Life insurance (prudential standard) determination No.12 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 No.12 of 2007 determines Prudential Standard 230 Reinsurance (LPS 230) to take effect from 1 January 2008.
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.
The introduction of LPS 230 reflects the proposals outlined in the Minister for Revenue and Assistant Treasurer’s December 2006 proposals paper, Streamlining Prudential Regulation: Response to ‘Rethinking Regulation’. Proposal 5.5 proposed the repeal of sections 123 and 125 of the Life Act relating to reinsurance, which was implemented by the SRR Act. Proposal 5.5 also identified that APRA may more appropriately deal with reinsurance issues through the prudential standards where it considers such requirements are necessary.
LPS 230 reproduces the requirements for life companies in regards to reinsurance that were previously in the Life Act and Prudential Rules. To ensure that the prudential framework continues to operate as intended, LPS 230 also replaces Prudential Rules 23 Reinsurance Reports (PR 23) and Prudential Rules 24 Reinsurance Contracts Needing Approval (PR 24).
The only change to the prudential framework in respect to reinsurance is a small technical amendment. The current provisions of PR 24 are too broad in some circumstances and can require approval of some reinsurance arrangements that should not need such approval. Paragraphs 2(c) and 3(c) in Attachment B of LPS 230 are intended to remedy this situation by allowing experience rebates in limited circumstances, without the need for APRA approval of the reinsurance contract.
2. Outline of the Determination
APRA is determining a new prudential standard, LPS 230. The provisions of the Life Act to be repealed under the SRR Act and re-created in the new LPS 230 are:
- section 123 Reporting of reinsurance arrangements; and
- section 125 Approval of certain reinsurance arrangements.
The new standard LPS 230 will also incorporate and replace PR 23 (which becomes Attachment A) and PR 24 (which becomes Attachment B). PR 23 and PR 24 will be revoked with effect from the commencement of the new standards.
3. Consultation
APRA consulted with industry participants from 2 August to 31 August 2007 by means of a discussion paper: Transition to the Revised Life Insurance Act. APRA received four submissions from the consultation process, which were generally in support of the amendments.