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Thursday, 28 June 2001
Page: 28814

Mr HOCKEY (Minister for Financial Services and Regulation) (9:40 AM) —I move:

That the bill be now read a second time.

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

This bill, the General Insurance Reform Bill 2001, is the most significant reform to the Insurance Act 1973 since its inception nearly 30 years ago, and has been the subject of extensive discussion with industry over the last two years.

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 in Australia.

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 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 They replace the outdated prudential supervisory requirements currently contained within the act.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, re-insurance capital requirements will be significantly higher than significantly less risky home and 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 person 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 company's liabilities; and

· 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.

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 House, and I present the explanatory memorandum.

Debate (on motion by Mr Swan) adjourned.