Life insurance (prudential standard) determination No.13 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.13 of 2007 makes Prudential Standard 310 Audit and Actuarial Requirements (LPS 310) 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 310 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 5.3 suggested that the sections in the Life Act relating to auditors and actuaries are unnecessarily prescriptive and inflexible, and are better addressed through prudential standards or prudential practice guides.
LPS 310, in general, reproduces the requirements for life companies in regards to auditors and actuaries that were previously in the Life Act. This is to ensure that the prudential framework for life companies continues to operate when provisions of the SRR Act take effect, and does so without disturbing the status quo wherever possible. At this stage, APRA is not seeking to change the policy settings for the life insurance industry, and intends to interpret and apply the new requirements in the same way as it did with the previous requirements under the Life Act.
The only changes to the prudential framework for auditors and actuaries under LPS 310 are:
- auditors no longer will be approved by APRA, but will be appointed by the life company according to criteria specified in LPS 310, and subject to the “fit and proper” criteria of Prudential Standard LPS 520 Fit and Proper (LPS 520) (this will simplify the appointment of auditors, as intended by amendments proposed by the SRR Act to sections 84 to 86 of the Life Act);
- a life company will still appoint its actuary, as before, but the criteria are now specified in LPS 310 and LPS 520 (these criteria are broadly similar to previous criteria, but will now be consistent with the criteria for the appointment of an actuary of a general insurance company); and
- life companies will no longer have to report on the “pecuniary interests” of their appointed actuary.
2. Outline of the Determination
Key provisions to be included in LPS 310 have been drawn from the following sections of the Life Act:
- section 83 Audit;
- section 84 Appointment of auditor;
- section 93 Appointment (of actuaries);
- section 113 Annual actuarial investigations (including the provision as modified for friendly societies by regulation 2A.01 of the Life Insurance Regulations 1995);
- section 115 Additional actuarial investigations (including the provision as modified for friendly societies by regulation 2A.01 of the Life Insurance Regulations 1995);
- section 116 Actuarial advice regarding policies; and
- section 119 Lodgement of financial condition report.
The SRR Act also amends subsection 47(1) of the Life Act to provide that the definition of income and outgoings of a statutory fund is specified in the prudential standards (rather than in the regulations). The definition of income and outgoings of a statutory fund is in paragraph 22 of LPS 310.
Prudential Standard 1 - Actuarial Advice
APRA is also incorporating in LPS 310 the mandatory aspects of Prudential Standards No 1 Actuarial Advice (PS 1), which is only applicable to friendly societies. APRA will revoke PS 1. These provisions are now in Attachment A of LPS 310.
PS 1 outlined the expectations of the Life Act, set out in subparagraph 113(1)(a)(ii) and paragraph 115(1)(b), as modified for friendly societies by Regulation 2A.01 of the Life Insurance Regulations 1995. It specified that the operations of a friendly society are subject to regular actuarial review.
3. Consultation
APRA consulted with industry participants from 2 August to 31 August 2007 by means of the 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.