Life Insurance (prudential standard) determination No. 11 of 2010 - Prudential Standard LPS 600 - Statutory Funds

Administered by Department of the Treasury

Legislation au F2010L03285 Not in force Legislative Instrument

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Life Insurance (prudential standards) determination

No. 11 of 2010

 

EXPLANATORY STATEMENT

 

Prepared by the Australian Prudential Regulation Authority (APRA)

 

Life Insurance Act 1995, section 230A

 

 

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.

 

Life insurance (prudential standards) determination No. 11 of 2010 makes Prudential Standard LPS 600 Statutory Funds (LPS 600) to take effect from 1 July 2011. It applies to all life companies, other than friendly societies.

 

Background

 

As part of the Government’s response to Rethinking Regulation: the Report of the Taskforce on Reducing Regulatory Burdens on Business, the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007 (SRR Act) made significant changes to the Life Act. Of relevance to this explanatory statement is that the SRR Act requires that prudential rules be phased out by 1 July 2011 in favour of prudential standards. 

 

By way of background, the explanatory memorandum to the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Bill 2007 (SRR Bill) explains that life company prudential requirements are currently provided for under prudential rules, actuarial standards, prudential standards, the Life Insurance Regulations 1995 (Life Regulations) and the Life Act. Prudential rules were the main tool used by the Regulator to prescribe requirements of life insurers under the Life Act, prior to APRA obtaining a prudential standards-making power. These amendments will simplify the Life Act by removing prudential rules from the Act and replace them with principles based prudential standards where necessary.

 

Accordingly, APRA is replacing the remaining prudential rules with prudential standards LPS 600 and Prudential Standard LPS 700 Friendly Society Benefit Funds (to be made by Life Insurance (prudential standards) determination No. 12 of 2010).   In addition, Prudential Standard LPS 900 Consolidation of Prudential Rules Nos. 15, 18, 22, 27 and 28 (LPS 900) is revoked and its content included in LPS 600.

 

LPS 600 applies to all life companies, other than friendly societies, and sets out requirements relating to statutory funds. It incorporates the relevant parts of Prudential Rule 36 Restructure of Statutory Funds (PR 36), Prudential Rule 50 Revised Starting Amounts (PR 50) and LPS 900.

 

Details of the mapping of the prudential rules to the new LPS 600, including the minor changes that have been made as part of the conversion process, are set out in the table below.

 

 

Prudential Standard LPS 600 Statutory Funds

 

Prudential Rules

Changes made – machinery in nature

PR 36

Restructure of Statutory Funds

 

  • Prudential Rule 36 has been split into two parts.  LPS 600 covers matters relevant to life companies and LPS 700 covers matters relevant to friendly societies.
  • The reference to Prudential Rule 47 has been removed as this prudential rule has been revoked.

PR 50

Revised Starting Amounts

  • Prudential Rule 50 has been merged with the starting amount content previously contained in LPS 900 and included in LPS 600.

LPS 900

Consolidation of Prudential Rules Nos. 15, 18, 22, 27 and 28

  • LPS 900 was a consolidation of Prudential Rules Nos. 15, 18, 22, 27 and 28.  Its entire contents have been incorporated in LPS 600 with minimal change.

 

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In undertaking the conversion, content that was previously included in the body of the prudential rule that related to making applications to APRA has been converted into forms. These forms are included at the end of each prudential standard.

 

The policy intent of LPS 600 is exactly the same as that contained in the prudential rules. For the most part, LPS 600 uses the same wording as the prudential rules.  This will minimise the impact of these changes on life companies.

 

APRA has determined that Life Insurance (prudential standards) determination No. 11 of 2010 be effective from 1 July 2011.

 

Purpose and operation of the Instrument

 

The purpose of this instrument is to revoke the existing PR 50. Life Insurance (prudential standards) determination No. 12 of 2010 revokes the existing PR 36. These revocations are consistent with the SRR Act which requires that prudential rules be phased out by 1 July 2011 in favour of prudential standards. The purpose of this instrument is also to revoke the existing LPS 900 applying to life companies and replace it with a corresponding standard which incorporates appropriate adjustments.  APRA considered that it would be clearer and more effective to consolidate the necessary changes within a new standard.   

 

Consultation

 

LPS 600 changes requirements imposed on industry only in form, not in substance.  The change merely moves requirements specified under prudential rules and a prudential standard to a new prudential standard.  Therefore there is no change in the policy being applied to industry. 

 

Regulation Impact Statement

 

A Regulation Impact Statement for the changes described in this explanatory statement was not required. 

Overview

The Life Insurance (prudential standards) determination No. 11 of 2010 was enacted by the Australian Prudential Regulation Authority (APRA) to address the need for updated and consolidated prudential standards in the life insurance sector, as mandated by the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007. This determination introduces Prudential Standard LPS 600 Statutory Funds, effective from 1 July 2011, which applies to all life companies except friendly societies. It consolidates and replaces existing prudential rules and standards with the aim of simplifying regulatory requirements and maintaining policy intent while enhancing clarity and effectiveness in regulatory standards. The policy objective behind this determination is to streamline and modernise the regulatory framework governing life insurance companies, ensuring they meet updated prudential standards without altering the underlying regulatory intent.

Scope and Application

The Life Insurance (prudential standards) determination No. 11 of 2010, made under the Life Insurance Act 1995, applies to all life insurance companies operating in Australia, excluding friendly societies, and aims to establish prudential standards in relation to statutory funds. This determination, which takes effect from 1 July 2011, consolidates and replaces existing prudential rules and standards to simplify and streamline the regulatory framework as mandated by the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007. The Prudential Standard LPS 600, established by this determination, incorporates the content of previously applicable prudential rules such as Prudential Rule 36 on the restructure of statutory funds, Prudential Rule 50 on revised starting amounts, and elements of LPS 900, with some modifications primarily of a procedural nature. The intent and substance of the requirements remain unchanged, ensuring a smooth transition for industry compliance.

Key Provisions

The main operative sections of Life Insurance (prudential standards) determination No. 11 of 2010 are those that establish and revoke existing standards and rules, and introduce new prudential standards. Specifically, section 1 revokes Prudential Rule 50 Revised Starting Amounts (PR 50) and Prudential Standard LPS 900 Consolidation of Prudential Rules Nos. 15, 18, 22, 27 and 28 (LPS 900) for life companies, while section 2 introduces Prudential Standard LPS 600 Statutory Funds (LPS 600) to replace these standards and rules. The determination is effective from 1 July 2011, as stated in section 3. The obligations imposed by the Act on the parties it governs primarily involve compliance with the new prudential standards. Life companies, other than friendly societies, must adhere to the requirements set out in LPS 600. This includes meeting the standards for statutory funds as outlined in the new prudential standard. Life companies are also required to submit any necessary applications to the Australian Prudential Regulation Authority (APRA) using the forms provided at the end of LPS 600, replacing the previous applications required under the revoked prudential rules. The determination imposes penalties and consequences for breaches of the new prudential standards. While the explanatory statement does not specify the exact penalties, it is implied that non-compliance with the standards could lead to enforcement actions by APRA. This might include fines, corrective measures, or other regulatory actions to ensure compliance. The severity of these penalties would be determined based on the nature and extent of the breach, in accordance with the provisions of the Life Insurance Act 1995.

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