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 streamlined and more adaptable regulatory standards in the life insurance sector, in line with the recommendations of the Rethinking Regulation Taskforce. This legislation was introduced under the authority of the Life Insurance Act 1995, paragraph 230A(1)(a), by the Australian Prudential Regulation Authority (APRA) as part of the Government’s initiative to simplify and modernise regulatory frameworks. The primary policy objective is to ensure that APRA has the flexibility to tailor prudential requirements to accommodate varying circumstances within the industry, thereby enhancing regulatory efficiency while maintaining robust financial oversight. These determinations reissued existing actuarial standards previously set by the Life Insurance Actuarial Standards Board (LIASB), transferring APRA’s responsibility for establishing these standards to ensure continued compliance and confidence among life insurance companies and their stakeholders.
Scope and Application
The Life Insurance (Prudential Standard) Determinations Nos. 5 to 11 of 2007 apply to all life insurance companies, including friendly societies, operating within Australia. These determinations are made under the Life Insurance Act 1995, with the Australian Prudential Regulation Authority (APRA) assuming the role of the Life Insurance Actuarial Standards Board (LIASB) in setting actuarial standards. The prudential standards established in these determinations, effective from 1 January 2008, include the Valuation of Policy Liabilities, Solvency Standard, Capital Adequacy Standard, Minimum Surrender Values and Paid-up Values, Cost of Investment Performance Guarantees, Management Capital Standard, and General Standard. The scope of these determinations covers all aspects of actuarial standards and financial regulation for life insurance companies, ensuring that they comply with specific requirements designed to maintain financial stability and protect policyholders. APRA's approach to reissuing the previous actuarial standards, with explicit changes to reflect the revised Life Insurance Act, aims to ensure continuity and clarity for industry participants.
Key Provisions
The Life Insurance (Prudential Standard) Determination Nos. 5 to 11 of 2007 (the Determinations) implement several prudential standards that all life insurance companies and friendly societies must adhere to under the Life Insurance Act 1995 (Life Act) (sections 1 to 3). 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 standard addresses specific aspects of the financial management and operational conduct of life insurance companies, ensuring they maintain adequate financial health and provide reliable policyholder benefits.
These Determinations impose specific obligations on life insurance companies to ensure compliance with the outlined prudential standards. For instance, under LPS 1.04, companies must accurately value their policy liabilities, while LPS 2.04 requires maintaining a minimum solvency margin. LPS 3.04 mandates that companies hold sufficient capital to cover potential risks. LPS 4.02 ensures that policyholders receive a minimum surrender value when they choose to surrender their policies. LPS 5.02 focuses on the performance guarantees related to investments. LPS 6.03 addresses the capital requirements for managing operational risks, and LPS 7.02 covers general standards of conduct and practices that support the overall stability and integrity of the insurance operations.
Failure to comply with these prudential standards can lead to various consequences. While the explanatory statement does not explicitly detail specific penalties or offences, breaches of prudential standards under the Life Act can result in enforcement actions by the Australian Prudential Regulation Authority (APRA). Such actions may include directives to rectify non-compliance, financial penalties, or even revocation of the company’s licence to operate. The severity of the consequences would depend on the nature and extent of the breach, with more significant or repeated violations likely leading to more severe penalties.