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Monday, 27 August 2001
Page: 26671


Senator IAN CAMPBELL (Parliamentary Secretary to the Minister for Communications, Information Technology and the Arts) (4:03 PM) —I table a revised explanatory memorandum relating to the bill and move:

That this bill be now read a second time.

I seek leave to have the second reading speech incorporated in Hansard.

Leave granted.

The speech read as follows

I rise today to introduce a bill that will modernise and strengthen the prudential supervisory regime for general insurers operating in Australia.

This bill is the most significant reform to the Insurance Act 1973 since its inception nearly 30 years ago.

The amendments contained in this bill will place Australia at the forefront of international best practice, and bring the general insurance regime into line with changes that have already occurred in authorised deposit-taking institutions and life insurers.

Unlike the current blunt and prescriptive arrangements, the new regime will be responsive to the individual risk profile of each insurance company. General insurers underwriting higher risk insurance will be required to hold a commensurate level of statutory capital.

The failure of HIH has highlighted the serious and wide-reaching ramifications of a general insurance company failure. The amended Act will provide policyholders with an unparalleled level of confidence in this vital industry.

The pivotal reform to the current regime is granting APRA the power to make, vary and revoke prudential standards. These standards will be subordinate to the Act and disallowable instruments. They will be subject to Parliamentary scrutiny.

They will provide flexibility to the new regime, allowing it to adapt over time to developments in the market and improvements in supervisory techniques.

It is proposed that there will be four prudential standards on liability valuation, capital adequacy, reinsurance arrangements and risk management.

These are in the final stages of preparation by APRA after consultation with stakeholders and careful calibration. They replace the outdated prudential supervisory requirements currently contained within the Act.

These new prudential standards will see minimum statutory capital requirements increase for most insurers, particularly those underwriting in riskier insurance markets, such as reinsurance. Further, the minimum level of capital for general insurers will be raised from $2 million to $5 million.

· Risk weighted capital adequacy, similar to that used in banking regulation will be introduced, allowing different insurance product lines to require different amounts of capital to be held by the insurer. For example, reinsurance capital requirements will be significantly higher than significantly less risky home & contents insurance.

· Currently, life insurance minimum capital is $10 million, banks require $50 million and building societies require $10 million. Approved trustees for superannuation require capital of $5 million.

· However, given the industry as a whole holds capital some 2.6 times above the current statutory requirements, most insurers will not need to increase their capital buffers.

Other key reforms contained in the bill include:

· strengthened fit and proper tests for the Board and senior management of general insurers;

· a requirement to appoint, except in limited cases, an APRA approved actuary to advise the Board of a general insurer on the valuation of the companies liabilities;

· obligations on auditors and actuaries to report to APRA on both a routine and non-routine basis. The purpose of these obligations is to provide an independent check on the internal control processes of a general insurer; and

· strengthened enforcement powers.

The Government is expecting to have the new regime commence on 1 July 2002. The bill provides a further two-year transition period before full compliance with the capital adequacy standard is required.

Regulatory change of the magnitude in this bill cannot be developed overnight or taken lightly. The bill represents the culmination of extensive industry consultation and development by APRA.

It is an important bill that will enhance Australia's position at the forefront of financial sector regulation.

I commend the bill to the Senate, and I present the explanatory memorandum.

Debate (on motion by Senator O'Brien) adjourned.

Ordered that the resumption of the debate be made an order of the day for a later hour.