Life insurance (prudential standard) determination Nos.5 to 11 of 2007
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority
Life Insurance Act 1995, paragraph 230A(1)(a)
Under paragraph 230A(1)(a) 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, including friendly societies.
Life insurance (prudential standard) determination Nos.5 to 11 of 2007 make the following prudential standards to take effect from 1 January 2008:
- Prudential Standard LPS 1.04 Valuation of Policy Liabilities;
- Prudential Standard LPS 2.04 Solvency Standard;
- Prudential Standard LPS 3.04 Capital Adequacy Standard;
- Prudential Standard LPS 4.02 Minimum Surrender Values and Paid-up Values;
- Prudential Standard LPS 5.02 Cost of Investment Performance Guarantees;
- Prudential Standard LPS 6.03 Management Capital Standard; and
- Prudential Standard LPS 7.02 General Standard.
1. Background
As part of the Government’s response to Rethinking Regulation: the Report of the Taskforce on Reducing Regulatory Burdens on Business (Rethinking Regulation), the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007 (SRR Act) removes a number of provisions from the Life Act. In particular, the amendments reflect Recommendation 5.4 of Rethinking Regulation, which states that the Government should ensure that APRA has sufficient flexibility to tailor requirements to accommodate differing circumstances.
These prudential standards reproduce the actuarial standards which were previously issued by the Life Insurance Actuarial Standards Board (LIASB). Effective from 1 January 2008, the SRR Act repeals Part 5 and Division 4 of Part 6 of the Life Act. These provisions of the Life Act established and regulated the actuarial standards and the LIASB. APRA will assume the role of the LIASB in relation to the making of actuarial standards.
APRA considers that, in the short term, the most efficient and transparent way of accomplishing this is to:
- reissue the current standards by attaching them, unchanged, to the new determination; and
- specify separately the changes that are necessary to allow the standards to operate as intended under the revised Life Act.
This approach allows life companies and their actuaries to have confidence that the only changes are those that are explicitly set out in the determinations.
APRA intends that, as far as possible, life companies should comply with the new prudential standards on actuarial matters in the same way that they complied with the LIASB actuarial standards.
2. Outline of the Determinations
Life insurance (prudential standard) determination No.5 of 2007: Prudential Standard LPS 1.04 Valuation of Policy Liabilities reissues the LIASB’s Actuarial Standard 1.04 Valuation of Policy Liabilities.
Life insurance (prudential standard) determination No.6 of 2007: Prudential Standard LPS 2.04 Solvency Standard reissues the LIASB’s Actuarial Standard 2.04 Solvency Standard.
Life insurance (prudential standard) determination No.7 of 2007: Prudential Standard LPS 3.04 Capital Adequacy Standard reissues the LIASB’s Actuarial Standard 3.04 Capital Adequacy Standard.
Life insurance (prudential standard) determination No.8 of 2007: Prudential Standard LPS 4.02 Minimum Surrender Values and Paid-up Values reissues the LIASB’s Actuarial Standard 4.02 Minimum Surrender Values and
Paid-up Values.
Life insurance (prudential standard) determination No.9 of 2007: Prudential Standard LPS 5.02 Cost of Investment Performance Guarantees reissues the LIASB’s Actuarial Standard 5.02 Cost of Investment Performance Guarantees.
Life insurance (prudential standard) determination No.10 of 2007: Prudential Standard LPS 6.03 Management Capital Standard reissues the LIASB’s Actuarial Standard 6.03 Management Capital Standard.
Life insurance (prudential standard) determination No.11 of 2007: Prudential Standard LPS 7.02 General Standard reissues the LIASB’s Actuarial Standard 7.02 General Standard.
3. Consultation
APRA consulted with industry participants from 2 August to 31 August 2007 by means of the consultation paper: Transition to the Revised Life Insurance Act. APRA received four submissions from the consultation process, which were generally in support of the amendments.
Overview
The Life Insurance (Prudential Standard) Determination Nos.5 to 11 of 2007 were enacted to align with the amendments introduced by the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007. These amendments, made in response to the Taskforce on Reducing Regulatory Burdens on Business, sought to streamline the regulatory environment and provide the Australian Prudential Regulation Authority (APRA) with the necessary flexibility to tailor regulatory requirements to suit various circumstances. As part of this reform, the Life Insurance Act 1995 was updated to transfer the responsibility of establishing actuarial standards from the Life Insurance Actuarial Standards Board (LIASB) to APRA. The determinations reissued the actuarial standards previously set by the LIASB, effective from 1 January 2008, ensuring a smooth transition and maintaining continuity for the industry. This legislative change was aimed at enhancing regulatory efficiency while upholding the integrity of the actuarial standards critical to the life insurance sector.
Scope and Application
The Life Insurance (Prudential Standard) Determination Nos. 5 to 11 of 2007 apply to all life insurance companies and friendly societies in Australia, as mandated by the Life Insurance Act 1995. These determinations were made under the authority of the Australian Prudential Regulation Authority (APRA) and came into effect on 1 January 2008. The legislation effectively replaces the previously existing actuarial standards issued by the Life Insurance Actuarial Standards Board (LIASB) by reissuing them unchanged as prudential standards. This legislative move was part of the government's effort to streamline regulation as recommended in the Rethinking Regulation report, providing APRA with the flexibility to tailor requirements to accommodate differing circumstances. There are no specific exclusions or exemptions mentioned in the determinations, but the application is intended to be consistent with how the previous actuarial standards were followed. The standards cover various aspects such as valuation of policy liabilities, solvency, capital adequacy, minimum surrender values, cost of investment performance guarantees, management capital, and general standards.
Key Provisions
The Life Insurance (Prudential Standard) Determination Nos. 5 to 11 of 2007 (the Determinations) establish several prudential standards that all life insurance companies and friendly societies must adhere to under the Life Insurance Act 1995 (Life Act). These standards, effective from 1 January 2008, include Prudential Standard LPS 1.04 Valuation of Policy Liabilities, Prudential Standard LPS 2.04 Solvency Standard, Prudential Standard LPS 3.04 Capital Adequacy Standard, Prudential Standard LPS 4.02 Minimum Surrender Values and Paid-up Values, Prudential Standard LPS 5.02 Cost of Investment Performance Guarantees, Prudential Standard LPS 6.03 Management Capital Standard, and Prudential Standard LPS 7.02 General Standard. These standards replace the previous actuarial standards that were issued by the Life Insurance Actuarial Standards Board (LIASB).
The primary obligations of the life companies under these determinations are to comply with the prudential standards, which were formerly actuarial standards. These standards cover a range of requirements including the valuation of policy liabilities, solvency standards, capital adequacy, minimum surrender values, cost of investment performance guarantees, management capital, and general standards. Life companies must ensure they adhere to these standards in their business operations and reporting, effectively continuing to operate under the actuarial frameworks previously set by the LIASB, now managed by the Australian Prudential Regulation Authority (APRA).
Failure to comply with these prudential standards may lead to regulatory consequences. While the determinations themselves do not explicitly detail specific offences, penalties, or consequences for non-compliance, it is understood that breaches could lead to regulatory scrutiny, potential enforcement actions, and penalties under the Life Act. The Life Act allows for penalties including fines and other sanctions for non-compliance with prudential standards. The exact penalties may vary depending on the nature and severity of the breach, and are further governed by other provisions within the Life Act and associated regulations. It is essential for life companies to maintain strict adherence to these standards to avoid any regulatory repercussions.