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, issued by the Australian Prudential Regulation Authority (APRA) under the Life Insurance Act 1995, address the gap created by the repeal of certain sections of the Act through the Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007. The new determinations, effective from 1 January 2008, aim to ensure that APRA has the flexibility to tailor regulatory requirements to accommodate differing circumstances, as recommended in the Rethinking Regulation report. The policy objective is to maintain regulatory confidence and operational continuity for life insurance companies by reissuing existing actuarial standards with necessary adjustments to align with the revised Life Insurance Act, thereby allowing life companies to comply with actuarial matters in the same manner as before.
Scope and Application
The Life Insurance (Prudential Standard) Determination Nos. 5 to 11 of 2007 apply to all life companies, including friendly societies, across Australia. These determinations, which became effective from 1 January 2008, establish prudential standards for actuarial practices in the life insurance industry. They were issued under the authority granted by paragraph 230A(1)(a) of the Life Insurance Act 1995, empowering the Australian Prudential Regulation Authority (APRA) to set prudential standards. The standards reissued in these determinations, which replicate the actuarial standards previously issued by the Life Insurance Actuarial Standards Board (LIASB), include LPS 1.04 Valuation of Policy Liabilities, LPS 2.04 Solvency Standard, LPS 3.04 Capital Adequacy Standard, LPS 4.02 Minimum Surrender Values and Paid-up Values, LPS 5.02 Cost of Investment Performance Guarantees, LPS 6.03 Management Capital Standard, and LPS 7.02 General Standard. The Financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007 repealed certain sections of the Life Insurance Act, transferring the responsibility for setting actuarial standards to APRA. APRA aims to maintain transparency and consistency in the transition, ensuring that any changes from the previous standards are explicitly detailed in the new determinations.
Key Provisions
The Life insurance (prudential standard) determination Nos.5 to 11 of 2007 under the Life Insurance Act 1995 (Life Act) re-establishes various prudential standards for life insurance companies and friendly societies. These standards, effective from 1 January 2008, encompass a range of actuarial and prudential measures that were previously regulated by the Life Insurance Actuarial Standards Board (LIASB). These standards include the Valuation of Policy Liabilities (Prudential Standard LPS 1.04), Solvency Standard (Prudential Standard LPS 2.04), Capital Adequacy Standard (Prudential Standard LPS 3.04), Minimum Surrender Values and Paid-up Values (Prudential Standard LPS 4.02), Cost of Investment Performance Guarantees (Prudential Standard LPS 5.02), Management Capital Standard (Prudential Standard LPS 6.03), and the General Standard (Prudential Standard LPS 7.02).
Under these determinations, life insurance companies and friendly societies must adhere to specific actuarial and financial requirements to ensure the stability and integrity of the life insurance market. These standards dictate how policy liabilities should be valued, the minimum solvency requirements, capital adequacy levels, minimum surrender values, costs associated with investment performance guarantees, management capital standards, and general requirements for maintaining the financial health of the companies. These requirements ensure that life insurance companies maintain sufficient reserves and financial resources to meet their obligations to policyholders.
Failure to comply with these prudential standards may result in regulatory action by the Australian Prudential Regulation Authority (APRA). The Life Act outlines various civil and criminal penalties for non-compliance with prudential standards. While specific penalties are not detailed in the explanatory statement, they can include fines, corrective actions, and in severe cases, the suspension or revocation of an institution's licence to operate. Additionally, individuals responsible for the non-compliance may face personal liability, which could include fines and imprisonment depending on the severity of the breach.
The legislative framework ensures that life insurance companies and friendly societies are held to high standards of financial responsibility and regulatory compliance. These standards are critical for maintaining consumer confidence and the overall stability of the life insurance sector. APRA's role in enforcing these standards is vital to preventing financial instability within the industry.