFIT FUND INCOME STATEMENTS
Item | Comment |
BP4: Revenue Component of Life Insurance Contract Contributions | With the distinction now being made between insurance contracts and investment contracts, this item now only includes premium revenue (excluding deposits) in respect of life insurance contracts.
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BP4A: Fees for Management Services rendered | This item includes all fee revenue, including initial fees, ongoing policy fees and asset management fees, on life investment contracts only.
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BP9: Claims Expense | With the distinction now being made between insurance contracts and investment contracts, this item now only includes claims expense (excluding withdrawals) in respect of life insurance contracts.
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BP11: Other Expenses | This item now includes amortisation and impairment of any Deferred Acquisition Costs (DAC) within a benefit fund.
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FORM B2 – BENEFIT FUND RECONCILIATION TO OPERATING PROFIT/(LOSS) AFTER TAX IN GENERAL PURPOSE FINANCIAL STATEMENTS
BP22A: Adjustment for assets not held at fair value | Where there are assets in the benefit funds which are not reported at Fair Value through the income statements in the General Purpose Financial Statements, revaluations of these assets to determine Life Act Operating Profit will differ from revaluations of these assets as reported in the General Purpose Financial Statements. The revaluation at Fair Value (and any associated changes in the values of tax assets and liabilities) less the revaluation included in the General Purpose Financial Statements should be reported at this item. | |
BP22B: Adjustment for Assets revalued direct to equity | Where there are assets in the benefit funds which are not reported at Fair Value through the income statement in the General Purpose Financial Statements, revaluation of these assets to determine Life Act Operating Profit will differ from revaluation of these assets as reported in the General Purpose Financial Statements.
The revaluation at Fair Value in the Regulatory Financial Statements less the revaluation included in the General Purpose Financial Statements should be reported at this item.
| |
BP22C: Adjustment for initial fee net revenue
| Where the Actuary determines, and can demonstrate to the satisfaction of APRA, that the calculation of the Policy Liability in accordance with paragraph 2.1 of Actuarial Standard 1.04 would reduce the retained profits of the benefit fund to such an extent that it would unreasonably hinder the distribution of surplus assets from that fund, then, for policies that were in force at 31 December 2005, the Policy Liability may, with APRA’s agreement, be determined in accordance with the requirements of Parts B and C of Actuarial Standard 1.04. A reconciliation adjustment is required in such cases. The accumulated adjustment (reported at item BP23B) will be equal to the difference between:
BB21, Policy Liabilities, as reported in Form B6, less BB13A, Policy Liabilities ceded under Reinsurance as reported in Form B5
and
{Net life insurance contract and life investment contract liabilities Plus Any liability held in respect of the Management Services Element of life investment contracts Less Any asset held in respect of the Management Services Element of life investment contracts} as reported in the general purpose financial statements.
The adjustment reported at this item will be equal to the change in the accumulated adjustment over the reporting period.
| |
FORM B2 – BENEFIT FUND RECONCILIATION TO NET ASSETS AT THE END OF THE PERIOD IN GENERAL PURPOSE FINANCIAL STATEMENTS
BP23A: Accumulated adjustment for Assets not held at Fair Value | Where there are assets in the benefit funds which are not reported at Fair Value through the income statement in the General Purpose Financial Statements, revaluations of these assets to determine Life Act Operating Profit will differ from revaluations of these assets as reported in the General Purpose Financial Statements. The accumulated revaluation at Fair Value (and any associated changes in the values of tax assets and liabilities) less accumulated revaluations included in the General Purpose Financial Statements should be reported at this item. |
BP23B: Accumulated adjustment for initial fee net revenue | (see comment under Form B2, Reconciliation to operating profit/(loss) after tax in general purpose financial statements in respect of the corresponding item)
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FORM B5 – BENEFIT FUND BALANCE SHEETS
This form now includes additional detailed breakdown of assets by whether they are held directly, via unit trusts, or otherwise.
Item | Comment |
BB2: Receivables | Receivables including Outstanding Premiums, but not including DAC arising in respect of policies, which is included as part of Policy Liabilities.
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BB10C and BB11: Investment Property | “Investment” added for clarification. Now excludes owner-occupied property. Also subdivided between “marketable” and “other” to enable direct calculation of liquidity ratios.
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BB12: Property, Plant and Equipment | “Property” added for clarification – this item includes owner-occupied property
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BB13A: Policy Liabilities Ceded under /reinsurance
| This item is required because BB21, Policy Liabilities, is reported gross of reinsurance. |
FORM B6 – BENEFIT FUND BALANCE SHEETS
BB16A: Seed Capital | Seed capital must be reported separately from Borrowings |
BB21: Policy Liabilities | Policy liabilities are to be reported as a liability of the Benefit Fund |
B22: Unallocated Benefit funds, B22A: Retained Profits | Net Assets are to be divided between Unallocated Benefits and Retained Profits |
FORM B10 - BENEFIT FUND SOLVENCY REQUIREMENT
Item | Comment |
Credit Risk Adjustment Other Resilience Adjustment | Details of credit risk and other adjustments to be reported separately. This reflects the change in the Actuarial Standards
|
BS23, Solvency Liability before Prescribed Change BS24, Solvency Liability after Prescribed Change BS25, Resilience Requirement | These items have been moved from the Supplementary Quarterly Return form, Solvency and Capital Adequacy Requirements |
FORM B10 – BENEFIT FUND SOLVENCY REQUIREMENT
FORM B12 - BENEFIT FUND CAPITAL ADEQUACY REQUIREMENT
These forms are derived from the Form “Solvency and Capital Adequacy Requirements”, which was included in the Quarterly Supplementary returns.
The indication of whether the fund has complied continuously with the Solvency and Capital Adequacy Standards has been removed as it is a specific requirement for the Appointed Actuary to comment on in the Financial Condition Report.
Item | Comment |
Credit Risk Adjustment Other Resilience Adjustment | Details of credit risk and other adjustments to be reported separately. This reflects the change in the Actuarial Standards
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PART C – MANAGEMENT FUND
GENERAL
Under General Purpose Financial Statements, benefit funds are consolidated. For reporting to APRA, Benefit funds are to be excluded in order to highlight the performance and capital strength of the management fund separate from the benefit funds
FORM C1 – MANAGEMENT FUND - INCOME STATEMENTS
Initial Fees | This item includes any amortisation of any deferred fee liabilities |
FORM C2 – MANAGEMENT FUND - INCOME STATEMENTS
Amortisation of Deferred Acquisition Cost | Any amortisation of a Deferred Acquisition Cost asset is included here, rather than in other expense items. |
FORM C3 Part ii – RECONCILIATION TO OPERATING PROFIT/(LOSS) AFTER TAX IN GENERAL PURPOSE FINANCIAL STATEMENTS
Adjustment for assets held at different values in the general purpose financial statements | Where there are assets in the management funds which are not reported at Fair Value through the income statement in the General Purpose Financial Statements, revaluations of these assets to determine Life Act Operating Profit will differ from revaluations of these assets as reported in the General Purpose Financial Statements. The revaluation at Fair Value (and any associated changes in the values of tax assets and liabilities) less the revaluation included in the General Purpose Financial Statements should be reported at this item. |
Adjustment for Assets revalued direct to equity | Where there are assets in the management funds which are not reported at Fair Value through the income statement in the General Purpose Financial Statements, revaluation of these assets to determine Life Act Operating Profit will differ from revaluation of these assets as reported in the General Purpose Financial Statements.
The revaluation at Fair Value in the Regulatory Financial Statements less the revaluation included in the General Purpose Financial Statements should be reported at this item.
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FORM C3 – RECONCILIATION TO RETAINED PROFITS AT THE END OF THE PERIOD IN GENERAL PURPOSE FINANCIAL STATEMENTS
Accumulated adjustment for assets held at different values in the general purpose financial statements | Where there are assets in the management funds which are not reported at Fair Value through the income statement in the General Purpose Financial Statements, revaluations of these assets to determine Life Act Operating Profit will differ from revaluations of these assets as reported in the General Purpose Financial Statements. The accumulated revaluation at Fair Value (and any associated changes in the values of tax assets and liabilities) less accumulated revaluations included in the General Purpose Financial Statements should be reported at this item. |
FORM C6 – MANAGEMENT FUND BALANCE SHEETS
The distinction between current assets and non-current assets, and between current liabilities and non-current liabilities, has been removed to simplify reporting. As a consequence, Forms C7 - Non-Current Assets, C8 - Current Liabilities, C11 - Note 4 – Other Non-Current Assets and C13 - Note 6 – Other Non-Current Liabilities, have been deleted. Non-current assets have been incorporated into Form C6 - Assets, and Form C10 - Note 3 – Other Assets. Current liabilities have been incorporated into Form C9 - Liabilities while details of other non-current liabilities are included in Form C12 - Note 5 – Other Liabilities.
Item | Comment |
Seed Capital to Benefit funds | Seed capital must be reported separately from other loans |
Investment Property | “Investment” added for clarification. Now excludes owner-occupied property.
|
Property, Plant and Equipment | “Property” added for clarification – this item includes owner-occupied property
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FORM C14 – MANAGEMENT FUND CAPITAL REQUIREMENT – INADMISSIBLE ASSETS
Intangibles | Included for consistency with revised actuarial standards |
Surplus/(Deficit) in Superannuation funds | Included for consistency with revised actuarial standards |
Assets not held at fair value | Included for consistency with revised actuarial standards |
FORM C14A – MANAGEMENT FUND CAPITAL REQUIREMENTS – OTHER ASSETS
This form has been added to enable details of Other Assets (CC31 to CC36) to be reported more easily.
FORMS C15 and C16 – MANAGEMENT FUND CAPITAL REQUIREMENTS – RESILIENCE RESERVE
These forms were previously part of the Supplementary Quarterly returns.
The indication of whether the fund has complied continuously with the Management Capital Standard has been removed as it is a specific requirement for the Appointed Actuary to comment on in the Financial Condition Report.
Value of Liability before and after prescribed change | Moved to Form C16 for easier comprehension |
Credit risk adjustment Other Resilience Adjustment | Credit risk adjustment is to be reported separately from other resilience adjustments |
PART D – HEALTH FUND RETURN
The separate return previously required in respect of health fund business which is operated out of the management fund is included as Form D1. The form has been revised to make it consistent with the returns currently submitted to the Private Health Insurance Administration Council (PHIAC).
In addition, PR 48 provides that jointly regulated friendly societies which are subject to the financial reporting requirements imposed by the Private Health Insurance Administration Council (PHIAC) must provide a copy of the returns which are submitted to PHIAC to APRA within four weeks of the date on which each return is required to be submitted to PHIAC.
PART E – SUBSIDIARIES, RELATED PARTIES AND CONTROLLED ENTITIES
Value in Regulatory Financial Statements is required to assist in understanding the extent to which value is being recognised in excess of the net assets of the entity.
DECLARATION, STATEMENT AND REPORT ATTACHED TO STATISTICAL COLLECTIONS
For Category 2 forms, a statement is required by the auditor, consistent with the requirement for the regulatory financial statements which are prepared at the same time.
Implementation
These new prudential rules will apply for reporting periods ending on or after 31 May 2006, i.e. corresponding to the first full financial reporting periods for which IFRS applies to a friendly society.
However, to maintain an orderly changeover to IFRS based data collection for APRA and for the industry as a whole APRA is extending the deadline for the first data collections under the revised forms by six weeks (i.e. for the collections based on data as at 31 May 2006 and 30 June 2006). The relevant deadlines for the first data collections for forms required annually will therefore be within 19 weeks of the end of the reporting period to which they relate and, for forms required quarterly, within 9 weeks of the end of the reporting period to which they relate.
Regulatory Impact Statement (RIS)
The Office of Regulation Review has advised that a RIS is not required. These revisions to the friendly society returns were covered in the RIS, APRA1 2005-47(1):7520, that was prepared and tabled with the legislative instrument, Record of Resolutions of the Life Insurance Actuarial Standards Board: Actuarial Standards, 5 December 2005. This deals with the changes arising from IFRS generally and, specifically, with the changes to the actuarial standards made by the Life Insurance Actuarial Standards Board in December 2005.