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General Insurance Reform Bill 2001
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General Insurance Reform Bill 2001
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THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
GENERAL INSURANCE REFORM BILL 2001
SUPPLEMENTARY EXPLANATORY MEMORANDUM
Amendments to be moved on behalf of the Government
(Circulated by authority of the Minister for Financial Services & Regulation,
the Hon Joe Hockey, MP)
Table of Contents
Financial impact statement............................................................................................................................................... 3
Regulation Impact Statement........................................................................................................................................... 4
Amendments to Schedule 1 - Amendment of the Insurance Act 1973 .................................................... 13
Amendments to Schedule 2 - Transitional provisions.................................................................................. 18
Amendments to Schedule 3 - Consequential amendment of other Acts......................................... 19
The following abbreviations are used in this supplementary explanatory memorandum.
Australian Prudential Regulation Authority
Australian Prudential Regulation Authority Act 1998
Banking Act 1959
HIH Insurance Group
Institute of Actuaries of Australia
Insurance Council of Australia
Insurance Act 1973
Life Insurance Act
Life Insurance Act 1995
Non-operating holding company
Superannuation Industry (Supervision) Act 1993
General Insurance Reform Bill 2001
1.1 This explanatory memorandum contains Government amendments that are to be included in the General Insurance Reform Bill 2001 (the Bill). The Bill was introduced into the Parliament during the 2001 Winter sittings.
1.2 The Government amendments relate to the enforcement provisions of the Insurance Act 1973 (Insurance Act) together with other technical amendments necessary to give effect to the Bill.
1.3 Amendments to the enforcement provisions of the Insurance Act were not initially included in the Bill as they were to be considered in a separate process to update and harmonise enforcement and resolution of failure provisions across all Australian Prudential Regulation Authority (APRA) regulated institutions.
1.4 Following the failure of the HIH Insurance Group (HIH) it is proposed that some enforcement provisions that relate specifically to general insurance be brought forward for inclusion in the Bill. The proposed amendments will enhance APRA’s investigative powers and its ability to gather information and issue directions to an entity. The amendments also expand APRA’s monitoring role, allow APRA to accept enforceable undertakings and improve the transfer of business provisions.
1.5 The amendments to the enforcement provisions:
· make provision to waive the requirement for a 14-day show cause notice prior to the appointment of an investigator;
· expand the circumstances under which APRA can issue directions;
· clarify that the grounds for an investigation specified in a notice served on a general insurer are the grounds required to be specified in that notice;
· expand the type of books and other documents to which APRA can require access;
· enable APRA to receive reasonable assistance to carry out its prudential monitoring function;
· enable the delegation of an Inspector’s powers to someone other than an APRA staff member;
· give APRA the power to accept enforceable undertakings;
· improve the transfer of insurance business provisions to facilitate the transfer of insurance liabilities to other insurers; and
· enable APRA to provide protected information to auditors and actuaries.
1.6 In addition to the enforcement provisions, a number of technical amendments are proposed. The Bill substantially amends the Insurance Act and many provisions have been repealed by the Bill and replaced with entirely new sections. In some circumstances, provisions that should have been retained were accidentally omitted in the initial drafting of the Bill. Technical amendments are also proposed to correct possible misinterpretations and ambiguities, ensure consistency within the Bill and with other Acts and to rectify omissions.
1.7 It is not envisaged that the Bill will have a financial impact on the operations of government.
3.1 The prudential supervisory regime under the Insurance Act has remained relatively unchanged in its 28-year history and lacks the flexibility to address developments in a rapidly changing marketplace. A number of improvements could be made to the enforcement powers of the Insurance Act, which governs the prudential supervision of authorised insurers. These improvements will assist APRA to effectively enforce the requirements of the Insurance Act and better protect policyholders from financial loss.
3.2 The HIH failure has highlighted the serious and wide-reaching ramifications of a general insurance company failure. Persons with outstanding claims under general insurance policies may suffer serious financial hardship if claims are not met.
3.3 The Financial System Inquiry (the Wallis Report) concluded that APRA should be a strong and independent regulator with the ability to conduct and enforce prudential regulation across the financial sector. To implement these recommendations, APRA needs a range of enforcement powers at its disposal.
3.4 In most cases, it is expected that regulatory concerns will be addressed promptly by entities taking action to remove or control risks, without the need for APRA to resort to enforcement powers. Nonetheless, effective formal enforcement powers play a vital role in ensuring that all insurers comply with prudential requirements in a timely manner.
3.5 In the interests of policyholders, APRA needs to have the appropriate tools to anticipate and prevent prudential problems and where problems do materialise, powers to ensure that the entity takes action to remedy that problem. However, it should be noted that enforcement powers do not prevent failures. Failures or exits are a natural feature of competitive markets. Extreme events can occur and in some cases, can occur so quickly and unexpectedly, that there is no time for APRA to intervene to prevent the failure of an entity.
3.6 It is proposed that existing enforcement powers under the Insurance Act be brought into line with best practice to ensure a transparent and consistent application of powers for the financial sector and provide greater certainty to industry as to how APRA will exercise its powers.
Show cause notice
3.7 It is a precondition that APRA must serve a notice in writing upon an authorised insurer prior to commencing an investigation. This notice requires the authorised insurer to show cause within a period of not less than 14 days why APRA should not carry out an investigation, or appoint an investigator. There is no provision in section 52 (or elsewhere) which enables APRA to give a shorter period of notice. This delays APRA from taking action in a circumstance that might reasonably call for an investigation to be commenced immediately (or more expeditiously than the minimum 14 days required).
3.8 The prerequisite to appoint an inspector or make directions in respect of freezing an insurer’s assets (without an investigation under section 52 being on foot) is that it must appear to APRA that an authorised insurer is, or is likely to become unable to meet its liabilities. However, circumstances occur from time to time where APRA has reasonable concerns about the financial condition of an authorised insurer, but where it is not possible to be satisfied that the insurer is unable to meet its liabilities or is likely to become unable to meet its liabilities. The high threshold test for investigations may prevent APRA from taking precautionary regulatory actions in the interests of policyholders.
Grounds for investigation
3.9 Circumstances have arisen where the grounds specified in the Insurance Act and stated in a notice have been challenged on the basis that they were not ‘grounds’ but ‘pre-conditions’. It has been argued that the notice need not only refer to the precondition upon which it purported to be exercised, but should also specify reasons (or ‘grounds’) why the power was to be exercised. Arguments of this nature can delay regulatory intervention and may further jeopardise the interests of policyholders in situations where serious concerns are held for a company.
Documents which can be obtained
3.10 Under section 115 of the Insurance Act, APRA can, for the purpose of ascertaining whether an authorised general insurer has complied with the provisions of the Insurance Act, require an insurer to produce any books required to be kept by that body corporate or under the Insurance Act. This power can be exercised even when an investigation is not under way. The books required to be kept under the Insurance Act are limited to certain accounts and statements. There may be other information that is useful or necessary to APRA in carrying out its monitoring role. By limiting the types of books able to be required, APRA may be prevented from access to documents which will assist in its understanding of a company, for example, board papers.
Requiring assistance from individuals
3.11 Only when an investigation under section 52 of the Insurance Act is underway may APRA serve notice to a person requiring that person to give to APRA all reasonable assistance in connection with the investigation. There is no requirement for a person to assist APRA in carrying out its functions in the ordinary course of affairs. Individuals that work for an insurer can provide APRA with valuable assistance in APRA’s ongoing monitoring of the company. The inability to require assistance from individuals may impede APRA’s supervisory capacity.
Delegation of Inspector’s powers
3.12 Under subsection 52(1) of the Insurance Act APRA can, in certain circumstances, investigate the whole or any part of the business of a body corporate or appoint an inspector to make such an investigation and report to APRA. Under paragraph 59(1)(b) of the Insurance Act an inspector may delegate his or her powers to an APRA staff member within the meaning of the APRA Act. However, there is no provision that enables an inspector to delegate his or her power to a person who is not an APRA staff member, for example, to an employee of the inspector. This limitation is impractical, especially in circumstances where a firm is used to undertake an investigation and different people within the firm have different specialist skills (for example, actuarial, legal and audit skills).
3.13 APRA does not have the power to accept enforceable undertakings under the Insurance Act. Under section 262A of the SIS Act, APRA may accept an undertaking given by a person in connection with a matter in relation to which APRA has a function or power under the SIS Act. If APRA considers that the person who gave the undertaking has breached that undertaking, APRA can apply to the Court for an order under subsection 262A(4) of the SIS Act. Similar provisions are contained in section 87B of the Trade Practices Act 1974 and section 93AA of the Australian Securities and Investments Commission Act 2001 . The lack of such a power within the Insurance Act means that APRA can only use black letter law powers such as directions. Enforceable undertakings provide a more flexible alternative, especially in circumstances where breaches do not put policyholders at immediate risk.
Voluntary transfer of liabilities
3.14 Currently, insurance business cannot be transferred from one insurer to another (other than by novation) unless the transferring insurer is seeking the revocation of its authority to carry on insurance business. The lack of a statutory capacity to transfer liabilities makes portfolio transfers between insurers extremely complex, inefficient and costly.
Provision of information
3.15 APRA’s capacity to disclose protected information and protected documents is regulated by section 56 of the APRA Act. APRA is prevented by section 56 to speak with an insurer’s auditors or actuaries about certain matters relating to a general insurer. This limitation may prevent APRA from finding out valuable information about, for example, the financial condition of a company.
3.16 The objective of the proposed amendments is to increase the efficacy and operation of existing enforcement provisions that relate specifically to general insurance. It is proposed that the Insurance Act be amended to bring it into line with best practice examples in other APRA administered Acts.
Identification of options
Option 1: Amend the Insurance Act to incorporate the improvements to enforcement powers
3.17 Under this option, the Insurance Act would be amended to:
· make allowance for the requirement for a 14-day show cause notice prior to the appointment of an investigator to be waived and expand the situations under which APRA can issue a show cause notice;
· expand the situations under which APRA can issue directions;
· clarify that the triggers set out in the Insurance Act that enable an investigation to be undertaken are the grounds to be specified in a notice served on an insurer informing them that an investigation is to be conducted;
· expand the types of documents to which APRA can gain access;
· increase APRA’s powers to receive reasonable assistance from individuals to facilitate it in carrying out its prudential monitoring functions;
· enable the delegation of an Inspector’s powers to someone other than an APRA staff member;
· give APRA the power to accept enforceable undertakings;
· improve the transfer of insurance business provisions to facilitate the voluntary transfer of policy liabilities to other insurers in ordinary business circumstances; and
· enable APRA to provide protected information to auditors and actuaries.
Option 2: No specific action
3.18 Under this option, no amendments to the Insurance Act would be introduced and insurers would continue to be subject to existing enforcement provisions.
Option 3: Self-regulation
3.19 Under this option, no amendments to the Insurance Act would be introduced and the market would develop self-regulatory methods to ensure that prudential requirements are met.
3.20 It is likely that APRA, authorised insurers and policyholders would be affected by these enforcement amendments.
Assessment of Costs and Benefits
Option 1: Amend the Bill to incorporate the improvements to enforcement powers
3.21 The enforcement provisions are consistent with powers conferred on APRA under other Acts. This option would, therefore, contribute to the wider policy objective of progressively harmonising the approach to supervising regulated entities across all sectors of the financial system. Harmonised supervisory requirements will enable APRA to realise greater economies of scale in supervision.
3.22 These amendments would create a more risk-responsive regime that increases the sensitivity of regulatory requirements to the individual risk profiles of insurers. APRA would be better informed through their enhanced ability to monitor and investigate. This would enable APRA to be more responsive, flexible and effective in their steps to regulate insurers. The proposed reforms would also expand APRA’s monitoring role, its ability to gather information, issue directions to an entity, and allow APRA to accept enforceable undertakings and improve the transfer of business provisions. This would assist APRA to fulfil its obligations to protect policyholders.
3.23 Specifically, the benefits to APRA include:
· the capacity to waive the 14-day show cause notice and the lowering of the evidentiary threshold before directions can be issued would allow APRA to move in more quickly to protect policyholders;
· the facility to clarify the grounds for a notice would prevent arguments as to the veracity of the notice, enabling a faster regulatory response;
· an expansion of the types of documents to which APRA can gain access, and the power to require a person to give to APRA all reasonable assistance would enable APRA to make better informed decisions when monitoring and investigating;
· the capability to allow an inspector to delegate his or her powers would enable a more efficient investigation;
· the ability to accept enforceable undertakings under the Insurance Act would provide APRA with more flexibility to address regulatory concerns;
· the capacity to enable an insurer to voluntarily transfer its policies to another general insurer would greatly simplify the complete or partial transfer of business to take place as a result of a restructure or other such event; and
· the capability to disclose protected information to auditors and actuaries for the purposes of performing APRA’s functions would ensure that APRA can discuss information which would enable them to be better informed when monitoring or ascertaining that an insurer is complying with the Insurance Act.
3.24 Insurers may be subject to increased compliance costs as a result of these amendments. However, these costs would only be realised on rare occasions, as in most circumstances recourse to enforcement powers is not required.
3.25 Specifically, insurers would be impacted by the proposed amendments in the following way:
· the capacity for APRA to waive the 14-day show cause notice and the lowering of the evidentiary threshold before directions can be issued would provide less time for an insurer to respond to the threat of an investigation. This may lead to increased costs for the insurer if more investigations or directions resulted which were ultimately found to be unnecessary;
· an expansion of the types of documents to which APRA can gain access may increase costs as a result of having to provide more information to APRA;
· the power to require a person to give APRA all reasonable assistance may result in an increase in costs;
· the ability for APRA to accept enforceable undertakings under the Insurance Act would provide APRA with a new power which could mean additional compliance costs for insurers; and
· the capability for APRA to disclose protected information to auditors and actuaries for the purposes of performing its functions may provide additional avenues for inquiry into an insurer leading to possible higher audit and actuarial costs.
3.26 Allowing APRA the capacity to be able to effectively regulate and enforce provisions would in the long-term contribute to a more robust prudential framework for insurers enhancing their business reputation. Conglomerates containing insurance companies would benefit from a more consistent framework of enforcement powers across the financial sector.
3.27 In addition, the amendments provide some specific benefits for insurers. In particular, the capacity to enable an insurer to voluntarily transfer its policies to another general insurer through a statutory mechanism would reduce the costs to an insurer in circumstances such as a restructure.
3.28 Under this option, APRA would have greater capacity to use enforcement powers. This would better safeguard the interests of policyholders.
Option 2: No specific action
3.29 This option would maintain the status quo.
3.30 Under this option, current and emerging weaknesses in the supervisory regime would not be addressed. This would potentially constrain APRA from effectively safeguarding the interests of policyholders in the future.
3.31 APRA’s enforcement powers would continue to be blunt, broad-brushed and harsh with no provisions for a consultative and collaborative approach with industry. Resolving the failures of insurers would continue to be an ‘eleventh-hour’ approach and problems may not be able to be rectified until too late.
3.32 Under this option, APRA would not be able to be responsive to the individual needs of the insurer and may be forced to implement harsh, last minute enforcement actions when a more consultative and cooperative approach is needed.
3.33 Insurers would not be subject to the increased compliance costs of working within an enhanced prudential supervisory regime. However, in the long-term the ramifications of keeping the status quo may result in substantially heavier costs, particularly if confidence in insurance companies was weakened as a result.
3.34 Insurance companies would not have access to a statutory mechanism to transfer liabilities. This would mean continued high costs associated with artificial transfers through mechanisms such as novation.
3.35 Under this option, policyholders may not be sufficiently protected from risks associated with the general insurance market.
Option 3: Self Regulation
3.36 This option would keep the status quo and encourage the insurance industry to regulate itself. Industry, under this option, may wish to establish an Industry Code of Practice. Advantages may include reduced costs of supervision for APRA.
3.37 APRA’s current and emerging weaknesses in the supervisory regime would not be addressed. This would potentially constrain APRA from effectively safeguarding the interests of policyholders in the future. Furthermore, APRA and the Government would not be provided with a high degree of certainty on the effectiveness of self regulatory measures and would also be confronted with a high risk should the measures fail.
3.38 APRA’s enforcement powers would continue to be blunt, broad-brushed and harsh with no provisions for a consultative and collaborative approach with industry. Resolving the failures of insurers would continue to be an ‘eleventh-hour’ approach and problems may not be able to be rectified until too late.
3.39 There may also be problems in obtaining industry compliance and coverage due to the lack of incentives for some insurers to comply.
3.40 Insurers would be governed by rules made by the industry and incorporate the expertise of those being regulated. Industry would therefore be more likely to accept the rules proposed.
3.41 Insurers would not be subject to the increased compliance costs of working within an enhanced prudential supervisory regime. However, in the long-term the ramifications of keeping the status quo may result in substantially heavier costs if problems should result. A considerable risk to the reputation of the insurance industry would exist, particularly if confidence in insurance companies weakened and undermined their commercial viability.
3.42 The industry would be slow to agree to changes to the rules given that there is no one consolidated industry representative body. Existing industry bodies would also lack adequate coverage of industry participants.
3.43 Under this option, APRA would not be responsive enough to the individual needs of the insurer and may be forced to implement harsh, last minute enforcement actions when a more consultative and cooperative approach is needed.
3.44 Under this option, policyholders may not be sufficiently protected from risks associated with the general insurance market. There may also be a number of ‘free-rider’ general insurers, such as those in financial difficulty, who do not comply with the industry’s rules and create greater risks for the policyholder in the long-term.
3.45 The Insurance Council of Australia (ICA) and the Institute of Actuaries of Australia (IAA) have been consulted on these amendments and agree to the proposed changes for Option 1.
3.46 These discussions follow extensive consultation over a long time period with general insurers and industry bodies, including the ICA and IAA. Consultative processes have included two IAA working group papers, followed by the release of three rounds of APRA Policy Discussion papers in September 1999, April 2000 and March 2001. These discussion papers set out the key aspects of the proposals for general insurance reform. APRA has been consulted extensively on all proposed changes to the legislation.
Conclusion and Recommended Option
Option 1 is the preferred option
3.47 Option 1 would contribute to the wider policy objective of progressively harmonising the enforcement and resolution of failure provisions across APRA regulated entities. Industry will benefit as it will reduce the current complexity of the current enforcement regimes and provide consistent methods for dealing with entities that have prudential concerns. Further, this option supports transparency in regulatory decision-making through the exercise of powers in a proportionate, consistent and fair manner and the fostering of a cooperative and open relationship between APRA and regulated entities.
3.48 Option 1 is needed to ensure that APRA can carry out its duty effectively in enforcing prudential standards and in turn, promote a supervisory regime that is forward-looking, primarily risk-based, and responsive to the needs of the policyholder and industry.
3.49 The proposed reforms would also expand APRA’s monitoring role, its ability to gather information, issue directions to an entity, and allow APRA to accept enforceable undertakings and improve the transfer of business provisions. It is necessary to ensure that APRA can act when deficiencies are evident and work with industry to minimise the chances of another general insurance company failure.
3.50 Options 2 and 3 would not bring the Insurance Act into line with other APRA administered Acts.
3.51 Option 3 would not effectively protect policyholders as there would inevitably be insurers who, if in financial difficulty, would not be compelled to comply.
3.52 It is proposed that the Insurance Act be amended to incorporate the proposals for general insurance reform identified in Option 1.
Implementation and Review
3.53 It is proposed to bring forward these amendments for inclusion in the Bill.
3.54 To facilitate the introduction of the new regime, it is proposed to provide for a two-year transition period. It is proposed that the new arrangements would commence on 1 July 2002.
3.55 APRA would assess the adequacy of the prudential supervisory requirements under the Insurance Act on an ongoing basis, to ensure that they effectively address the risk profiles of insurers.
Item 22 - Section 3 - Definitions
4.1 This amendment is to clarify that a foreign general insurer is required to be authorised under section 12.
Item 22 - Section 10 - Bodies corporate and Lloyd’s underwriters carrying on insurance business
4.2 This amendment is to clarify that subsection 10(1) does not apply to corporate Lloyd’s underwriters. Lloyd’s underwriters are subject to subsection 10(2) and it was not intended that they should also be subject to subsection 10(1).
Item 22 - Section 12 - Obtaining an authorisation
4.3 Amendments to this section are designed to remedy a drafting error. It was not intended that APRA should approve a form for companies seeking authorisation under the Insurance Act. Rather, it was intended that APRA would require applications to be in writing and that some information or documents could be required by way of a statutory declaration.
Item 22 - Section 15 - When APRA may revoke an authorisation
4.4 Amendments to this section are designed to insert an additional provision which was accidentally omitted during the drafting of the Bill. The amendment allows APRA to revoke an authorisation where a general insurer has not commenced insurance business within 12 months of obtaining an authority. This provision duplicates an existing power of APRA under subsection 36(3) of the current Insurance Act.
4.5 The amendments also clarify that the Treasurer’s agreement is only required when APRA is proposing to revoke a general insurer’s authorisation under this section. The Treasurer’s agreement is not, for example, required in circumstances where an insurer has requested the revocation under section 16.
4.6 In addition, an amendment to this section clarifies the relationship between this section and section 17. This is to clarify that APRA may serve a notice on a general insurer specifying its intention to revoke that insurer’s authorisation even though at the point of serving the notice, the general insurer still has liabilities in respect of insurance business carried out by it in Australia. Section 17 could then be used to enable the assignment of those liabilities prior to the revocation taking place. This amendment also clarifies an issue of timing to the effect that APRA must not revoke an authority until after the time specified in the notice for the general insurer to provide any submissions to APRA has lapsed and APRA has considered any such submissions.
Item 22 - Section 17 - Assignment of liabilities to enable revocation
4.7 Amendments to this section are designed to clarify its operation. Subsection 17(1) is amended to make it clear that, in circumstances where an insurer has been directed by APRA to assign its liabilities to another insurer, the assigning insurer cannot enter into an absolute obligation to assign its liabilities without the prior approval of APRA.
4.8 The proposed deletion of subsection 17(2) is to clarify the relationship between section 17 and the newly inserted Division 3A (see below). Section 17 will, as a result of these amendments be restricted to circumstances where APRA directs the transfer of insurance liabilities. The newly inserted Division 3A will address circumstances where an insurer voluntarily wishes to transfer its liabilities.
4.9 The insertion of subsection 17(4A) is to ensure that the rights of policyholders are maintained following the transfer of their liabilities from one insurer to another.
4.10 In addition, it is proposed to insert an offence for non-compliance with a direction issued by APRA under section 17. The offence would be a strict liability offence and the maximum penalty for non-compliance would be 60 penalty units. This is consistent with other provisions of the Bill which provide for an offence in circumstances where an insurer fails to comply with a direction of APRA (see for example, section 37).
Item 22 - Division 3A - Transfer and amalgamation of general insurance business
4.11 These amendments insert a new division into the Insurance Act. The Division provides a statutory mechanism to enable an insurer to voluntarily transfer its policies (including both rights and liabilities under those policies) to another authorised general insurer.
4.12 It is an established principle of law that a contractual obligation may not be assigned. Obligations can only be transferred through novation of the contract, that is, with the consent of the other party to the contract. As a result of this, transfers of insurance portfolios in circumstances where companies wish to restructure or sell one part of its business are extremely complicated. This division provides a process for an insurer to voluntarily transfer its policies (including both rights and liabilities under those policies) to another insurer. The process includes a requirement for a scheme to assign insurance liabilities to another insurer to be approved by the Federal Court.
4.13 A statutory mechanism for assigning insurance liabilities already exists for life insurance companies and these amendments have been modelled on Part 9 of the Life Insurance Act.
Item 22 - Section 18 - Authorisation to be a NOHC
4.14 Amendments to this section are designed to remedy a drafting error. It was not intended that APRA should approve a form for companies seeking authorisation under the Insurance Act. Rather, it was intended that APRA would require applications to be in writing and that some information or documents could be required by way of a statutory declaration.
Item 22 - Section 21 - When APRA may revoke a NOHC authorisation
4.15 The amendments to this section clarify that the Treasurer’s agreement is only required when APRA is proposing to revoke a NOHC’s authorisation under this section. The Treasurer’s agreement is not, for example, required in circumstances where a NOHC has requested the revocation under section 22.
Item 22 - Section 27 - APRA may remove a director or senior manager of a general insurer or authorised NOHC
4.16 This amendment inserts an offence for non-compliance with a direction issued by APRA under section 27. It is proposed that the offence would be a strict liability offence and the maximum penalty for non-compliance would be 60 penalty units. This is consistent with other provisions of the Bill which provide for an offence in circumstances where an insurer fails to comply with a direction of APRA (see for example, proposed section 37).
Item 22 - Section 32 - APRA may determine prudential standards
4.17 These amendments are designed to clarify the original intent of the standard making power. This section is amended to enable APRA to have the flexibility to approve or impose specific prudential requirements in relation to a body corporate and also modify or exclude particular prudential requirements in relation to a body corporate. This may be necessary in circumstances where, for example, APRA perceives that a particular general insurer has a higher risk profile than other general insurer and should, as a result, hold higher levels of capital. APRA must obtain the Treasurer’s written agreement prior to modifying a prudential standard.
4.18 In addition a new provision is inserted to enable APRA to prescribe requirements by reference to other instruments such as actuarial standards.
Item 23 - Sections 42, 44 and 45 - Revocation of approval
4.19 These amendments are designed to clarify that APRA can disqualify or revoke the approval of an auditor or actuary of a general insurer where that person no longer meets the eligibility criteria for such an appointment as set out in the prudential standards. The amendments also clarify that as a further pre-condition for revoking the disqualification of an auditor or actuary, APRA must be satisfied that the auditor or actuary meets the eligibility criteria for such an appointment as set out in the prudential standards.
Item 23 - Section 46 - Notification of appointment as an auditor or actuary
4.20 This amendment is to remedy an accidental omission from the original Bill. It was intended that APRA would be notified not only of the date on which a person is no longer the appointed auditor or actuary of a general insurer, but also of the reasons for, and circumstances of, the event.
Item 23 - Section 47 - Exemption from requirement to appoint actuary
4.21 Amendments to this section are designed to ensure that APRA has the power to impose a condition on an exemption given by APRA under section 27. It is also proposed to introduce an offence for non-compliance with such a condition. It is proposed that the offence would be a strict liability offence and the maximum penalty for non-compliance would be 60 penalty units. This is consistent with other provisions of the Bill which provide for an offence in circumstances where an insurer fails to comply with a condition imposed by APRA (see for example, proposed section 14).
4.22 Amendments to this section also clarify that APRA is only required to provide a notification under subsection 47(2) in respect of exemptions provided to one or more general insurers. It was not intended that APRA would be required to provide such a notice in circumstances where the prudential standards exempted an entire class of general insurers as provided for under subsection 47(3). In addition, references to paragraph 40(1)(b) have been amended to paragraph 39(1)(b) to remedy a cross referencing error in the Bill.
Item 23 - Section 48 - Referring matters to the professional associations for approved auditors and actuaries
4.23 This amendment updates the reference from the Australian Securities and Investments Commission Act 1989 to the Australian Securities and Investments Commission Act 2001.
Item 23 - Section 49A - Additional duties of auditors
4.24 This amendment inserts a new requirement for auditors and actuaries to whistleblow to APRA in circumstances where an auditor or actuary has reasonable grounds for believing that a general insurer, NOHC or a subsidiary has contravened the Insurance Act or any other law and that contravention would endanger the interests of policyholders. This requirement was accidentally omitted from the Bill and is consistent with requirements under the Life Insurance Act.
Item 23 - Heading to Division 3
4.25 This amendment alters the heading of Division 3. The change is make it clear that an investigation under this section is to be undertaken by an actuary appointed by APRA.
Item 23 - Section 49E - Actuarial investigation of liabilities
4.26 This amendment corrects a drafting error in the Bill.
Item 23 - Section 49H - Delegate’s decision to extend time
4.27 This amendment is designed to provide greater certainty to general insurers seeking an extension to the period in which an actuarial report must be provided under section 49E. The amendment reduces the time frames in section 49H for a general insurer to request an extension and also reduces the time frame for APRA to consider such a request. The reason for this amendment is to ensure that, in circumstances where an insurer only has 30 days to provide the report to APRA under paragraph 49E(6)(a), and where a request for an extension is rejected by APRA, the company still has a reasonable time frame in which to ensure that the report is provided within the required time. As the section was previously drafted, a request for an extension could have been rejected by APRA after the original time frame had elapsed.
Item 23 - Section 49L - Lodgement of auditor’s certificates
4.28 This amendment corrects a drafting error and clarifies that a general insurer is required to provide to APRA any reports which are required to be prepared by that insurer’s auditor under the prudential standards.
Items 30, 31 and 36 - Subsections 51(1) and 52(1)
4.29 These amendments broaden the range of circumstances in which APRA may exercise its power to give directions or commence an investigation. Currently the prerequisite to exercise these powers is that it must appear to APRA that an authorised insurer is, or is likely to become unable to meet its liabilities. Circumstances occur from time to time where APRA has reasonable concerns about the financial condition of an authorised insurer, but where it is not possible to be satisfied that the insurer is unable to meet its liabilities or is likely to become unable to meet its liabilities. This amendment will allow APRA to take appropriate regulatory action in these circumstances.
Items 36A and 36B - Subsection 52(1) and after subsection 52(1)
4.30 These amendments make it clear that the grounds set out in paragraphs 52(1)(aa), (ab), (a) or (b) are the grounds to be specified in a show cause notice.
4.31 In addition a provision has been inserted that permits the requirement to give 14 days notice of a proposed investigation to be dispensed with in circumstances where the prior agreement of the Treasurer has been obtained.
Items 41A, 41B, and 41C - Subsection 55(1) and after subsection 55(1)
4.32 These amendments are designed to broaden the range of circumstances in which APRA can require a person who is a prescribed person in relation to a general insurer to give APRA all reasonable assistance. The amendment would enable APRA to use this power in its day to day monitoring rather than only in circumstances where an investigation is on foot as is currently the case.
Item 41D - Paragraph 59(1)(b)
4.33 This amendment enables an inspector, with APRA’s prior agreement, to delegate his or her powers, by signed instrument, to a person included in a class of persons approved in writing by APRA. This amendment would allow, for example, the inspector to delegate to his or her employees and would allow the inspector to call on particular expertise in carrying out an investigation.
Item 52A - Paragraph 93(10)(c)
4.34 This amendment updates the reference from the Acts Interpretation Act 1901-1966 to the Acts Interpretation Act 1901 .
Item 57 - Subsections 115(1) and (2)
4.35 These amendments are designed to broaden the types of documents to which APRA can gain access. In particular, the new provision should enable APRA to require the production of books, accounts or documents that contain information in respect of the entity to which the notice is directed.
Item 60 - Section 116 and Section 116A
4.36 This amendment is designed to enable certain premium assets to be counted as assets in Australia for the purposes of section 28. This is already provided for under the current Insurance Act and was accidentally omitted from the Bill. In addition, share capital and statutory fund liabilities are excluded from the calculation of liabilities for the purposes of sections 28 and 116.
Items 65A and 65B - Subsection 122(1) and Paragraph 123(1)(a)
4.37 This amendment is designed to rectify an omission in the original drafting of the Bill. The amendment ensures consistency with other parts of the Bill and takes into account the introduction of the NOHC concept into the Insurance Act.
Item 66A - After section 125
4.38 This amendment will enable APRA to accept a written undertaking given by a person in connection with a matter in relation to which APRA has a power or function under the Insurance Act. Enforceable undertakings that have been accepted by APRA are enforceable by the Court.
Item 66B - Before section 128
4.39 This item inserts a severability clause into the Insurance Act.
Item 81 - Section 131
4.40 This amendment remedies a drafting error in the original Bill by removing a reference to repealed section 105.
Item 3A - Effect of authority under old Act
5.1 This amendment obviates any argument that there is a continuing ‘accrued right’ to carry on insurance business arising from the old Act authority.
Item 10A - Application of the old and new Act to certain insurers after the end of the transition period
5.2 This amendment ensures that APRA can determine that a general insurer who is not authorised under the new regime can remain under the old regime indefinitely, if that insurer does not write any new business. Also to be included is a power to enable APRA to determine that a general insurer who is authorised under the new regime can have sections of the old regime continuing to apply to it indefinitely on condition that the general insurer does not write any new business. This amendment rectifies an omission and ensures that entities will still have a prudential framework applying to them even if they do not move into the new regime.
Item 1A - After subsection 56(6)
6.1 This amendment allows APRA to disclose information about an APRA regulated entity to an auditor or actuary who has provided, or is providing professional services to that entity where APRA considers it necessary to do so for the purposes of exercising its powers and performing its functions.