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 the need for regulatory clarity and effectiveness in the prudential standards governing life insurance companies, including friendly societies, regulated by the Australian Prudential Regulation Authority (APRA). These determinations were made under the authority granted by subsection 230A(5) and 230A(1) of the Life Insurance Act 1995, which empowers APRA to revoke or determine prudential standards as necessary. In March 2010, APRA revoked the existing Prudential Standard LPS 310 and replaced it with two new standards, LPS 310 Audit and Related Matters and LPS 320 Actuarial and Related Matters, necessitating consequential amendments to other prudential standards to correct cross-references and typographical errors. These determinations aim to ensure the ongoing compliance of life insurance companies with updated regulatory standards, thereby enhancing the effectiveness of prudential supervision in the sector.
Scope and Application
The Life Insurance (prudential standards) determinations Nos. 5, 6, 7, 8, 10 of 2010 apply to all life insurance companies regulated by the Australian Prudential Regulation Authority (APRA), including friendly societies. These determinations are made under section 230A of the Life Insurance Act 1995 and are designed to revoke existing prudential standards and replace them with new standards that incorporate necessary adjustments. The new prudential standards include LPS 1.04 Valuation of Policy Liabilities, LPS 2.04 Solvency Standard, LPS 3.04 Capital Adequacy Standard, LPS 5.02 Cost of Investment Performance Guarantees, LPS 6.03 Management Capital Standard, and LPS 7.02 General Standard. The determinations aim to amend cross-references to reflect the restructuring of LPS 310 into LPS 310 Audit and Related Matters and LPS 320 Actuarial and Related Matters, as well as to correct other cross-references and typographical errors. The determinations came into effect from the date of their registration on the Federal Register of Legislative Instruments, thus extending the regulatory reach to all entities within the scope of the Life Insurance Act 1995, which is a Commonwealth Act. There are no stated exclusions, exemptions, or thresholds specified in the text, but the application of these determinations may be further detailed through subordinate instruments issued by APRA.
Key Provisions
The Life Insurance (prudential standards) determination Nos. 5, 6, 7, 8, 10 of 2010, issued under the Life Insurance Act 1995 (Life Act), revoke certain existing prudential standards and replace them with new ones. These new standards include 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 updating cross-references to reflect the new titles of the standards and correcting other typographical errors. The determinations are effective from the date of their registration on the Federal Register of Legislative Instruments.
These new standards impose specific obligations on all life insurance companies regulated by the Australian Prudential Regulation Authority (APRA). Companies must comply with the new prudential standards, which address various aspects such as the valuation of policy liabilities, solvency requirements, capital adequacy, costs of investment performance guarantees, management capital, and general standards. The standards aim to ensure that life insurance companies maintain sufficient financial health and stability to meet their obligations to policyholders. Companies must also ensure that their internal processes and controls are updated to reflect the changes in the prudential standards.
Failure to comply with these prudential standards may result in regulatory action by APRA. The consequences of non-compliance can include formal warnings, financial penalties, or more severe actions such as the imposition of conditions on a company's operations or even the revocation of its licence. The specific penalties depend on the severity and frequency of the non-compliance, but they are designed to enforce adherence to the standards and protect policyholders. The maximum penalties for breaches of the prudential standards are detailed in the relevant sections of the Life Act and related regulations.