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 in response to the recommendations made by the Taskforce on Reducing Regulatory Burdens on Business as outlined in the Rethinking Regulation Report. This legislation was introduced to ensure that the Australian Prudential Regulation Authority (APRA) has the flexibility to tailor prudential requirements to suit the varying circumstances of the life insurance industry. The Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007, enacted by the Australian Parliament, repealed certain provisions of the Life Insurance Act 1995, transferring the responsibility of setting actuarial standards from the Life Insurance Actuarial Standards Board (LIASB) to APRA. The policy objective is to maintain the integrity and stability of the life insurance sector by ensuring that life insurance companies adhere to high prudential standards, thereby safeguarding policyholder interests and financial stability.
Scope and Application
The Life Insurance (Prudential Standard) Determination Nos. 5 to 11 of 2007 applies to all life companies, including friendly societies, operating within Australia. These determinations, made under the Life Insurance Act 1995, mandate that these entities comply with specific prudential standards set by the Australian Prudential Regulation Authority (APRA). The standards encompass areas such as the valuation of policy liabilities, solvency, capital adequacy, and investment performance guarantees. These regulations ensure that life companies maintain adequate financial stability and protect policyholders' interests. APRA has assumed the role previously held by the Life Insurance Actuarial Standards Board in establishing these actuarial standards. The determinations took effect from 1 January 2008, following amendments made by the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007, which streamlined the regulatory framework for life insurance companies. The standards reissued by these determinations aim to provide a transparent and efficient regulatory environment, ensuring that life companies adhere to the new requirements in a manner consistent with previous actuarial standards.
Key Provisions
The Life Insurance (Prudential Standard) Determination Nos.5 to 11 of 2007, issued by the Australian Prudential Regulation Authority (APRA), outlines a series of standards that all life insurance companies and friendly societies must comply with, effective from 1 January 2008 (sections 1-2). These standards include Prudential Standard LPS 1.04 Valuation of Policy Liabilities (section 2.1), Prudential Standard LPS 2.04 Solvency Standard (section 2.2), Prudential Standard LPS 3.04 Capital Adequacy Standard (section 2.3), Prudential Standard LPS 4.02 Minimum Surrender Values and Paid-up Values (section 2.4), Prudential Standard LPS 5.02 Cost of Investment Performance Guarantees (section 2.5), Prudential Standard LPS 6.03 Management Capital Standard (section 2.6), and Prudential Standard LPS 7.02 General Standard (section 2.7). Each of these standards corresponds to previously established actuarial standards issued by the Life Insurance Actuarial Standards Board (LIASB), which have now been reissued by APRA under the revised Life Insurance Act 1995.
Life insurance companies and friendly societies are obligated to comply with these prudential standards, ensuring they meet the required standards for valuation of policy liabilities, solvency, capital adequacy, minimum surrender values, cost of investment performance guarantees, management capital, and general compliance (sections 1-2). These standards are designed to maintain the financial stability and reliability of life insurance companies, ensuring they can meet their policyholder obligations and maintain public confidence in the sector.
Failure to comply with these prudential standards can result in regulatory action by APRA, which may include enforcement actions, financial penalties, or other sanctions (section 3). The exact consequences of non-compliance can vary based on the severity and nature of the breach, but the overarching intent is to ensure that life insurance companies operate within the prescribed regulatory framework to safeguard policyholder interests. The maximum penalties for breaches of these standards are not explicitly stated in the determinations, but they would generally align with the penalties prescribed under the Life Insurance Act 1995 and any relevant regulatory guidelines issued by APRA.