Life Insurance (prudential standard) determination No. 1 of 2011 - Prudential Standard LPS 600 - Statutory Funds

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Legislation au F2011L00787 Not in force Legislative Instrument

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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):

  1. revoked Prudential Standard LPS 900 Consolidation of Prudential Rules Nos 15, 18, 22, 27 and 28 made on 19 December 2007 (LPS 900);
  2. revoked Prudential Rules No. 50 Revised Starting Amounts made on 16 December 2005; and
  3. 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.

 

 

 

 

  1. 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. 

Overview

The Life Insurance (prudential standard) determination No. 1 of 2011 was enacted to address the need for a continuous limit on the unsecured borrowings of life companies, particularly those managing statutory funds. This was necessitated by the amendment to subsection 38(4) of the Life Insurance Act 1995, which changed the reference from prescribed amounts in regulations to amounts ascertained in accordance with prudential standards. The Australian Prudential Regulation Authority (APRA), empowered under sections 230A and 252 of the Life Insurance Act, revoked the old instrument and issued a new one to ensure these standards are met. The new instrument aims to maintain the same policy applied to industry but shifts the specified requirements from regulation to a prudential standard, thus ensuring the limit on unsecured borrowings is continuously imposed. The new determination includes an amendment to Prudential Standard LPS 900 and determines Prudential Standard LPS 600, effective from 1 July 2011, for all life companies except friendly societies.

Scope and Application

The Life Insurance (prudential standard) determination No. 1 of 2011, issued by the Australian Prudential Regulation Authority (APRA) under the Life Insurance Act 1995, applies to all life companies in Australia, excluding friendly societies. This determination revokes the previous Life Insurance (prudential standard) determination No. 11 of 2010 and introduces new provisions to ensure compliance with prudential standards, particularly regarding the limits on unsecured borrowings for statutory funds as outlined in subsection 38(4) of the Life Act. The new determination, effective from 1 July 2011, amends Prudential Standard LPS 900 and determines Prudential Standard LPS 600 to incorporate the borrowing limits previously prescribed under Regulation 4.01 of the Life Insurance Regulations 1995. The changes are designed to maintain continuity in the regulatory framework, ensuring that the borrowing limits on statutory funds are consistently enforced across the life insurance industry. APRA has not altered the substance of the previous regulations but has restructured the requirements to align with the updated legislative framework.

Key Provisions

The Life Insurance (prudential standard) determination No. 1 of 2011 (the new instrument) primarily serves to replace the old Life Insurance (prudential standard) determination No. 11 of 2010, which was set to take effect on 1 July 2011 (subsection 230A(1) of the Life Insurance Act 1995). The new instrument also amends the Prudential Standard LPS 900 and determines the Prudential Standard LPS 600 Statutory Funds (LPS 600), both effective from 1 July 2011. LPS 600 applies to all life companies excluding friendly societies, and it incorporates provisions relating to subsection 38(4) of the Life Act, which prohibits a life company from borrowing money for statutory fund business if it would result in exceeding a specified limit on unsecured borrowings. The new instrument aims to ensure continuity in the regulation of these borrowing limits by aligning LPS 600 with the requirements previously outlined in Regulation 4.01 of the Life Insurance Regulations 1995, which has been amended by the Financial Sector Legislation Amendment (Prudential Refinements and Other Measures) Act 2010. The new instrument imposes specific obligations on life companies, primarily those concerning the borrowing limits for statutory fund business. These companies must now comply with the provisions in LPS 600, which include restrictions on the total amount of principal outstanding under unsecured borrowings as determined by the prudential standards (subsection 38(4) of the Life Act). This requirement is a continuation of the policy previously set out in Regulation 4.01, ensuring that there is no substantive change in the regulation but merely a shift in the form of its application. Furthermore, the amendment to LPS 900 ensures that the transition is smooth and that the borrowing limits continue to be enforced without interruption when LPS 900 ceases to have effect on 1 July 2011. The Life Insurance (prudential standard) determination No. 1 of 2011 does not introduce new offences or penalties but rather maintains the existing framework for ensuring compliance with borrowing limits. Any breach of the borrowing limits specified under subsection 38(4) of the Life Act could lead to regulatory scrutiny or enforcement actions by the Australian Prudential Regulation Authority (APRA). Although the specific penalties for non-compliance are not detailed in the new instrument, they would generally involve financial penalties, corrective measures, or other regulatory actions as determined by APRA under the Life Insurance Act 1995. The continuous enforcement of these prudential standards is critical to maintaining the financial stability and integrity of life insurance operations within Australia.

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