Life Insurance (prudential standard) determination No. 3 of 2026
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 (the Act), APRA has power to determine standards in relation to prudential matters (prudential standards) to be complied with by life companies (including friendly societies) and registered non-operating holding companies (registered life NOHCs) and subsidiaries of life companies and registered life NOHCs. Under subsection 230A(5) of the Act, APRA may, in writing, vary or revoke a prudential standard.
On 29 April 2026, APRA made Life Insurance (prudential standard) determination No. 3 of 2026 (the instrument), which revokes Prudential Standard LPS 360 Termination Values, Minimum Surrender Values and Paid-up Values made under Life Insurance (prudential standard) determination No. 3 of 2023 (the previous LPS 360) and determines a new Prudential Standard LPS 360 Termination Values, Minimum Surrender Values and Paid-up Values (the new LPS 360).
The instrument commences on 1 July 2026.
1. Background
APRA’s mandate is to ensure the safety and soundness of prudentially regulated financial institutions so that they can meet their financial promises to depositors, policyholders, and fund members within a stable, efficient, and competitive financial system.
APRA carries out this mandate through a multi-layered prudential framework that encompasses licensing and supervision of institutions. In the case of the life insurance industry, APRA is empowered under the Act to issue legally binding prudential standards that set out specific prudential requirements with which relevant APRA-regulated institutions must comply. These standards are supported by prudential practice guides which clarify APRA’s expectations with regard to prudential requirements.
APRA regularly reviews its prudential framework and amends its prudential requirements as a result of a number of factors, including:
- international developments;
- changes in financial market conditions;
- changes in risk management practices, in response to identified weaknesses in the prudential framework; and
- to reduce potential negative impacts of emerging industry issues.
When amending its prudential requirements APRA has regard to, amongst other things, the impact on industry in terms of both industry burden and matters of proportionality.
The previous LPS 360 set out the requirements for determining termination values, minimum surrender values and minimum paid-up values. The ‘termination value’ of a policy is the company’s liability to the policy owner in the event of a wind-up. It is used in determining the adjusted policy liabilities and capital base. The ‘surrender value’ is the amount that must be paid to the policy owner should they request to surrender their policy. The ‘paid-up value’ is the reduced amount of coverage that the policy owner may be entitled to, should they request to no longer pay premiums.
In June 2025, APRA commenced a review of its capital framework for longevity products (including annuities), to support better retirement outcomes for Australians by fostering a more vibrant and competitive annuity market.
The review was consistent with the Government’s objective of expanding options for retirees to manage longevity risk and was a key contribution to APRA’s strategic objective of ‘getting the balance right’ by ensuring its regulation is efficient and proportionate. The initiative was designed to support the market for retirement income products, with the better alignment of APRA’s capital settings with the long-term nature of longevity liabilities supporting greater innovation and competition in the market for longevity products and allowing life companies to offer retirees better retirement income solutions.
In April 2026, the previous LPS 360 was remade to incorporate reforms stemming from the review.
2. Purpose and operation of the instrument
The purpose of this instrument is to revoke the previous LPS 360 and replace it with the new LPS 360. The new LPS 360 amends the previous LPS 360 by incorporating changes arising out of APRA’s review of its capital framework for longevity products. This includes introducing a new, optional way to calculate the illiquidity premium (the ‘advanced illiquidity premium’ or ‘AILP’), which increases the discount rate that life companies use to calculate liabilities for longevity products under APRA’s capital framework. The changes are expected to provide capital relief benefits and to reduce pro-cyclicality within the capital requirements.
The new LPS 360 sets out the requirements for determining termination values, minimum surrender values and minimum paid-up values. Termination values are used in determining the capital base of a life company and its statutory funds. Section 207 of the Act requires a life company to pay a surrender value to a policy owner in some circumstances. Section 209 of the Act requires a life company to vary a policy in some circumstances if the policy owner requires that no further premiums be paid.
A description of the key provisions of the new LPS 360 is set out in Attachment A to this Explanatory Statement.
3. Scope of administrative powers
Exercise of discretion by APRA
The new LPS 360 provides for APRA to exercise a discretion. Decisions made by APRA in exercising the discretion are not subject to merits review. This is because these decisions are preliminary decisions that may facilitate or lead to substantive decisions which are subject to merits review.
Under the Act, a breach of a prudential standard is a breach of the Act, as the Act provides that regulated entities must comply with the requirements of a standard. However, there are no penalties prescribed for such breaches. Instead, a breach of a provision in the Act is grounds for APRA to make further, substantive decisions under the Act in relation to the relevant entity. Those decisions may include the decision:
- to issue a direction to the entity, including a direction to comply with the whole or part of a prudential standard (section 230B of the Act);
- to impose conditions on the entity’s registration (sections 22 and 28B of the Act);
- to investigate life insurance business of a body corporate that is a life company, or business of a body corporate that is a registered NOHC (section 137 of the Act); and
- to revoke a life company’s registration under section 21 if APRA is satisfied that the company has no liabilities in respect of life insurance business carried on by it in Australia (section 26 of the Act) or to revoke a registered NOHC’s registration under section 28A (section 28C of the Act).
A decision of APRA to give a direction or impose a condition is subject to merits review under section 236 of the Act. Before exercising such a power, APRA will give an affected body corporate an opportunity to comment on the whether the exercise is warranted or not.
Revocation of a life company’s registration or a life NOHC’s registration is subject to merits review (section 236 of the Act).
Adjust and exclude discretion
The new LPS 360 gives APRA the discretion to adjust or exclude a specific requirement in the prudential standard (paragraph 51). The power to include such a discretion is provided for under subsection 230A(4) of the Act.
APRA may exercise this power when it is satisfied that the adjustment or exclusion of a specific requirement will better support APRA in meeting its objectives. For example, the adjustment or exclusion may be necessary to obtain a better prudential outcome than would be the case if the prudential requirement were applied unaltered. A tailored approach gives APRA greater flexibility to ensure that the prudential requirements are fit for purpose and protect the interests of policyholders. APRA will also take into account other considerations, such as efficiency, competition, contestability, competitive neutrality and regulatory burden.
The exercise of APRA's powers is governed by a robust decision-making framework. This framework supports APRA in fulfilling its mandate by limiting decision-making to those APRA officers with the appropriate experience and skill to exercise prudent judgement.
4. Documents incorporated by reference
Under paragraph 14(1)(a) of the Legislation Act 2003, the prudential standard incorporates by reference as in force from time to time:
Acts of Parliament; and
Prudential Standards determined by APRA under:
o subsection 11AF(1) of the Banking Act 1959;
o subsection 32(1) of the Insurance Act 1973;
o subsection 230A(1) of the Act; and
o subsection 92(1) of the Private Health Insurance (Prudential Supervision) Act 2015.
These documents may be freely obtained on the Federal Register of Legislation at www.legislation.gov.au.
In the new LPS 360, reference is made to the “Consumer Price Index (CPI)”. This referenced item is not incorporated into the new LPS 360. There is no application of the content underpinning the item as a requirement under the new LPS 360. The item does not impose any obligations on a life company.
5. Consultation
APRA undertook two separate rounds of public consultation on proposed changes to its capital settings for longevity products (including annuities).
In June 2025, APRA released a consultation paper inviting industry feedback on certain proposed changes to the life insurance capital framework for longevity products. In response, APRA received 11 submissions from entities and industry bodies. APRA also undertook additional engagements with several stakeholders. Submissions were generally supportive of APRA’s direction and included a range of suggestions to refine the proposal. The main suggestion was that the proposed capital benefit should be better aligned with the level of risk controls proposed. This feedback was accepted and informed the development of draft revised prudential standards.
In October 2025, APRA undertook a second round of consultation inviting further feedback on APRA’s refined proposal, including a draft version of the new LPS 360. APRA received nine submissions, primarily from entities and industry bodies. Industry feedback strongly supported the reforms, with it being noted that the changes represent a significant improvement to the current framework by reducing procyclical risks to life insurers’ capital positions. Stakeholders noted APRA’s reforms represent an important step towards developing Australia’s retirement income market by promoting innovation and expanding options for retirees to manage longevity risk. Respondents indicated that they largely expect the reforms to improve capital efficiency and stimulate greater market participation.
While overall feedback was positive, many submissions suggested some further refinements to specific parameters of the proposed ‘advanced illiquidity premium’ (AILP) calculation, notably in relation to the proposed floor for the risk allowance and treatment of the AILP in the credit spread stress charge under Prudential Standard LPS 114 Capital Adequacy: Asset Risk Charge. Mixed views were received in relation to proposed restrictions on assets backing longevity products, ranging from recommending the removal of restrictions to advocating for greater flexibility and higher asset limits. APRA acknowledged the feedback received but determined that the proposed settings for the AILP remain sound and strike the right balance in providing capital efficiency in return for appropriate risk controls.
In March 2026, APRA released a response paper finalising the changes to its capital settings for longevity products, including the new LPS 360. All relevant consultations and non-confidential submissions are available on APRA’s website.
APRA is satisfied that the consultation undertaken was appropriate and reasonably practicable.
6. Impact Analysis
The Office of Impact Analysis confirmed that a Regulation Impact Statement was not required.
7. Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
A statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 is included in Attachment B to this Explanatory Statement.
ATTACHMENT A
Description of key provisions of the new LPS 360
Part A – Termination values
Part A defines the termination value as the greater of what the company would normally pay on voluntary termination and the minimum termination value set by the standard. It must be adjusted so it reflects fair asset values for investment-linked policies, covers incurred claims and unexpired risks (or where greater, contractual premium refunds), and accounts for any deferred or instalment payments. For annuities, fixed-term/rate, funeral bond and certain other policies, it cannot be less than the risk-free best estimate liability, using a risk-free discount rate (plus illiquidity premium if applied).
Part B – Minimum termination values
Part B outlines how minimum termination values are calculated. For funeral bond and non-long-term risk business, the minimum termination value is zero. For unbundled investment business, traditional business and long-term risk business, immediate annuities and fixed term/rate business minimum termination values are calculated by a prescribed method.
Part C – Minimum surrender values
Part C defines the minimum surrender value. Part C provides that products issued by friendly societies and certain other defined types of business have no minimum surrender value. For all other policies, the minimum surrender value equals the minimum termination value.
Part D – Minimum paid-up values
Part D provides that the minimum paid-up value is zero for policies with no minimum surrender value and for all policies issued by friendly societies. For other life companies, if a policy has secured debt, the company may retain the debt, secured against the paid-up value, or reduce the paid-up value by extinguishing the debt. Part D prescribes the method for calculating the minimum paid-up value for traditional business, long-term risk business and unbundled investment business of life companies other than friendly societies.
Attachment 1 – Prescribed parameters
This attachment outlines the prescribed parameters used to calculate minimum termination values and paid-up values for different life insurance products.
Attachment 2 - Determination of minimum termination values and paid-up values for traditional business and long-term risk business
This attachment explains how to calculate the minimum termination value and minimum paid-up value for traditional and long-term risk life insurance policies.
Attachment 3 - Calculation of minimum termination values and paid up values for certain types of traditional policies (the specified policies)
Attachment 3 explains how to calculate minimum termination values and paid-up values for specific types of traditional life insurance policies, such as family income, policies with additional benefits, options, altered or increased contracts, and paid-up policies. It provides rules and formulas for adjusting values when policies are varied or converted.
ATTACHMENT B
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Life Insurance (prudential standard) determination No. 3 of 2026
This legislative instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (HRPS Act).
Overview of the Legislative Instrument
The purpose of this instrument is to revoke Prudential Standard LPS 360 Termination Values, Minimum Surrender Values and Paid-up Values (LPS 360) and replace it with a new version of LPS 360 to incorporate certain changes arising out of APRA’s review of its capital framework for longevity products.
LPS 360 sets out the requirements for determining termination values, minimum surrender values and minimum paid-up values. The standard also specifies certain matters relating to requirements set out in the Life Insurance Act 1995.
Human rights implications
APRA has assessed the legislative instrument and is of the view that it does not engage any of the applicable rights or freedoms recognised or declared in the international instruments listed in section 3 of the HRPS Act.
Conclusion
Accordingly, in APRA's assessment, this legislative instrument is compatible with human rights as it does not raise any human rights issues.