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 address the need for updated actuarial standards following amendments to the Life Insurance Act 1995. The Australian Prudential Regulation Authority (APRA), under the authority granted by paragraph 230A(1)(a) of the Life Insurance Act, issued these determinations to ensure that life insurance companies, including friendly societies, could continue to operate under appropriate prudential standards. These standards, effective from 1 January 2008, were intended to replace the previously issued actuarial standards from the Life Insurance Actuarial Standards Board (LIASB), which were repealed by the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007. APRA’s approach to reissue the existing actuarial standards with necessary modifications ensures that life companies and their actuaries can easily transition to the new framework while maintaining the integrity of the standards. This reform aims to streamline regulation, providing APRA with the flexibility to tailor requirements according to differing circumstances, as recommended in Rethinking Regulation.
Scope and Application
The Life insurance (prudential standard) determination Nos.5 to 11 of 2007 applies to all life insurance companies and friendly societies operating in Australia. These prudential standards were issued by the Australian Prudential Regulation Authority (APRA) under its power granted by the Life Insurance Act 1995. They were designed to replace the actuarial standards previously set by the Life Insurance Actuarial Standards Board (LIASB). These standards cover various aspects of life insurance operations including the valuation of policy liabilities, solvency, capital adequacy, minimum surrender values, cost of investment performance guarantees, management capital, and general standards. Effective from 1 January 2008, the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007 repealed the previous provisions of the Life Insurance Act that established and regulated the actuarial standards and the LIASB, transferring APRA's role in this respect. The application of these standards is limited to the Commonwealth jurisdiction and does not include any specific exclusions or exemptions as outlined in the explanatory statement. Subordinate instruments may extend or restrict the application of these standards as needed.
Key Provisions
The Life Insurance (Prudential Standard) Determination Nos.5 to 11 of 2007, made under the Life Insurance Act 1995, establish a set of prudential standards for life insurance companies and friendly societies to comply with, effective from 1 January 2008. These standards include the Valuation of Policy Liabilities (LPS 1.04), Solvency Standard (LPS 2.04), Capital Adequacy Standard (LPS 3.04), Minimum Surrender Values and Paid-up Values (LPS 4.02), Cost of Investment Performance Guarantees (LPS 5.02), Management Capital Standard (LPS 6.03), and General Standard (LPS 7.02). Each of these standards (sections referenced in parentheses) outlines specific requirements that life insurance companies must adhere to in order to maintain their financial stability and ensure the protection of policyholders.
Life insurance companies and friendly societies governed by these standards are required to comply with detailed actuarial and financial benchmarks. For instance, under Prudential Standard LPS 1.04, companies must accurately value policy liabilities to ensure that sufficient funds are held to meet future obligations. Similarly, under LPS 2.04, companies must maintain a solvency margin that reflects their risk profile and business activities. These obligations also extend to regular reporting and disclosures to the Australian Prudential Regulation Authority (APRA) to maintain transparency and regulatory oversight.
Failure to comply with these prudential standards may result in significant consequences for the companies involved. The Life Insurance Act 1995 provides for various penalties, including financial penalties and the potential revocation of the company’s licence to operate. In cases of severe non-compliance, companies may face criminal charges, which could result in fines and imprisonment for responsible individuals. For example, under section 233 of the Act, individuals found guilty of breaches related to solvency or capital adequacy standards could be subject to fines of up to $1,100,000 for corporations and lesser amounts for individuals, along with potential imprisonment terms. These stringent measures underscore the importance of adhering to the prescribed standards to ensure the continued stability and integrity of the life insurance sector.