Life Insurance (Prudential Rules) Determination No. 5 of 2005: Prudential Rules No. 35 Applying To Life Companies Other Than 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.
Subsection 82(1) of the Act requires every life company to give APRA financial statements as at the end of each financial year of the company. Paragraphs 82(5)(a) and (b) of the Act provide that these financial statements must be in the form prescribed, and signed, in accordance with the Prudential Rules made under subsection 252(1) of the Act. Prudential Rules No. 35 (PR 35) deals with such financial statements for life companies other than friendly societies.
Although section 82 does not appear in some published editions of the Act, it will continue to form part of the Act until it is repealed by Items 48 and 75 of Schedule 2 to the Financial Sector (Collection of Data – Consequential and Transitional Provisions) Act 2001.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 insurers under section 13 of the Financial Sector (Collection of Data) Act 2001 and, under section 15 of that Act, the reporting standard begins to apply to life insurers. Accordingly, for the time being, section 82 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
Life Insurance (Prudential Rules) Determination No 5 of 2005 revokes the PR 35 (made on 31 March 1999 under subsection 252(1) of the Act for the purposes of subsection 82(5) of the Act, and varied subsequently) and makes new PR 35 for the same purposes.
The revoked PR 35 specified the form in which life companies other than friendly societies were to produce financial statements each year to give to APRA and how they should be signed and audited. By virtue of Life Insurance (Prudential Rules) Determination No. 3 of 2004 they also included transitional regulatory reporting arrangements pending the introduction of new International Financial Reporting Standards (IFRS).
The new PR 35:
- remove the transitional regulatory reporting arrangements in place pending the IFRS changes;
- incorporate the changes to the regulatory financial statements required as a result of the introduction of IFRS; and
- incorporate the changes to the Actuarial Standards made by the Life Insurance Actuarial Standards Board as a consequence of the introduction of IFRS;
Background to the Changes
Australian reporting entities are adopting Australian equivalents of International Financial Reporting Standards (IFRS) for reporting periods commencing on or after 1 January 2005. The accounting standards are available from the Australian Accounting Standards Board (AASB) website (www.aasb.com.au).
APRA’s objective in its approach to IFRS is to continue to align its prudential and reporting standards with Australian accounting standards and principles to the extent practicable, as the latter provide a widely accepted basis for the recognition and measurement of assets, liabilities, equity, revenue and expenses. However, while consistency with general purpose reporting is an appropriate aim, it is inevitably subordinate to the primary purpose of the regulatory reporting regime which is to support the administration of the Act and the prudential supervision of the industry by APRA. Therefore, to the extent that elements of the general purpose accounting treatment are not appropriate for the administration of the Act or prudential supervision of the industry, it is necessary that the form and/or content of regulatory financial statements differ from those of the general purpose accounts. These differences are set out in the Schedules to PR 35 and are commented on below.
Actuarial valuations and calculations included in regulatory financial statements prepared to meet APRA requirements must be determined in accordance with the actuarial standards. Conversely, a number of elements included in the solvency, capital adequacy and management capital standards, as well as the value of assets against which those capital requirements are compared, are derived from the regulatory financial statements. It is therefore necessary that these interactions between the regulatory financial statements and the actuarial standards continue to operate appropriately and effectively following the adoption of IFRS.
Summary of Key Changes
The proposed financial information reported to APRA under these Rules retains the primary presentation which distinctly reflects prudential requirements. This includes measures of profit and retained earnings as necessary to support the appropriate application of the Act requirements relating to the allocation and distribution of profit.
A separate reconciliation to key values in the general purpose accounts appears in the notes to the regulatory financial statements.
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 but is confined to the regulatory financial statements submitted to APRA, which reflect these changes, and is not intended to extend to general purpose financial statements.
As there will be adjustments to retained earnings on first time adoption of IFRS, new Prudential Rules No 50, Revised Starting Amount, have been developed to set out how these adjustments are to be made for regulatory reporting purposes and to provide a reconciliation of retained profits immediately before first time adoption of IFRS with retained profits following first time adoption of IFRS.
The revised Schedules retain the requirement for companies to supply consolidated information. It is intended to review this requirement as part of the general review of life insurance statistics being undertaken by APRA.
Schedule 1, Form C, Statement of Cash Flows, is no longer required to be completed.
The financial statements referred to in these Rules apply only to life insurance companies which are not 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 financial reporting to APRA which will reflect the different management structure of friendly societies.
Explanation of the Changes
Specific changes to Schedules 1 and 2 of PR 35 are as follows:
GENERAL
Item | Comment |
Assets in Statutory 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 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 recorded in the regulatory financial statements. |
SCHEDULE 1
FORM A – PROFIT AND LOSS ACCOUNT
Item | Comment |
Fees for Management Services rendered | This item is of sufficient significance to warrant a separate line. It includes initial fees, ongoing policy fees and asset management fees on investment contracts
See also Schedule 2, Form D.
|
Operating Expenses | This item now includes amortisation and impairment of Deferred Acquisition Costs (DAC)
See also Schedule 2, Form G.
|
Operating Profit | Extraordinary items are no longer separately identified. |
FORM B – BALANCE SHEET
Item | Comment |
Other Receivables | Receivables other than Outstanding Premiums, but not including DAC arising in respect of policies, which is included as part of Policy Liabilities.
|
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
|
Excess of net market value of interests in subsidiaries over recognised amounts
| This item deleted as it is no longer recognised |
SCHEDULE 2
FORM A – NOTE [...] SUMMARY OF SHAREHOLDERS’ INTERESTS
Item | Comment |
Operating Profit/(Loss) after Income Tax | This figure should be the same as the corresponding figure in Schedule 1 Form A |
Shareholders’ Retained Profits at the Beginning of the Year | This figure should be the same as the corresponding figure in Schedule 2 Form B at the end of the previous year. |
Accumulated adjustment for Assets not held at Fair Value | Where there are assets in the statutory funds which are not reported at Fair Value through profit and loss 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. |
Accumulated 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 AS1.04 would reduce the retained profits of the statutory 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 AS1.04. A reconciliation adjustment is required in such cases. The accumulated adjustment reported at this item will be equal to the difference between
Net Policy Liabilities as reported in Schedule 2, Form H
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.
|
Life Insurance Act Shareholders’ Equity | This figure should be the same as the corresponding figure in Schedule 1 Form B. |
FORM B - NOTE [...] LIFE INSURANCE ACT 1995 OPERATING PROFIT and RETAINED PROFIT OF STATUTORY FUNDS
PART 3 – DETAILS OF OPERATING PROFITS
Item | Comment |
Adjustment for Assets not held at Fair Value | (see comment under Schedule 2 Form A, in respect of the corresponding item) 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 statutory funds which are not reported at Fair Value through profit and loss 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 less the revaluation included in the General Purpose Financial Statements should be reported at this item.
|
Adjustment for initial fee net revenue | (see comment under Schedule 2 Form A, in respect of the corresponding item) The adjustment reported at this item will be equal to the change in the adjustment made to the Policy Liability value over the reporting period.
|
Sources of Life Insurance Act Operating Profit | This item has been divided into Insurance Contracts, Investment-linked contracts and Other Investment Contracts, to reflect the distinctions reported in the General Purpose Financial Statements.
|
FORM B - NOTE [...] LIFE INSURANCE ACT 1995 OPERATING PROFIT and RETAINED PROFIT OF STATUTORY FUNDS
PART 4 – DETAILS OF RETAINED PROFITS
This part of the form is largely unchanged, being presented entirely from a Life Act perspective.
FORM C - NOTE [...] SOLVENCY REQUIREMENTS OF THE STATUTORY FUNDS
Item | Comment |
Life Act Shareholders’ Equity | This figure should be the same as the corresponding figure in Schedule 2 Form A
|
FORMS D TO I
These items have been divided into Insurance Contracts, Investment-linked contracts and Other Investment Contracts, to reflect the distinctions reported in the General Purpose Financial Statements. Insurance contracts include all contracts with participating features.
FORM D – INSURANCE PREMIUM REVENUE
This form has now been extended to incorporate details of Fees for Management Services.
“Premiums” received or receivable uses the traditional Life Act understanding of “premiums” and hence, as is evident from the illustration, includes elements under life investment contracts that are now reported as “fees” in financial statements
FORM G – OPERATING EXPENSES
This form has now been extended to incorporate amortisation of DAC as part of the operating expenses.
FORM H – POLICY LIABILITIES
This form now includes a separate analysis for life investment contracts which are no longer subject to Margin on Services reporting.
FORM I, PARTS 1 AND 2
As it is expected that companies will not be able to readily separate investment earnings on assets in excess of policy liabilities into insurance contracts and other investment contracts, investment earnings on assets in excess of policy liabilities for Other investment contracts are to be included with investment earnings on assets in excess of policy liabilities for Insurance contracts.
Allowance is also made for a separate analysis for life investment contracts which are no longer subject to Margin on Services reporting.
Financial Instrument Profit represents the net amount of all cash flows deemed to be related to the Financial Instrument Elements of the contracts including the change in the value of the Life Investment Contract Liability and investment earnings on assets supporting that liability.
Management Services Profit represents the net amount of all cash flows deemed to be related to the Management Services Elements of the contracts including the change in the value of any asset or liabilities associated with that element and investment earnings on assets supporting that liability.
Investment earnings on assets in excess of those supporting the Policy Liability are reported as Investment Earnings on Retained Profits.
FORM J – SUBORDINATED DEBT
As companies do not normally allocate subordinated debt below statutory fund level, Form J retains the division into investment linked and non-investment linked statutory funds.
FORM K – STATUTORY FUNDS AND SEGMENT INFORMATION
The changes made to Form K are consistent with the changes made to the Forms in Schedule 1 and Forms A to I in Schedule 2.
DECLARATION, STATEMENT AND REPORT ATTACHED TO REGULATORY FINANCIAL STATEMENTS
The declarations, statements and reports attached to regulatory financial statements are distinct from those attached to the general purpose financial statements, and need to be made having regard to any difference between the two statements.
However, they should not be regarded in any way as contradictory, since they are made in different contexts. In particular, the directors’ statement that the profit and loss statement truly represents the profit and loss, and that the balance sheet truly represents the financial position, are made in the context of the of the Act and these Rules – i.e. that they truly represent the amounts to be reported in accordance with the Act and the Rules. This should not therefore contradict any statement made in relation to a different profit or loss or financial position as reported in the general purpose financial statements.
Implementation
These new prudential rules will apply for reporting periods ending on or after 31 December 2005, i.e. corresponding to the first full financial reporting periods for which IFRS applies.
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. The relevant deadlines for the first data collections will therefore be within 19 weeks of the end of the reporting period to which they relate.