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Insurance Laws Amendment Bill 1991

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House: House of Representatives Portfolio: Treasurer Purpose To increase the asset or share backing needed for the approval of insurance companies; disqualify certain people from holding positions in insurance companies; introduce actuarial requirements for general insurance companies, and to tighten the reporting and investigation provisions relating to life insurance companies.

Background The measures contained in this Bill form part of a package announced in late 1990 and early 1991 to protect the holders of insurance policies and to strengthen the prudential standards of insurance companies. The measures followed losses of policy holders funds in a takeover bid for the Occidental Life Insurance Company of Australia Limited and Regal Life Insurance Limited. This incident is dealt with in the Digest for the Insurance Acquisition and Takeovers Bill 1991.

There are two varieties of insurance companies, general insurance companies operating under the Insurance Act 1973, and life insurance companies which operate under the Life Insurance Act 1945. Organisations are required to be registered under the relevant Act to undertake insurance business in Australia. The standards applying under the two Acts differ in various areas and this Bill will amend both of these Acts.

The proposal to increase the reserves of both types of insurance companies has been under consideration for some time by the Insurance and Superannuation Commission and industry representatives. Their implementation was hastened by the Occidental and Regal Life incident noted above. The necessary level of reserves was last increased in 1983.

Main Provisions Amendments to the Insurance Act 1973 Section 23 of this Act deals with the approval of applications for an authority to carry on insurance business for companies that do not currently carry on insurance business in Australia. The section requires such companies to have share capital of at least $500 000 or, if the company has no share capital, to have assets that exceed liabilities by at least $1 million. Clause 6 will increase these amounts to $2 million.

Section 24 deals with the requirements for the approval of applications to re- enter the industry by insurance companies that carried out insurance business in Australia before 9 December 1971. Such companies are currently required to have reserves equal to the greater of: the current amounts described above (i.e. $500 000 and $1 million), or at least equal to 20% of the previous years premium income. Clause 7 will amend this section to increase the requirement to $2 million. As well, a new provision will be inserted requiring the reserves to be the greater of this amount, the 20% of premiums described above, or 15% of the previous years outstanding claim provision (i.e. the provision made by the company in its books for claims liability less any allowances for reinsurance that would be recoverable - clause 4).

Section 29 provides that it is a condition of approval to continue to carry out insurance business to have the same reserves as described in section 24. Clause 8 will amend this section in the same manner as clause 7 will amend section 24. Clause 31 provides for the phasing in of the reserves that must be held under clause 8. The phasing in will take place over three years, with the amount of dollar value reserves being $1 million in the first year and $1.5 million in the next two years. For the outstanding claims provisions, the rates will be 5% in the first year, 10% in the second year and 12.5% in the third year.

Proposed section 48A, which will be inserted into this Act by clause 11, provides for the Commissioner to require insurance companies to appoint an independent actuary to investigate all or part of the companies outstanding claim provision, and to provide a report on the investigation.

Proposed section 117A deals with the people who will be disqualified from holding senior offices in insurance companies. A disqualified person will be one who has been convicted: * of an offence against this Act; * a Commonwealth, State or Territory offence relating to insurance or dishonest conduct; or who has become bankrupt, applied for the relief of bankruptcy or has compounded with their creditors. Such people are not to act as directors or principal executive officers of Australian companies or act as the local executive officer of a foreign insurance company. The penalty for a breach of this provision will be a maximum of two years imprisonment for the individual concerned and a maximum $25 000 fine for the company that permitted such a person to so act. It will be a defence for the company to prove that they did not know, could not reasonably know, and took reasonable steps to find out, that the person was a disqualified person (clause 24).

Amendments to the Life Insurance Act 1945 Section 19 deals with the conditions a company must satisfy when it applies for registration under this Act, and currently provides, among other matters, that such companies must have a credit of $2 million in its share premium account where it has share capital. Clause 39 will amend this section to increase this amount to $10 million for Australian companies with share capital. Where the company is an Australian company that does not have share capital, or is a foreign company, the eligible assets of the company must not be less than $10 million.

Proposed section 19A provides that the $10 million reserve described above will apply to companies carrying on life insurance business in Australia. As well, such companies will be required to always have an excess of eligible assets over liabilities of $5 million (clause 40).

Clause 47 provides for the phasing in of the proposed section 19A reserve requirements over four years. Where the reference is to $10 million, the necessary reserve will be $3 million in the first year, $4 million in the second, $6 million in the third and $8 million in the forth. Where the reference is to $5 million, this is to be read as $1.5 million in the first year, $2 million in the second, $3 million in the third and $4 million in the forth.

Section 48 provides for actuarial reports and statements to be provided to the Commissioner every five years. Clause 41 will amend this to every 12 months.

If it appears to the Commissioner that a company registered under this Act may not be able to meet its liabilities, the Commissioner will be able to inquire into the affairs of the company and direct it not to deal in specified assets. Such a direction may last for a maximum of six months and will cease if the company begins to be wound up. It will be an offence, with a maximum fine of $1 million, for a company to breach such a direction (clause 43 which will insert proposed section 54C into this Act).

Where it appears to the Commissioner that a company registered under this Act will be unable to meet its liabilities, or has contravened this Act or a direction given under it, the Commissioner will be able to give the company directions as to how it is to perform its business, including directions that it is not to issue further policies. Directions may last for a maximum of 12 months and will cease to have force at the end of this period, when the Commissioner revokes it, or the company commences to be wound up. The maximum penalty for a breach of such a direction will be a fine of $20 000 (proposed section 57A which will be inserted into this Act by clause 44).

Proposed section 146A will prohibit certain people from holding senior positions in life insurance companies and is the same as proposed section 117A of the Insurance Act 1973 (see above) (clause 46).

Bills Digest Service Parliamentary Research Service For further information, if required, contact the Economics and Commerce Group on 06 2772460.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Commonwealth of Australia 1991

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Published by the Department of the Parliamentary Library, 1991.