Life Insurance (prudential standard) determination No. 1 of 2011
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority (APRA)
Life Insurance Act 1995, sections 230A, 252
Under subsection 230A(1) of the Life Insurance Act 1995 (Life Act), APRA has the power to determine (in writing) standards in relation to prudential matters to be complied with by all life companies or a specified class of life companies.
Under subsection 230A(5) of the Life Act, APRA has the power, in writing, to vary or revoke a standard.
Under subsection 252(4) of the Life Act, APRA may, on or after the cut‑off day, vary or revoke a Prudential Rule. The cut-off day is provided for under subsection 252(2) of the Life Act
Life Insurance (prudential standard) determination No. 11 of 2010 made on 13 December 2010 (the old instrument):
- revoked Prudential Standard LPS 900 Consolidation of Prudential Rules Nos 15, 18, 22, 27 and 28 made on 19 December 2007 (LPS 900);
- revoked Prudential Rules No. 50 Revised Starting Amounts made on 16 December 2005; and
- determined Prudential Standard LPS 600 Statutory Funds in the form set out in the Schedule to determination No. 11 of 2010.
The old instrument was expressed to take effect on 1 July 2011.
APRA has decided to revoke the old instrument and to make a new determination which includes an additional provision.
Life Insurance (prudential standard) determination No. 1 of 2011 (the new instrument) makes Prudential Standard LPS 600 Statutory Funds (LPS 600), to take effect from 1 July 2011. It applies to all life companies that are not friendly societies.
LPS 600 will now include a provision in relation to subsection 38(4) of the Life Act.
The new instrument also amends LPS 900. The amendment to LPS 900 is also for the purposes of subsection 38(4) of the Life Act, and the amendment will continue until 1 July 2011 when LPS 900 will cease to have effect.
- Background
Subsection 38(4) of the Life Act prohibits a life company from borrowing money for the purposes of the business of a statutory fund, if the result would be that the total amount of principal outstanding under unsecured borrowings would exceed an amount ascertained in accordance with the prudential standards.
Regulation 4.01 of the Life Insurance Regulations 1995 had previously prescribed an amount for the purposes of subsection 38(4) of the Life Act. However, pursuant to the Financial Sector Legislation Amendment (Prudential Refinements and Other Measures) Act 2010 the prior reference in subsection 38(4) to the allowed amount of unsecured borrowing being prescribed in regulations made under the Life Act was amended to be a reference to the allowed amount of unsecured borrowing being ascertained in accordance with the prudential standards.
APRA does not intend to change the substance of what had previously been prescribed under Regulation 4.01 of the Life Insurance Regulations 1995; accordingly, LPS 900 is being amended, and LPS 600 is being determined, to include the provision previously contained in Regulation 4.01.
LPS 600 as attached to the new instrument is in identical terms to LPS 600 as attached to the old instrument except that LPS 600 now also makes provision for the purposes of subsection 38(4) of the Life Act.
Accordingly, except for the new provisions made for the purposes of subsection 38(4) of the Life Act, the new instrument makes corresponding provisions to those made under the old instrument.
LPS 600 will address the limits on unsecured borrowings on an ongoing basis from 1 July 2011. LPS 600 will include the same requirement in this regard as in LPS 900, as LPS 900 ceases to have effect on 1 July 2011. Together, these instruments will ensure the limit on unsecured borrowings is imposed on a continuous basis.
The revocation of the old instrument takes effect on registration of the new instrument on the Federal Register of Legislative Instruments.
2. Purpose and operation of new instrument
The purpose of the new instrument is to repeal the old instrument and to amend LPS 900 and to determine LPS 600 so as to make provision for the purposes of subsection 38(4) of the Life Act. In all other respects, the new instrument makes corresponding provisions to those made under the old instrument.
LPS 600 changes requirements imposed on industry in form only, not substance. The change moves requirements specified under Regulation 4.01 to a prudential standard. There is no change in the policy being applied to industry.
3. Regulation Impact Statement
A Regulation Impact Statement for the changes described in this explanatory statement was not required.