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 introduced under the authority of the Life Insurance Act 1995, enacted by the Australian Parliament. These determinations, effective from 1 January 2008, were made by the Australian Prudential Regulation Authority (APRA) in response to the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007. This legislative amendment aimed to streamline regulatory requirements, particularly by allowing APRA greater flexibility in tailoring prudential standards to accommodate varying circumstances, as recommended in the Rethinking Regulation report. The determinations address a legislative gap by transitioning the actuarial standards previously regulated by the Life Insurance Actuarial Standards Board (LIASB) to APRA, ensuring that the regulatory framework remains effective and efficient. The policy objective is to maintain a robust prudential regulatory environment while facilitating regulatory simplification and flexibility.
Scope and Application
The Life Insurance (Prudential Standard) Determination Nos.5 to 11 of 2007 applies to all life companies, including friendly societies, in Australia, providing a framework for the prudential standards they must adhere to. These standards encompass various aspects such as 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, these determinations were established in response to the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007, which sought to streamline regulatory burdens and grant the Australian Prudential Regulation Authority (APRA) the flexibility to tailor requirements. APRA, taking on the role of the Life Insurance Actuarial Standards Board (LIASB), reissued the actuarial standards previously managed by LIASB, ensuring minimal disruption for industry participants. The determinations aim to maintain consistent standards while allowing for necessary adjustments under the revised Life Insurance Act.
Key Provisions
The Life Insurance (Prudential Standard) Determination Nos. 5 to 11 of 2007 sets out various prudential standards for life insurance companies, including friendly societies, to follow. These standards cover areas such as the valuation of policy liabilities (LPS 1.04), solvency (LPS 2.04), capital adequacy (LPS 3.04), minimum surrender and paid-up values (LPS 4.02), cost of investment performance guarantees (LPS 5.02), management capital (LPS 6.03), and general requirements (LPS 7.02). These standards are intended to ensure the financial stability and compliance of life insurance companies in Australia.
The Act imposes several obligations on life insurance companies, including the requirement to maintain adequate financial reserves and capital, comply with prescribed actuarial standards, and provide sufficient information to the Australian Prudential Regulation Authority (APRA) to assess their financial health. For instance, under Prudential Standard LPS 2.04 Solvency Standard, life insurance companies must ensure they maintain a minimum solvency margin to cover potential future liabilities. Similarly, under Prudential Standard LPS 3.04 Capital Adequacy Standard, companies must hold sufficient capital to absorb unexpected losses and protect policyholders.
Failure to comply with the prudential standards may lead to various consequences, including regulatory action by APRA. While the Act does not explicitly list civil or criminal penalties, breaches of these standards could potentially result in enforcement actions such as fines, orders for corrective action, or in severe cases, the revocation of a company's licence to operate. For instance, if a company fails to maintain the required solvency margin, APRA may impose fines or require the company to take steps to restore its financial stability. Additionally, chronic non-compliance may lead to more severe penalties, including the cessation of business operations.
The determinations were developed following consultation with industry participants, as outlined in the consultation paper "Transition to the Revised Life Insurance Act." APRA received four submissions, which were generally supportive of the amendments. This process ensured that the standards reflect the practical needs of the industry while maintaining high levels of financial prudence and consumer protection.