Life Insurance (prudential standards) determination
Nos. 5, 6, 7, 8, 10 of 2010
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority (APRA)
Life Insurance Act 1995, section 230A
Under subsection 230A(5) of the Life Insurance Act 1995 (Life Act) APRA may, in writing, revoke a prudential standard made in relation to prudential matters to be complied with by all life insurance companies (including friendly societies). Under subsection 230A(1) APRA may, in writing, determine a prudential standard made in relation to prudential matters to be complied with by all life insurance companies (including friendly societies).
- Background
In March 2010, APRA revoked LPS 310 and remade the standard as two separate prudential standards LPS 310 Audit and Related Matters (new LPS 310) and LPS 320 Actuarial and Related Matters (LPS 320). Due to the restructuring of these standards, consequential amendments are needed to certain prudential standards. Several other changes to correct other cross-references and typographical errors have also been corrected.
Life Insurance (prudential standards) determination Nos. 5, 6, 7, 8, 10 of 2010 revoke certain prudential standards applying to life insurance companies regulated by APRA and replace them with new prudential standards which are similarly titled. These prudential standards are:
- 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 5.02 Cost of Investment Performance Guarantees;
- Prudential Standard LPS 6.03 Management Capital Standard; and
- Prudential Standard LPS 7.02 General Standard.
The key changes involve:
- amending cross-references to LPS 310 to reflect the new title of the standard;
- amending cross-references to actuarial-related content formerly contained in LPS 310 and now included in LPS 320.
APRA has determined that Life Insurance (prudential standards) determination Nos. 5, 6, 7, 8, 10 of 2010 be effective from the date of their registration on the Federal Register of Legislative Instruments.
2. Purpose and operation of the Instrument
The purpose of each instrument is to revoke the existing prudential standards applying to life insurers and replace them with corresponding standards which incorporate appropriate adjustments. APRA considered that it would be clearer and more effective to consolidate the necessary changes within new standards. For that reason, APRA decided to revoke and replace affected prudential standards rather than to amend them.
3. Consultation
APRA undertook public consultation on its proposed Prudential Standard LPS 310 Audit and Related Matters as part of its broader consultation on the ‘Enhanced Supervision of Life Companies’ package released on 7 May 2009.
The consequential changes were foreshadowed as part of this consultation. As the changes were minor APRA did not undertake consultation on the proposed changes.
4. Regulation Impact Statement
A Regulation Impact Statement for the consequential changes described in this explanatory statement was not required.
Overview
The Life Insurance (prudential standards) determination Nos. 5, 6, 7, 8, 10 of 2010 were enacted to address gaps and issues arising from the restructuring of prudential standards for life insurance companies regulated by the Australian Prudential Regulation Authority (APRA). These determinations were made under the Life Insurance Act 1995, providing APRA with the authority to revoke and determine prudential standards necessary for maintaining the prudential integrity of life insurance companies. The primary objective of these determinations was to streamline and clarify the regulatory framework by replacing existing standards with new ones that better reflect current practices and regulatory requirements. The changes were necessary to correct cross-references and typographical errors, and to ensure that references to the restructured standards were appropriately updated.
APRA undertook public consultation on the proposed Prudential Standard LPS 310 Audit and Related Matters, which was part of the broader consultation on the 'Enhanced Supervision of Life Companies' package. Given the minor nature of the consequential changes, APRA determined that additional consultation was not necessary. These determinations were intended to be effective from the date of their registration on the Federal Register of Legislative Instruments, marking a significant step in ensuring the continued stability and reliability of the life insurance sector in Australia.
Scope and Application
The Life Insurance (prudential standards) determination Nos. 5, 6, 7, 8, 10 of 2010 apply to all life insurance companies, including friendly societies, regulated by the Australian Prudential Regulation Authority (APRA). These determinations involve the revocation of existing prudential standards and their replacement with new standards that reflect necessary adjustments. The geographic and jurisdictional reach of these determinations is Commonwealth-wide, as they are issued under the authority of the Life Insurance Act 1995. The new standards address various aspects such as valuation of policy liabilities, solvency, capital adequacy, cost of investment performance guarantees, management capital, and general standards, each incorporating appropriate amendments to reflect the restructuring of LPS 310 and LPS 320. These determinations do not specify any exclusions, exemptions, or thresholds beyond the scope of life insurance companies regulated by APRA. Additionally, the application of these prudential standards may be extended or restricted through subordinate instruments issued by APRA.
Key Provisions
The main operative sections of the Life Insurance (prudential standards) determination Nos. 5, 6, 7, 8, 10 of 2010 involve the revocation of existing prudential standards applicable to life insurance companies and their replacement with new standards that incorporate necessary adjustments (sections 1 and 2). The determination revokes the existing Prudential Standard LPS 310 and replaces it with two new standards: Prudential Standard LPS 310 Audit and Related Matters, and Prudential Standard LPS 320 Actuarial and Related Matters (section 2). Additionally, it amends other prudential standards to reflect these changes, such as updating cross-references to the new titles and content. The new determinations aim to ensure clarity and effectiveness by consolidating the necessary changes within new standards, rather than amending the existing ones (section 2).
These instruments impose obligations on all life insurance companies, including friendly societies, regulated by the Australian Prudential Regulation Authority (APRA). The companies must comply with the new prudential standards, which include the updated cross-references and content adjustments. For example, the new Prudential Standard LPS 310 Audit and Related Matters now governs audit-related matters, while Prudential Standard LPS 320 Actuarial and Related Matters deals with actuarial-related content. The companies must ensure their practices align with these standards to maintain regulatory compliance (section 2).
Under the Life Insurance Act 1995, non-compliance with the prudential standards set by APRA can result in various consequences. While the determination does not explicitly state penalties, breaches of the prudential standards can lead to enforcement actions by APRA. These actions may include issuing directions, imposing financial penalties, or taking more severe measures such as revoking the company's license. The specific penalties depend on the severity and nature of the breach, but they are designed to ensure that life insurance companies maintain the necessary prudential standards to protect policyholders (section 230A).